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.

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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.)

So how did we get here? :: A Short History of the Farm Bill(s)

Dorothea Lange's "Migrant Mother" is one of the most iconic photos taken of Dust Bowl and Depression-era America. It encapsulates a complexity of emotions, possibilities, and hardships that confronts this mother of two, living as a sharecropper recently moved points westward. As Lange herself recounted:

 I did not ask her name or her history. She told me her age, that she was thirty-two. She said that they had been living on frozen vegetables from the surrounding fields, and birds that the children killed. She had just sold the tires from her car to buy food. There she sat in that lean-to tent with her children huddled around her, and seemed to know that my pictures might help her, and so she helped me.

The story of this photo -- how this mother came to be here, her circumstances, and her surroundings, in all their complexity --  is the story of the Farm Bills origin. Its evolution is no less complex, a series of well-intended actions to protect farmers gone awry and large-scale attempts to systematize the way American agriculture worked, bringing in new stakeholders(1) into the story of American farming.

The Farm Bill began life not as a single piece of legislation, but a series of legislative acts and executive directives brought forth by Franklin Delano Roosevelt to counter two very specific and intertwined events: the increased & aggressively detrimental Dust Bowl and the ongoing economic complications of the Great Depression. The former was a result of increased mechanization and one-crop planting that had come to define Midwestern agriculture in the early 20th century -- deep plowing and planting loosened soil, and when drought cycles hit in the 1920's, these practices allowed large amounts of topsoil to dry out and literally blow away(2). (So much so that the Capitol in Washington, D.C. was covered in a fine film for many years.) The latter was (and still is) the subject of much debate by economists and historians, but the long story short, the price fluctuations that accompanied the market collapse not only left many families unable to afford milk, grains and other products, but also left the prices of many products (determined by the Chicago commodities market) completely under the cost of production. Farmers were producing product no one could by at volumes and costs that swamped any income they did derive from it(3).

In response, and as a part of the early experimentation in what would become the New Deal programs, a series of programs and legislative acts appeared in the 1930's to respond to the economic and ecological issues brought together by these events. Starting with the Agricultural Adjustment Act of 1933, 6 subsequent pieces of legislation would follow through to 1938 with these intial goals:

1) To stabilize price floors for farmers -- a government-backed guaranteed minimum price per bushel on crops -- to ensure that they could remain solvent.

2) To develop incentives for farmers -- government payments directly given to farmers -- to encourage the use of ecologically sound techniques to preserve soil health and long-term agricultural utility of the land.

3) Quotas and government buying programs -- used to keep production at specific levels to keep prices stable, and using the latter to buy the surplus to supplement the first of the major government food programs (food stamps and school lunches).

The initial Farm Bill legislation acted as triage for a farm sector that was bleeding profusely in the 30's, and the Bill retained that character when it was brought up for review in 1948. Going forward, those 3 elements -- price stability and assurances, conservation, and government food programs -- formed a trinity of overarching themes that cover the majority of the present-day 15 titles of the Farm Bill.

From here, individual farm bills matter less than the trends that accompanied them. For example, in the 1950's, complications began to arise with regards to those first and third principles as the General Agreement on Tariffs & Trade (GATT, the precursor to the World Trade Organization) sought to eliminate those sorts of artificial price supports. This lead to a massive restructuring of how payments were calculated and conducted, leading to the introduction of direct payments to farmers (a concept we'll come to in our next post). In the 1970's, we saw the introduction of Agriculture Secretary Earl Butz, man of the "get big or get out" school of agricultural production who oversaw not only an expansion of the subsidy program, but also more tightly focused its benefactors, specifically to the product of corn. The program saw only minor changes in content over the next several decades in terms of content, though the allocations made for its procurement would grow around 35-50% per five year period. In the 90's, we saw an increase for conservation and rural development programs, and the institutionalizing of the organics program. Much remained the same up until the the 2007 Farm Bill, which became a watershed moment for the amount of public attention turned towards its content, thanks to a little book called "The Omnivores Dilemma"(4).

And there, in less than 1000 words, is the historical order and general shifts of the Farm Bills. Does this seem to gloss over a lot? Hell yes. Is it possible to cover all of this matter succinctly? Hell no. That's why I am saving the content of specifics for the individual titles, to give more background and flesh out each topic in greater specifics. My goal here is to make sure these posts don't turn you into some Dinty Moore-snogging zombie and that you get bite-size pieces that give you enough to digest. Like Dorothea Lange's photo, each entry tells part of the story -- and like the photo, there's a lot to process in each title.  So sit back, relax, and digest. There's more to come(5).

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(1) Stakeholders is a delicious term that refers to anyone who has a "stake" or an investment in a given issue or topic. It's also a highly problematic term, in that not all stakes are created or weighed evenly.

(2) Donald Worster, 2004 (1979) Dust Bowl: The Southern Plains in the 1930s (25. anniversary ed) Oxford University Press.

(3) Bordo, Michael D., Claudia Goldin, and Eugene N. White , eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (1998) University of Chicago Press.

(4) Most of this information is being drawn off a number of Congressional Research Service (CRS) reports on the Farm Bill. If you're unfamiliar with the CRS, it's a great institution that boils down the details of legislation and research for members of Congress, with an emphasis on dispassionate, fact-based review. Many of these reports are not available for public consumption, however at http://opencrs.com/ you can find many (search Farm Bill) for some of the ones used here. (Think of it as additional reading for the especially geeky!)

(5) In an effort to be succinct yet brilliant, I am in fact limiting myself to entries of about 1000 words. I could let myself go on for ages on given topics, but 1000 words is almost 4 pages of reading. That's a hunk these days. And it forces me to be concise and consider the most important parts of each section I'm creating here.