Report Finds Potential Farm Bill Follies

American Enterprise Institute's report examines potential budgetary costs for shallow-loss farming programs.

Published on: Jun 21, 2012

The American Enterprise Institute released a study late last month examining potential costs for shallow-loss farming programs, like the one in the 2012 farm bill, finding that such programs could be costly for taxpayers and may not provide a much better solution than direct payments.

The report, "Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow-Loss Farming Programs" was prepared by Vincent H. Smith, professor of economics at Montana State University, Bruce Bacbcock, professor of economics at Iowa State University, and Barry K. Goodwin, William Neil Reynolds Professor of Agricultural Economics at North Carolina State University.

American Enterprise Institutes report examines potential budgetary costs for shallow-loss farming programs.
American Enterprise Institute's report examines potential budgetary costs for shallow-loss farming programs.

Findings from the study indicated that shallow-loss programs could be costly for taxpayers. Depending on structure and crop prices, the report said, the program could meet or exceed current costs with the direct payments program, averaging as much as $8 to $14 billion per year over the next five years.

In a conference following the report release, Goodwin stressed the potential for the shallow-loss program to be expensive for taxpayers.

"We are essentially talking about a policy design that ratchets up the level of support when markets are doing well and if we did have a decrease in prices it could be potentially very expensive," Goodwin said.

Goodwin also said Economic Research Service data indicates that many misconceptions about the farming business and farm households are fueling the fire.

"We often think that farms are facing foreclosure because they are so highly leveraged, and in fact these high asset values tend to lead to relatively low ratio of debts to assets compared to other segments of the economy. Not only are they low, but they are getting lower over time," Goodwin said.

The shallow-loss program also would provide farmers with subsidies when current-year revenues fall below about 90% of their average levels over the previous five years, according to the report. Goodwin said that these levels are unheard of in any other sector.

"There is a question of whether the federal government guarantees revenues of any industry to the levels of 88 to 90%. I'm not aware of any examples of that," Goodwin said.

Report findings also indicated that the Congressional Budget Office's cost estimates for shallow-loss programs assume that high commodity prices are here to stay—and Goodwin said that as prices go up so will subsidy costs.

"They tend to increase support levels as incomes rise, which seems to be sort of an odd type of policy," Goodwin said.

Smith said that if a moderation in prices comes about, CBO estimates won't hold up, and numbers will get bigger.

"You are looking at an open-ended commitment to spend large amounts of money," Smith said. But if prices do moderate, the farm sector will still be relatively healthy.

Additionally, the report highlighted that larger farms receive larger subsidies, perpetuating the "federal farm program tradition" of giving subsidies to farms that the report says don't need them in the first place.

"The largest and wealthiest farmers enjoy built-in buffers in the form of substantial equity in their farm operations," the report said, allowing those farms to receive the "lion's share" of shallow-loss subsidy payments.

The report said shallow-loss programs that are based on farm-level yields could create incentives for the wasteful use of economic resources, for example buying down deductibles associated with federal crop insurance.

"Farm earnings are enjoying a prosperous period of time right now," Goodwin said.

But, high prices in conjunction with guaranteed revenues opens the door for risk that Goodwin said could "create incentives for inefficient use of our agricultural resources."