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Farm Subsidy Primer

The federal government provides a "safety net" to agricultural producers to help them through the variations in agricultural production and profitability from year to year - due to variations in weather, market prices, and other factors - while ensuring a stable food supply. However, this support is highly skewed toward the five major "program" commodities of corn, soybeans, wheat, cotton, and rice. A handful of other commodities also qualify for government support, including peanuts, sorghum, and mohair, though subsidies for these products are far smaller. Dairy and sugar producers have separate price and market controls that are highly regulated and can be costly to the government.

Despite the rhetoric of "preserving the family farm," the vast majority of farmers do not benefit from federal farm subsidy programs. Small commodity farmers qualify for a mere pittance, while producers of meat, fuits, and vegetables are almost completely left out of the subsidy game (i.e. they can sign up for subsidized crop insurance and often receive federal disaster payments).

The subsidized crops benefit from an increasingly complex layering of subsidy programs begun in the 1930s and altered haphazardly ever since. The primary subsidy system today consists of the following elements, each of which will be explained in more detail below.

  • Direct payments are paid at a set rate every year regardless of conditions.
  • Counter-cyclical payments are triggered when market prices fall below certain thresholds.
  • A new revenue assurance program provides for overall profitability for a given crop.
  • Marketing loans offer very favorable terms whereby farmers can realize tremendous gains through loan deficiency payments (LDPs) and commodity certificates.
  • Disaster payments recoup large losses due to natural phenomena. And the government subsidizes crop insurance to further insulate farmers from risk.

The following sections will summarize briefly each of these programs, except for crop insurance, which is given expanded treatment here.

Direct Payments

The 1996 Freedom to Farm Act envisioned a move away from subsidized farming and into a free-market system. As a transition, the 1996 farm bill established a direct payment program to wean farmers off the government dole. Payments are based on a formula involving the historic production on a given plot of land in 1986. This set payment goes to the current landowner or farm operator every year. The program has been maintained beyond its intended lifetime and now is a federal entitlement program for farmers that costs the government about $5 billion per year. These payments are usually included in land value estimate, driving up land prices and rents and making it harder for small farmers to expand and new farmers to enter the business.

Counter-Cyclical Payments (CCPs)

This program compensates farmers for drops in market prices. Congress sets price targets for each of the program commodity crops, and when prices drop below those targets, producers receive a government payment. The payment formula is similar to the formula used for direct payments and also is based on historic production. Because it is not tied to current production, these payments often make little sense. For instance, if a farmer's land was producing cotton at the time when the base acreage was calculated, the current owner will get a cotton CCP regardless of what he is or is not growing currently. The program is the heart of the farm safety net, but offers perverse incentives that often reduce profitability and drive up taxpayer cost, even at times when farmers don't need the help.

Farmers generally produce as much as they can in order to maximize their sales. The consequence often is an oversupply on the market, which drives down prices. Thus, a farmer who had a bumper crop may have sold all his produce for a lower-than-normal price, but the sheer size of the crop could have earned him a moderate or large profit. This farmer would still be eligible to receive a CCP if the average crop price in his county was below the mandated target price, in addition to his profit on the market.

Marketing Loans, LDPs, and Certificates

In order to moderate supply and price fluctuations, the government offers marketing loan assistance to give farmers the ability hold onto their crop and sell when it is most needed on the market. Without this assistance, cash-strapped farmers would all be pressed to sell their crops immediately after harvest, causing a temporary glut of product and very low prices on the market, followed by a swing in the opposite direction.

The current loan structure dates back to the 1986 farm bill. Congress sets the minimum loan rate (essentially the target price) for each program commodity crop. Farmers are able to take a marketing loan from the government, using their crop as collateral. After harvest, the farmer can market, or sell, his product whenever he chooses. If he sells at a high price, he can repay the loan with cash. If, however, the farmer repays the loan when market prices are below the mandated target price, he repays the loan at the value of the lower price, keeps the difference, and retains the crop to sell it later at a higher price. The difference between the loan price and the lower repayment price is called a marketing loan gain (MLG). Alternatively, producers can forgo the loan process and just accept a government payment for this price differential in the form of a loan deficiency payment (LDP).

A third variation of this process is the use of commodity certificates. Farmers with outstanding loans during a period of low prices can choose to repay the loans by purchasing generic commodity certificates for the posted market price. This is essentially the same as a MLG.

Through these ways, a producer is able to guarantee a certain return for his crop, even in addition to the actual sale of the crop, and can game the system to make large profits at government expense. MLGs and LDPs had been subject to congressionally mandated limits of $75,000 per individual, but this limit was eliminated in the 2008 farm bill. Gains through the use of certificates were never subject to limits, so these programs provide an unlimited source of government subsidies.

Average Crop Revenue Election Program (ACRE)

This is a new safety net option for producers created in the 2008 farm bill that brings together the risks in price and yield to provide assurance of a minimum total revenue. Thus, farmers would get a payment if they lost money under a low-price scenario - similar to the CCP program but without unnecessary payments - or when the yield is low due to weather, pests, or other factors - which is similar to crop insurance. Farmers who choose to enroll in ACRE forfeit their right to future CCPs and see a reduction of 20 percent of their direct payments and 30 percent of their MLGs and LDPs. The program has seen only limited enrollment so far, with the majority of acres being corn and soy.

Disaster Payments

The uncertainty of the weather is one of the great risks of farming and perhaps the greatest source of anxiety for farmers. Drought, frost, hurricanes, tornadoes - all can be devastating to a farmer's crop and his income for the year. That is why the federal government subsidizes crop insurance. In addition, however, Congress has appropriated large sums of money on a nearly annual basis to compensate farmers who experience losses in a given year due to natural disasters. These payments are documented in our database and total $20.4 billion from 1995-2010, or more than $1 billion per year.

In an attempt to prevent this expensive ad hoc disaster assistance, the 2008 farm bill established the Agricultural Disaster Relief Trust Fund to administer payments through the Supplemental Revenue Assistance Payments (SURE) program. SURE is supposed to work with the existing crop insurance and commodity subsidy programs to ensure that a disaster does not cause a participating farm's revenue to fall below a target level. Nonetheless, efforts currently are underway to issue additional, stand-alone disaster assistance payments, begging the question of what effect SURE has had, if any.

Crop Insurance

Please see the Crop Insurance Primer for additional information on this program.