The Washington Post is continuing its series on the state of the farm welfare system, which I wrote about yesterday. Today, they write about an program that pays farmers to compensate for declining prices, even when prices are rising.
EDEN, Md. — Roger L. Richardson, a vigorous 72-year-old who grows corn on 1,500 acres of prime Eastern Shore farmland, had a good year in 2005. Thanks to smart planning, shrewd investing and a little luck, he grossed a healthy $500,000 for his crop.
But the federal government treated him as if he needed help and paid him $75,000.
The subsidy is called the loan deficiency payment. Although it has cost taxpayers $29 billion since 1998, it is virtually unknown outside farm country. But in rural America, the LDP is a topic at backyard barbecues and local diners along with the high school football team and the weather. Despite its name, it is neither a loan nor, in many cases, payment for a deficiency. It is just cash paid to farmers when market prices dip below the government-set minimum, or floor, if only for a single day.
And, as with every other cash giveway program that the gorvernment has implemented, it has created perverse incentives:
The LDP has become so ingrained in farmland finances that farmers sometimes wish for market prices to drop so they can capture a larger subsidy.
“In the fall of the year, we find the farmer wanting the price to go down,” John Fletcher, a Missouri grain dealer, told Congress last year. “It’s almost unnatural.”
Well, not really. Farmers are merely responding to the incentives given to them. If the government will pay them a subsidy when prices are low, they are going to act in ways that contribute to declining prices. Makes perfect sense when you think about it.
And just how does the LDP work ? From the Post’s description, it sounds like something straight out of Staliin’s collective farming program:
Efforts to equalize the subsidies fall to a staff of 10 officials housed in the USDA’s Commodity Office in suburban Kansas City. Every workday, they check with online services, call grain elevators across the Midwest and poll 19 major grain markets, where large merchants and food processors go to buy.
Then, in a 4 p.m. ritual, the USDA officials gather around a conference table with an open phone line to headquarters in Washington. Poring over maps and prices, the group sets the next day’s LDP for corn, wheat and 15 other commodities in more than 3,000 counties.
Officials add a few cents in one county and take away in another, when the research shows that subsidies in different areas would be too far apart.
The results, of course, are not surprising at all:
Increasingly, farmers have learned to lock in their subsidies when prices are low and sell when prices are higher.
or last year’s crop, farmers sold their corn for an average of $1.90 per bushel, only 5 cents below the national floor price. But they received an LDP averaging 44 cents, government payment records show. The difference amounted to $3.8 billion.
The same thing happened in 2004, when the LDP was 27 cents even though the price farmers received when they sold their crops was above the floor. The windfall for farmers was $2.7 billion.
That’s 6.5 billion dollars of taxpayer money that went into the pockets of farmers who have learned to game the system. What’s happened, of course, is that a system that was supposedly designed to assist farmers in times of low commodity prices has been turned into a risk management tool, basically a taxpayer-financed hedge fund. Consider for example, the case of Illinois corn farmer John Kuhfuss:
In spring 2005 he had seized such an opportunity and sold 30,000 bushels of corn to a local elevator for $2.25 a bushel. By October, with buyers offering only $1.70 a bushel, that decision looked smart.
With his price assured, Kuhfuss made another smart decision: “I LPDed all my corn at over 40 cents a bushel,” he said.
He said he and his partners netted nearly $40,000 in LDP on their 500 acres of corn. They were not alone. On the days he received his checks, other Illinois corn farmers netted $36.5 million.
And, of course, the farmers and their supporters defend this practice as “helping the family farm.”
The result of all this, of course, is that the agriculture market is completely distorted. Thanks to the LDP and other programs, farmers grow crops that are eligible for subsidies rather than those that are not, which distorts the influence of supply and demand on that decision. The programs also give farmers the incentive to withhold products from the market at times when they, arguably, ought to be sold and to sell things at times when the shouldn’t be.
What’s worse is that all of this is done to “save the family farm”, but by making farmers less responsive to the market and more dependent on government what it is really doing is destroying farming as a viable business little by little.