Field of schemes: The taxpayer and economic welfare costs of shallow-loss farming programs

Article Highlights

  • Shallow-loss programs could cost taxpayers $8-$14 billion a year over the next five years.

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  • Farmers want a guarantee that their revenues will not fall below 90 percent of recent levels.

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  • Farm-based shallow-loss programs will provide incentives for moral hazard behaviors on the part of farmers.

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Key Findings Field of schemes: The taxpayer and economic welfare costs of shallow-loss farming programs

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  • Shallow-loss programs are costly: Depending on structure and crop prices, these programs could cost the taxpayer as much as or more than the direct payments program they would replace, averaging as much as $8 to $14 billion a year over the next five years.

 

  • Shallow-loss programs amount to a new entitlement: Payments would be automatically triggered by revenue shortfalls and would be linked to average revenues over the past five years. So, when prices and yields increase, payment triggers will also increase, creating a new, partially disguised entitlement program that locks farmers into near-record incomes at the taxpayer’s expense.

 

  • Shallow-loss programs based on farm-level yields create incentives for the wasteful use of economic resources by buying down deductibles associated with federal crop insurance: Farmers would reap the benefits of record crop yields and prices. However, because a high percentage of revenues are guaranteed, farmers may adopt more risky farming techniques.

 

  • The Congressional Budget Office’s cost estimates for shallow-loss programs assume that recent historically high prices will be sustained: If corn, wheat, soybean, rice, and cotton prices return to the average levels observed between 1996 and 2011, however, program costs will balloon. A county-based program would cost taxpayers between $8.4 and $13.98 billion, depending on the rate of reimbursement. The Stabenow-Roberts shallow-loss proposal would likely cost taxpayers between $5 billion and $7 billion, depending on the mix of farm-based and county-based programs.

 

  • Shallow-loss programs will perpetuate the federal farm program tradition of giving the majority of subsidies to farms that do not need them in the first place: Shallow-loss subsidies, like direct payments and crop insurance subsidies, would be tied to the amount of land that households farm. Consequently, the largest and wealthiest farmers enjoy built-in buffers in the form of substantial equity in their farm operations (debt-to-asset ratios average less than 9 percent in the entire American agricultural sector). These individuals would receive the lion’s share of shallow-loss subsidy payments.

 

Vincent H. Smith is a professor of economics at Montana State University and a visiting scholar at the American Enterprise Institute.

Bruce A. Babcock is a professor of economics at Iowa State University.

Barry K. Goodwin is the William Neil Reynolds Professor of Agricultural Economics at North Carolina State University.

 

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About the Author

 

Vincent H.
Smith
  • Vincent H. Smith is Professor of Economics in the Department of Agricultural Economics and Economics at Montana State University and co-director of MSU’s Agricultural Marketing Policy Center. He received his Ph.D. from North Carolina State University in 1987 and his bachelor’s and master’s degrees from the University of Manchester in 1970 and 1971. Dr. Smith’s current research program examines agricultural trade and domestic policy issues, with a particular focus on agricultural insurance, agricultural science policy, domestic and world commodity markets, risk management, and agricultural trade policy. He has authored nine books and monographs and published over 100 articles on agricultural and other policy and economic issues. His work has been recognized nationally through multiple national awards for outstanding research programs. In 2008, he became a Distinguished Scholar of the Western Agricultural Economics Association. Currently he is a Visiting AEI Scholar and co-director of AEI’s agricultural policy initiative. Dr. Smith is married and he and his wife, Laura, have two children, Karen and Meredith.
  • Email: uaevs@montana.edu
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    Name: Neil McCray
    Phone: 2028625826
    Email: neil.mccray@aei.org

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