Farm Subsidy Reform Coming?

USDA Chief Tom Vilsack gave the keynote address last Thursday at the USDA’s annual “Agricultural Outlook Forum.” During his speech, he laid out his priorities, including those given to him by his boss – President Obama. According to Vilsack:

[Obama had] three goals for this department in addition to all of the obvious goals. He wanted to make sure that America's children in particular had more nutritious food...

He wanted to make sure that we did everything we could at USDA to expand energy opportunities, the capacity of our land, our farms, and our ranches to produce alternative forms of energy and fuel. And he wanted to make sure that we worked hard at doing the research necessary to allow, over time, agriculture to transition away from its rather significant dependence today on fossil fuels.

In addition, Vilsack will focus on food safety, the decline of mid-sized farms and ways to lower the average age of farmers (now 57). But one apparent priority that didn't make it on his list was the one that consumed agriculture and food policy types last week – the fate of agricultural subsidies.

It was just a few days before that Obama ignited a firestorm with a single sentence when in his address to Congress he said: “in this budget, we will...end direct payments to large agribusinesses that don't need them.”

The reaction was immediate and negative – despite the fact that no one really knew what he was talking about. Then, on the same day that Vilsack spoke at the USDA forum, the White House released the actual budget language that detailed the proposed reforms:

As part of an effort to transition large farms from direct payments provided to owners of base acres to increased income from revenue derived from emerging markets for environmental services, the President's Budget phases out direct payments over three years to farmers with sales revenue of more than $500,000 annually... Large farmers are well positioned to replace those payments with alternate sources of income from emerging markets for environmental services, such as carbon sequestration, renewable energy production, and providing clean air, clean water, and wildlife habitat.

As my eighth-grade chemistry teacher used to say to sum up our understanding of the day’s lesson, “Clear as mud. Right?” Of course, even these sparse details garnered more negative responses from politicians like House Ag Committee Chairman Collin Peterson (D-MN), Rep. Frank Lucas (R-OK) and Sen. Saxby Chambliss (R-GA) and from industry groups like the American Farm Bureau and the National Cotton Council. But interestingly, Senate Ag Committee Chair Sen. Tom Harkin (D-IA), Sen. Kent Conrad (D-ND) and Sen. Mike Johanns (R-NE) were all surprisingly supportive of the idea.

One reason for that has to do with the nature of the “direct payments” program itself – one of the few (if not the only) agricultural subsidies that is related only to the size of the farm and not to the price of a commodity. As Jill Richardson explains:

Direct payments are a result of the 1996 farm bill. Prior to that, subsidies were given based on need. If you couldn't sell your crops at a price the government thought was fair, you got a subsidy to make up the difference...

If you own land where commodities were grown (by you or someone else) in the past, you get a direct payment whether you grow anything or not. You could do nothing, potentially, and still receive a direct payment. Does that sound stupid? I think so too.

Your direct payment is calculated on your "base acres." They keep a running average of how much you grew on your land (or how much somebody grew on your land if it wasn't you), and that yield determines how much you get in government cash. During the past farm bill debate, grain prices were high and farmers were doing well, but the direct payments kept flowing in.

As a consequence this subsidy ends up going disproportionately to industrial farmers – which is why cotton and rice farmers, the largest of the large, like this program so much. The program was originally intended as a temporary support, but like any benefit program, once started it has proved all but impossible to kill.

Still, it has its critics, even among farm-state representatives – and it’s the rare ag subsidy that receives any criticism at all from that quarter. Indeed, Congress just lowered the eligible annual income limit for receiving direct payment down to $750,000 (while President Obama, Sen. Harkin and others tried to get it even lower to $250,000).

Meanwhile exactly whom this new cut will affect remains unclear. The budget refers to farmers with “sales revenue of more than $500,000 annually.” And OMB Chief Peter Orszag repeated that formulation in testimony to Congress. Sen. Chuck Grassley (R-IA) expressed concern that many farmers who have that much in sales often still lose money. Meanwhile, Ob Fo presumes the budget refers to a “profit” of $500,000 rather than sales and thus would spare money-losing farmers.

But profit is profit and sales are sales and while I think the administration would have said “profits” if they meant it, I also think they are being deliberately vague on this point. Let Congress fill in the details and determine if it’s net or gross sales (and, if they’re so inclined, hike the cut-off level).

But lost in the debate over the cut itself is the fact that Obama intends to replace most of the direct payments subsidy with another one - what he refers to as “revenue derived from emerging markets for environmental services.” Though Vilsack has been talking about this for a while now, it remains under the radar - probably because the market that’s supposed to generate these “ecological services” payments doesn’t exist.

While it’s true that there are small-scale “conservation banks” that maintain and preserve wetlands or wildlife habitats for which you can purchase “credits” and while carbon sequestration credits (aka “carbon offsets”) exist in various forms, there’s nothing on the scale that the Obama budget suggests (and certainly no real “market” in credits for clean air and water). One can only hope it’s not the only mechanism that Vilsack has in mind “to transition [agriculture] away from its rather significant dependence… on fossil fuels.” If so, it might take quite a while.

The USDA has an enormous amount of work ahead of it to figure out how to value ecological services and how to set up and manage a market in them. It’s not entirely clear that such a market is truly possible.

It’s also unclear the significance of “privatizing” a government subsidy as they’re proposing to do. Farmers would receive payments from, presumably, polluters or developers who want to offset their environmental damage. Poorly implemented, such a system could do more harm than good – as Europe’s carbon-offset system has shown. And there are precious few examples of an attempt to switch government cash subsidies over to private sources of money. Who knows what the policy implications might be.

Clearly, there’s no point in any breath-holding. If we need a reminder of that, we have only to listen to the common refrain among Ag Committee members that, as Rep. Peterson put it, “we just finished the farm bill last year, and I don’t think we’ll open it up.” Peterson is referring to the five-year cycle that the Farm Bill runs on – it was re-authorized in 2008 (a year late) and isn’t due to be “re-opened” until 2012.

With no system in place to “monetize” farms’ ecological services, there is no carrot to go along with the stick of cutting the program and no incentive to do any of this sooner than 2012. No one will be willing to embark on this plan until farmers have some hope of recouping the money – and even then, most large conventional farms would first have to abandon their reliance on synthetic fertilizers, pesticides and diesel fuel before they could earn any environmental credits.

Meanwhile, the plan doesn’t touch the central subsidy regime, the one that focuses almost entirely on “commodity crops” like corn, soy, wheat and cotton, and all but ignores fruits and vegetables - so-called “specialty crops.” While Vilsack has no interest in attacking that system head on, he does want to throw a bone to specialty crops. The hope is to do it from the demand side of the equation.

As Vilsack said in his speech, “you will see USDA make a major effort to try to encourage Americans, and particularly America's children, to consume more fruits, vegetables, nuts.” The USDA will accomplish this through reform of the National School Lunch and Food Stamps Program – which, if successful, would represent real change. But failing that, there’s always Pinocchio!

In the end, for all the noise, reform is happening, but mostly on the margins. There will be no frontal assault on Big Ag – although their screams of protest will be loud regardless. Yes, some fights are on the horizon and the “ecological services market” concept is potentially transformational, if far off. Agriculture, it seems, is one of those policy areas where reformers can be both too timid and too ambitious all at the same time.

(Photo credit: Rickes on Flickr.)