Subsidies are dead, long live subsidies

Subsidies are dead, long live subsidies

Stephen Budiansky

To pay farmers not to grow a crop, Franklin Roosevelt’s secretary of agriculture Henry Wallace said in 1933, goes against human nature. “I hope we shall never have to resort to it again.” It has taken 63 years, but Wallace finally may be getting his wish.

What began as emergency aid to farmers in the Great Depression and then was kept alive year after year by pork-barrel politics is finally about to succumb to the inexorable force of the budget deficit. Under a sweeping reform passed last week by the Senate and likely to be approved soon by the House, the government will abandon the elaborate system of price supports that restricted the amounts of corn, wheat, cotton, rice and feed grains farmers could grow–and when that didn’t work to prop up prices, handed them billions of dollars a year in “deficiency payments.”

Still going. Reports that farm subsidies are dead are premature, however. Payments under the new Freedom to Farm bill will decline only modestly over seven years, from $5 billion to $6 billion today to about $4 billion a year. Corn growers, for example, received an average of $2.4 billion a year over the last seven years; they will be getting $1.85 billion seven years from now under the new fixed-payment plan. The bill also retains the $2 billion-a-year Conservation Reserve Program, which pays farmers to keep 36 million acres of highly erodible farmland in wildlife habitat.

Though touted as saving $13 billion over seven years, the bill may save less than $1 billion, says the Congressional Budget Office, since price supports under the old program, tied to market prices, would have declined anyway because market prices for grains are high.

While the new bill may be only partial reform, it is still being hailed by ag economists as a major victory for free markets. By replacing price supports with a fixed and slowly declining subsidy, it would end almost all government efforts to manage supply. For the first time in decades, farmers will have complete freedom to decide what to plant, responding only to market forces.

Economists have long criticized farm programs for inefficiency and distorting the market. Not only did participating farmers have to set aside a prescribed percentage of their land each year to help regulate supplies, they also had to plant the same subsidized crops every year to remain eligible for payments. Government attempts to match supply and demand by adjusting the set-aside percentages have even been counterproductive. “When USDA tries to control the market by manipulating acreage, it almost invariably shoots behind the duck,” says C. Ford Runge, an agricultural economist at the University of Minnesota. And by idling about 12 million acres a year in an effort to keep prices up, the programs have cost U.S. farmers market share to rival grain exporters such as Argentina, Canada, Australia and Europe.

A strong market is now likely to cushion any blow to farmers from lost subsidies. “We’re expecting the strong prices to prevail over the next five to seven years,” says James Schaub of USDA’s Office of the Chief Economist. Trade liberalization and rising global incomes, especially in developing nations, are creating strong demand for grain. World grain stocks are currently at a 20-year low. And for consumers, says Schaub, “it probably means virtually nothing” in any case–the farm value of the wheat in a loaf of bread is about 5 to 10 percent of its price, for example.

Freedom. The flexibility to plant whatever crops are most profitable and to increase crop acreage will offset half to two thirds of the lost subsidy payments, according to analyses by the Food and Agricultural Policy Research Institute at Iowa State University. And it’s unlikely that adding the 12 million acres now idled to the 190 million acres growing crops covered by current commodity programs will drive prices down very far.

Three pork-barrel perennials–the peanut, sugar and dairy programs–are virtually unaffected by the new bill. These programs, which sharply limit production, cost the taxpayer little or nothing directly but drive up retail prices–some $1.4 billion a year for sugar, for example. But if it’s not a line item in the budget, it’s not on Washington’s radar screen this year.

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