Our dreadful farm policy gets worse.

Our dreadful farm policy gets worse.

Our dreadful farm policy gets worse.

Moneybox
Commentary about business and finance.
Nov. 18 2004 5:47 PM

We Bought the Farm

Who knew that America's demented agricultural policies could get even worse?

Thanks to high commodity prices, an expanding domestic economy, and a hungry China, the U.S. agricultural sector is raking it in. Earlier this month, the Agriculture Department's Economic Research Service forecast that farms would reap a record net cash income of $77.5 billion in 2004. That's up 13 percent from 2003 and up a whopping 50 percent from 2002. Last week, the Agriculture Secretary Ann Veneman crowed that the prosperity was "broadly shared across virtually all of American agriculture."

That's great news for farmers and ag-related industries, but bad news for consumers, many businesses, and investors. Higher prices are either passed on to the consumer—dairy prices are up 6 percent from last year—or take out a bite of profits somewhere along the line. In its most recent earnings report, Kraft said higher costs for commodities like meat and "record high cheese markets" cut into profit margins. Tyson Foods, reporting lower earnings earlier this week, cited "increased grain costs of $106 million as compared to the same period last year" and higher beef prices.

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Of course, markets always reward some and punish others. The real annoyance in recent farm prosperity is that it only seems to have increased the burden of American taxpayers. Even as farm net income rose by half between 2002 and 2004, the volume of direct government payments (read: subsidies) paid to farmers rose by nearly the same amount, from $11 billion to $15.7 billion. If farmers are reaping such a green harvest, why are the rest of us subsidizing them so heavily?

The reason is that our demented farm policy has managed to get even worse recently. It's no surprise that this strangely market-distorting action has taken place in the last few years under a Republican Congress and a Republican president. Despite their self-identification as the party of entrepreneurial, competitive small business, the Bush crowd has shown itself to be a relentless advocate for non-entrepreneurial, competition-averse large businesses. Political geography also plays a role here. Many of the largest farm-goods producing states are red, and many of the largest farm-goods consuming states are blue. To a large degree, the 2002 farm bill, which is responsible for the current regime of subsidies, acts as a mechanism for transferring wealth from the people who earn lots of money in states like Connecticut and New Jersey to (mostly corporate) farmers in Kansas and Nebraska.

Here's a précis of the 2002 bill's provisions. It provides three sources of income support for commodity farmers. Direct payments are made to farmers regardless of "current production or ... current market prices." According to this chart, those will cost us $5.3 billion in 2004. A new subsidy program—counter-cyclical payments—guarantees farmers a minimum price for their crops regardless of the market price (estimated 2004 payments: $1.9 billion). Then there are provisions for loans ($4.1 billion), a special dairy program, and payments for conservation.

Few—except the libertarian folks at the Cato Institute—advocate eliminating all government support for farmers. But even advocates must admit the absurdity of the subsidy regime. These provisions aren't about guaranteeing a food supply for Americans or saving the increasingly mythic family farm. They're about making life easier for big agriculture. This breakdown of federal-aid recipients shows that while 38.8 percent of all farms received payments in 2003, "about 67 percent of commercial farms received government payments." Commercial farms took more than half of all payments. Worse, the programs don't really target the farmers who need it most. They are indiscriminate. In 2003—an excellent year for farmers—pretty much every sector received payments of some sort: 91 percent of cash grain and soybean farms, nearly half of all hog farmers, a quarter of poultry farmers, and nearly 80 percent of dairy farmers.

The 2002 farm bill helped set up a nice risk-reward proposition for farmers big and small. With guaranteed prices for many crops, they can invest with abandon and prepare and plant as they want, knowing they won't be exposed to the full fury of the market if things go awry. The United States essentially gives farmers a free put, which guarantees them a certain price for their goods regardless of how low the market price falls. But there's no obverse. When the market goes the farmers' way, they reap the full profits. And the rest of us pay twice: We pay through the nose for our food, and we continue to fund federal farm payments. There seems to be no mechanism for reducing many of these payments when prices rise above a certain level.

So, the politically connected reap all the benefits of a market economy when it goes their way but are insured against its downsides. Meanwhile, the public at large has no protection against price increases and can never receive the full benefits of global competition. Wealth without risk, upside with no downside. Privatize success and socialize failure.