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Farm Subsidies 101: For eaters, not policy wonks

Thursday, July 1, 2010

There's a lot of talk these days about healthy food, sustainable farming, organics, and buying local. A lot.

But how many of us really understand how the U.S. farm subsidy system affects the food on our plates? Not I.

Enter EWG's Farm Subsidy Primer.

It's not that you have to be a rocket scientist - or an ag policy wonk - to get it, but it is complicated - Byzantine, even. But next time you're complaining about, say, how there's corn in everything and soybeans as far as the eye can see, you'll know why.

What are farm subsidies, anyway? 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.

Who gets the subsidies? Support is highly skewed toward 5 major "program" crops (wonks call them "commodities") of corn, soybeans, wheat, cotton, and rice. A handful of other crops 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, fruits, and vegetables are almost completely left out of the subsidy game (i.e. they can, however, sign up for subsidized crop insurance and often receive federal disaster payments).

If you want to know exactly who gets the subsidies (in your area, even), simply enter your zip code into the search tool above (right), and voila. Fascinating - usually shocking - stuff.

The nitty gritty: How it really works 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:

So farmers would get a payment if they lost money under a low-price scenario, or when the yield is low due to weather, pests, or other factors. Farmers who choose to enroll in ACRE forfeit their right to some of the the programs. The program has seen only limited enrollment so far, with the majority of acres being corn and soy.

Crop insurance is a whole other ball of wax, so we'll have to talk about those some other day.

  1. Direct payments are paid at a set rate every year - regardless of conditions. 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.

    This 1996 program (originally a temporary "fix" to the original program) has lasted 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 estimates, driving up land prices and rents and making it harder for small farmers to expand and new farmers to enter the business.

  2. Counter-cyclical payments (CCPs) are triggered when market prices fall below certain thresholds. 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 to fill the gap.

    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. Weird, huh?

    This 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.

  3. A new revenue assurance program (the Average Crop Revenue Election Program (ACRE)) provides for overall profitability for a given crop. This new safety net option for producers brings together the risks in price and yield to provide assurance of a minimum total revenue.
  4. Marketing loans offer very favorable lending terms so farmers can hold onto their crop and sell when it is most needed on the market. This moderates supply and price fluctuations, without which cash-strapped farmers would be pressed to sell their crops immediately after harvest, creating a temporary glut of product and very low prices on the market, followed by a swing in the opposite direction.
  5. Disaster payments recoup large losses due to natural phenomena. The government subsidizes crop insurance to further insulate farmers from risk. The uncertainty of the weather is one of the great risks of farming and perhaps the greatest source of anxiety for farmers. Because natural evens like drought, frost, hurricanes, tornadoes can all be devastating to a farmer's crop and his income for the year, the federal government subsidizes crop insurance.

Congress also appropriates 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 total nearly $18 billion from 1995-2009, or more than $1 billion per year.

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