Wednesday, April 25, 2007

If you build subsidies, they will come...

The [lamentable] bulletproof nature of farm subsidies has attracted the interest of more than a few very bright minds lately. Since our quintennial chance to alter this flow of entitlement is at hand, the $20B or so of federal moolah has sparked some innovative thinking.
Citigroup proposes to provide subsidy recipients an alternative to the fixed DPs, CCPs and marketing loans (see Existing Programs, p. 12). The choice will be voluntary. Recipients would receive a fixed settlement amount to forego future payments. Recipients and U.S. taxpayers will benefit
  • Recipients linked by subsidies to the land will be free to make other life choices
    • – Retire, move, pay down debt, cover expenses (e.g., school, medical)
    • – Reinvest in farm (expand, modernize)
  • Recipients will weigh the certainty of the Buyout vs. payments that could cease anytime
  • Assuming 50% of DP and CCP recipients accept the buyout offer, it generates:
    • – Savings to redirect for other needs
      • Budget savings of $18.9 billion over the first 10 years*
      • $47.6 billion future savings (assuming no other change in programs)
    • – A cash infusion that will stimulate the economy, promote rural growth, create jobs and accelerate tax receipts
    • – Enhanced Doha leverage -- payments should qualify as non-trade distorting support, exempt from WTO disciplines
  • A lower entry cost for new farmers and ranchers as subsidies are no longer capitalized into land prices
    • – Immediate compensation to landowners for losses in land values vs. simple reduction of benefits
    • – 2006 U.S. farm prices were up 15% partly due to corn price surge and drop in farm acreage (Bloomberg 2/20/07)
  • Buyout price can incorporate 2007 Farm Bill AGI limits as well as other provisions
  • Potential for tax benefit at lower AGI levels
  • Citigroup’s proposed buyout offers a voluntary path for recipients entitled to DPs or CCPs to receive upfront cash to spend as they choose. It could generate budget savings of $18.9 billion over the next 10 years.
  • * If fewer recipients accept the Buyout -- say 25% of DP and CCP recipients -- the savings would instead be $9.3 billion over the first 10 years
[Link removed by request - I'll keep looking for more detail to share as this proposal is more widely discussed]

Citigroup has devised an idea they are already marketing in the EU (more on that later). Basically put, it seems to me like a structured settlement similar to lottery winners and lawsuit beneficiaries.

After the tobacco buyout I was struck by the possibilities for buying out feedgrain/cotton/oilseed subsidies. But as the Citigroup author pointed out, the problem with the tobacco settlement as a prototype for other buyouts was, lacking a separate source of funding like the tobacco trust many would consider it too generous. Obviously, he was not thinking from the farmer perspective. (We have no words that mean "too generous")

That is why, despite calculations showing how the US government will save money with a scheme like this, it won't get past too many rural Senators UNLESS fiscal constraints actually become a factor.

No, seriously, it could happen. And Sanjaya could win a Grammy. The farm lobby has consistently shown the ability to override any government funding constraints. We learned that from Freedom to Farm.
Regrettably, in order to hold back efforts to reverse the hard-won agriculture program reforms, both sides--Republicans as well as Democrats--wound up in a bidding war. Although the actual economic loss due to 1998 weather-related disasters was less than $1.5 billion, the Republicans proposed $4.2 billion in "emergency disaster relief." Ostensibly, part of the reason for this generosity was to make up for lost export markets. Eventually, to fend off Democrats' efforts to reopen the farm law and return to the old supply-control policies, Republicans upped the ante to nearly $7 billion. [More]
My conversation with the author also contained an interesting moment when he pointed out how many landowners are well, old. He offered a statistic something like 73% of all landowners are over "60" (70, 55, ? - my note-taking is not great).

There followed a significant pause - I think the implication was that older people would be likely to opt for up-front money versus variable subsidies. (Never underestimate the size of the industry building to deal with Boomer-geezers and wealth.)

Well, as someone within spitting range of 60, I think they overestimate both the flexibility and motivation for farm landowners. My experience is landowners like the predictability and simplicity of farm ownership, as opposed to any other asset -even money. My estimate is land is flowing into increasingly stronger hands, especially as it appreciates in value. In short, there aren't that many clueless, declining prime farmland owners.

Consider this point (page 3):
  • Recipients will weigh the certainty of the Buyout vs. payments that could cease anytime
Farm payments "ceasing at any time"? I wish.

And as for helping young farmers, this proposal will do little. That phrase is routinely included to add glamor. To be sure there are fewer young farmers, but the more logical reason is: we don't need them. The fact that younger people are backed up looking for an entry opportunity illustrates we don't have a recruiting problem, we have a technology addiction. This solution will do little to alter our demographic profile, IMHO.

Other questions leap to mind:
  1. Is the land disqualified for subsidies in perpetuity or just for the current farm bill? (See comments)
  2. In the days of ethanol-fueled gross incomes of say $800/A, is a $25/A DCP loss really going to hold down land prices?
  3. Do you really, really believe the ag lobby is going to let this ride even if it should pass? We are in DC 24/7, ya know.
  4. Outside of Reps. Flake and DeMint - neither of whom is a household name - does anyone in Washington care about fiscal propriety?
  5. Giving money to farmers/owners is a notoriously poor way of helping rural economies the last time I looked. Why is this program any different?
A multi-billion trust fund seems like a great idea if you are in the trust fund/bond underwriting biz. But unless the idea is of boondoggle proportions neither the farm/agribusiness community nor their Congressional allies will give this proposal a sniff, I think.

I'm betting my farm's future on that assumption. And the fact that, as far as I know, only 6-7 (you never know about Larry) farmers agree with my opposition to subsidies.

Does Citigroup have a good idea? Absolutely. Buying out subsidy recipients is what passes for political courage these days.

Does it have a prayer? Absolutely not.

Updated 4/28 - Thanks for the corrections.


Anonymous said...

The idea of having a VOLUNTARY buyout of DCP is really interesting. Other buyouts like the Tobacco buyout you reference gave little option...the program was going away so there was only the option of taking the money or not, but if you didn't take the money there was no program left to participate in.

But this voluntary approach provides lots of flexibility and everyone can make their own decision as to what is best for them. I would be real interested to know how many would take the buyout considering a bird in hand is worth two in the bush. I think I would seriously consider it on my farm in Virginia.

I do think alot of absentee landlords might take it, especially in surbanizing areas where development pressure is increasing.

I wonder if Chairmen Harkin and Peterson have expressed an opinion on this concept?

John Phipps said...

Virginia: I too like the voluntary part, but while trying not to be skeptical, could see betting on The End of Subsidies as a sucker's bet. I still have scars from the extra AMTA's - and I was the guy getting the money!

What I learned was making conservative plans to account for a loss of government payments means you lose cash rent acres to guys who trust the government to cash the large checks they write. They were right, and fool me once...

With the free trade wind reversing direction, WTO compliance loses much of its once-hopeful power to reform our payments.

It could be some cross section of farmowners would find this attractive, but my guess it would be lots of smaller farms/few acres.

Like the tobacco buyout, this plan likely will only assume urgent consideration if it's Hobson's choice.

BTW - I found the answer to one of my own questions (1). The buyout would preclude the acres from all future payments. (Again, "never" is a liquid concept, especially in election years.)

The buyout proposal was featured in DC pubs Thursday. I haven't seen any response yet.

Let me know if you hear anything.

Anonymous said...

It's only six John....I talked to Larry. Don't fight the trend. We are in DC 24/7 to defend what is ours. Just like any other special interest group. We have something vital to provide which is food and now potentially energy security. Our politicians and the general public realize this fact. Sometimes I don't think you do.

John Phipps said...


I am struck by your use of the phrase "what is ours". Exactly which article of the Constitution declares this right?

It is this sense of entitlement that I find most puzzling. Why me and not other Americans? There is no link to food. If farm payments were about meat and potatoes, we would underwrite those, I would think.

And if it is about food, what's the deal with cotton? Bruce Babcock at Iowa State offers the best summary of this fallacy I believe. I linked to his paper in an earlier post.

Farm payments strike me as political subsidies, like most government aid.

Anonymous said...

I, too, agree that the government should butt out of farmers'/ranchers' businesses. However, it is easier said than done. Consider the sugar industry. When the gov't stopped sugar sales to Cuba, it essentially cut off a market that sugar cane growers worked so hard to develop. I guess the gov't felt guilty about ruining the market that these growers relied so heavily upon. Thus, they had to do something to replace the lost revenues caused by this. Also, any payment that the government makes affects many more people than the payment receiver. For instance, the payments gov't makes to corn farmers affects corn prices, which affects feed prices, which affects cattle prices, which affects .... you could go on and on. So, just stopping government payments will be a hard thing to convince the people to do. That being said, a subsidy buyout seems to be a viable option. But as you said, it doesn't have a prayer. We live in the days of politicians buying votes through government spending and I don't think there are enough of us that are anti- subsidies to stop a political backlash on anyone who votes to end government programs. It's sad that no one will stand up for what's right for fear of losing votes.

John Phipps said...


I am actually more optimistic about irrelevance as opposed to outright ending subsidies. I have written about this at TP - see "What if they passed a farm bill..." ob AgWeb or my archives at

All it would take is (1) any sort of strict payment limit or (2) dilution of funds to other farmers like fruit/veg, meat, etc. or (3) some sort of hard limit on funding or (4) a WTO deal that actually has teeth.

Or any combination of the above. We may still get a DCP but it won't be our reason to live.

Thanks for reading.