US farm policy amounts to $80 billion for rich people

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Alice doesn't just live in Wonderland anymore; she seems to be everywhere. On ABC, in numerous op-ed columns (along with the entire Corleone family in one case), and even hiding out in multiple DC monuments. She has also, apparently, invaded many congressional offices. Why? Because the chaos of Wonderland ‒ complete with various lunatic Queens of Hearts, Mad Hatters, Sleepy Dormice, and random Cheshire Cats on Cruz control ‒ seems to have become pervasive in Washington's corridors of power over the past three weeks (you can pick your own cast for Charles Dodgson's characters; there are many, many contenders for the leading roles).

But, in fact, the advent of Wonderland into the world of congressional legislation is not a new phenomenon. And the House and Senate agricultural committees are prime examples of the long standing nature of the Wonderland legislative tradition.

You might think that no sensible policy maker would have handed out about $80 billion dollars in welfare checks mainly to very wealthy farm households at the rate of about $5 billion a year for doing nothing since the mid-1990s, but you would be wrong. The House and Senate Agricultural Committees have been more than happy to do exactly that through the Direct Payments program.

Then there is the fiscal fiasco called the federal crop insurance program. When you and I buy home owners or auto insurance, or small and large businesses purchase property and casualty insurance, we pay premiums that cover the full commercial costs to the private insurance companies that design, deliver, and service those insurance contracts. That is not the world of federally subsidized crop insurance. In that Wonderland world, taxpayers cover 70 percent of the insurance premium costs (all of the administrative costs and an average of about 62% of expected losses). Not quite the way a free enterprise market based system would envisage how a service should be offered or paid for.

Most farms are successful moderate-sized businesses (annual failure rates in agriculture run at about one of every 200 farms). Many of them would have to pay about $30,000 a year in premiums to cover crop losses on their operations if they had to pay the full costs of their policies. Instead, those farms get to pay $9,000 premiums and on average receive about $23,000 a year in indemnities. What a great deal, and wouldn't many moderate sized main street and manufacturing businesses like to have the same deal for the property/casualty insurance they buy. But those businesses are not in the Senate and House Agricultural Committees' versions of Lewis Carroll's Wonderland.

Recently, National Crop Insurance Services, a major lobbying group for the crop insurance companies that deliver the federally subsidized program (in return for two to three billion dollars of tax payer funds in most years), also happily contributed to the Wonderland world of farm policy debates. They claimed that farmers paid large amounts for their insurance coverage each year, over $4 billion in 2012 and 2013, and, therefore, the program requires tough sledding on the farmers' part.

How true with respect to the $4 billion, but what a wonderfully distorted Wonderland view of the world! Because, of course, in 2012, those same farmers also received a total of more than $16 billion in payments for crop losses (merely about $12 billion more than they paid into the program).

In a good year for crops, but a bad year for indemnity payments, the worst farmers are likely to do is pay $4 billion dollars or so in premiums and get back only about $7 or $8 billion dollars in indemnity payments (a mere transfer of $3 or $4 billion). An agricultural Mad Hatter might well say "How unreasonable, give those mainly very wealthy farmers more."

And that is what the House and Senate agricultural committees want to do in the newest Wonderland crop insurance proposal they have included in the recent House and Senate agricultural bills, the Supplementary Coverage Option (SCO). It is not enough that farmers can buy heavily subsidized crop insurance policies that trigger payments when their revenues or yields from a crop fall below 85 percent or 75 percent of expected levels. Now both the House and Senate agricultural committees wants to give them even more protection, mainly at the expense of taxpayers, when in the county in which their farms are located average revenues or yields fall below 90 percent of their expected levels.

There are many other wonderland farm subsidy policies; for example, the U.S. sugar program (which costs consumers over $3 billion a year) and the ethanol mandate (which has more than doubled the price of corn but done little or nothing for the environment). And a recent claim by a senior Senate Agricultural Committee member that reducing crop insurance subsidies for millionaire farmers by 15% would undermine the fiscal integrity of the program comes straight out of the Lewis Carroll nonsense poem playbook. So, when it comes to farm policy, Alice and her Wonderland associates have been alive and kicking for many a long year. If only they would all go to sleep for a while and give the taxpayer a break!

Vincent Smith is a visiting scholar at the American Enterprise Institute (AEI), and a professor of economics in the Department of Agricultural Economics at Montana State University. 

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About the Author

 

Vincent H.
Smith
  • Vincent H. Smith is Professor of Economics in the Department of Agricultural Economics and Economics at Montana State University and co-director of MSU’s Agricultural Marketing Policy Center. He received his Ph.D. from North Carolina State University in 1987 and his bachelor’s and master’s degrees from the University of Manchester in 1970 and 1971. Dr. Smith’s current research program examines agricultural trade and domestic policy issues, with a particular focus on agricultural insurance, agricultural science policy, domestic and world commodity markets, risk management, and agricultural trade policy. He has authored nine books and monographs and published over 100 articles on agricultural and other policy and economic issues. His work has been recognized nationally through multiple national awards for outstanding research programs. In 2008, he became a Distinguished Scholar of the Western Agricultural Economics Association. Currently he is a Visiting AEI Scholar and co-director of AEI’s agricultural policy initiative. Dr. Smith is married and he and his wife, Laura, have two children, Karen and Meredith.
  • Email: uaevs@montana.edu
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