Jan. 31 (Bloomberg) -- Imagine an industry on a roll. Its income surpassed the $100 billion mark last year for the first time. On top of these riches, those in the business got an additional $25 billion or so in federal handouts.
The 1 percenters of Wall Street? Not even close. The beneficiaries are America’s farmers, or to be more accurate, the wealthy owners of very big farms.
Considering how flush the farming industry is these days, thanks to surging commodity prices, Congress should have no qualms about eliminating the most egregious agriculture policies and using the savings to chip away at the budget deficit.
Every five years, Congress writes a new farm bill -- the next one must be adopted in 2013 -- which means that Congress might start drafting new legislation soon.
A lot of the political horse-trading in this cycle involves the worst of the giveaways -- the roughly $5 billion in direct payments -- that go to a small slice of the largest agribusinesses, most of which produce a handful of commodity crops such as corn, wheat and soybeans. The owners receive these subsidies regardless of need or the health of the farming industry.
What’s notable now is that the farming industry has given up on preserving this particular subsidy bonanza. Earlier this month, the American Farm Bureau Federation said it would drop its opposition to direct payments. But in exchange, the agriculture lobby and its defenders in Congress are angling for a broadening of subsidized crop insurance instead of the more limited coverage offered now. The danger is that the promised savings from the end of the direct-payments program will be diverted into yet another revenue stream for well-off farmers.
Direct payments were themselves “reforms” adopted in 1996 in an effort to wean farmers from traditional price supports that dated to 1930s-era New Deal programs. The payments were supposed to decline and be phased out over a five-year period. But subsidies in Washington are like well-tended crops: With the benefit of lobbying from farming interests, they persisted and grew.
President Barack Obama last year proposed ending direct payments, arguing that more than half the benefits go to recipients with annual incomes of more than $100,000. (The U.S. Department of Agriculture reported that 20 percent of all direct payments went to just 1 percent of farming businesses.) The proposal was included in a package of $23 billion in agricultural program cuts that Congress’s so-called supercommittee was considering as part of its mandate to reduce the federal budget deficit. Although the committee disbanded in November without reaching an agreement, the push to end direct payments has bipartisan support: Republican Senator Tom Coburn of Oklahoma sponsored legislation that would have made rich farmers ineligible for the program.
With direct payments at risk, the agriculture industry last year began pressing for more federal support for crop insurance. It’s already one of the fastest-growing benefits for the agriculture industry, with subsidies for insurance premiums rising to more than $7 billion in 2011 from a little more than a $1 billion in 2000.
Crop insurance normally pays a claim if a farmer’s revenue falls to between 75 percent and 85 percent of a historical average, whether as a result of weather, floods or falling prices. Facing the loss of direct payments, the industry wanted to bump this up by an additional 10 to 15 percentage points. This would mean a payout to farmers even in years when revenue fell only modestly.
The result would have set up incentives more perverse than those already in place: Farmers, understandably, would try to raise their historical average by planting more crops. In turn, they would need more insurance and still bigger government subsidies. In other words, as crop prices went up, insurance costs would rise and so would the cost to taxpayers. And since crop prices are so high today, farmers could collect huge payoffs if prices were to return to levels seen before the financial crisis touched off the commodities boom.
To blunt criticism, the farming industry has floated a different plan it says would only provide insurance payouts in case of larger losses. The most troubling aspect of this proposal? Farmers might bear even less of the cost, which can only mean that the government would pay more. Congress should resist these proposals.
Direct payments and crop insurance aren’t the only farm handouts that should be eliminated or scaled back. A $7 billion loan program, in effect, ensures minimum prices for crops. Farmers borrow from the government, pledging their crops as collateral. If prices are high, a farmer can repay the loan with cash left over from selling the crop. If prices are low, a farmer can repay the loan at the lower value and keep the crop to sell later when prices are higher. The heads-we-win, tails-you-lose structure of this program has to end.
The loan program is paired with a $4 billion counter-cyclical payment system adopted in 2002 that rewards farmers based on historical production. If prices fall, a farmer can get a payment, even if there is no financial need. It is all too reminiscent of the old price-support regimen that direct payments were supposed to replace.
Eliminating agricultural subsidies altogether isn’t realistic, given how much sway the industry has in Washington. Spending on research and development is crucial, as are programs to encourage people to take up farming. But whatever Congress decides in the next farm bill, it should resist swapping one farming gravy train for another.
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