Washington/Chicago | Reuters –– U.S. farmers are about to reap a bumper harvest not just in corn and soybeans but also in new subsidies that could soar to US$10 billion, blowing a hole in the government’s promise that its new five-year farm bill would save taxpayers money.
If payments for 2014, the first year the farm bill takes effect, do come in at that level — as some private economists have calculated — they would be more than 10 times the U.S. Department of Agriculture’s working estimate and more than double the forecast by the Congressional Budget Office.
Farmers will be in line for payouts if revenues fail to meet benchmarks tied to long-term price and production averages. Both USDA’s and the CBO’s estimates were made before crop prices tumbled this year on oversupply from a huge harvest.
The farm budget blowout for 2014 is unlikely to cause a furor in Washington, despite the clamor for cost-cutting among Republicans who now control Congress. The trillion-dollar farm bill took so long to enact because of controversy over some of its other major planks, including food stamps for low-income families, that lawmakers are loath to re-open it.
From Monday, farmers were able to start signing up for the compensation programs. Most participants will be the families who own and operate about 98 per cent of all U.S. farms, large and small.
“The (farm) bill actually did little to rein in costs,” said Republican Rep. Tom Petri of Wisconsin in an emailed statement. “What we’re seeing is a program that still costs far more than it should and fails to include reforms that actually save taxpayer dollars.”
The farm bill’s new programs were meant to cost the taxpayer less by replacing a nearly two-decade-old scheme of direct cash payments to farmers, which were about $5 billion a year and were made regardless of need (all figures US$).
But the payouts for 2014 now look likely to far exceed that amount.
Because of ample supplies, corn prices have fallen well below the long-term average price used as a benchmark for one of the new programs. Ironically, this year’s bumper harvest may not be large enough to compensate for those price falls and revenues for some farmers could be low enough to trigger payments.
“Crop insurance has drifted away from that basic safety net concept and the farm bill has taken it even farther away,” said analyst Craig Cox of The Environmental Working Group, a non-profit, non-partisan body that researches environmental health, food and agriculture.
“It’s going to be expensive”
In August, USDA forecast subsidies for the 2014 crop under the farm bill’s Agriculture Risk Coverage (ARC) and the Price Loss Coverage (PLC) programs would be $762 million, using $4.20 per bushel for corn as an average market price for 2014. It put average annual payments over the lifetime of the bill at $5.7 billion.
The CBO, forecasting in January before the farm bill became law, put the 2014 payment for both ARC and PLC at $3.8 billion and the average annual figure at about $2.3 billion.
As forecasts are based on several variables, including price and the amount of crop produced, estimates can change. The long-term average used as the benchmark also alters in coming years as it always reflects prices in the previous five years.
Corn futures on the Chicago market hit a five-year low of $3.18-1/4 per bushel in October and are now around $3.70 per bushel. USDA estimated in its monthly report on Nov. 10 that the price would be between $3.20 and $3.80 per bushel for the crop year that runs from Sept. 1, 2014.
Chris Hurt, professor of agricultural economics at Purdue University and a regular speaker at farm investment conferences, estimates support payments to the average Indiana farm using the farm bill’s formula and an average 2014 corn price of $3.40 a bushel would be around $70 an acre under the ARC program.
“It’s going to be expensive,” he said, adding Indiana would be fairly typical across the country, where about 85 million acres could be sown to corn. “That’s $6 billion for corn for 2014 alone. Maybe $8 billion to $10 billion is likely in the first year when you consider other crops,” he said.
Patrick Westhoff, director of the Food and Agriculture Policy Institute, said he calculated payments could reach $8 billion for the 2014 crop for ARC and PLC. Congress set up the institute to prepare forecasts for the agriculture sector.
USDA said it was too early to know what the actual cost of the farm bill payments would be this year.
USDA chief economist Joe Glauber conceded ARC payments could be high this year and next. But, “if prices remain low, those ARC guarantees will be potentially getting much, much smaller over time,” he told Reuters.
Farmers have until March to sign up for the new programs and must choose only one. Payouts for the 2014 crop will come next October and the average price for the year will be set then.
The program likely to be most popular is ARC, which calculates compensation based on a five-year average of national prices and county yields, less the high and the low. The PLC program uses a reference price, currently at $3.70 per bushel for corn.
— Ros Krasny and Christine Stebbins are Reuters correspondents in Washington and Chicago respectively.