April 17, 2002 | Backgrounder on Agriculture
The House of Representatives and the Senate are close to agreeing on legislation reauthorizing agriculture policy for the next 10 years. As soon as the differences between the Senate-passed Agriculture Conservation and Rural Enhancement Act (S. 1731) and the House-passed Farm Security Act (H.R. 2646) are mended in conference, the final bill is expected to be approved quickly by Congress and then sent to the White House for President Bush's signature or veto. If signed into law, this legislation will set U.S. agriculture policy back decades and abandon the reforms of the 1996 farm bill that were designed to promote a free market for U.S. farmers.
Last December, President Bush instructed Congress to pass a responsible farm bill that: (1) provides all farmers with a safety net based on savings accounts, (2) expands international trade, (3) is based on free market principals, and (4) is fiscally responsible.1 Congress has failed on all four of these accounts, and President Bush should veto the farm bill for at least 10 compelling reasons.2
REASON #1: The total cost of the massive farm bill is not known.
The Congressional Budget Office (CBO) estimates the cost of House and Senate farm bills at $171 billion over 10 years. However, the actual costs of the farm bill will depend on the economic performance of the farm sector. Over the past decade, poor forecasting and technical errors have caused actual agriculture spending to be twice as high as CBO forecasts.3
Several economists suggest that the CBO has once again underestimated the true cost of the farm bill. These suspicions were bolstered by the CBO's recent admission that it had misread a key provision of the Senate bill and consequently underestimated its cost by over $6 billion.4 Furthermore, other questionable economic assumptions and technical errors in the CBO's original projection could also underestimate the cost of the farm bill. If historical patterns hold and actual agriculture spending ends up double the forecasted level, the farm bill's final cost would increase from $171billion to $342 billion.
Clearly, any legislation of such enormous cost with such a large margin of error is not ready for enactment.
Farm subsidies have grown faster than any other major federal program over the past five years, increasing from $6 billion in 1996 to nearly $30 billion in 2000. As the most expensive farm bill in the history of any nation, the current bill would mandate continued subsidy increases throughout the next decade.
This $171 billion bill includes $154 billion in direct payments to farmers. When taking into account the $37 billion cost of the crop insurance program enacted last year, the total amount of farm subsidies over the next 10 years will be $191 billion (or higher if current cost estimates understate the bill's true cost).5 These subsidies will cost the average American household $1,805 in higher taxes over the next decade.
The high income taxes needed to pay for subsidies are not the only costs of this flawed agriculture policy. The bill preserves the Conservation Reserve Program, which raises the price of food above the market-clearing level by taking cropland out of use and thereby creating a food shortage. Prices of commodities such as milk and sugar are fixed by government-set cartels that raise domestic prices as high as three times their world price. Under the farm bill, this "food tax" would cost American consumers an astounding $271 billion over the next decade--an average of $2,572 per household.6
Moreover, though Americans would see their food budgets stretched thin, the recipients of the targeted food price supports are hardly in need. In fact, the largest beneficiary will be Florida's Flo-Sun Inc., a sugar empire with over 410,000 acres of land in Florida and the Dominican Republic that has reaped the bounty of past subsidies. Flo-Sun's owners, Alfonso (Alfie) and Jose (Pepe) Fanjul, have a fortune conservatively estimated at $500 million and, with the help of past sugar price supports, have purchased a 7,000-acre luxury resort with several mansions, 14 swimming pools, and world-class golf courses.7 If President Bush signs the farm bill, the Fanjuls will be guaranteed a continuation of their $125 million annual benefit in federal sugar price supports while working families will feel the pinch at the supermarket.8
In sum, even if one accepts the current cost estimates, the farm bill's combined cost in taxes and higher food prices will be approximately $462 billion over 10 years--which is more than the federal government will spend on education and environmental protection combined. This tab will leave the average household with $4,377 less to spend on necessities such as mortgage payments, health insurance, retirement savings, or their children's education.
Most Americans do not mind paying taxes to help those who are in need, and farm subsidies are typically defended as being necessary to help struggling family farmers. But while many farmers were poor when farm policy was created in the 1930s, farmers today are much wealthier. Today, the average farm reports a net worth of nearly $564,000 (double that of the average household)9 and an annual income of $64,347 (17 percent above the national average) despite the fact that the cost of living in rural areas is 10 percent to 40 percent lower than the national average.10 By no means a teetering industry, the failure rate for farms is just one-sixth the rate for non-farm businesses.11
Despite this wealth and stability, the 456,000 full-time farms in America will receive, on average, an astounding $1 million each in combined subsidies and inflated food prices over the next decade. Farmers are no more in need or at risk than other working Americans, and any industry unpredictability due to weather and soil conditions can be addressed through crop insurance and futures markets.
Not only do farm subsidies transfer money from taxpayers and consumers to an agriculture sector that is generally well-off, but the criteria for distributing these funds also ensure that the largest and wealthiest farms receive the vast majority of farm subsidies. While it would cost just $4 billion per year to guarantee every full-time farmer in America an income of at least 185 percent of the federal poverty line ($32,652 for a family of four in 2001),12 the federal government spent nearly $30 billion in farm subsidies in 2000. Under provisions of both the House and Senate's farm bill, the federal government would spend $191 billion in direct funding and an additional $271 billion in price supports over the next decade.
Despite the justification that it is needed to help small family farms, agriculture assistance is designed to bypass smaller farms. Because subsidies increase with the amount of crops that are produced, the largest agribusinesses, which benefit from economies of scale, receive the largest subsidies. The Environmental Working Group reports that two-thirds of farm subsidies go to just 10 percent of farms, most of which have annual incomes above $250,000. In contrast, the bottom 80 percent of farmers receive just one-sixth of subsidies.13
Supporters claim the farm bill toughens subsidy limits, but numerous loopholes render these restrictions useless. Farm subsidies are awarded to individuals, not farms, so large farms can sign up every employee (and sometimes their family members) for subsidies. Subsidy limits can be increased to as much as 200 percent as long as the payments are spread across numerous properties. In one case, Tyler Farms of Arkansas collected nearly $24 million in farm subsidies between 1996 and 2000 simply by dividing a farm into 66 separate "corporations" and signing up numerous individuals as subsidy recipients.14
Subsidies that are concentrated among the largest and most profitable agribusinesses have helped these large farms buy out smaller farms and further consolidate the agriculture industry. In what one agriculture official calls the "plantation effect," family farms with less than 100 acres are being bought out by larger agribusinesses, which then convert them into tenant farms. Three-quarters of rice farms have already become tenant farms, and other types of farms are trending in that same direction.15 Far from saving the family farm, continuing the current farm subsidy system will accelerate its demise.
The farm bill does nothing to address the flaws of a subsidy system that has targeted the largest and most wealthy agribusinesses. Instead, it will simply shroud the identities of subsidy recipients to make this bias a state secret. Records currently available to the public reveal that 14 Members of Congress receive as much as 160 times the national median farm subsidy; 15 Fortune 500 companies receive as much as 58 times the national median farm subsidy; and wealthy celebrities such as Ted Turner, David Rockefeller, and Scottie Pippen receive as much as 75 times the median farm subsidy.16
Rather than address the bias of a system that has awarded subsidies to such wealthy individuals and corporations, the farm bill will amend the Freedom of Information Act to restrict the public's right to know where the federal government is spending farm subsidy tax dollars.17 This could set a dangerous precedent that invites more proposals to exempt from public disclosure additional federal programs that may include information embarrassing to public officials and influential private citizens.
The current farm policy system was created in the 1930s, when half of the nation's people worked on farms and farm technology did not approximate today's advancements. Yet policies designed to meet needs that existed 70 years ago persist today.
For example, in the 1930s, policymakers were concerned that milk produced in the Midwest would spoil by the time it could be transferred by train across the country, so they encouraged milk production on the East and West Coasts by creating a system of milk cartels, which guaranteed that the price of milk would increase with a producer's distance from Eau Claire, Wisconsin. Today, even though California, not Wisconsin, is the nation's top dairy producer and virtually no milk travels cross-country by train, this Depression-era relic still adds as much as 20 cents to the price of a gallon of milk.
Milk cartels are not the only unnecessary farm programs. Although some argue that the agriculture sector would collapse without subsidies, 90 percent of all farm subsidies are allocated to producers of just five crops: wheat, corn, cotton, rice, and soybeans. The producers of those five crops are given guaranteed incomes and constant bailouts that are unparalleled by those of any other industry.18 The producers of 400 other agriculture products who have not been eligible for most farm supports have managed to thrive over the past century; the sky will not fall if farm subsidies are eliminated for these final five crops.
Farm policy is based on the premise that a surplus of crops has lowered crop prices too far and farmers need subsidies to recover lost income. However, the federal government's remedy is to offer subsidies that increase as a farmer plants more crops. This creates greater crop surpluses, driving prices down even further and spurring demands for even greater subsidies.
At the same time the federal government is paying some farmers to grow more crops, the Conservation Reserve Program pays other farmers to grow fewer crops. Adding to the contradiction and confusion, the federal government employs price supports to make food more expensive at home and then funds export subsidies to make the same American food less expensive for consumers overseas. Farmers get "emergency" bailouts whether the weather is good (and abundant crops lower prices) or bad (and crops are destroyed). In sum, federal farm policy contradicts itself and makes no economic sense.
Because 96 percent of the world's consumers live outside the United States, international trade is vital to American farmers. Yet, due to an average global agriculture tariff of 62 percent, just 25 percent ($14 billion) of American agricultural products are exported.
The farm bill does very little to open global markets and engender a level of trade that would create jobs and increase incomes in the agriculture sector. Furthermore, by including $271 billion in price supports that artificially raise the price of American food, the farm bill guarantees that many American crops will be too expensive to find buyers in other nations.
Not only does this legislation fail to facilitate access to export markets or remove trade-restricting price supports, but it also could eliminate American exports from the arena of competition. The World Trade Organization (WTO) limits the United States to $19.1 billion annually in "trade-distorting" farm policies. Price supports for dairy and sugar, loan deficiency payments, marketing loan gains, and commodity certificates (and probably the new "countercyclical" payments, which will cost up to $5 billion annually) all qualify as "price distorting" practices. If the United States violates the WTO farm subsidy limit, the WTO can be expected to impose trade sanctions on American farm products, and this would have a devastating effect on U.S. exports.
The current farm bill does not expire until September 30, 2002. The President should veto the new farm bill and allow Congress to spend the next five months crafting a better bill that incorporates market principles, opens global markets, and does not cost American taxpayers and consumers hundreds of billions of dollars.
In the meantime, President Bush should ask Congress to extend current farm policies for one year to alleviate any short-term funding unpredictability for farmers who are currently making their annual planting decisions. Otherwise, if this legislation becomes law, the nation will be locked into 10 years of expensive, mistargeted, and self-defeating farm policies, creating an even larger problem that will plague Americans for decades.
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.
2. Though there are two farm bills--the House and Senate versions--the references in this paper to "the new farm bill" denote the provisions that are identical in both bills and likely to remain unchanged in the final legislation.
3. Data provided by the Congressional Budget Office. This poor forecasting track record is nothing new; see U.S. General Accounting Office, USDA's Commodity Program: The Accuracy of Budget Forecasts, April 1988.
8. "Sugar's First Family," Center for Responsive Politics, at http://www.opensecrets.org/pubs/cashingin_sugar/sugar08.html.
10. U.S. Department of Agriculture, 2001 Agricultural Statistics, Table 9-42, and U.S. Bureau of the Census, "Historical Income Table--Households," Table H-5, at http://www.census.gov/hhes/income/histinc/h05.html.
11. Jerome M. Stam, Daniel L. Milkove, and George B. Wallace, "Indicators of Financial Stress in Agriculture Reported by Agricultural Banks, 1982-99," U.S. Department of Agriculture, Economic Research Service, AIS-74, February 2000, p. 48, and data provided by U.S. Department of Agriculture at http://www.ers.usda.gov/briefing/FinancialMarkets/AIS74a.pdf.
12. "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. The eligibility threshold for several federal income-assistance programs, like Women, Infants and Children (WIC), is 185 percent of the federal poverty level.
13. Data provided by the Environmental Working Group at http://www.ewg.org.