The Obama administration’s recent proposal to reduce Federal crop subsidies going to large farms is heartening to some sustainable agriculture advocates, but it is causing a major stir among mainstream farm organizations. In its FY 2010 “budget framework” released on February 26, the Obama administration proposed to begin phasing out “direct” payments to farmers with annual gross sales over $500,000. It is estimated that, after a 3-year phase-out period, this would reduce Federal payments to larger farms by $1.2 billion annually. The Obama administration is also proposing to reduce crop insurance premium and underwriting subsidies.
[This article is excerpted from a longer article by the author that was published March 6 in The Dakota Day:
“Obama’s First Forty Days: What Are the Signals for Agriculture and Food?”]
These ‘direct payments’ have their origin in the 1996 Federal Farm Bill, in which they were referred to as “production flexibility contract payments”. At the time, they replaced crop-specific ‘deficiency payments’. Allocations to each contract farm were based on the farm’s historical base acreage and yield, not on current acreage planted to individual crops. In farm policy jargon, the payments were ‘decoupled’ from actual production. They were scheduled to run through the year 2002 and, presumably, then terminate. The nationwide payments started at $5.6 billion in FY1996, were supposed to reach $5.8 billion in FY1998, and then were to decline to $4.0 billion in FY2002. Although never officially the policy, the implication was that these payments were to provide cushion and some protection to farmland values while the nation transitioned to a more market-oriented farm policy.
The phase-out of these payments never occurred. The 2002 Farm Bill changed the name to ‘direct payments’, while at the same time restoring a form of partially ‘coupled payments’ that they were originally intended to replace. So, the ‘direct’ (more accurately described as ‘fixed direct’) payments became a sort of permanent fixture, even while Federal farm policy continued most of the old price support mechanisms, albeit in new and ever more complicated forms. The new Farm Bill passed in 2008 (Food, Conservation and Energy Act of 2008) also continues the fixed direct payments, as well as virtually all of the price and other income support programs of the 2002 Farm Bill and some new subsidy programs or options, like the Average Crop Revenue Election (ACRE) provision. Attempts to reform farm policy by further ‘decoupling’ payments to farmers, tying payments more closely to environmental performance, and bringing U.S. farm subsidies more in line with World Trade Organization (WTO) rules largely failed with passage of the 2008 legislation.
Since 2004, the annual fixed direct payments to farmers have been approximately $5.2 billion. (Other kinds of Federal farm subsidies tied directly or indirectly to ‘commodity’ production, as well as government subsidized crop and revenue insurance payouts, vary from year to year depending largely on market prices and crop yields.) The 2008 Farm Bill calls for only a slight reduction in these fixed direct payments over the next three marketing years, and no reduction at all from 2002 Farm Bill levels after that. By contrast, Obama’s proposed $1.2 billion annual reduction (after full phase-in) would constitute an approximate 23 percent reduction. This, of course, is the estimated overall effect; farmers with less than $500,000 in annual gross sales would not be affected by Obama’s proposal.
To hear the howls of protest from politicians in farm country and mainstream farm organizations, you would think that Obama’s proposal would gut the existing lavish farm subsidy program. According to recent articles in the New York Times and the Grand Forks Herald, North Dakota Senators Conrad and Dorgan are among those opposed to the proposal, as is Representative Collin Peterson, of Minnesota, Chairman of the House Agriculture Committee. A Reuters article reports National Farmers Union president Tom Buis as saying a $500,000 cut-off is too low and would harm “family farmers”. American Farm Bureau president Bob Stallman also opposes the proposal, according to The Washington Times.
Let’s give this a little perspective, however. In the year 2007, according to recently released Agricultural Census data, slightly more than 5 percent of the nation’s 2.2 million farms had gross sales of $500,000 or more (the percent was no doubt higher in 2008, because of quite high commodity prices during much of last year). In South Dakota, for example, 2,844 (9 percent) of the State’s 31,169 farms had gross sales of $500,000 or more, and in North Dakota there were 3,625 such farms (11 percent) out of 31,970 total farms.
Combining census data with data on fixed direct payments compiled by the Environmental Working Group, we can determine the importance of those payments in the Dakotas relative to the total value of agricultural products sold in 2007. In South Dakota, fixed direct payments (to farms of all sizes) were equivalent to 2.6 percent of the value of agricultural products sold, and in North Dakota they were 3.7 percent. Of course, fixed direct payments would constitute a much higher percentage of net farm income in each State. Nevertheless, these figures show that phasing out fixed direct payments for the largest 10 percent or so of farms in regions like the Dakotas is hardly a deal breaker! Moreover, why should the average Federal income tax payer, who typically has far less income and wealth than the owners and operators of these large farms, be responsible for subsidizing them anyway?
Ironically, the fixed direct payments are less objectionable to the WTO than other more ‘coupled’ commodity subsidies in the U.S. system. But the fixed direct payments do stick out like a sore thumb to those who ask, “What does the taxpayer get in return?” If those payments were converted to some kind of environmental stewardship payments, they would be much less objectionable.