As the Senate debates the 2012 Farm Bill, American Enterprise Institute has released a report from agricultural economists Vince Smith, Bruce Babcock, and Barry Goodwin on the bill’s shallow-loss program. The proposed shallow-loss program would pay farmers automatic subsidies to bring them up to 90 or 95 percent of the average revenues they have received for any given crop over the previous five years. Payment triggers would be linked to prices and yields increases, creating a new partially disguised entitlement program that locks farmers into near-record incomes at the taxpayer's expense.

"[S]hallow-loss programs are potentially expensive for taxpayers and especially costly in an environment in which grain and oilseed prices are declining from recent levels, as seems likely to be the case"

Among the key findings:

Costly: Depending on structure and crop prices, these programs could cost the taxpayer from $8 to $14 billion a year over the next five years. As much as, or more, than the direct payments program they would replace.

A new entitlement: Payments would be automatically triggered by revenue shortfalls and would be linked to average revenues over the past five years. Payment triggers would be linked to prices and yields increases, creating a new partially disguised entitlement program that locks farmers into near-record incomes at the taxpayer's expense.

CBO's questionable assumptions: The Congressional Budget Office's cost estimates assume that recent historically high prices will be sustained. However, shallow loss subsidies will balloon if corn, wheat, soybean, rice, and cotton prices return to the average levels observed between 1996 and 2011. If prices are calculated based on changes at the county-level taxpayers would be liable for $8.4 to $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.

Never-ending, misallocated subsidies: Shallow-loss programs will perpetuate the federal farm program tradition of giving the majority of subsidies to farms that do not need them: shallow-loss subsidies, like direct payments and crop insurance subsidies, would be tied to the amount of crops produced by farm households. Consequently, the largest and wealthiest farmers who enjoy built-in buffers in the form of substantial equity in their farm operations would receive the lion's share of shallow-loss subsidy payments. On average, farmers have enough available cash to weather short term drops in revenue (debt-to-asset ratios average less than 9 percent in the entire American agricultural sector).

For more information about AEI's 2012 Farm Bill project, please go to www.aei.org/americanboondoggle

Vincent H. Smith is a professor of economics at Montana State University and a visiting scholar at the American Enterprise Institute. He can be reached at vsmith@montana.edu or through his research assistant brad.wassink@aeilorg or 202.862.7197. Bruce A. Babcock (babcock@iastate.edu) is a professor of economics at Iowa State University. Barry K. Goodwin (barry_goodwin@ncsu.edu ) is the William Neil Reynolds professor of agricultural economics at North Carolina State University.

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