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Farm Subsidy Cap No Answer

“Eliminate subsidies by raising commodity prices
with price supports and supply management”

George Naylor
Churdan, Iowa

Recent headlines on federal budget deliberations highlight President Bush's proposal to cut farm subsidy programs and a proposal by Senator Grassley of Iowa and Senator Dorgan of North Dakota called the “Rural America Preservation Act.” The President’s proposal would cut 5% in every “subsidy” category, limit Loan Deficiency Payments (LDP) to historical production instead of current production, and cap subsidy payments to farmers at $250,000. The Grassley-Dorgan bill prescribes a similar payment cap as a silver bullet to “preserve rural America.”

The proponents of payment caps claim this reform will fulfill the public’s desire to stop farm consolidation and save taxpayers a handsome sum that can be used for other worthy uses or balance the federal budget. I believe these payment cap proposals will do neither.

First of all, payment cap reform ignores the fundamental problem of the current farm bill, the use of “marketing loans” that result in farmers producing crops at less than the cost of production with no alternative but to plant fencerow-to-fencerow. Selling any commodity into the domestic market or overseas at less than the cost of production has a corrosive effect on our economy beginning with the incomes of local rural economies and the related tax receipts that vanish into thin air. Farm subsidy payments are the only thing keeping farmers from going broke overnight given typical commodity prices.

Secondly, how can politicians ignore the fact that government payments to farmers are highest when commodity prices are lowest? Why don’t they focus on the windfall profits afforded corporate livestock feeders, exporters and processors of cheap commodities instead of the government payments to farmers that don’t begin to make up for low prices.

Taxpayer savings? According to President Bush’s budget calculations, his payment cuts, including the cap on payments, would amount to less than $600 million per year. The Grassley-Dorgan payment cap alone saves even less. Surprisingly, both these proposals ignore the opportunity for much, much bigger savings. The 2003 drought increased market prices of most commodities so that almost no LDP or counter-cyclical payments were paid to farmers, saving taxpayers a real chunk of change -- $10 billion! That’s “b” for billion, or over sixteen times the projected savings of a cap on payments and other payment cuts projected by the President’s budget. This points the way to real subsidy reform: eliminate subsidies by raising commodity prices with price supports and supply management.

What about stopping farm consolidation? It is well recognized that a $250,000 payment cap will affect very few corn and soybean farmers unless extremely low prices jack up government payments. But let’s say some big rice and cotton farmers do approach the cap, what will they do? They will switch more of their acres to corn and soybeans, lowering their total payments, but helping drive down corn and soybean prices, thus driving up payments to every producer of those crops.

Besides adding to government outlays for these crops, two more significant effects must be faced: (1) more U.S. production of corn and soybeans will mean lower prices for farmers around the world, including Mexico and Central America, and (2) these cheap feed ingredients will result in increased industrial livestock production, hurting family farm livestock producers internationally.

The proposals by Senators Grassley and Dorgan and President Bush to cap farm subsidy payments are misguided. These initiatives inaccurately portray subsidies as a big farmer versus small farmer problem. Payment caps without price supports and supply management would actually give taxpayers little relief, and corporate agribusiness would continue to replace diversified production on family farms with giant feedlots. Highly processed food created from corn, wheat, soy flour and soy oil would further supplant healthy diets and local food supplies around the world.

The trend of farm consolidation needs to be reversed so that our young people have opportunities to make a decent living in rural America. Farm bill reform needs to create price floors for commodities related to their true cost of production and stop fencerow-to-fencerow farming. Taxpayers will benefit only when giant agribusiness pays rational prices to farmers. This will happen when politicians stop pitting farmers against other farmers and speak for the public interest, not that of giant agribusiness.

George Naylor, president of the National Family Farm Coalition, farms near Churdan, Iowa, and is a member of Iowa Citizens for Community Improvement.

Published in In Motion Magazine, May 1, 2005

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