Farm Subsidies Are on the Chopping Block
Policy + Politics

Farm Subsidies Are on the Chopping Block

Getty Images/The Fiscal Times

It seemed gutsy when Republican presidential hopeful Tim Pawlenty traveled to politically pivotal Iowa recently and vowed to help end federal ethanol subsidies – the mother’s milk of ethanol producers and the Midwestern farmers who supply the grain used to produce it. “We need to cut spending, and we need to cut it big-time,” Pawlenty said, adding, “we can’t have any more sacred cows.”
But Pawlenty, the former Minnesota governor, is hardly the first prominent farm- state politician to take aim at the once politically sacrosanct ethanol program--or other costly farm safety net programs. With food prices soaring, farm incomes at record levels and Congress and the White House negotiating ways to slash the $1.5 trillion budget deficit, many lawmakers and farm groups see the handwriting on the wall.

Case in point: Sen. Chuck Grassley, R-Iowa, a farmer himself and long a champion of the agricultural industry, last month introduced legislation that will significantly reduce tax incentives for ethanol over the next two years before converting the program to a small tax break tied to fluctuations in crude oil prices.

Ethanol is an alcohol-based fuel made from fermented corn and blended with gasoline. For years producers and distributors have been showered with tax credits, tariff protections, and favorable government mandates. But the subsidies have fueled grain and food inflation, leading many to question why ethanol needs government help at a time when oil companies are charging exorbitant prices for gasoline.

Grassley, a senior member of the Senate Finance Committee, described his proposal as “a responsible approach” that would gradually eliminate the $7 billion-a-year subsidy, but without “pulling the rug out from under the only domestic renewable energy source that is making significant contributions to our energy supply.” The two Democratic senators from Pawlenty’s heavily agricultural state--Al Franken and Amy Klobuchar--have cosponsored Grassley’s bill, along with Senate Budget Committee Chairman Kent Conrad, D-N.D., and other Democrats and Republicans from rural Iowa, Nebraska, and South Dakota.

Meanwhile, House Republican leaders, the White House, and a bipartisan group of six House and Senate members led by Vice President Joe Biden have set their sights on a much fatter target--the estimated $20 billion a year in Agriculture Department commodity payments, crop insurance, credits and other programs aimed at stabilizing the agricultural industry.

For example, the House-passed Republican budget designed by Rep. Paul Ryan, R-Wis., calls for shaving a further $30 billion from farm subsidies over the coming decade, on top of the nearly $12 billion of reductions in crop insurance and other programs approved within the past year.

The negotiating team headed by Biden is considering cuts in commodity payments and crop insurance totaling $34 billion over 10 years, according to congressional and agriculture industry sources. That would be more than a 50 percent cut in the $63 billion currently projected to be spent on government commodity price and income supports in the coming decade, according to the American Farm Bureau Federation, the lead lobbying group for farmers and ranchers.

“We think that’s a really disproportionate cut, and we have concerns about it,” said Mary Kay Thatcher, director of public policy for the Farm Bureau. “Our members have always been very fiscally conservative and for either a balanced budget or a whole lot more balanced budget than we have now, so we would like to see them be serious about deficit reduction, but we really don’t want to be taken to task and have only agriculture cut.”

But a congressional staffer familiar with the Biden group talks told The Fiscal Times: “Ag subsidies were part of the low-hanging fruit.  It was an early area of agreement for this group trying to establish common ground. This was one of the first things to go.”

Moreover, six liberal-to-conservative Washington think tanks that prepared major deficit-reduction plans with grants from the Peter G. Peterson Foundation all proposed abolishing or greatly reducing farm subsidies and ethanol credits. (Pete Peterson is a principal backer of The Fiscal Times.) In short, it looks as though there is no way farm subsidies can avoid the budget chopping block this year.

The plan outlined by one of those think tanks, the middle-of-the-road Bipartisan Policy Center, would achieve $185 billion in cumulative savings through 2040 by reducing and limiting payments to commercial farms, reforming the Federal Crop Insurance Program, reducing premium subsidies, and consolidating and capping agriculture conservation programs.

“I think every sector of our federal budget will have to be cut and that would include farm programs,” Rep. Bob Goodlatte, R-Va., a senior member of the Agriculture Committee, told The Fiscal Times. “I think there are good reforms to be made to save a lot of money.”

Ryan, the chairman of the House Budget Committee, has argued that there is no excuse for not scaling back programs when the agricultural sector is racing far ahead of the overall U.S. economy and net farm income this year is forecast to be the second-highest recorded in the past 35 years. The Agriculture Department projects net farm income of $94.7 billion in 2011, up almost 20 percent over the previous year and the second-best year for farm income since 1976. 

“With crop prices – and deficits – hitting new highs, it’s time to adjust support to this industry to reflect economic realities,” Ryan said in his budget document, “The Path to Prosperity.”

Federal farm subsidies totaled $245 billion between 1995 and 2009, according to an Environmental Working Group farm subsidy data base. Ten percent of farmers collected 74 percent of all subsidies amounting to $157.7 billion over 15 years, according to EWG analysis. The biggest beneficiaries were corn, wheat, cotton, soybean, and rice growers.

While the time may seem ripe for trimming or gutting farm subsidies, House Agriculture Committee Chairman Frank D. Lucas, R-Okla., and Rep. Collin C. Peterson of Minnesota, the ranking Democrat on the Agriculture Committee, strongly oppose deep subsidy cuts, saying they ignore the “lessons from history” that the agricultural economy is cyclical. 

“It’s a mistake for us to undo the safety net,” Peterson told The Fiscal Times this week. “It’s [political] ideology, not common sense. . . . I’m O.K. with making some changes, but the reality is, it’s too expensive nowadays to farm without having a backstop. And people won’t get financed if these prices go down, and we’ll end up passing a bill to bail these people out, and it will be the wrong way to do it because it will be done in panic.”

Peterson, the former chairman of the Agriculture Committee before the Republicans won back control of the House last year, recalled that the GOP once before sought to eliminate price supports as part of the 1996 Freedom to Farm Reform Act. Congress subsequently had to pass costly emergency legislation to address crop failure due to adverse weather and tumbling commodity prices.

“One thing about farmers, when you have good prices, you’ll get low prices [eventually], because they’ll over produce,” he said. “Good prices bring the investment, bring the land into production, and then we’ll overproduce and then we’ll have low prices again.”

Peterson said “the biggest concern I have now is all of these negotiations are going on and there really isn’t anybody in the room that understands anything about agriculture, and that’s dangerous.” But Senate Finance Committee Chairman Max Baucus, a Montana Democrat well versed in ranching, is part of the Biden negotiating team.  

Related links:
Appropriators approve agriculture cuts, target farm subsidies and Brazil - (The Hill)
Farm Subsidies: A Useful Sacrifice in the Budget Debate  (The Huffington Post)
Exclusive interview with Tim Pawlenty (Hot Air)