Below The Beltway

I believe in the free speech that liberals used to believe in, the economic freedom that conservatives used to believe in, and the personal freedom that America used to believe in.

More On The Absurd Farm Welfare System

by @ 10:24 am on July 3, 2006. Filed under Economics, Government Waste, Politics

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.

Previous Post:

Time To End Farm Welfare….Again

Post to Twitter Post to Digg Post to Facebook Post to Reddit Post to StumbleUpon

11 Responses to “More On The Absurd Farm Welfare System”

  1. I have enjoyed reading your posts on this. Welfare is welfare, regardless of the recipient. It is one thing to help those who can’t help themselves and quite another to provide money in such a way as to encourage bad behavior. These farm programs encourage bad behavior and should be eliminated.

  2. Ray Hyde says:

    Wait a minute. Kuhfuss made $135 an acre on the sale of his corn. It costs that much to have a kid mow an acre of grass, in town. With the subsidy he gets a whopping $215 an acre. Would you really like to take car of an acre of anything for four months for $215? Gross, not net?

    Richardson grossed $500,000, but his net was probably more like $25,000. How many times would you want to risk that kind of money and work that many acres for $25,000?

    I agree the system is screwed up, but I don’t think the characterization you are making is correct.

  3. Ray,

    Actually, I think that your math makes my point for me. Without the subsidy, Kuhfuss would be losing money. In a normal market not distorted by the LDP, he would have to find a way to deal with that. The options are many — he could cut expenses, change to different crops, or maybe even decide that it no longer makes economic sense for him to farm the land and that it should be put to a more productive use.

    By subsidizing his business and masking the true economic condition of that business, the LDP makes him think everything is okay and he continues to operate in an inefficient manner.

  4. Ray Hyde says:

    I agree with you entirely.

    Believe me, he cannot cut expenses. If he changes to another crop, then it is the same problem with another crop. There is simply too much surplus land to make a decent living at it. He may, and probably should decide that it makes no ecoomic sense for him to farm, and he should put it to a better use. But he is prohibited from doing that because he is zoned for agriculture. Who could he sell to, except another farmer who would face the same conditions, and probbly at a higher land cost? Because of his zoning he is prohibited from operating in an efficient manner and getting out.

    In my case, I am virtually required to farm, and farm at a loss. If I do not, I will be taxed as if I was suitable for a housing development, except that development is denied to me. So, it is farm and lose money, or don’t farm and lose still more money.

    I actually believe it is worse than that. My county Supervisor told me in so many words, that his goal for my property would be to have somebody rich buy it. Rich enough to place it in conservation easement and take a giant tax subsidy.

    Since another farmer is not going to buy it and it cannot be used for anything else due to zoning, the available market has been dramatically reduced. This means that some rich person will eventually get a fine estate, not only at a discount to the true market value, but with a subsidy as well.

    But there are othe ways in which the market is not acting in an efficient manner. I am prohibited from any activity near the stream beds that cross my land. This is for the benefit of people living downstream from me, yet they pay me no land rent. People want to preserve “their” viewshed, but don’t pay me for providing it. When I look at the farm, yes, it is lovely, but all I see is all the work that is lurking in the bushes, that they don’t see.

    New Zealand and some other places now pay land owners for environmental services (over and above whatever subsidies they have).

    So, I agree with you about markets and operating efficiently, but you need to look at the total system and not focus on one narrow incentive. It is a badly run incentive, I agree. But it does buy us things other than badly run farms. Lets look at the situation and figure out what it does buy, and how we can buy those things more efficiently.

  5. Ray,

    Believe me, I know its more than just the farm subsidy system that is screwed up.

    Environment laws, Zoning laws, and who knows what else. They all restrict what you, or any other property owner can do with their property. And, if we’re going to fix it, we need to fix ALL of it.

  6. Welfare for farmers

    The Washington Post is carrying a series on the farm welfare system. Fellow blogger Doug Mataconis wrote yesterday and again today about it. Just in case you somehow thought welfare was limited to the proverbial single mother with five kids, here&#8217…

  7. Links and Minifeatures 07 03 Monday

    Carnival of Investing Recommended It’s Just Money

  8. Ray Hyde says:

    Thanks, Doug.

    I’ve been arguing that with Jim Bacon. You just can’t pick out one target and plink away at it without considering the whole system. We have to change on thing at a time because the whole system is screwed up, and yet if we do, we might make things even worse. The “public good” turns out to be the sum ao all the little individual “goods” and the more we restrict those (absent real health and safety issues) the less well of we all are.

    I estimate that the difference between Loudon growth policy and Fauquier growth policy has cost the equivalent of a million dollars in wealth for every single person in Fauquier.

  9. [...] Time To End Farm Welfare?.Again More On The Absurd Farm Welfare System Maybe They Send Flood Aid To The Desert   [link] [...]

  10. [...] The Washington Post has been giving alot coverage to the farm welfare fiasco over the past weeks. We’ve seen storties of people getting farm subsidies who don’t even own farms, other farmers gaming the farm relief system to make huge profits, ranchers who get disaster subsidies even though they’ve never subsidized a disaster, and farm policy being made to benefit one South Dakota Senator. [...]

  11. [...] Time To End Farm Welfare?.Again More On The Absurd Farm Welfare System Maybe They Send Flood Aid To The Desert Politics And Welfare. Perfect Together. Farm Welfare: Its Not Just Welfare, Its Pork   [link] [...]

[Below The Beltway is proudly powered by WordPress.]