February 10, 2016 | Backgrounder on Agriculture
The next President should bring attention to the expansive role the federal government plays in agriculture, well before the next farm bill is introduced. Farmers in America receive a seemingly endless array of subsidies. These subsidies have little to do with helping struggling farmers, but are instead mostly provided to large agribusinesses. When the government intervenes through agricultural subsidies, farmers are acting, not in response to the market, but in response to the subsidies. Subsidies create serious harm, including hurting farmers by crowding out private solutions to help manage risk and undermining free trade. Consequently, there is a need for a strong, proactive agricultural agenda that is based on principles of free enterprise and economic freedom, not harmful government intervention. The focus should be on how the government makes it more difficult for farmers and ranchers to manage risk and run their operations.
At the outset of the next Administration, the President should bring attention to the overly expansive role the government plays in agriculture. The farm bill, which is reauthorized approximately every five years, is the centerpiece of agricultural policy. Instead of waiting until 2018, when the next farm bill legislation will likely be introduced, it is critical to get ahead of the process and develop a vision for the proper role of government in agriculture.
This paper gives a general framework and a starting point for discussing agricultural policies. Furthermore, it provides a proactive and positive approach that can help move the nation away from the status quo of government intervention in agriculture toward reforms that empower farmers and ranchers to best provide the food and fiber that meet market needs.
Farmers receive a seemingly endless array of direct and indirect federal subsidies. Existing policies are not really about protecting struggling farmers from serious and unforeseen losses that are beyond their control and they have little to do with the so-called safety net; rather, they are really about providing handouts to large agribusinesses to help ensure they do well financially. In general, agricultural policies have little to do with helping struggling farmers. The large majority of farm households are not struggling and have much higher income and wealth compared to all U.S. households. The median income for farm households was 19 percent higher than all U.S. households from 2005–2014, and a staggering 50 percent greater in 2014. Farm households had 10 times the net worth of all U.S. households in 2013. Only two percent of farm households are in the bottom half of all households in terms of both income and wealth, based on 2011 data.
Agricultural subsidies tend, in general, to benefit large agribusinesses. According to the Environmental Working Group, the top 20 percent of crop insurance policyholders in 2011 were the beneficiaries of 73 percent of the total premium subsidies. For commodity payments, the top 20 percent of recipients accounted for 78 percent of payments in 2012. According to the 2012 Census of Agriculture, and in regard to government payments in 2012, farms with $250,000 or more in sales constituted only 23 percent of the farms receiving such subsidies but they received 60 percent of the payments.
Further, these large agribusinesses, which are well positioned to manage risk, generally receive subsidies at a higher rate than smaller farms. Data regarding government payments (conservation and commodity payments) from the U.S. Department of Agriculture’s (USDA) “Family Farm Report 2014 Edition” show that 31 percent of small family farms (family farms with less than $350,000 in gross cash farm income) received payments whereas 80 percent of midsize and large-scale family farms (family farms with $350,000 or more in gross cash farm income) received payments.
This is not to say, however, that subsidies would be appropriate if the farms were small. The fact that a farm is small does not justify subsidizing it (especially given that any subsidy is almost certainly unjustified). In fact, more than half of all farms had sales less than $10,000, making them more like hobby farms than working agricultural operations. Taxpayers should not be forced to subsidize hobby farms any more than they should shoulder financial burdens for large agribusinesses.
Most farms do not participate in the safety net. The safety net refers to the federal crop insurance program, in which taxpayers subsidize 62 percent of the premiums for participating farmers, as well as the commodity price and income support programs. However, most farms do not receive these subsidies. Only 25.2 percent of all farms received commodity payments in 2011. Based on 2010 data, only about 15 percent of all farms participated in the crop insurance program. These participation numbers may seem low, but likely are due to most farms being extremely small and having little production, not all commodities being eligible, and some farmers simply choosing not to participate.
Moreover, the safety net protects against almost all risk. The safety net for farmers not only offers protection against major losses, but also covers minor dips in expected revenue; further, in some cases, producers can even receive payments in excess of losses sustained. In other words, it is not a safety net at all, but instead more like a trampoline. Taxpayers should not be expected to cover what often is just the risk of doing business.
The heavily subsidized federal crop insurance program does not require a disaster, any catastrophic loss, or for that matter even a yield loss for participating farmers to receive indemnity payments. The program offers revenue-based policies that insure farmers in the event that they receive less revenue than expected (the dip in revenue can be small). Further, there are no payment limits on the total amount of farmers’ premium subsidies or total indemnities that farmers can receive in the crop insurance program.
The cost to taxpayers for all of the “agriculture-related” parts of the farm bill is significant, reaching approximately $20 billion per year. The cost is far from the only reason why the status quo of farm bill and other agricultural subsidies is unacceptable and needs to be addressed. Subsidies can lead to the problem of moral hazard, in which farmers will take actions they would otherwise not take because the costs of the risks are being passed on to taxpayers. For example, farmers may decide to plant crops on marginal lands that have high rates of losses because they do not bear the risk. They also may not seek to innovate because there is less reason to do so.
When the government intervenes through agricultural subsidies, farmers are acting, not in response to the market, but in response to the subsidies. The numerous subsidies that form the foundation of existing agricultural policy lead to many problems, including:
There is a need for a strong, proactive agricultural agenda that is based on principles of free enterprise and economic freedom, rather than on government intervention. As seen in the 2016 Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal, economic freedom is positively related to a wide variety of critically important social and economic goals.
The federal government should be aggressive in promoting free trade and eliminating policies, specifically regulations, which hamper private risk management and create unnecessary obstacles for farmers and ranchers to meet consumer demand.
Critical considerations include the following:
Some policy recommendations, beyond getting rid of most, if not all subsidies, include:
Separate food stamps from agricultural programs. Food stamps account for about 80 percent of the costs of the farm bill, thus really making it a food stamp bill. In 2013, the U.S. House of Representatives did the right thing when it tried to separate food stamps from agricultural programs by passing an agriculture-only bill and a nutrition-only bill. These distinct programs are combined for political purposes so that these programs can get passed. Legislators who would otherwise seek reform of agricultural programs (or vice versa) stay quiet in order to maintain the status quo of their favored program.
It is illuminating when status quo proponents acknowledge that separation would make it difficult to get agricultural programs and food stamps passed. This strange and amusing argument is a tacit admission that the programs would never get support if they were considered on their own merits. What does that say about the programs? The entire purpose of reauthorizing programs is for Congress to review existing policy and, if necessary, change or eliminate ineffective policies (or expand effective ones). By combining the programs, the value of reauthorization is reduced because an open and thoughtful process to reassess existing policy (and the chance to make important changes) is mostly nonexistent.
Aggressively promote free trade in agriculture. Both agricultural producers and consumers benefit from free trade. According to the USDA’s Economic Research Service, the $144.38 billion in agriculture exports in 2013 created an additional $176.0 billion in economic activity, and over 1 million full-time jobs, of which 27 percent were outside farming. Imports provide consumers better access to products they demand and can lower food costs through greater competition. Regrettably, however, agriculture across the globe is heavily subsidized, including in the U.S. In order to have credibility in trade negotiations, the U.S. needs to eliminate its own subsidies. Further, the federal government can play a critical role in challenging trade barriers imposed by other countries; this includes being far more aggressive using the World Trade Organization dispute settlement process where the U.S. has been very successful.
Eliminate policies that unnecessarily inhibit risk-management methods like the commodities markets. Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act is a prime example of policy that hurts agricultural risk management. This part of the statute, which covers commodities markets, should not apply to farmers. In 2010, Dodd–Frank was enacted to address the 2008 financial crisis. Yet this law is being interpreted broadly by the Commodities Futures Trading Commission to cover businesses that had nothing to do with the 2008 crisis, including agricultural producers. Farmers need to be able to effectively use commodity markets to manage risk. The application of Title VII of Dodd–Frank will make it more difficult to do so.
Devolve power regarding water policy from the federal government to states and local communities, and stop federal overreach. Water policy is critical to farmers and ranchers. Federal policy should not try to establish one-size-fits-all policies that fail to address the unique ecological features of local water bodies. States and local communities should be allowed to develop solutions to their unique problems. The means to achieving measurable outcomes should not be dictated by the federal government.
Further, federal overreach like the recent Environmental Protection Agency (EPA) and U.S. Army Corps of Engineers “Waters of the United States” rule, which allows the federal government to regulate almost any type of water, should be repealed. Congress needs to define clearly in the Clean Water Act that the waters covered under the statute should be generally limited to traditional navigable waters.
Treat farmers and ranchers as partners in protecting wildlife under the Endangered Species Act (ESA), by respecting property rights. In order to best protect wildlife, and particularly species that are deemed endangered under the ESA, farmers and ranchers should be partners in the protection process. This will happen only if their property rights are respected. The protection of property rights entails providing compensation to property owners for restrictions imposed upon them for the use and enjoyment of their property. Society has made the choice to protect endangered species; the cost therefore should be borne by society as a whole, not individual property owners who are merely using their property without interfering with the enjoyment of property by others.
The next President should take a step back and ask whether, if current agricultural policies did not exist, what kind of policies would truly be necessary? Before the next farm bill, the new President and Members of Congress should consider this question and develop appropriate and thorough responses. Agricultural policies should not be the work product of a small group of individuals, as they generally are now, given the importance of agriculture. Everyone is affected by agriculture because everyone eats.—Daren Bakst is Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.
 For important principles to guide agricultural policy, see Daren Bakst, “10 Guiding Principles for Agriculture Policy: A Free-Market Vision,” Heritage Foundation Issue Brief No. 4213, May 5, 2014, http://www.heritage.org/research/reports/2014/05/10-guiding-principles-for-agriculture-policy-a-free-market-vision.
 U.S. Department of Agriculture, Economic Research Service, “Historic Data on Mean and Median Farm Operator Household Income and Ratio of Farm Household to U.S. Household Income, 1960–2014,” November 24, 2015, http://www.ers.usda.gov/data-products/farm-household-income-and-characteristics.aspx (accessed February 3, 2016), and U.S. Department of Agriculture, Economic Research Service, “Principal Farm Operator Household Finances, 2009–2015F,” November 24, 2015, http://www.ers.usda.gov/data-products/farm-household-income-and-characteristics.aspx (accessed February 3, 2016).
 For the net worth of farm households in 2013, see U.S. Department of Agriculture, Economic Research Service, “Principal Farm Operator Household Finances, 2009–2015F.” For the net worth of all U.S. households in 2013, see Jesse Bricker et al., “Bulletin: Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances,” Board of Governors of the Federal Reserve System, Vol. 100, No. 4 (September 2014), p. 8, http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf (accessed February 3, 2016). Note that Robert A. Hoppe, “Structure and Finances of U.S. Farms: Family Farm Report, 2014 Edition,” U.S. Department of Agriculture, Economic Research Service, Economic Information Bulletin No. 132, December 2014, http://www.ers.usda.gov/media/1728096/eib-132.pdf (accessed February 3, 2016), also used data from the Survey of Consumer Finances to determine net worth of all U.S. households.
 Robert A. Hoppe, “Structure and Finances of U.S. Farms: Family Farm Report, 2014 Edition,” U.S. Department of Agriculture, Economic Research Service, December 2014, Table 10, http://www.ers.usda.gov/media/1728096/eib-132.pdf (accessed February 3, 2016)
 Environmental Working Group, “Concentration of Premiums Subsidies in the United States, 2011,” Crop Insurance Primer, http://farm.ewg.org/cropinsurance.php?fips=00000&summpage=CONC2011&statename=theUnitedStates (accessed February 3, 2016).
 Environmental Working Group, “Commodity Subsidies in the United States Totaled $5.3 billion in 2012,” Farm Subsidy Database, 2012, http://farm.ewg.org/progdetail.php?fips=00000&progcode=totalfarm&page=conc&yr=2012®ionname=theUnitedStates (accessed February 3, 2016).
 These payments include direct subsidies like conservation payments, which are generally not considered part of the “safety net,” but are significant in scope, and commodity payments, but do not include crop insurance subsidies.
 U.S. Department of Agriculture, National Agricultural Statistics Service, 2012 Census of Agriculture, Vol. 1, chap. 1, “Economic Class of Farms by Market Value of Agricultural Products Sold and Government Payments: 2012 and 2007,” May 2014, http://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/st99_1_003_003.pdf (accessed February 3, 2016).
 Hoppe, “Structure and Finances of U.S. Farms,” Table 6. Note that government payments appear to be defined differently here than in the 2012 Census of Agriculture.
 This data covers family farms, not all farms; however, family farms account for about 99 percent of all farms.
 “Gross cash farm income (GCFI) is the sum of the farm’s crop and livestock sales, government payments, and other farm-related income.” See Hoppe, “Structure and Finances of U.S. Farms,” p. 4.
 Hoppe, “Structure and Finances of U.S. Farms,” Table 6.
 U.S. Department of Agriculture, National Agricultural Statistics Service, 2012 Census of Agriculture, Vol. 1, chap. 1, “Economic Class of Farms by Market Value of Agricultural Products Sold and Government Payments: 2012 and 2007.” See also U.S. Department of Agriculture, 2012 Census of Agriculture: 2012 Census Highlights, “Farm Economics,” May 2014, http://www.agcensus.usda.gov/Publications/2012/Online_Resources/Highlights/Farm_Economics/ (accessed February 3, 2016).
 To learn more about the federal crop insurance program, see Dennis A. Shields, “Federal Crop Insurance: Background,” Congressional Research Service, Report for Congress No. 40532, August 13, 2015, https://www.hsdl.org/?view&did=786838 (accessed February 3, 2016).
 To learn more about Title I commodity programs, see Dennis A. Shields, “Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113–79),” Congressional Research Service, Report for Congress No. 43448, March 28, 2014, http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R43448.pdf (accessed February 3, 2016).
 Hoppe, “Structure and Finances of U.S. Farms,” Table 6.
 See Roger Claassen, “The Role of Commodity, Conservation, and Crop Insurance Programs: The Future of Environmental Compliance Incentives in U.S. Agriculture,” U.S. Department of Agriculture, Economic Research Service, Economic Information Bulletin No. 94, March 2012, http://www.ers.usda.gov/media/361085/eib94_2_.pdf (accessed February 3, 2016), and U.S. Department of Agriculture, Economic Research Service, “Farm Household Income (Historical),” November 24, 2015, http://www.ers.usda.gov/topics/farm-economy/farm-household-well-being/farm-household-income-(historical).aspx#sizeoffarm (accessed February 3, 2016).
 Even with the low participation number, the crop insurance program still covered many acres of crops. According to the Congressional Research Service, in 2014 about 83 percent of U.S. crop acreage was insured under the federal crop insurance program. Shields, “Federal Crop Insurance.”
 Most agricultural production comes from large agribusinesses. In 2012, about 4 percent of all farms accounted for two-thirds of all agricultural sales. These farms were million dollar-plus operations, with 32 percent of all sales coming from farm operations with $5 million or more in sales. Seventy-five percent of all farms accounted for just 3 percent of all agricultural sales (these farms had sales less than $50,000). U.S. Department of Agriculture, National Agricultural Statistics Service, 2012 Census of Agriculture, Vol. 1, chap. 1, “Economic Class of Farms by Market Value of Agricultural Products Sold and Government Payments: 2012 and 2007.” See also U.S. Department of Agriculture, 2012 Census of Agriculture: 2012 Census Highlights, “Farm Economics.”
 Agricultural commodities have significant price volatility, but so, too, do many other commodities. Addressing price volatility through government intervention is problematic (and unnecessary). As well explained by the Organization for Economic Co-operation and Development (OECD): “Governments have often assumed that the answer to farming risk lies in stabilising prices. In fact, by doing this they may actually increase the variability of income and have the opposite effect. … Price interventions will isolate farmers from underlying market fundamentals such as high prices that signal a negative supply shock or low prices that signal over-supply. Governments end up carrying the entire burden of risk management at high cost to consumers and taxpayers because their actions have crowded out the efforts of farmers themselves and the private sector.” See Organization for Economic Co-operation and Development, “Risk Management in Agriculture: What Role for Governments?” November 2011, http://www.oecd.org/agriculture/agricultural-policies/49003833.pdf (accessed February 3, 2016).
 This is merely referring to the non-nutrition titles of the farm bill. Some of these non-nutrition titles, such as the rural title, are questionable as to whether they are agriculture-related.
 For example, see Renée Johnson and Jim Monke, “What Is the Farm Bill?” Congressional Research Service, Report for Congress No. 22131, July 23, 2014, https://www.fas.org/sgp/crs/misc/RS22131.pdf (accessed February 3, 2016).
 U.S. Department of Agriculture, Risk Management Agency, “Crop Insurance Providers List for 2016,” August 17, 2015, https://www3.rma.usda.gov/tools/agents/companies/indexCI.cfm (accessed February 3, 2016).
 The Washington Post gives an example of the consequences when one crop insurance company had a new idea to increase competition. Gilbert M. Gaul, Dan Morgan, and Sarah Cohen, “Crop Insurers Piling Up Record Profits,” The Washington Post, October 16, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/15/AR2006101500585.html (accessed February 3, 2016).
 Daren Bakst, “Why Are We Paying $300 Million to Help the Brazilian Cotton Industry?” The Daily Signal, October 9, 2014, http://dailysignal.com//2014/10/09/300-million-help-brazilian-cotton-industry/.
 Subsidies may benefit some farmers, but often at the expense of other farmers. Even for those who receive certain subsidies, there is the possibility that those same subsidies will end up harming them in the long run.
 Terry Miller and Anthony B. Kim, 2016 Index of Economic Freedom (Washington, DC: The Heritage Foundation and Dow Jones & Company, Inc., 2016), http://www.heritage.org/index/about.
 Congressional Budget Office, “H.R. 2642, Agricultural Act of 2014: Cost Estimate,” January 28, 2016, https://www.cbo.gov/publication/45049 (accessed February 3, 2016), and Johnson and Monke, “What Is the Farm Bill?”
 U.S. Department of Agriculture, Economic Research Service, “Agricultural Trade Multipliers: Effects of Trade on the U.S. Economy,” February 2, 2015, http://www.ers.usda.gov/data-products/agricultural-trade-multipliers/effects-of-trade-on-the-us-economy.aspx (accessed February 3, 2016).
 Dodd–Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203.
 As Senator Pat Roberts (R–KS), Chairman of the Senate Agriculture Committee, explained: “Farmers, ranchers and end-users did not cause the 2008 financial crisis, and Congress did not intend for them to be subject to Title VII of Dodd–Frank,” Roberts said. “However, five long years later, they continue to be subjected to a bounty of rules and regulations stemming from the regulatory implementation of Dodd–Frank. As chairman, I am continuing to work with members on the committee to address the regulatory overreach.” See news release, “Chairman Roberts Releases Statement on Fifth Anniversary of Dodd–Frank,” Committee on Agriculture, Nutrition, and Forestry, U.S. Senate, July 21, 2015, http://www.ag.senate.gov/newsroom/press/release/chairman-roberts-releases-statement-on-fifth-anniversary-of-dodd-frank (accessed February 3, 2016).
 For more about Title VII of Dodd–Frank, see Norbert J. Michel, “Fixing the Dodd–Frank Derivatives Mess: Repeal Titles VII and VIII,” Heritage Foundation Backgrounder No. 3076, November 16, 2015, http://www.heritage.org/research/reports/2015/11/fixing-the-doddfrank-derivatives-mess-repeal-titles-vii-and-viii.
 U.S. Environmental Protection Agency, “Clean Water Rule: Definition of Waters of the United States Under the Clean Water Act,” June 29, 2015, http://www.epa.gov/cleanwaterrule/definition-waters-united-states-under-clean-water-act (accessed February 3, 2016). For a brief discussion on the final rule, see Daren Bakst, “The EPA’s Water Power Grab: Lawmakers Can Use the Appropriations Process to Stop It,” The Daily Signal, December 4, 2015, http://dailysignal.com/2015/12/04/the-epas-water-power-grab-lawmakers-can-use-the-appropriations-process-to-stop-it/, and Daren Bakst, “Congress Deserves Credit for Trying to Rein in EPA, but More Is Needed,” The Daily Signal, January 25, 2016, http://dailysignal.com/2016/01/25/congress-deserves-credit-for-trying-to-rein-in-epa-but-more-is-needed/.
 33 U.S. Code, chap. 26.