The Taxpayer and Economic Welfare Costs of Shallow-Loss Farming Programs

June 12, 2012

The agricultural sector has long enjoyed protection and support from the federal government in order to cushion losses from falling crop prices.  This support has traditionally taken form in the Direct Payments Program, a $5 billion-a-year welfare program in which payments mainly go to larger and wealthier farms, say Vincent H. Smith, a professor at Montana State University, Bruce A. Babcock a professor at Iowa State University, and Barry K. Goodwin a professor at North Carolina State University.

Now, however, the farm lobby is pushing for the expansion of a relatively new form of subsidies, broadly termed "shallow-loss programs."  These programs amount to an expanded safety net for an industry that hardly needs the assistance.

  • Shallow-loss programs would provide farmers who produce crops like corn, soybeans and wheat with subsidies when current-year revenues for that crop fall below about 90 percent of their average levels over the previous five years.
  • Effectively, the funds provided through such a system would allow farmers to take advantage of record high prices without exposure to subsequent dips.
  • The justification for this support, according to the farm lobby, is that without it, so many farmers would go broke that the American food supply chain would fail to deliver enough food for the rest of the population.
  • This is far from the truth: the current average debt-to-asset ratio in the farm sector is less than 9 percent and has been declining steadily over the past decade.
  • Moreover, farms fail at a rate of less than 1 in 200 a year, and, from a financial perspective, farms are better placed than almost any sector of the economy to handle year-to-year variations in revenues and costs by themselves.

Depending on structure and crop prices, these programs could cost the taxpayer as much as or more than the direct payments program they would replace, averaging as much as $8 billion to $14 billion a year over the next five years.  Various amendments to the program and moderate tinkering keep the price tag in the billions of dollars.

Furthermore, the guarantee of payment for low crop prices will offer a perverse incentive for farmers to engage in risky agricultural practices because it has reduced the potential downside of their actions.

Source: Vincent H. Smith, Bruce A. Babcock and Barry K. Goodwin, "Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow-Loss Farming Programs," American Enterprise Institute, May 30, 2012.

For text:

http://www.aei.org/paper/economics/fiscal-policy/field-of-schemes-the-taxpayer-and-economic-welfare-costs-of-shallow-loss-farming-programs/

 

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