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Backgrounder Update

August 11, 1988

August 11, 1988 | Backgrounder Update on

The Emergency Farm Bill: Where Are the Dollars Going?

(Archived document, may contain errors)

8/11/88 83

THE EMERGENCY FARM BILL: WHERE ARE THE DOLLARS GOING?

(Updating Executive Memorandum No. 208, "Responding to the Drought," July 6, 1988.) Succumbing to election year pressures to "do something" about the effect on American farmers of this summer's drought, Congress on August 9 approved a package of federal drought aid. Es- timated by Congress to cost almost $4 billion, the real tab could be billions higher. While sup- porters claim the bill is necessary to help drought-stricken farmers, it does little to target aid to those most in need. Although this legislation deserved a veto, Ronald Reagan, recognizing elec- tion year realities, signed it. To prevent more such poorly targeted bills in the future, Reagan now should order the Department of Agriculture to examine how much of this money reaches needy farmers. And Congress should begin a careful review of all farm programs to determine how taxpayers, as well as farmers, can better be protected from droughts and similar disasters.

In the weeks before Congress acted, the Department of Agriculture had taken several important steps to ease the hardships caused by the drought. These actions focused on loosening federal farm restrictions through such steps as allowing livestock to graze on land previously set aside under government programs, and letting farmers sell commodities stored in government-restricted but farmer-held reserves. This bill, however, shifts the focus of drought relief to providing cash to farmers who have been hurt by the drought.

Formula for Payments. Under the legislation, farmers who lose between 35 percent and 75 percent of their crop because of the drought will receive payments of 65 percent of the price guaranteed by the government under the farm subsidy programs for that crop (or, for those not covered by price support programs, 65 percent of the crop's average market price for the past five years). If they lose more than 75 percent of their crop, farmers will receive 90 percent of the price. Farmers losing less than 35 percent of their crop will not be required to repay all the, subsidy payments received from the federal government earlier in the season, when it was assumed that the crops would be large and prices low.

While this formula roughly targets those farmers most affected by the drought, it does not channel aid to those most in need. While a farmer may have lost 35 percent of his crop because of the drought, this does not mean that he is in financial distress. A prosperous farmer, with large cash and crop reserves from prior years, or with only a small debt burden, could absorb drought losses with relatively little trouble. Yet, there is no requirement that farmers show any financial need for this federal aid. While the bill does ban relief to farmers with $2 million or more in gross sales (and livestock producers with $2.5 million or more), this excludes only about 1/10 of one percent of American farmers and ranchers.

Higher Dairy Prices for Consumers. The drought bill includes additional provisions to reward powerful special interest groups. Most notably, the bill cancels the previously scheduled 50 cent (per hundredweight) decrease in dairy price support levels, and instead increases it by 50 cents for three months next summer. This means the federal government will be increasing its purchases of dairy products, at the taxpayers' expense, to put them into storage. Thus, instead of increasing dairy supplies and minimizing price increases in a time of drought, the federal goverm,nent will divert dairy products from the supermarket and raise the price to consumers.

Supporters of the dairy price support increase argue that it is needed to protect dairy farmers from the effect of higher feed prices. Yet, because the drought has hurt some areas more than others, not every dairy farmer has been hurt in the same way. In fact, higher dairy prices generally will more than offset the financial impact of the drought, even without a price support increase. Nevertheless, the bill simply gives federal money to all dairy farmers, regardless of need.

Reducing Federal Interference. Ronald Reagan should order the Department of Agriculture to undertake a comprehensive study of the effects of this legislation, to determine where the money goes, how much reaches farmers in need, and how much is pocketed by farmers not suffering financial problems. Once the immediate crisis is past, Congress should consider requiring farmers receiving federal aid to purchase crop insurance, which can substantially protect farmers from the effect of drought. Ironically, because of relief bills such as the one pending, farmers actually are discouraged from buying such insurance.

Congress also should consider "decoupling" farm production from subsidies. Under the current system, subsidies are based on production and crop prices. This not only distorts agricultural markets, as farmers produce food according to federal program requirements rather than consumer needs, it means also that farmers receive least help in drought years. By making payments independent of production, federal interference in agriculture would be reduced, while payments would no longer soar in good years, and plummet in bad.

James L Gattuso McKenna Senior Policy Analyst in Regulatory Affairs

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