Significant—and Necessary—Farm Subsidy Reforms for the Next Farm Bill

April 17, 2018 13 min read Download Report

Senior Research Fellow in Agricultural Policy

Bakst studies and writes about agricultural and environmental policy and property rights, among other issues.

Summary

In April, the House Agriculture Committee released its draft farm bill. The legislation does not reform the out-of-control farm-handout system as it should—it makes it worse. Congress should not waste this opportunity to reform farm subsidies. The significant reforms listed in this Issue Brief would still leave an overly generous safety net in place, but would start the process of getting the federal government out of farm policy: Congress would start giving farmers and ranchers the freedom to compete like other businesses throughout the economy. Anything short of these reforms would be a disservice to farmers, taxpayers, and consumers.

Key Takeaways

The new House Agriculture Committee farm bill draft does not reform the out-of-control farm subsidy system as it should—it makes it worse.

The next farm bill should include, at a minimum, some important and commonsense subsidy reforms that move farm policy in the right direction.

Congress should give farmers and ranchers the freedom to compete like other businesses, and should start to get the federal government out of farm policy.

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Last week, the House Agriculture Committee released its draft farm bill.1

The legislation does not reform the out-of-control farm-handout system as it should, and instead it makes it worse.2

Ideally, several programs would be eliminated; any safety net should at most provide assistance to farmers when they have had crop losses connected to disasters.3

This Issue Brief provides a list of some important and commonsense farm subsidy reforms that may fall short of the ideal, but make changes significant enough to move in the right direction.

Significant Farm Subsidy Reforms—and One Critical Regulatory Reform

A reasonable level of reform would require removing the new provisions in the draft farm bill that make existing law worse, including the provision that could increase reference prices.4

It would also require some combination of the following reforms:

Capped Costs of Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) Programs. Taxpayers should not shoulder open-ended liability for these two programs. The House recognized this during the last farm bill debate. By an overwhelming bipartisan vote of 267 to 156,5

the House passed an amendment to its farm bill that would have limited the cost of these two programs to 110 percent of the projected Congressional Budget Office (CBO) costs for the first five years of these programs.6

If this amendment introduced by Representative Virginia Foxx (R–NC) had not been removed in conference, taxpayers would have saved about $13 billion: The ARC and PLC programs are costing far more ($31 billion) than the CBO projected ($18 billion).8

Reference Prices for PLC Program Based on Capped Five-Year Moving Average of Past Prices. One of the most egregious aspects of the PLC program is the way it develops reference prices. By setting a fixed reference price in statute, the entire system can be gamed so that the program is not covering deep price declines (as allegedly was its purpose)9

but to effectively guarantee payments. This type of scheme is not transparent and can easily be manipulated to help some commodities secure more subsidies than others, which distorts production decisions.

The House Agriculture Committee’s draft bill maintains the existing reference prices (which were set at a time of record-high or near-record-high prices) and even allows them to increase if prices go up. As a result, many commodities have projected prices right now that are already well below the reference prices.10

This is not protecting against losses (deep or shallow), but effectively guaranteeing payments from the outset.

To have a reasonable system that does not allow the system to be gamed, and allows it to be somewhat market-oriented, the reference price should not be fixed in statute, but should be calculated by taking 75 percent of the average commodity price over the previous five years, dropping the highest and lowest prices. To provide protection if prices go up, there should be a cap based on what have been “normal” prices for a specific commodity.11

Reduced Premium Subsidy Rate for Crop Insurance from an Average 62 Percent to 50 Percent or Lower. Taxpayers should not be paying more for the cost of premiums than the farmers who actually benefit from the crop insurance policies. The Government Accountability Office (GAO) has recommended reducing the premium subsidy and explained that “the [Obama] administration, CBO [which recommended a reduction to 40 percent], and other researchers say that a modest reduction in premium subsidies would have little impact on program participation.”12

The Trump Administration’s fiscal year (FY) 2019 budget would reduce the premium subsidy rate from 62 percent to 48 percent.13

Limited Premium Subsidy Level for Federal Crop Insurance Program. There is no limit on the total subsidy provided to producers to help pay their crop insurance premiums. The GAO has recommended limiting premium subsidies for farmers to $40,000. Based on its analysis of 2011 data, the GAO found that such a limit would have affected less than 4 percent of those farmers participating in the federal crop insurance program.14

This commonsense recommendation was included in President Trump’s FY 2018 budget15

and estimated to save about $16 billion over 10 years.16

This reform is also included in the bipartisan Assisting Family Farmers through Insurance Reform Measures (AFFIRM) Act.17

No More Supply Controls. The federal government should not tell businesses how much of their goods and services they can sell. This is the very antithesis of a free market and, for that matter, economic freedom in general. These controls are also intentionally designed to drive up prices, hurting consumers, especially those at lower income levels. Fortunately, supply controls are no longer prevalent in agriculture, at least not like they were in the past.

Yet, some supply controls still remain. For example, the federal sugar program still maintains marketing allotments, which restrict how much sugar can be sold in the U.S.18

Bipartisan legislation, the Sugar Policy Modernization Act, would eliminate marketing allotments.19

There are also about 29 fruit and vegetable marketing orders,20

which, among other things, authorize research and promotion of commodities, establish minimum quality standards, and sometimes limit supply through volume controls.21

The good news is that these volume controls are not as prevalent as in the past, with only three marketing orders having active volume controls.22

No More Protection Against Shallow Losses. The current safety net does not even require deep losses but instead covers what are known as shallow losses (minor losses). Providing protection against shallow losses is very problematic not merely because it is unjustified, but also because it can encourage farmers to ignore market signals. In 2011, the American Farm Bureau Federation did an excellent job of outlining the numerous problems with shallow loss programs, including the moral hazard problem.23

A properly focused safety net should protect against large or deep losses only. This means that programs such as ARC should at most provide a revenue guarantee that does not exceed 75 percent.24

Further, taxpayers should not be subsidizing crop insurance coverage at levels beyond 75 percent; higher coverage levels in the crop insurance program could still be provided, but they should not be subsidized by taxpayers.

End of “Double Dipping” by Requiring Eligible Agricultural Producers to Choose Between ARC/PLC and Federal Crop Insurance. A small number of commodities receive most of the farm program support (94 percent of farm program support goes to six commodities representing just 28 percent of production).25

These and other commodities also receive support from multiple programs, including ARC or PLC, and the federal crop insurance program. As a result, agricultural producers can receive taxpayer assistance from different programs to cover the same losses.

According to the Environmental Working Group, “for the 2014 and 2015 growing seasons, the ARC program paid out $10.4 billion and the PLC program paid out $2.7 billion. In the same years, the revenue-based crop insurance program paid out $10.7 billion for the same crops that received ARC and PLC payments.”26

This duplication or “double dipping” needs to be stopped.

Both Representative John Duncan (R–TN) and Senator Jeff Flake (R–AZ) have introduced much-needed commonsense legislation27

that would address these very costly duplicative taxpayer handouts. Their legislation, requiring eligible producers to choose ARC/PLC or federal crop insurance, is projected to save more than $60 billion over 10 years.28

Properly Defined “Waters of the United States” Under the Clean Water Act. There is arguably no regulatory issue hurting farmers and ranchers more than the Environmental Protection Agency and U.S. Army Corps of Engineers’ overreach under the Clean Water Act, especially their definition of “waters of the United States ” (WOTUS).

Congress needs to define “waters of the United States” and not delegate it to these agencies. Even if the Trump Administration develops the best possible WOTUS rule, a future Administration can always get rid of that rule. This next farm bill should use this unique opportunity to properly30

define this term once and for all in order to create predictability for farmers and ranchers, to protect property rights, and to respect the role of the states under the Clean Water Act.

Conclusion

The farm bill only comes around for a vote every five years or so. Congress should not waste this opportunity to reform farm subsidies. The significant reforms listed in this Issue Brief would still leave an overly generous safety net in place, but it would start the process of getting the federal government out of farm policy. Congress would start giving farmers and ranchers the freedom to compete like other businesses throughout the economy. Anything short of these reforms would be a disservice to farmers, taxpayers, and consumers.

—Daren Bakst is Senior Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom, at The Heritage Foundation.

This article is republished with permission from our friends at The H eritage Foundation.

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