In a just-released report, American Enterprise Institute (AEI) agricultural economists Vince Smith, Bruce Babcock, and Barry Goodwin examine one of the main provisions of the 2012 farm bill, a 'shallow-loss' program that would give farmers subsidies ensuring that farm revenues do not drop--even if crop prices fall.

"[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 their key findings:

• 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: $8 to $14 billion a year over the next five years.
 
• 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, program costs 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).

EVENT: Agricultural economists Vince Smith and Barry Goodwin will discuss their findings at an event later this morning on Capitol Hill (385 Russell Senate Office Building at 11:45am). Please RSVP to jesse@aei.org if you would like to attend in person, a full video will be posted tomorrow here.

Find more information about AEI's American Boondoggle: Fixing the 2012 Farm Bill project at 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. 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. Both are available for interviews and can be reached at vsmith@montana.edu, barry_goodwin@ncsu.edu and babcock@iastate.edu, respectively.

For media inquiries please contact Jesse Blumenthal at jesse@aei.org or 202.862.4870.