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Cato

No. 2 • March 2002

Farm Reform Reversal

by Chris Edwards and Tad DeHaven
Cato Institute

With support from the Bush administration, Congress appears set to pass
a huge farm bill that moves decisively away from agriculture policy
reforms enacted in 1996. The increases in this year's bill will cause farm
subsidies to cost taxpayers at least $170 billion over the next decade.
The costs may end up being much higher. When the 1996 law was passed,
subsidies were expected to cost $47 billion in total from 1996 to 2002.[1] Instead, farm
subsidies since 1996 have cost $123 billion.[2]

The landmark 1996 Freedom to Farm law was designed to move away from
the command-and-control regime that had marked six decades of federal farm
policy. The law increased farmers' flexibility in planting and eliminated
some price supports for major crops. The law was also supposed to phase
down subsidy levels between 1996 and 2002. But after the law's enactment,
Congress ignored agreed-upon subsidy limits and has passed huge farm
supplemental spending bills every year since 1998. As a result, total farm
subsidies have soared to more than $20 billion per year, up from an
average of $9 billion per year in the early 1990s (see Chart 1).[3]

Politically Favored Crops

Not all farmers are on the subsidy gravy train. In fact, commodities
that get federal payments account for just 36 percent of U.S. farm
production. Commodities, such as fruits and vegetables, that are not on
the federal dole account for 64 percent of U.S. farm production.[4] More than 90
percent of direct federal subsidies go to farmers who raise just five
crops-wheat, corn, soybeans, rice, and cotton.[5]

Subsidies are skewed not just by crop but also by farm size. In 1999
the largest 7 percent of farms received 45 percent of all farm subsidy
payments.[6] So
while politicians love to discuss the plight of the small farmer, they
actually dole out the bulk of the subsidies to the largest farms.

Welfare for the Well-to-Do

Figures from the U.S. Department of Agriculture show that the average
farm household income was $61,307 in 2000.[7] That is 7.5
percent higher than the average U.S. household income of $57,045 in 2000.
Commercial farms, as defined by the USDA, get about half of all farm
subsidies, had average household incomes of $118,450 in 2000, and received
an average subsidy of $43,379. When large-scale federal farm subsidies
began in the 1930s, farm incomes were just half of the national average.[8]

Much of the farm subsidy payout goes to individuals and companies that
clearly do not need taxpayer help. A Washington, D.C., think tank has
posted individual farm subsidy recipients on its webpage at www.ewg.org to
illustrate the unfairness of farm welfare for the well-to-do. Farm subsidy
recipients include Fortune 500 companies, members of Congress, and
millionaires such as Ted Turner (see Chart 2).[9]

Even middle-class farm-subsidy recipients are not in great need of
taxpayer handouts. Many farm households earn the bulk of their income from
nonfarm sources, which stabilizes farm finances. USDA figures show that,
of the $61,307 in average farm household income in 2000, $58,709 came from
off-farm sources.[10] Only 38
percent of farm households consider farming their primary occupation, and
most family farms have at least one spouse who works off the farm.[11]

Taxpayers to Take Bipartisan Beating

Congress is set to pass a farm bill that will increase farm program
costs by about $74 billion over 10 years. The ultimate taxpayer cost will
be higher if farmers demand further supplemental spending.

And this year's farm bill will reverse progress toward reducing
economic distortions by introducing a new price support program. The USDA
noted in a major farm policy report last September that "government
attempts to hold prices above those determined by commercial markets have
simply made matters worse time after time" by encouraging unneeded output
and inflating land prices.[12]

While the Bush administration did signal some initial resistance to
such backward farm policy last year, it has now capitulated to the farm
lobby. The administration had already shown a willingness to dish out farm
subsidies when it signed a $5.5 billion supplemental farm bill last
summer.

Sen. Richard Lugar (R-Ind.) had offered a more pro-market-reform farm
plan that would phase out subsidy programs and replace them with a voucher
system promoting reliance on insurance and other financial instruments.
But that was rejected in favor of old-fashioned subsidy approaches.

Farm subsidies are not good for either taxpayers or the agriculture
industry itself in the long run. Subsidies induce overproduction, which
pushes down prices and creates demand for further subsidies. Besides, real
prices of major farm commodities are expected to continue falling as they
have for the past 50 years because of advances in technology and economies
of scale.[13]
Farms that cannot adjust to this reality should exit the industry.

With new national security demands on the federal budget, and spending
on the elderly expected to soar in coming years, tradeoffs must be made.
Farm subsidies are a good place to start cutting spending, given their
harmful economic effects and the unfairness of transferring income from
taxpayers to a small group with above-average incomes.

For further details, see "Farm Subsidies at
Record Levels As Congress Considers New Farm Bill, Cato Briefing Paper
70.

Notes

1. Congressional Budget Office estimates cited in David
Orden, Robert Paarlberg, and Terry Roe, Policy Reform in American
Agriculture: Analysis and Prognosis, 1999, pp. 152, 164.

2. Budget of the United States Government, Fiscal Year
2003. This is the 1996-2002 figure for budget function 351 (2002 is
estimated).

3. Source for Figure 1 is USDA, www.ers.usda.gov/data.
Data are for calendar years; figure for 2001 is estimated.

4. Congressional Research Service, "Farm Community
Programs: A Short Primer," March 19, 2001. Data are for 1999.

5. General Accounting Office, "Farm Programs: Information
on Recipients of Federal Payments," June 2001, p. 22.

6. Ibid., p. 2.

7. USDA, "Agricultural Income and Finance Outlook,"
September 25, 2001, pp. 20, 29; and U.S. Census Bureau
http://www.census.gov/hhes/www/income.html.

8. Orden, Paarlberg, and Roe, p. 33.

9. Sources for Chart 2 data are Environmental Working
Group farm subsidy database, www.ewg.org/farm; Brian Riedl an John
Frydenlund, "At the Federal Trough: Farm Subsidies for the Rich and
Famous," Heritage Foundation, November 26, 2001, p. 5; John Lancaster,
"Farm Aid Benefits Lawmakers," Washington Post, September 1, 2001, p. A1;
John Kelly, "Mega-Farms, Government Agencies, and the Rich Get Bulk of
Federal Farm Aid, AP Survey Shows," Associated Press, September 9,
2001.

10. USDA, "Agricultural Income and Finance Outlook," p.
29.

11. USDA, Agricultural Outlook, June-July 2001, pp. 15,
17.

12. USDA, "Food and Agriculture Policy: Taking Stock for
the New Century," September 2001, p. 47.

13. Orden, Paarlberg, and Roe, pp. 25, 204.

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