April 9, 2002 | Backgrounder on Agriculture
The House and Senate are close to agreeing on legislation reauthorizing most farm programs for the next 10 years. Although both the Farm Security Act (H.R. 2646) and the Agriculture Conservation and Rural Enhancement Act (S. 1731) would take a toll on the finances of most American families for years to come, the most active citizen participants in the development of the farm bill have not been representatives of taxpayers and consumers, but the leaders of several large farm organizations.
Not coincidentally, most analysts agree that the farm lobby will be the largest beneficiary of legislation that will increase farm subsidies to $191 billion over the next 10 years.1 These subsidies, combined with an additional estimated $271 billion in government-inflated food prices, will cost the average American household nearly $4,400 over the next decade.2 Given that the nation's farm legislation will have such a large impact on all Americans, it is important to identify the farm policy's winners and losers, and to examine the role agricultural interests have played in crafting it.
Current agriculture policies are designed to concentrate farm subsidies among large farms and agribusinesses. Rather than being awarded with regard to need, subsidy payments are based on the types of crops that are grown. More than 90 percent of all farm subsidies are allocated to farms that produce just five of the United States' 400 domestic agricultural products. In addition, subsidies to farmers increase with crop production, guaranteeing that the largest and most profitable farms receive the largest federal subsidies.
In addition to subsidies, assistance is given to farmers in the form of price supports, through which crop prices are artificially increased. The lion's share of this assistance, likewise, goes not to farmers who are most in need, but to large farms that grow the most crops.
In a system that is more accurately classified as corporate welfare than as income-support for struggling farmers, two-thirds of all farm subsidies go to just 10 percent of farms, most of which earn over $250,000 annually. At the same time, 60 percent of the nation's farmers, regardless of need, are left out of the farm subsidy system altogether.3
Because the largest agribusinesses are the chief beneficiaries of agriculture policy, they have both the incentives and resources necessary to invest heavily in maintaining the current flow of subsidy dollars. Through representative organizations, they have served on federal commissions, testified before Congress, and donated millions of dollars to federal political candidates. Not surprisingly, the House and Senate farm bills include many of the provisions that these groups support, including massive farm subsidies and price supports.
Producers of subsidized commodities have been the chief beneficiaries of farm policy. The 1996 Freedom to Farm Act4 was an important attempt to reform farm policy and would have initiated a gradual phaseout of nearly all farm subsidies. However, this impetus toward reform was countered by emergency agriculture spending bills that were passed by Congress every year between 1998 and 2001, resulting in a record high of $29.8 billion in farm subsidies in 2000.5
The farm bill that is developed this year will be critical in setting the direction of farm policy for the next decade. Congress will decide whether to recommit to the Freedom to Farm goal of phasing out crop subsidies or to abandon Freedom to Farm altogether and return to an era of massive government subsidies to farmers.
Of the $64.2 billion in direct subsidies paid to farmers between 1999 and 2001, over 90 percent went to producers of just five crops--wheat, corn, cotton, soybeans, and rice.6 With millions of dollars at stake, the farm lobby has been actively involved in the current farm bill debate through both policy advice and generous donations to political candidates.
Organizations representing the farmers of the subsidized crops are responsible for much of the $69.6 million that agribusinesses have donated to congressional and presidential candidates since 1999.7 Several of these organizations were also represented on the 11-member Commission on 21st Century Production Agriculture, which was established under the Freedom to Farm Act to review its performance and recommend changes. In January 2001, the commission released a report calling for the complete abandonment of Freedom to Farm through (1) the extension and expansion of Production Flexibility Contract (PFC) subsidies that were supposed to be phased out, (2) the creation of a new "counter-cyclical" farm subsidy program, and (3) the continuation of policies targeting subsidies to the largest farms and agribusinesses.8
American Farm Bureau Federation President Bob Stallman, a commission member, reiterated these policy prescriptions before the House Agriculture Committee on February 28, 20019 and later called any vote against them a "slap in the face."10 The Washington, D.C., office of the American Farm Bureau Federation backed up these calls for increased farm subsidies with political donations of a steady $4.5 million per year.
Similarly, a member of the National Cotton Council's board of directors, claiming to represent the entire cotton industry, testified in favor of subsidy increases before the House Agriculture Committee on July 18, 2001. His suggestion was given added weight by $304,422 in political donations that the council contributed to federal political candidates since 1999.11
The unprecedented farm subsidy increases proposed by these agriculture industry representatives were quickly written into farm legislation, and on October 5, 2001, the House of Representatives voted overwhelming to pass the most expensive farm bill in history. The 10-year, $171 billion bill contains virtually the same PFC expansions, new counter-cyclical farm subsidies, and further tilting of farm subsidies toward the largest farms that were proposed by the farm lobby. The Senate followed suit by passing an equally expensive bill with most of the same policy prescriptions.12
If these bills become law, the biggest winners will be pro-farm subsidy organizations such as the Washington office of the American Farm Bureau Federation, which made large investments to promote expanded farm subsidies and will be able to claim credit for increased government payments to their membership. Winners will also include numerous Members of Congress, Fortune 500 companies, and other notables listed in Table 1 as well as large farms and agribusinesses listed in the Appendix.13
Currently, the federal government provides benefits to sugar growers through price-setting policies that artificially raise the prices that consumers pay for sugar, rather than through direct subsidies. These price-setting policies contain the following elements: (1) strict tariffs (import taxes) and import limits to prevent competition from cheaper foreign sugar; (2) non-recourse loans to sugar processors, which revert to the status of grants if the price of sugar drops below a certain level; and (3) domestic limits on how much sugar can be processed.
All told, the sugar program artificially increases the price of sugar to three times the world market price and costs American consumers $1.9 billion per year in higher food prices.14 Despite its harm to consumers, however, the federal sugar program was left untouched by the 1996 Freedom to Farm Act.
Since 1999, $4.3 million has been donated to federal politicians by the sugar industry, nearly all of which has come from organizations representing farmers who benefit from these price supports and want to continue them. Among such pro-price support organizations are the American Sugar Cane League, which has donated $414,898 to federal candidates since 1999, and American Crystal Sugar, which has donated $795,235. In December 2001, an amendment offered by Senator Judd Gregg (R-NH) to eliminate the federal sugar program and shift the savings to the food stamp program was defeated by a vote of 71-25.15
The largest beneficiary of continued government price-fixing in the sugar industry, however, will be Florida's Flo-Sun, Inc. Owned by brothers Alfonso (Alfie) and Jose (Pepe) Fanjul, the Flo-Sun sugar empire includes several sugar mills and 410,000 acres of land in Florida and the Dominican Republic. Despite a fortune conservatively estimated at $500 million, the Fanjuls receive a huge annual sugar benefit from the federal government: roughly $65 million for their Florida-grown sugar and an additional $60 million for the Dominican sugar they sell in the United States.16 Profiting from Congress's misguided policies, the Fanjuls have purchased a 7,000-acre luxury resort with 14 swimming pools, several mansions, and world-class golf courses.17
It is not unreasonable to assume that Flo-Sun may well have had substantial influence on the current farm policy debate on Capitol Hill, given that it has donated $1,136,900 to federal politicians since 1999. Overall, the sugar industry continues to be a major beneficiary of price-support policies that have cost American consumers billions of dollars.
While the sugar industry has been actively lobbying to maintain its price supports, the peanut industry has dedicated its resources to promoting a shift from price supports to taxpayer subsidies for peanut production. Currently, peanut prices are increased to artificially high levels through import restrictions and non-recourse loans.
Prices are also kept high through domestic shortages that have been created by limiting permission to grow peanuts for domestic sale to those who possess marketing quotas--licenses to grow a specific amount of peanuts. These government-created shortages raise the price of peanuts sold in the United States to double the world price and cost American consumers over $400 million annually.18
For years, Congress has talked about eliminating peanut price supports, and the peanut industry has worked actively to ensure that any such change will preserve government benefits to the peanut industry. In testimony before the House Agriculture Committee on June 18, 2001, Western Peanut Growers Association (WPGA) President Doyle D. Fincher proposed replacing the current peanut price support system with direct government subsidies to peanut growers and called for massive government payments to compensate holders of peanut quotas for the loss of the value of their quotas.19 The National Peanut Growers Group (NPG), a coalition of state and local peanut organizations, also provided congressional testimony in favor of moving away from price supports and toward government subsidies.20
Adding weight to these proposals are hefty political donations made by these organizations. Since 1999, the Western Peanut Growers Association has donated $107,000 to federal candidates, and the National Peanut Growers Group has donated $138,000.
The wishes of the WPGA and NPG were granted when the House's Farm Security Act included a provision to replace peanut price supports with a new a 10-year, $3.5 billion peanut subsidy program. The Senate bill contains similar provisions. In effect, the new program shifts the cost of peanut subsidies from consumers to taxpayers.
According to the U.S. General Accounting Office, the biggest winners will be the peanut growers who had not previously owned a peanut quota but would now be granted permission to grow peanuts for domestic sale. Not only will they now be able to grow peanuts without restrictions, but they will also be eligible for federal subsidies. Not to be denied, quota holders will also benefit, since both the House and Senate bills award grants averaging $125,000 to each quota holder as compensation for losing the value of the quota.21
The House and Senate farm bills also benefit the dairy industry. Current law is based on the perception that Midwest dairy farmers produce milk too efficiently, resulting in milk prices that are considered to be too low.
In response to this situation, the federal government allows states with less efficient dairy farmers to establish local milk cartels to keep less expensive Midwest milk off the market and sustain artificially high prices for milk produced in those states. Under this Depression-era program, the further a participating state is away from Eau Claire, Wisconsin, the higher its milk prices are increased. Each year, this "milk tax" costs supermarket customers approximately $2.7 million.22
Much of the $3.3 million donated to federal candidates by the dairy industry since 1999 has been from dairy farmers who support continuing the current price-fixing scheme. In testimony before the House Agriculture Committee on April 5, 2001, Jerry Kozak--CEO of the National Milk Producers Federation (NMPF), which represents a majority of the nation's 83,000 dairy farmers--declared that the current milk policy, which raises the price of milk as much as 20 cents per gallon, benefits consumers and should be continued.23 The policy prescriptions of the NMPF were buttressed by the $120,500 in donations it has made to federal candidates since 1999.
In a step toward reform, the Northeast Interstate Dairy Compact, which had allowed New England states to set milk prices even higher than federal regulations permitted, was allowed to sunset in October 2001. However, this move was countered by a stipulation in the Senate bill, which awards $2 billion in golden parachute payments to assist dairy farmers who will lose the benefits of this second tier of price inflation and provides additional aid to other dairy farmers nationwide. An amendment by Senator Michael Crapo (R-ID) to delete this funding was strongly opposed by the farm lobby and failed by a vote of 51 to 47.24
As written, both the House and Senate bills will continue current price-altering milk policies. Federal policies that increase milk prices appear to be here to stay, and dairy farmers--especially those far away from Eau Claire, Wisconsin--will continue to be the beneficiaries.
The House and Senate farm bills create many winners--first and foremost the producers of corn, wheat, cotton, rice, soybeans, sugar, peanuts, and milk. Specifically, the 241,000 farms that are awarded two-thirds of all farm subsidies, the 57,500 farms that each receive more than $100,000 annually, and those that benefit from government-inflated food prices will benefit greatly under the record-high subsidies and price supports included in H.R. 2646 and S. 1731.25
The bills' losers include the 270 million Americans who will be forced to pay high taxes and inflated food prices to subsidize this special interest. While the final bill has yet to be written, it is currently estimated that the House and Senate bills will increase total agriculture subsidies to $191 billion and that inflated prices will cost consumers another $271 billion over the next 10 years.
Within the next decade, these special-interest programs will cost the average American household $1,805 in taxes and $2,572 in inflated food prices, for a total of $4,377.26 Furthermore, these inflated prices will disproportionately hurt low-income families, who spend a higher percentage of their income on food.
If the $462 billion in benefits over the next decade were to be divided among the nation's 456,000 full-time farms, each would receive an average benefit of more than $1 million in direct subsidies and inflated prices. In light of the fact that approximately two-thirds of the $69.6 million in political donations given by agribusinesses was given by entities that favored increased subsidies and price supports, this indicates quite a good return on the dollar. Their $46.4 million investment brought home a $462 billion bounty.
Many political scientists no doubt would consider agriculture policy a classic case of special-interest politics. Agricultural policy has very few beneficiaries, but the stakes are high and the benefits are great for those who could be among the winners. These beneficiaries therefore have great incentive to invest their time, expertise, and money to ensure that the current system is perpetuated and expanded.
On the other hand, though the cost of these special-interest policies is in the billions, it is diffused over 270 million Americans, most of whom do not notice the slow trickle of dollars being transferred from their pockets to agribusinesses and farms with incomes that dwarf their own. They therefore feel little incentive to counter the farm lobby.
Thus far, the beneficiaries of subsidies and price-fixing practices have been successful in their efforts to influence the crafting of farm policy that will be in place for the next decade. Consumers and taxpayers should keep this in mind every time they go to the supermarket and every time they pay their taxes.
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.
1. This figure was calculated by removing the expenditures in the $171 billion farm bill that are not direct subsidies to farmers and adding other farm subsidy programs, such as crop insurance, which are funded in other bills, resulting in a total of $191 billion.
2. For a statistical breakdown of these totals, see Brian M. Riedl, "The Cost of America's Farm Subsidy Binge: An Average of $1 Million Per Farm," Heritage Foundation Backgrounder No. 1510, December 10, 2001.
5. U.S. Department of Agriculture, "FY 2002 Budget Summary," at http://www.usda.gov/agency/obpa/Budget-Summary/2002/2002budsum.htm.
6. The $64.2 billion figure is taken from U.S. Department of Agriculture, "Budget Summary," 2000, 2001, and 2002 editions, and the breakdown of subsidies by crop is from U.S. General Accounting Office, Farm Programs: Information on Recipients of Federal Payments, GAO-01-606, June 2001, p. 23.
7. All political donation statistics are from www.opensecrets.org, through October 1, 2001.
9. For a summary of Mr. Stallman's testimony, see www.fb.org/issues/farm_bill/.
10. Cited at www.opensecrets.org.
11. Mark Williams, before the Committee on Agriculture, U.S. House of Representatives, July 18 2001, at www.cotton.org/gov/testimony/Williams-House-Testimony.cfm.
12. While the Senate bill reduces the maximum annual subsidy a farmer can receive from $500,000 to $275,000, it retains the numerous loopholes that make these limits irrelevant. See Brian M. Riedl, "How Farm Subsidies Became America's Largest Corporate Welfare Program," Heritage Foundation Backgrounder No. 1520, February 25, 2002.
13. Members of Congress defend their votes for farm subsidy programs that benefit themselves by pointing out that they are financially affected by many policies, such as tax policy, and still vote on those policies. The conflict of interest, however, is in the degree to which farm policy affects these Members. While marginal tax policy changes have a minor financial affect that is distributed more or less evenly across taxpayers, a vote to continue farm subsidies can transfer as much as $750,000 in direct payments to a single Member of Congress--a benefit 99.9 percent of other Americans would not be given.
16. "Sugar's First Family," Center for Responsive Politics, at http://www.opensecrets.org/pubs/cashingin_sugar/sugar08.html.
19. Doyle D. Fincher, testimony before Committee on Agriculture, U.S. House of Representatives, July 18, 2001, at http://www.go-peanuts.org/jul18b.htm.
20. Dykes Adkison, testimony before the Subcommittee on Specialty Crops and Foreign Agriculture Programs, Committee on Agriculture, U.S. House of Representatives, June 13, 2001, at http://agriculture.house.gov/hearings/h010613w4.pdf.
22. Data from U.S. Department of Agriculture, Economic Research Service, as cited at www.cato.org/pubs/regulation/reg19n4-cur.html.
23. Jerry Kozak, testimony before Committee on Agriculture, U.S. House of Representatives, April 5, 2001, at http://agriculture.house.gov/hearings/h10405w1.pdf.