Knowing Your Terms: Talking about Subsidies

So, Carolyn Dmitri, former economist with the USDA and a professor of mine, made the point to denote a distinction that went amiss in the last post, namely, the use of the term “subsidies”. Historically, the Farm Bill started out as a program to assist the profession of farming through price assurances – namely, allowing farmers to do what they do and get a price that allowed them to live off the land and their profession. Many of the programs that were primarily in the legislation of the 1930's and 1940's hit that happy medium, farmers being allowed to farm and their product being used in food stamps for the unemployed and hungry of the Depression. These were price supports and assurance programs, not subsidies (which are specifically for the purposes of spurring or protecting production, a semantic but important distinction). While we disagree as to their present use, the terminological distinction is noted, and that distinction becomes the point for this post – about vocabulary.

Price floors & income supports versus subsidies :: subsidy is a term thrown around a lot, but it is actually very distinct from the goals of the original Farm Bill. What the Farm Bill started out ensuring was income supports – namely, neutral and non-distorting ways of providing income to farmers to continue their day-to-day operations of production and continuing to farm their land. In the days of the depression and the Dust Bowl, the fear was very much that farmers would abandon their lands and in turn, the food supply would be driven inexorably into the red, leading to greater social unrest. Income supports allowed farmers to keep doing what they were doing. Over the 1940's and '50's, these income supports evolved into price floors, whereby the government ensures a price minimum per bushel. Whereas income supports were a triage measure to keep farmers on the land, price floors exist as a form of price stabilization and insurance against radical price fluctuations. These programs remained in place until the advent of actual subsidies – policies and programs designed specifically to boost production, underwrite costs, and incentivize planting, with a goal of making competitive a particular industry – in the 1980's in conjunction with a curious little event known as the Uruguay Round of the World Trade Organization¹.

These subsidy programs – direct payments, counter-cyclical payment programs, and the expansion of crop insurance programs – still operate under the notion of income supports for farmers. But each of them has, in the last 20-30 years, also become a systemic form of subsidy for a select series of crops, and many industries have been built around the de-facto subsidies that exist in the United States². These programs are usually measured not by financial need, but around the concept of historical base acreage, defined as the number of recorded acres dedicated to growing one of the 6 recognized supported crops (cotton, rice, sugar, corn, soy, wheat). As mentioned previously, the use of the term historical means that the land does not presently need to grow anything – it can remain fallow, and still collect payments, because it is the idea of production being protected³. And that amount is determined by the five-year Olympic average of production on that lot, or the average production over 5 years, minus the highest and lowest yielding years. These form the basis for the annual direct payment to a farmer over the course of a Farm Bill interval. Counter-cyclical payments are the form of price floor we were talking about earlier, ensuring that, on top of the direct payment, a farmer can derive a set minimum from his crop in the event of a low market.

On its face, crop insurance seems the most innocuous of the concepts and the easiest to understand. Its protection against weather and blight, a way to really help a profession where there is a large degree of external difficulty out of the hands of the farmers themselves. Problem is, who qualifies for the insurance and how does it cover farmers? The answer is pretty sad on both fronts, as only commodity growers qualify for crop insurance supports from the government (so apples, lettuces and the like? Those farmers need to buy privately), and it can cover a bevy of things. Shallow losses (a very popular term this Farm Bill season) are covered, meaning that any minor loss is covered, and the definition of minor loss is pretty broad. A tornado two counties away? Your croplands can qualify for full coverage, even if you haven't lost an ear of corn. Flood downriver from you? Your soy can also receive coverage. The crop insurance system is ultimately undermined by issues of moral hazard, whereby the insurance system itself sets farmers up to take unnecessary risks and also play the system in a way that protects them on two ends. Farms can make insurance claims, destroy portions of crop, and drive up the price of their product artificially, making good on both the insurance payment as well as the price increase. The reason this is problematic is that farmers who get coverage through Farm Bill programs don't actually pay for it – taxpayers cover both the costs of administration and application of the insurance program as well as the payment to the farmers themselves. And that is part of what makes this a moral hazard.

Not to get too partisan for a moment – this blog is primarily an exploration of the Farm Bill – but the issue of moral hazard is probably the most important to understand because at its core, it is the concept that informs much of the payment programs to farmers. Through direct payments, counter-cyclical price propping, and myriad insurance and coverage programs, farmers – very specifically large commodity growers and the industries who benefit them – are able to play the system, and in so doing play a dangerous game with our food supply. The purpose of the Farm Bill in its origins was as a triage measure to allow farmers a degree of assistance to continue their occupation as stewards of the land and as productive members of society. The Farm Bill of the present still does this, but in a twisted, malformed sort of way, where taxpayers underwrite a system that fundamentally works against them in that it does not support food production so much as food products; it underwrites high-risk behaviors and practices that taxpayers again bear the brunt of the cost for (in terms of public health, environmental cleanup, and the labor market). And the majority of farmers who benefit from these programs are not the farmers at your farmers markets, but the farmers locked into a system where their only way of deriving a sound income is through working the system precisely because it does not benefit them, but the people they work for – the industries of food processing, agricultural insurance, agricultural bank & loans, and the agricultural industries of seed, machines & agribusiness, who tend to own in part or in whole the industries previously listed.

While the Farm Bill nominally helps support farmers through payments and price supports, the Farm Bill is also a subsidy to the industries that undermine the farms themselves. And it is important, when considering the Farm Bill, to recall this distinction.

****************************************************************************

I'd like to know from readers what you might be interested in learning about the Farm Bill and its myriad programs. I can sit here and prattle on about the different titles and such, but then the blog is really no more different than a wiki. So we're looking to both expand the variety of content and make it relevant. Current events will start entering the picture here as we try and relate some issues (like, did you know that certain members of the Ag Committee have been trying to pass the Farm Bill under closed door negotiations? Or the odd coalition going on between the conservative Farm Bureau and environmental groups to make payment programs more accountable to farmers needs?) because there's a lot of rich stuff out there and be able to help filter stuff in and out. I've got plenty of copy set aside for various articles – but I am interested in your feedback and interest.

1And some of you might be wondering “WTF does the WTO have to do with the Farm Bill”? Actually, quite a lot, especially where the Uruguay round is concerned. See, Uruguay round talks were the first ones where the WTO took on the issue of agricultural trade and production, and one of the first meetings where the less-developed countries (LDC's) of the world took issue and proposed protections and safeguards for their exports. The result was a series of checks and balances that restricted or eliminated certain methods of internal protection or promotions of agricultural industry – and resulted in some cheeky new systems to get around those rules, specifically to be used in Farm Bill programs.

2And they won't go away if subsidies are removed, either. One of the major points economists would make is that, were we to get rid of the major payment programs and reform the insurance programs, the only discernable impact on the food industry would be that they would pay more for raw material, farmers would get paid more (and perhaps diversify their agricultural acreage), and the price for most of the “junk” food in the US supermarket might begin to reflect closer to true cost. And I say “only” in the tongue in cheek way that, while as a social scientist these represent big shifts that could have big impacts on consumer behavior, most economists would see this as a blip, not a sea change.

3And, if a part of the conservation programs, a double-incentive to the preservation of natural landscape or soil integrity. (Also the reason why subdivisions and housing can qualify for payments and program incentives.)