Field of Schemes Mark II: The taxpayer and economic welfare costs of price loss coverage and supplementary insurance coverage programs

Reuters

Cory Brown, a son of Sunburst Dairy owner Brian Brown, drives a feeder tractor past some corn at their dairy farm near Belleville, Wisconsin September 6, 2012.

 

 

This study provides estimates of the taxpayer costs of two major new farm subsidy programs proposed by the House Agricultural Committee in its version of the 2012 farm bill: the Price Loss Coverage (PLC) revenue support program and the Supplementary Coverage Option (SCO) insurance program.

Key Findings:

The PLC program has the potential to be very costly:

  • If crop prices remain at historically high levels, program costs would be relatively modest (approximately $1.1 billion).
  • If crop prices moderate toward more recent historical average levels, annual program costs could exceed $18 billion—almost four times the cost of the direct payments subsidy program it would replace.

The PLC program disproportionately subsidizes certain crops:

  • Even under the CBO baseline forecasted prices, peanut and rice producers would each receive an annual average subsidy of $68 on every acre they plant.
  • A rice or peanut producer who planted one-thousand acres would receive an annual PLC check of $68,000—roughly 40 percent more than the total income received by the median nonfarm household in the United States.
  • If prices moderated toward their historical average levels, PLC payments would exceed $200 per acre for peanuts and $300 per acre for rice.

The SCO exacerbates the crop insurance boondoggle:

  • If prices remain at current high levels, the SCO would cost taxpayers $2.6 billion annually.
  • $500 million of those subsidies would flow directly to crop insurance companies—companies that already receive $3 billion a year in other taxpayer subsidies.
  • If prices moderate to recent historical average levels, the SCO program costs would decline to an estimated $1.5 billion—but the cost of the PLC program would explode.

PLC and SCO represent skewed priorities:

  • If crop prices moderate toward their recent historical average levels, the PLC and SCO programs would cost taxpayers over $20 billion per year.
  • This is more than all current spending on farm-oriented programs, including programs that enhance farm incomes—like subsidized crop insurance, direct payments, disaster aid, and loan rate programs. This also includes programs such as publicly funded research and development and education programs that benefit consumers, processing companies, and farmers by improving agricultural productivity.

Both programs may adversely impact US trade relations:

  • PLC and SCO subsidies would directly affect current production decisions, providing incentives for increased output.
  • Both programs would clearly be WTO amber box programs and would likely to be the subject of WTO trade disputes.
  • Potential consequences for US exporters would include reduced access to export markets for agricultural commodities and penalties for harming other countries’ export sectors—penalties ultimately borne by the US taxpayer.

 

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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
  • Assistant Info

    Name: Neil McCray
    Phone: 2028625826
    Email: neil.mccray@aei.org

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