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Issue Brief #3797 on Fiscal Cliff

December 10, 2012

Fiscal Cliff Deal: Including Farm Bill Would Lock in Spending

By

Lawmakers looking for spending cuts to avert the fiscal cliff may try to include the nearly $1 trillion House Agriculture Committee–passed farm bill and its $35 billion in “savings” as part of a “grand bargain.”[1] While savings would be welcome, they should be used for deficit reduction, not to pay for new spending. They should also be based on responsible policy.

The House farm bill does not meet these goals. Its reforms—such as ending commodity programs—are offset by new commodity subsidies, an expanded crop insurance program, and new milk subsidies. Like the Senate farm bill’s shallow loss program, these new subsidies could ultimately cost taxpayers more than the current ones.[2] Coupling the farm bill with a grand bargain would also lock in five years of wasteful programs and spending when Washington should be reducing spending.

A Bipartisan Problem

Earlier this year the Senate passed S. 3240, a $970 billion bill, and the House Agriculture Committee approved H.R. 6083, which would cost $947 billion.[3] Yet both chambers of Congress have failed to reach an agreement on a bill to replace the expired omnibus farm bill.

The agriculture sector is riding a wave of record income and crop prices; net farm income is forecast to reach $91.7 billion in 2012, second only to last year’s record of $98.1 billion.[4] Next year would be an opportune and justifiable time to enact major agriculture reforms, including decoupling farm programs from food stamps, and ending the direct and countercyclical payment programs and crop insurance subsidies. But a lame-duck session—or one in conjunction with any grand bargain—is not the time to lock in new wasteful subsidy spending.

Tangle of Special Interests

The farm bill also encompasses food stamps and nutrition, energy, conservation, trade, and rural development programs. Political pressures surrounding these programs are impediments to reform. Lawmakers should treat agriculture programs separately and send the other programs—such as food stamps, which accounts for 80 percent of farm bill spending—to more relevant committees.[5]

Flawed New Subsidies

Despite some reforms, the House bill’s farm provisions would be an abundance of income subsidies, price supports, trade quotas, and other schemes that distort market prices, incentivize farmers to make risky land-use decisions, and undermine free trade. They also unfairly punish taxpayers and consumers. Most of these Depression-era programs are antiquated in light of technological advances in agriculture.

Existing commodity subsidies—direct and countercyclical payments—are based on historical acreage and a farm’s crop yield, regardless of whether the land is currently farmed. Thus, they increasingly favor large-scale farms over smaller farms, even though large farms are more resilient to crop failures and other setbacks.[6] President Obama called to eliminate this $5 billion in annual subsidies in his fiscal year 2013 budget proposal.[7] Both the House and Senate farm bills propose the same, which would be significant, albeit singular, progress. Yet the fatal flaw in each bill is replacing them with new “safety net” programs.

The House bill would introduce the price loss coverage (PLC) program to subsidize farmers’ income if commodity prices fall below new target prices based on recent years’ prices—which are the highest in history. The CBO estimates the new program will cost $3.1 billion a year. However, if current high prices fall to their average historical levels, taxpayers could be on the hook for some $18 billion annually—far in excess of what the direct payments being replaced currently cost.[8]

Taxpayers also subsidize crop insurance, paying about 62 percent of farmers’ premiums. The insurance covers a substantial portion of crop losses or price declines. The government also reimburses the administrative costs of the insurance companies that administer the policies ($1.3 billion in 2011).[9] According to the Congressional Budget Office (CBO), the insurance subsidies will cost taxpayers $8.9 billion a year.[10]

The House bill expands crop insurance and introduces the Supplementary Coverage Option (SCO) program, which the CBO projects will cost $4 billion over 10 years. However, other findings report that if crop prices remain at current high levels, SCO could cost $2.6 billion annually.[11] Further, under SCO, the very insurance companies already getting taxpayer subsidies would receive even more lavish subsidies.

Current subsidies, such as import quotas on sugar and dairy subsidies, also artificially inflate the cost of food in addition to damaging our trade relations with other countries. A 15.36 cents per pound tariff applies to sugar imported above the statutory quota, a cost that gets transferred to consumers. During the past year, American consumers paid 41 percent more on average for sugar than the average world price.[12]

Controls on milk supplies also inflate prices. Cheese, for example, is priced about 50 percent higher than the world price, and butter prices are double the world price.[13]

Again, the House bill undoes its own progress by replacing old dairy subsidies with new ones. Because milk subsidies in the expired farm bill partially subsidized farmers for high costs of feed (caused by the ethanol mandate), lawmakers may leverage the threat of higher milk prices absent such subsidies in their quest to attach the farm bill to a fiscal-cliff deal.

Farming does entail risk, but so do most other entrepreneurial activities. Rather than rely on taxpayer-funded subsidies, farmers could utilize existing market-based, non-governmental solutions to help manage their risk. Private insurance, crop diversification, credit reserves, and futures contracts and hedging are a few examples.[14]

Farm Policy Ripe for Reform

Agriculture policy reform is long overdue, but both the House and Senate farm bills propose inadequate reforms and make matters worse. The better solution is to decouple farm policy from food stamps and the other programs and end the subsidies that create perverse incentives for farmers at unnecessary cost to taxpayers and consumers.

Combining the farm bill with a fiscal-cliff deal would not achieve necessary agriculture reforms or reduce federal deficits. Only cutting spending and reforming entitlement programs can accomplish those goals.

—Emily J. Goff is a Research Associate in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Show references in this report

[1] Sara Wyant, “Washington Week Ahead: How a Farm Bill Could Still Help Avoid the Fiscal Cliff,” Agri-Pulse, November, 25, 2012, http://www.agri-pulse.com/Washington-week-ahead-how-farm-bill-could-still-help-avoid-the-fiscal-cliff-11252012.asp (accessed December 4, 2012).

[2] Emily Goff, “Shallow Loss: The 2012 Farm Bill’s New Subsidy Program,” Heritage Foundation Issue Brief No. 3662, July 10, 2012, http://www.heritage.org/research/reports/2012/07/shallow-loss-the-2012-farm-bill-s-new-subsidy-program#_ftn1 (accessed November 9, 2012).

[3] Congressional Budget Office, Cost Estimate of S. 3240, July 6, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/s3240Passed_0.pdf (accessed December 6, 2012), and Congressional Budget Office, Cost Estimate of H.R. 6083, July 26, 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr6083.pdf (accessed December 6, 2012).

[4] Diane Katz, “Farm Bill 2012: Agriculture Policy Ripe for Reform,” Heritage Foundation Backgrounder No. 2697, June 7, 2012, http://www.heritage.org/research/reports/2012/06/farm-bill-2012-agriculture-policy-ripe-for-reform#_ftnref27 (accessed November 26, 2012).

[5] Robert Rector and Katherine Bradley, “Reforming the Food Stamp Program,” Heritage Foundation Backgrounder No. 2708, July 25, 2012, http://www.heritage.org/research/reports/2012/07/reforming-the-food-stamp-program (accessed November 9, 2012).

[6] Katz, “Agriculture Policy Ripe for Reform,” p. 3.

[7] White House Office of Management and Budget, President’s FY 2013 Budget Proposal, February 2012, http://www.whitehouse.gov/omb/budget/ (accessed November 30, 2012).

[8] Vincent H. Smith, Bruce A. Babcock, and Barry K. Goodwin, “Field of Schemes Mark II: The Taxpayer and Economic Welfare Costs of Price Loss Coverage and Supplementary Insurance Coverage Programs,” September 12, 2012, p. 6, http://www.aei.org/files/2012/09/12/-smith-goodwin-babcock-field-of-schemes-mark-ii-price-loss-coverage-and-supplementary-insurance-coverage-programs-final_161111359930.pdf (accessed December 6, 2012).

[9] Romina Boccia, “Farm Bill Should End Secrecy in Crop Insurance Subsidies,” Heritage Foundation Issue Brief No. 3674, July 23, 2012, http://www.heritage.org/research/reports/2012/07/2012-farm-bill-and-crop-insurance-subsidies (accessed November 30, 2012).

[10] U.S. Government Accountability Office, Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining, GAO–12–256, March 2012, http://www.gao.gov/assets/590/589305.pdf (accessed November 8, 2012).

[11] Smith, Babcock, and Goodwin, “Field of Schemes Mark II,” p. 26.

[12] Bryan Riley, “Abolish the Costly Sugar Program to Lower Sugar Prices,” Heritage Foundation Issue Brief No. 3791, December 5, 2012, http://www.heritage.org/research/reports/2012/12/sugar-industry-abolish-the-costly-sugar-program-to-lower-sugar-prices (accessed December 6, 2012).

[13] U.S. Government Accountability Office, Dairy Industry: Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options, GAO–05–50, December 29, 2004, http://www.gao.gov/products/GAO-05-50 (accessed December 4, 2012).

[14] Katz, “Agriculture Policy Ripe for Reform,” pp. 8–9.

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