Bill Would Send More Subsidies to Farms

Tractor spraying soybean field at spring

FARMERS WERE HIT HARD DURING LAST OCTOBER’S FLOODS. SO WERE MANY OTHERS. BUT ARE MORE GOVERNMENT SUBSIDIES ALWAYS THE ANSWER?

[Note: Gov. Haley signed this bill in June, 2016.]

Thousands of individuals and businesses have received governmental assistance following South Carolina’s historic rainfall and flooding in October of 2015. However, one industry in particular has said the assistance made available to it was not enough. Farmers have called upon the governor to draw down more federal dollars to help pay for agricultural losses.

Governor Haley has expressed reluctance to provide additional targeted aid to farmers, but lawmakers are sounding more agreeable. Thus House bill H.4717 creates a new farm aid fund for farmers who lost at least 40 percent of their crops as a result of a natural disaster. The bill has attracted 74 co-sponsors so far. Early reports also indicate the House Ways and Means version of the state budget includes $40 million to help farmers who suffered crop losses during the flooding.

What’s the right policy here: Further targeted aid to farmers, or none? To answer that question, we need to find out (a) what sort of government assistance is already available to farmers, and (b) the financial state of the average farmer.

Emergency assistance

Specific federal relief programs have been made available to farmers since last year’s flooding. The declared state of emergency in South Carolina meant, furthermore, that farmers were eligible for discounted loans from the U.S. Department of Agriculture (USDA) worth up to $500,000 to cover production and property losses.

Crop insurance

The Congressional Budget Office (CBO) projects the federal government will spends around $9 billion annually over the next 10 years to subsidize farmers’ purchase of crop insurance. On average the federal government pays 62 percent of a farmer’s premium costs for crop insurance.

There are 16 highly regulated firms nationwide that sell federally subsidized crop insurance. The USDA’s Risk Management Agency (RMA) approves products, approves premium rates, administers premium subsidies, reimburses the regulated firms for administrative and operating costs, and reinsures company losses. There is no rate competition among the 16 participating firms.

The regulated companies reap massive profits under this program. Under the Standard Reinsurance Agreement the companies assign a majority of high risk policies to the government while retaining profitable low-risk policies. Between 1981, when insurance companies began administering the federal crop insurance program, and 2006, participating firms suffered $139 million in losses in a few bad years while collecting more than $4 billion in profit during the good ones. By contrast, between payments to farmers and administrative fees to insurers in 2005 it cost the government $3.34 for each $1 it paid out in claims to farmers with crops damaged by bad weather.

To put it briefly: Thanks to government regulation and subsidies, crop insurance is only available from a few large firms at an uncompetitive high price (and most of that price is paid by the government). This system is beneficial for a few insurance companies and some farmers, but grossly unfair to taxpayers.

Other federal subsidies

Prior to 2014, the federal government further supplemented subsidized crop insurance with around $5 billion in annual direct cash payments to farmers based on the number of acres they owned. With the passage of the 2014 farm bill, this acre payment system has been removed in favor of programs that pay farmers when the price of agricultural commodities fall below a preset level. This was supposed to save money. In reality, the change in agricultural prices since the passage of the current farm bill means subsidy payments will soar even higher. The CBO estimates total government aid to farmers will grow to $23.9 billion in 2017.

The federal government also provides indirect assistance to farmers through tariffs and import quotes on select agricultural commodities like sugar. These restrictions on foreign competition push up prices and increase U.S. farmers’ profits.

State aid to farmers

South Carolina farmers also receive promotional and marketing aid from state government. The current Department of Agriculture budget allocates nearly $10 million to “marketing services” for South Carolina agriculture. Included in these services are programs like the Market Bulletin (a state funded trading publication for agricultural products), and the “Certified SC” marketing program. Most other industries don’t have entire government agencies devoted to marketing their products.

Farmer income

Between federal and state subsidies, many farmers are taking in high levels of government largesse. And, partly as a result, the average farmer income outstrips the average U.S. household income by 53 percent. Farming is also a relatively stable industry; the average annual business failure rate in the US is 14 times greater than the average annual failure rate of farms. Consider these and several related points on average farmer income and wellbeing in this Mercatus study.

Bottom line

Agriculture is one of the most heavily subsidized industries in the United States, and the average U.S. farmer fares better financially than the average U.S. household. South Carolina’s recent flooding was highly damaging and will no doubt had financial repercussions for farmers, just as it did for many other businesses and individuals. That does not justify appropriating even more government aid to an already heavily subsidized sector.

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