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WebMemo #899 on Federal Budget

October 27, 2005

The Senate Attempts To Prematurely Extend the Bloated Farm Bill Through 2011

By

This past April, Congress enacted a budget resolution that called for streamlining $34.7 billion in entitlement spending over the next five years. A seemingly minor provision coming out of the Senate Agriculture, Nutrition, and Forestry Committee threatens to negate all of the positives in the reconciliation bill. In return for shaving $3 billion off the $102 billion scheduled to be spent on farm subsidies and conservation payments over the next five years, the Senate reconciliation bill extends the farm subsidy programs of the 2002 farm bill-currently scheduled to expire in 2007-through 2011. This $60 billion commitment will likely eliminate any chance to meaningfully reform the bloated farm programs and may seriously imperil America's ability to open foreign agriculture markets.

 

Perpetuating a Broken System

The Farm Security and Rural Investment Act of 2002 (P.L. 107-171) increased farm subsidy payments by 80 percent. Turning their backs on the 1996 "Freedom to Farm" reforms designed to bring the free market to agriculture, lawmakers expanded existing farm subsidy programs and created new ones. The distribution of these subsidies is woefully unequal: Nearly all subsidies go to growers of just six crops-wheat, cotton, corn, soybeans, rice, and peanuts. The remaining 73 percent of farmers specializing in livestock, fruits, vegetables, and other crops are locked out of most subsidies. Among the farmers who receive subsidies because they grow the "right" crops, nearly 70 percent of farm subsidies are distributed to just 10 percent of the subsidy recipients. Subsidizing large agribusinesses that grow certain crops while excluding many family farmers who grow other crops has earned farm subsidies the title "America's largest corporate welfare program."[1]

 

There is a widespread misconception that farmers are much poorer than most Americans. But most farming is done on large corporate farms, not family farms, and most farmers, on the whole, are better off than the popular misconception allows. As a Department of Agriculture report states, "On average, farm households have higher incomes, greater wealth, and lower consumption expenditures than all U.S. households."[2] Specifically, farmers earn incomes 17 percent above the national average and report net worths well above the national average. In 1999, the 136,000 households with annual farm sales of more than over $250,000-the group that receives the largest farm subsidies-reported an average income of $135,397, or two-and-a-half times the national average.[3] By no means a faltering industry, the farm industry suffers a failure rate just one-sixth the rate for non-farm businesses. Still, taxpayers subsidize (mostly large) farms with between $15 billion and $30 billion annually.

 

In addition, subsidies harm farmers because they simply make no economic sense. 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. The federal government's remedy is to offer subsidies that increase as a farmer plants more crops. Planting more crops, however, only leads to greater crop surpluses, driving prices down even further and spurring demands for even greater subsidies. Then, while paying some farmers to plant more crops, Washington turns around and pays other farmers not to farm 40 million acres of cropland each year. The economic illiteracy exhibited by farm subsidies is stunning even by government standards.[4]

 

Finally, farm subsidies harm farmers and consumers by restricting international trade. 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 United States cannot win access to global agriculture markets without paring back its own farm subsidies.

 

Enacting a Barrier to Reform

Conservatives and liberals have together called for phasing out farm subsidies and replacing them with Farmer Savings Accounts and other crop insurance mechanisms that shield family farmers from crop unpredictability without creating a permanent welfare system or subsidizing large agribusinesses. For various reasons, organizations representing taxpayers, consumers, environmentalists, international trade, third-world countries, and even farmers themselves have united around the shared conclusion that the 2002 farm bill was a step backwards. Thus, President George W. Bush has called for reducing the annual farm subsidy cap from $360,000 to $250,000 per farm and closing loopholes that allow large farms to collect much more than that. At the Doha round of international trade negotiations, the United States has proposed sweeping farm subsidy reforms designed to open up foreign markets. As 2007 nears, agriculture reform proposals are overflowing.

 

Every one of these proposals is endangered by the proposed four-year farm bill extension. A spokesperson for Senate Agriculture, Nutrition, and Forestry Committee Chairman Saxby Chambliss has stated that the Senator still plans to write new farm subsidy provisions in 2007 but that extending the farm bill through 2011 is necessary to guarantee that the budget reconciliation reforms designed to save $3 billion between 2006 and 2010 come to an end in 2011. This alone should be a reason to oppose the extension. Entitlement reforms should create permanent savings by permanently altering program spending formulas. By reverting to the old farm subsidy formulas in 2011, spending growth rates will spike back up to their pre-2006 levels and much of the permanent savings will be lost.

 

Furthermore, if lawmakers plan to write a new farm bill in 2007, then there is no reason to extend current law through 2011. Surely they could enact whatever changes they want to the 2011 baseline while writing the 2007 bill.

 

Instead, this four-year extension functions as an accounting gimmick that creates a barrier for real agriculture reform. Despite Sen. Chambliss' best intentions, once subsidy levels have been extended through 2011, there will be no statutory obligation to fix them in 2007. Supporters of the current system will likely consider these baseline levels as a floor and therefore see little reason to "reopen the farm bill" if the 2007 budget environment is more strict than the free-spending environment that produced the bloated 2002 legislation. Farm subsidy reforms will be difficult enough to enact in 2007 without creating a new $60 billion status quo.

 

Conclusion

Technically, this $60 billion commitment is not scored by the Congressional Budget Office as "new" spending because these spending levels were already assumed in long-term baseline estimates. However, by extending the current farm subsidy programs, lawmakers would lock that bloated baseline into law for four more years and likely prevent any meaningful agriculture reforms. Lawmakers should reconsider this stealth commitment to spend $60 billion more on a failed system.

 

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] U.S. Department of Agriculture, "Income, Wealth, and Economic Well-Being of Farm Households," Agricultural Economic Report No. 812, July 2002, p. 42.

[3] Ibid., pp. 16 and 52.

[4] Brian M. Riedl, "Top 10 Reasons to Veto the Farm Bill, "Heritage Foundation Backgrounder No. 1763,April 17, 2002, at http://www.heritage.org/Research/Agriculture/BG1538.cfm.

 

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