On January 2, President Barack Obama signed a bill designed to avert the fiscal cliff. At the same time, to slightly less fanfare, he averted the "milk cliff." By extending the 2008 farm bill another nine months, he prevented the automatic revival of a 1949 law requiring the federal government to buy dairy products under certain circumstances, effectively setting a floor for the price of milk. While the actual fate of milk prices was far from clear, the milk cliff provided cover to continue the practices of subsidizing wealthy farmers, to the detriment of just about everyone else.
In 2012, the Department of Agriculture (USDA) spent $22 billion on subsidy programs for farmers. Introduced in the 1930s to help struggling small family farms, the subsidies now routinely draw condemnation from both left and right as wasteful corporate welfare. While the number of farms is down 70 percent since the 1930s—only 2 percent of Americans are directly engaged in farming—farmers aren't necessarily struggling anymore. In 2010, the average farm household earned $84,400, up 9.4 percent from 2009 and about 25 percent more than the average household income nationwide.
What's more, a handful of farmers reap most of the benefits from the subsidies: Wheat, corn, soybeans, rice, and cotton have always taken the lion's share of the feds' largesse. The Environmental Working Group (EWG) reports that "since 1995, just 10 percent of subsidized farms—the largest and wealthiest operations—have raked in 74 percent of all subsidy payments. 62 percent of farms in the United States did not collect subsidy payments."
The good news is that our fiscal problems have made these subsidies politically unsustainable. As a result, the farm bill currently under consideration by Congress is set to terminate them. But attempts to wean farmers from the federal teat have proved disastrous in the past.
Take the $4.1 billion the federal government spent on direct payments in 2011. Created in 1996 as a way to get farmers off their addiction to price guarantee programs, these supposedly temporary direct payments are still around. In 2013, a new farm bill, even with the elimination of direct payments, would be a similarly hollow victory. Lawmakers would compensate farmers by expanding another unjustifiable farm subsidy program: crop insurance.
Like most businesses, farms buy insurance policies to protect from potential losses, such as poor yields or declining prices. Unlike most businesses, they can count on the government to pay about two thirds of the premiums, at a cost of $7 billion annually. The proposed "shallow-loss program" would send money to farmers in the event of small drops of revenue that are not typically covered by crop insurance.
Senate Agriculture Committee Chairwoman Debbie Stabenow (D-Mich.) claims that the extension would save taxpayers money, swapping $3 billion in new payments in exchange for eliminating $4 billion in direct payments. But the crop insurance scheme is likely to cost twice as much as estimated, according to a 2012 American Enterprise Institute study by the economists Vincent H. Smith, Barry K. Goodwin, and Bruce A Babcock. History tells us that it won't be long before the program resembles the direct payments it was supposed to replace. That's because, if implemented, these subsidies will kick in at relative low level of losses. Given that prices will surely come down from their current record levels, most farmers will wind up receiving a payment every year.
Direct payments and crop insurance are not the only farm programs in need of termination. Price support programs such as marketing loans are a serious waste of taxpayer money, as are the conservation subsidies that pay farmers not to farm on their land. So are export subsidies, which aid farmers in foreign sales, and countercyclical payments, which compensate for drops in crops' market prices.
In addition to the direct cost to taxpayers, these subsidies cause enormous economic distortions. Consider the domestic sugar industry. The USDA protects its producers against foreign competitors by imposing U.S. import quotas, and against low prices with a no-recourse loan program that serves as an effective price floor. As a result, the University of Michigan economist Mark Perry reports, Americans have had to pay an average of twice the world price of sugar since 1982.
That's just one of many government interventions that have hurt the poorest Americans by increasing the price of food. The food stamp program—an $80 billion initiative designed to help poor Americans offset the high price of buying food—is embedded in the very farm bill that keeps those prices so high.
Farm subsidies also hurt young farmers through their impact on land values. Almost half of the country's farmland is operated by someone other than its owner. Those renters—especially young farmers who generally have higher borrowing costs to start with—face increases in both the price of renting and the cost of buying. On the other hand, farmers near retirement age, who own land through inheritance or length of tenure, reap the benefits of higher land values induced by the subsidies. In 2010 some 90,000 direct payments went to wealthy investors and absentee land owners in more than 350 American cities, according to an EWG report.
"It's no accident that the average age of farmers is nearing 60 years old," a friend who runs a farm wrote in a recent email to me. "We've drastically increased barriers to entry through subsidy programs, at huge social and economic costs. If I'm a 30-year-old farmer, as my sons-in-law are, I should mightily resent the fact that the landowner whose land I need receives government subsidies while I'm forced to compete against those subsidies to secure enough land to have a viable farm business."
Farm subsidies benefit the rich and hurt the poor. They are massively expensive and hugely wasteful. They must end.
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