Do Subsidies Help the Economy

[Eddie_T]

I picked this up from capitalpress.com:

Farm subsidies' effects pervade economy

Designed to avoid distorting markets, direct payments subtly alter behavior

By MATEUSZ PERKOWSKI

Capital Press

Supporters argue subsidies help avoid an economic catastrophe if crop prices plunge, but critics complain they are counterproductive.

Countercyclical subsidies, which kick in when crop prices fall below target levels, are accused of driving oversupply by enticing farmers to maintain production.

"You're ultimately necessitating more subsidies," said Diane Katz, research fellow at the Heritage Foundation, a free-market think tank.

However, subsidies have a much more complex effect on how commodities are grown, the value of land and the nonsubsidized specialty crop and livestock sectors, experts say.

For example, direct payments go to farmers regardless of crop prices. They were begun specifically because they don't distort commodity markets and trade, said Wallace Tyner, agricultural economist at Purdue University.

"It has nothing to do with what I do this year," he said, speaking from the perspective of a farmer.

But farmland values are inflated by direct payments, which boost the revenue property generates, Tyner said.

"The value of land is dependent on the income stream it produces," he said.

This dynamic bolsters the land market but has negative repercussions for young farmers and others hoping to enter the business or buy land, said Neil Harl, emeritus economics professor at Iowa State University.

If direct payments were eliminated, it would deflate farmland values by a modest amount, said Bob Young, chief economist for the American Farm Bureau Federation.

A drop in commodity prices would lead to an even steeper decline in land values, prompting defaults on loans backed by land values and potentially causing financial calamity, he said.

Another type of subsidy is the countercyclical program, which was instituted to reduce the effect of a crop price drop. It establishes a minimum-price safety net for farmers growing certain program crops.

Those payments are currently a moot point due to the strength of commodity prices, Tyner said. The prices of most program crops are well above the price level that would trigger countercyclical payments.

"Even if you eliminated them, you'd never get any credit for reducing the deficit," he said.

Countercyclical payments were originally created to decrease price shocks to the farming system, Harl said.

"It's a long, painful process when agriculture goes into one of those periods," he said.

Agricultural prices can swing wildly due to weather and other factors, but the demand for food is constant, he said.

"These programs are designed for the consumer as much as they are for the producer," said Anthony Busch, a farmer and chair of the public policy team for the National Corn Growers Association. "We produce something people can't live without, which is food."

The concern now is that countercyclical payments wouldn't do much good even if they became necessary, he said. That's because the costs of fuel, fertilizer and other inputs are so high the payments would do little or nothing to protect farmers' bottom lines.

"If we get back to that, we're all broke and in deep trouble," Bush said.

Take corn and wheat growers. On the futures market, corn was trading just below $7 per bushel while wheat was at or above $7 a bushel, depending on the delivery dates.

Target prices, which would trigger countercyclical subsidies, are $2.63 per bushel for corn and $4.17 per bushel for wheat.

If the value of commodity crops fell below those levels, farmers simply couldn't afford to grow the crops, even with countercyclical payments, said Young, the Farm Bureau economist.

"The cost of putting a crop in the ground anymore is really phenomenal," he said.

As currently structured, countercyclical payments are also "decoupled" from actual farm production.

Rather than paying farmers based on how much of a crop they actually grow, payments are based on historical yields and "base acreage" established under previous farm bills.

Farmers aren't allowed to grow fruits, tree nuts, vegetables and wild rice on the base acreage and still receive payments, but they're otherwise free to grow what they want -- or nothing at all.

The idea is to provide a degree of separation between the production of a crop and countercyclical payments, so they don't spur oversupplies and distort trade.

In reality, though, farmers often choose to continue growing the commodity for which the base acreage is designated, said Dan Sumner, an agricultural economist at the University of California-Davis.

That's because growers want to be able to update yield data whenever possible, he said.

In the 2002 Farm Bill, for example, some rice farmers effectively couldn't update yield data because they'd also have to update their base acreage, which they had reduced, Sumner said.

"If you're not growing the program crop, most growers feel like they're more vulnerable," he said.

That reluctance to switch out of program crops discourages farmers from competing in other markets because they fear losing payments, Sumner said.

The system also discourages farmers from shifting to crops like alfalfa, which they can grow on base acreage without losing payments, he said.

"It definitely affects crop choice," said Dan Putnam, an alfalfa and forage extension specialist at the University of California-Davis.

Farmers' reliance on subsidy programs is partly responsible for the decline in U.S. alfalfa acreage in recent decades, he said. Alfalfa acreage has dropped from 27 million in the 1970s to less than 20 million now, according to USDA.