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Backgrounder #1520 on Federal Budget

February 25, 2002

How Farm Subsidies Became America's Largest Corporate Welfare Program

By

With the House and Senate close to agreeing on a new $171 billion farm bill, the time is right to take a fresh look at farm policy to ensure that taxpayers are getting their money's worth. Although farm subsidies are justified as helping struggling family farmers make ends meet, the bulk of subsidy payments goes to the largest high-income farms. In fact, current farm policy allocates two out of every three farm subsidy dollars to the top 10 percent of subsidy recipients while completely shutting 60 percent of farmers out of subsidy programs.

The ceilings that are in place on most farm subsidy programs are rarely enforced by Congress or the U.S. Department of Agriculture (USDA), and contain loopholes that allow the largest farms and agribusinesses to bypass these limits. As a result, taxpayers are paying billions of dollars to subsidize prosperous farms. Making matters worse, many of the large farms that receive subsidies have used these funds to buy out small farms and consolidate the agriculture industry.

Far from remedying this problem, the House's Farm Security Act of 2001 (H.R. 2646) and the Senate's Agriculture Conservation and Rural Enhancement Act (S. 1731) both increase subsidies and continue tilting them to large farms and agribusinesses.1

Subsidy Programs Designed for Agribusinesses

Farm subsidies are traditionally defended as--in the words of Senate Agriculture, Nutrition and Forestry Committee Chairman Tom Harkin (D-IA)--a "safety net" supplementing the incomes of poor farmers.2 One would expect farm safety-net programs to target poor farmers, just as other safety-net programs such as food stamps and Medicaid limit eligibility to low-income families.

In reality, however, the opposite is true: Farm subsidies are distributed not on the basis of need, but with regard to two other criteria: (1) the type of crop grown, with 90 percent of all farm subsidies awarded to farms that produce wheat, corn, cotton, rice and soybeans,3 and (2) the amount of crops grown, with farmers who grow more crops receiving higher subsidies. Therefore, large farms and agribusinesses--which, as a result of economies of scale, are also the most profitable farms--are eligible for massive subsidies as long as they grow the crops the government wants them to grow. Meanwhile, small lower-income farms growing the same five crops receive only a fraction of what large farms receive; and farmers planting the 400 other crops, regardless of their need, are completely excluded from most farm subsidies.

In sum, although farm subsidies are promoted as being necessary to provide income maintenance for poor farmers, they are designed to function as the largest corporate welfare program maintained by the federal government.

Limits and Loopholes

While farm subsidy limits have been set, they exist more on paper than in practice. For example, the 1996 Federal Agriculture Improvement and Reform Act4 included regulations that set ceilings on the amount of farm subsidies that an individual may receive--per farm program, and per property. But these limits have not prevented large farms from collecting millions of dollars annually.

Since 1998, Congress has passed annual "emergency supplemental" bills that have increased Production Flexibility Contract (PFC) payments by as much as 100 percent.5 Likewise, marketing loan gains and loan deficiency payments supposedly contain $75,000 payment limits. However, their stipulations allow farmers to continue receiving money beyond the subsidy limit and then forfeit their crops to government to settle the loan.

Predictably, Congress has been averse to having tens of thousands of farmers forfeit their harvest to the federal government, given that the Department of Agriculture would have to store and eventually sell or give away the crops. To avoid this burden, Congress opted to double the marketing loan gain and loan deficiency payment ceiling to $150,000 in 1999 and 2000 so that farmers would not have to forfeit their crops. In 2000, then-Agriculture Secretary Dan Glickman implemented a commodity certificate program that effectively eliminated all payment limits for marketing loan gains and loan deficiency payments.6

Acts of Congress and orders from the Secretary of Agriculture are not always needed to circumvent payment limits. Congress has left several loopholes in the law that large farms can easily utilize to maximize their subsidies.

The greatest loophole is the fact that subsidy limits apply to people, not farms; this applies to individuals as well as to corporations and partnerships. Therefore, large farms and agribusinesses can simply sign up each of their employees for a subsidy, and farmers in some cases can sign up their spouses and children to maximize the total subsidy to a given farm. Furthermore, the limits shown for individual payments in Table 1 can be doubled if they are spread out across up to three properties. For example, an individual who receives the maximum PFC subsidy of $40,000 for one property can also receive up to $20,000 for each of two additional properties, for a total of $80,000 in subsidies.

Farm owners have taken advantage of this law by dividing an existing farm into several separate farms and then having its workers collect a separate subsidy for each farm. A case in point is Tyler Farms in Arkansas, which collected $23.8 million in farm subsidies between 1996 and 2000 (the largest amount granted to any farm in America) by dividing itself into 66 legally separate "corporations" to maximize its farm subsidies.7

The failure of Congress and government entities to enforce payment ceilings, combined with subsidy limits that are full of loopholes, has created a system that has channeled billions of dollars in "support" to the largest and most profitable farms as long as they grow what the government wants them to grow.

Predictable Results

Under this mistargeted system, agriculture policy has become America's largest corporate welfare program. According to the Environmental Working Group, two-thirds of all farm subsidies go to the top 10 percent of subsidy recipients while the bottom 80 percent of recipients receive less than one-sixth of farm subsidies. A full 60 percent of America's farmers do not qualify for any assistance. In 2000 alone, more than 57,500 farms received subsidies totaling over $100,000, and subsidies of at least 154 farms topped $1 million. Among these beneficiaries are fifteen Fortune 500 companies, including Westvaco, Chevron, and John Hancock Mutual Life Insurance, which receive as much as 58 times as much as the median annual subsidy of $935.8

The current system has caused hardship not only for the taxpayers who pay this enormous subsidy tab, but also for unsubsidized farmers with small farms. Many of the largest, most profitable farms and agribusinesses that have received the lion's share of subsidies have used these funds to buy out smaller farms. In what one agriculture official calls the "plantation effect," family farms with less than 100 acres of land are being bought out by larger agribusinesses, which then convert them into tenant farms. To date, three-quarters of the nation's rice farms have already become tenant farms, and the ownership of other types of farms is beginning to trend in that same direction.9

In other words, far from saving America's family farms, the current farm subsidy system is destroying them.

How Current Bills will Increase these Subsidies

According to the USDA, the cost of creating an effective safety-net farm policy to ensure that the income of every full-time farmer in America would be at least 185 percent of the federal poverty line ($32,652 for a family of four in 2001) would have been approximately $4 billion in 1997 and just slightly more today.10 This investment is dwarfed by the amount that has been spent for the nation's crop subsidy programs, which totaled $29.8 billion in fiscal year 2000.11

Both the House and Senate farm bills would spend approximately $171 billion on subsidies over the next 10 years.12 These large increases in farm subsidies would be used in part to expand Production Flexibility Contracts, establish a new "countercyclical" subsidy program, and extend marketing loan gains and loan deficiency payments to producers of wool, mohair, and honey.

Both bills not only preserve massive subsidies for large farms and agribusinesses, but effectively increase these subsidies by weakening payment limitations. Table 1 shows that the House bill increases the annual PFC ceiling from $40,000 to $50,000, while the Senate bill establishes a limit as high as $100,000 for PFCs and new countercyclical payments combined. Both bills also double the ceiling for marketing loan gains and loan deficiency payments to $150,000. Finally, the maximum grant for one-year Environmental Quality Incentives Program (EQIP) projects is quintupled from $10,000 to $50,000 in both bills, while the maximum grant for multi-year projects increases from $50,000 to $150,000 in the Senate bill and to $200,000 in the House bill.

Overall, these changes will further consolidate subsidies among the wealthiest farms and agribusinesses, and will substantially increase the programs' cost to taxpayers. There have, however, been some attempts to trim back such increases in corporate welfare.

  • Representative Nick Smith (R-MI) proposed an amendment to the House bill that would have enforced the new $150,000 annual limit for marketing loan gains and loan deficiency payments by restricting the commodity certificates loophole to bypass the limits; the amendment was defeated 238-157.13
  • Another amendment authored by Representative Smith would have directed the Secretary of Agriculture to reduce the subsidies of those whose benefits were above $150,000 in the event that annual farm subsidies exceeded the subsidy ceiling mandated by the World Trade Organization; that amendment failed by a voice vote.14
  • The Senate voted to reduce the total subsidies an individual can receive in one year from $500,000 to $275,000; that first step, however, though well-intentioned, would not reduce the bias toward wealthy farms because subsidies would still be targeted to the largest farms growing the most crops, and every subsidy-limit loophole described above would be retained. Rather than seriously reform the farm subsidy system's bias toward wealthy farms, the Senate has moved to make this bias a state secret. S. 1731 amends the Freedom of Information Act to classify many of the publicly released lists showing who receives farm subsidies and how much they receive.15

Conclusion

At a time when the critical war against terrorism is costing approximately $70 billion per year and a recession is reducing tax revenues, the nation will face persistent budget deficits of over $100 billion annually and possible tax increases unless Members of Congress can make the decisions necessary to reduce wasteful spending. Abandoning a massive $171 billion corporate welfare farm bill that is designed to shift more money to the largest farms and agribusinesses at the expense of small farmers and taxpayers should be one of their easier tasks.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

Show references in this report

1. The House of Representatives passed H.R. 2646 by a vote of 291-120 on October 5, 2001, and the Senate passed S. 1731 by a vote of 58-40 on February 13, 2002.

2. "Harkin Farm Bill Approved by Senate Agriculture Committee," press release, office of Senator Tom Harkin, November 15, 2001, at http://www.senate.gov/~harkin/news.cfm?id=179611.

3. U.S. General Accounting Office, Farm Programs: Information on Recipients of Federal Payments, GAO-01-606, June 2001,
p. 23.

4. P.L. 104-127.

5. P.L. 105-127, P.L. 106-78, P.L. 106-224, and P.L. 106-387.

6. U.S. General Accounting Office, Farm Programs: Information on Recipients of Federal Payments, p. 10.

7. John Lancaster, "More Subsidy Money Going to Fewer Farms," The Washington Post, January 24, 2002.

8. Data compiled from Environmental Working Group Web site, at www.ewg.org.

9. Elizabeth Becker, "Land Rich in Subsidies, and Poor in Much Else," The New York Times, January 22, 2002.

10. "A Safety Net for Farm Households," U.S. Department of Agriculture, Agriculture Outlook, January-February 2000, pp. 19-24. The authors estimated a cost of $7.8 billion when including everyone who reports any farm income, including "hobby farmers" who have other full-time jobs. Restricting their data to full-time farmers, defined as lower sales, higher sales, and large family farms as well as a fraction of limited-resource farms that are also full-time, the total cost adds up to approximately $4 billion. For several federal income-assistance programs, like Women, Infants and Children (WIC), the eligibility threshold is 185 percent of the federal poverty level.

11. FY 2000 net outlays for commodity programs reported by the U.S. Department of Agriculture, at http://www.usda.gov/agency/obpa/Budget-Summary/2002/2002budsum.htm.

12. Congressional Budget Office cost estimates for H.R. 2646 and S. 1731 project that base spending will be $98 billion and that both bills will add approximately $73 billion over 10 years.

13. House Roll Call Vote No. 365, October 3, 2001.

14. House voice vote, October 4, 2001.

15. See S. 1731, Title II, Section 204(g).

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