The Farm Bill: When Water, Energy, Trade and Budget Issues Collide

By JIM DIPESO, REP policy director

AN HISTORICAL DOCUMENT: Jim delivered this speech at REP’s Washington Chapter annual meeting in Spokane, on September 15, 2007.

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There’s a ranchette housing development down in Texas that has something extra for buyers. That something extra is much more than granite countertops, stainless steel appliances, or an outdoor spa. These houses come with a check — a subsidy from the U.S. Department of Agriculture.

But you don’t have to be a farmer to qualify for the subsidy. You don’t even have to know the first thing about farming. You just have to be lucky enough to have bought a ranchette on land that once was used to grow rice. If you don’t feel right about accepting the rice subsidy, it won’t do much good to give it back. The money will be redirected to other landowners who are not nearly as conscientious as you.

Hello, Alice. Welcome to the Wonderland of American farm policy. It’s a world unto itself, a veritable thicket of sometimes bewildering policies that comes with a full package of jargon and acronyms that are opaque to almost everyone except specialists.

Every five years, Congress and the administration go to work updating the collection of agricultural policies known simply as “the farm bill.” This year is one of those years. The House has already passed a farm bill and the ball is now in the Senate’s court.
There’s a lot to work on. The farm bill is a menagerie of programs — commodity crop supports, crop loans, insurance, disaster assistance, marketing, export promotion, food assistance, research, and conservation. For our purposes today, I’m going to focus on the commodity crop support and conservation elements.

This matters to all of us. First, we all consume the abundance produced by American farmers, the best farmers in the world. But it’s more than that. Farm policy affects the federal budget, international trade, and the environment.

Farming has a significant environmental footprint. Farm runoff is a contributing factor in the failure of nearly half our nation’s river miles to meet water quality standards. Agriculture accounts for 7 percent of total U.S. greenhouse gas emissions. Agriculture accounts for about 2 percent of U.S. energy demand — fuel for farm machinery, oil and gas consumed to manufacture fertilizer and chemicals, energy for irrigation pumping and grain drying equipment.

Farm subsidies are a significant hit on the federal budget. All of the commodity crop support, conservation, and disaster assistance payments have cost more than $160 billion over the past 10 years. About three-fourths of that was support payments for commodity crops.

The farm bill has international implications. Commodity crop supports have gotten us into trouble with the World Trade Organization. In 2005, a WTO dispute resolution panel ruled that U.S. cotton subsidies violate a global trade agreement that we’re a party to.
President Bush’s administration says the time for reforming farm policy has come. Crop prices are high, sales are up, and farmers have the healthiest balance sheets in years.

Agriculture Secretary Mike Johanns says money now spent on commodity crop support payments should be redirected towards conservation programs that help farmers protect soil, water quality, and wildlife habitat. These programs work well and are very popular among farmers. As an extra bonus, money for conservation programs wouldn’t count against the U.S. under international trade rules.

For what it’s worth, there is a potent farm bill reform movement that draws from across the political spectrum. In addition to conservation, they want to shift funding to renewable energy, rural development, and better nutrition. You have your religious organizations concerned about how U.S. crop subsidies affect farmers in developing nations. Bread for the World, for example. You have conservative deficit hawks who want spending cut and trade promoted. That would include the Club for Growth. You have conservation organizations, and you have farmers who raise fruits and vegetables.

The politics of reforming farm policy will not be easy, however. Farm bill politics tend to cut across regional boundaries and crop linesrather than partisan lines. Earlier this year, for example, an amendment to reform farm policy went down to defeat in the House.

The bill would have cut back crop subsidies and redirected funds towards conservation.

Washington’s three House Republicans split on the issue. Dave Reichert voted for the amendment, Doc Hastings and Cathy McMorris Rodgers voted against it. All told, 44 R’s and 73 D’s in the House voted for the amendment. The opponents prevailed with the votes of 151 Republicans and 158 Democrats.

What the House vote says, however, is that those who benefit from the way farm policy is structured have a strong interest in keeping things pretty much the way they are.

Those include growers of the Big Five commodity crops. The Big Five includes wheat, corn, soybeans, cotton, and rice.

Payments for the Big Five go primarily to Midwestern and Southern states.

Twenty congressional districts account for half the commodity subsidies paid out. Between 2003 and 2005, those 20 districts received nearly $18 billion. Their representation breaks down as 12 Republicans and 8 Democrats. The gravy train chugs both red and blue.

The Big Five receive more than 90 percent of the farm bill’s commodity crop payments. Let’s dwell on these commodity crop programs for a minute.

Essentially, the argument that’s made for support payments is that farmers face market dynamics that cause recurring imbalances in supply and demand, which can cause hardship. Once the crop is in the ground, farmers can’t adjust production in the face of changing market conditions. Weather adds another measure of unpredictability.

The counter argument is that subsidies distort markets, inflate land values, and exacerbate the concentration of farms into fewer and larger hands. The subsidies encourage overproduction, which lowers prices, which triggers price support payments. A subsidy machine that essentially feeds on itself.

Eligibility for commodity support payments is based on crop. If you grow one of the Big Five or a few others, you’re eligible. If you don’t, you’re not. For example, growers of what are called “specialty crops” — fruits and vegetables — account for about half of non-livestock farm production. But they don’t get a penny of crop payments because they’re not eligible.

This divide cuts right across Washington. A wheat farmer in the Palouse is eligible for commodity crop payments. An apple grower in Wenatchee is not, nor is a cranberry farmer near Grays Harbor.

Rather than treat you to a deluxe tour of commodity crop programs, I’ll give two examples — the direct payment program and the loan deficiency payment program.

The direct payments program is the one that is paying Texas hobby ranchers for the privilege of owning acreage that used to be rice fields. Direct payments were included in the 1996 farm bill with the best of intentions. The 1996 law was called the Freedom to Farm Act. The idea was to start weaning farmers off crop subsidies and put market forces in charge.

The payments were supposed to be temporary. But it didn’t work out that way.

Direct payments are tied to historic production, not price, and landowners are not obligated to continue growing the crop in question. The law of unintended consequences took hold. In the Texas case, many farmland owners have taken their acreage out of rice production and developed ranchettes worth more than $300,000 each. Texas grows far less rice than it used to.

The loan deficiency payment, on the other hand, is tied to prices. It goes to farmers when crop prices fall. But farmers don’t have to sell at that support price. They can wait for prices to go up, then sell. This has the perverse result of farmers hoping for crop prices to fall. The loan deficiency payment program has cost nearly $30 billion over the past 10 years.

There is a lot of concern that the commodity crop programs are Robin Hood in reverse — they benefit larger corporate farms and absentee landowners more than they help family farmers. From 2003 to 2005, for example, the top 20 percent of crop subsidy program beneficiaries accounted for 84 percent of all payments.

Another concern is that farm programs work at cross purposes. Commodity support payments encourage overproduction that lowers prices. Sugar quotas, on the other hand, raise prices. According to the Organization for Economic Cooperation and Development, the overall effect of U.S. farm subsidies is that they raise the average household’s annual food bill by $100.

How have we gotten to this point? Well, as the old saying goes, it seemed like a good idea at the time. Back in the Thirties, the combination of the Depression and the Dust Bowl caused widespread hardship in farm country. In an effort to prop up prices, the federal government started buying up surplus crops and imposed acreage limits, essentially telling farmers how much they could grow.
Since the Depression, farm subsidies have changed. We now have a bewildering variety of cash support, loan, and production limitation programs. Ever heard of a milk marketing order? A milk marketing order means that in regional markets across the country, including the Northwest, the USDA sets the price that processors and coops must pay for raw milk. If this sounds like price-fixing, well, it is.

Reformers, including the Bush administration, say it’s time to reduce crop subsidies and redirect some of the savings towards farm conservation programs. Let’s get acquainted with some of these programs and see what they’ve accomplished. The first thing to note is that conservation programs are voluntary. Farmers don’t have to participate, but many want to. In fact, only one out of four farmers who apply for conservation funding actually get it. There is not enough funding to meet the demand.

For example, the Conservation Reserve Program was established in 1985. It is the brainchild of Senator Richard Lugar, an Indiana Republican who owns and works a 604-acre farm where he raises corn, soybeans, and black walnut trees.

The Conservation Reserve Program pays farmers to plant cover crops on lands enrolled in the program. A cover crop is a plant that protects erodible soils. At the end of 2005, about 4 percent of U.S. farmland was enrolled.

There is evidence that Conservation Reserve has yielded some significant environmental benefits. Between 1982 and 2003, for example, annual soil erosion losses on farmland fell 43 percent. Other studies show that the populations of ducks and other game birds do better on Conservation Reserve lands.

A similar program is the Wetlands Reserve Program. Participating farmers can sell conservation easements to the federal government to pay for wetlands restoration. Nearly 2 million acres are enrolled.

Other programs help livestock producers with manure management and row crop farmers with no-till farming. A new twist on conservation programs is energy. The 2002 farm bill authorized loans and grants to install renewable energy systems, such as methane digesters and solar-powered pumps.

All told, farm conservation costs about $5 billion per year.

As part of its reform proposal, the administration wants to boost conservation significantly. For example, the acreage limit in the Wetlands Reserve Program would be tripled. A billion and a half dollars would be spent on researching cellulosic ethanol production.
If biofuels are to make a significant dent in gasoline demand, we’ll have to find a way to make ethanol from cellulose derived from farm waste and low-value crops. Corn won’t get us there. Even if we dedicated every kernel of corn in this country to ethanol production, we could replace no more than about 15 percent of gasoline demand. A significant amount, but nowhere near enough to unhook us from the crooks, crazies, and cartel bosses who control a goodly share of world oil production.

An interesting approach to farm policy reform has been developed by a bipartisan group of lawmakers, including Richard Lugar in the Senate and Dave Reichert in the House. The reform legislation was introduced as an amendment to the House version of the 2007 farm bill. The amendment would have accomplished a number of things.

Essentially, it would have scaled back the crop-specific approach to farm programs. Instead, the farmer safety net would be an income insurance program for all farmers.

It would have reduced those direct payments that I talked about earlier, and limited payments to people who actually farm.

It would have denied subsidies to any commercial farm with adjusted gross income of $250,000 per year or more. Today, farms at that income level receive an average of $70,000 per year in subsidies.

It would have provided a voluntary, IRA-like “risk management account” that farmers could tap when their gross revenues fall.

It would have expanded conservation programs.

And it would save around $20 billion by 2012, according to Senator Lugar, who is sponsoring the Senate version of the reform legislation.

But the House amendment failed on a lopsided bipartisan vote. That was two months ago. Instead, the House passed a bill that includes a few modest subsidy reforms and conservation increases, but largely continues the status quo.

It even created a new sugar subsidy. USDA will be required to buy domestic sugar production equal to the volume of Mexican sugar imports, then sell the sugar at a cut-rate price to ethanol plants. Cost to the taxpayers: $1.4 billion over 10 years. An amendment to reform the loan deficiency payment program by House Minority Leader John Boehner was defeated.

The bill’s passage was partly the doing of Nancy Pelosi trying to score points for freshman Democrats who represent districts that benefit from the big commodity subsidy programs. The vote on the bill broke largely on partisan lines, unusual for a farm bill, but that was the result of a tax issue associated with the bill.

So, where do we go from here? The 2002 farm bill expires soon. The House has done its work, but the Senate has yet to weigh in. Ultimately, a bill will have to win the approval of the president, who has said that if the final bill looks anything like the House bill, he’ll veto it.

More broadly, as a country we have to determine what we want out of our farms. Few would disagree that we want good, healthy food available at prices that reward farmers for their labor and are affordable for consumers.

Beyond that, there are public policy questions to answer, and the biggest one is, should we subsidize agriculture, and if so, for what purpose. Research? Conservation? Income support? Export assistance? Nutrition? All of the above, none of the above, some of the above?

These are hard questions, but what we know for certain is that the present system spends a great deal of the taxpayers’ money on programs that foster inequities and distort markets.

Newer priorities — including water quality protection and renewable energy development — exist that weren’t foreseen during the New Deal era. Unfunded budget liabilities and our obligation to comply with international trade agreements add urgency to the reform mix.
Despite the obstacles, we share Senator Lugar’s cautious optimism that farm reform can happen. The House has largely failed, but it is now the Senate’s turn.

As columnist George Will wrote this summer, Farmer Lugar is once again putting his hand to the plow of farm reform. May the rains be fair and his crop grow well.

Thank you.

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