Column by John Mattingly
Agriculture – April 2007 – Colorado Central Magazine
IN THE YEARS I’VE FARMED and been around ranchers, I’ve noticed the general public is often irked, or at least confused, by agricultural subsidies. Perhaps because farmers and ranchers are most often heard championing hard work while criticizing the welfare system, it’s hard to reconcile the appearance of those same folks on the list of subsidy recipients available to the public at www.ewg.org. However, when subsidies are viewed in the context of our full U.S. economy, the facts — as well as the full roster of beneficiaries — are surprising.
The federal government spends about $15 billion a year on all agricultural subsidies. That’s less than 1% of our GNP, (and less than we currently spend every two weeks in Iraq). Our federal government spends relatively little on ag subsidies, and what it does spend, I suggest, would be a legitimate function of our federal system, if prudently allocated, because a stable food supply is in the national interest.
Currently, the biggest federal ag subsidies are distributed for conservation, disaster relief, and commodity payments.
1. Conservation.Conservation payments, known as EQIP (Environmental Quality Incentives Program) can be for such things as cross-fencing and waterhole development, or irrigation efficiency improvements. To qualify for these payments, the landowner fills out a form describing the project in detail, and the government official has a computer program that awards quality points for those features of the proposed project that align with current national policy priorities. For example, if you’re applying for money to cross-fence a pasture, this will score big points in a year when the policy priority is aimed at effective pasture utilization by grazing rotations between fenced zones. But it would not score points in a year when the policy directive was toward, say, carbon sequestration. If the applicant scores enough points, the subsidy is roughly 50% of the project cost.
My personal experience with these programs is that anyone who can endure the brain damage required to wade through the point system deserves at least a hundred bucks, but beyond that, it is my opinion that these payments are too trivial for federal participation. Any rancher worth his salt should be able to afford to build fence and provide water to livestock without federal assistance, just as any farmer worth his weight in dirt can afford irrigation improvements such as drop nozzles or gated pipe. These are the category of improvements that should come from the cash flow of the business and pay for themselves in a timely manner.
Federal conservation payments also go to the Conservation Reserve Program (CRP). A landowner agrees to set aside (not harvest or graze) certain acres for ten years in exchange for an annual payment. The landowner must plant the set-aside acres to a qualifying grass variety, then perform regular weed and pest control (mowing and/or spraying operations) the sum of which typically consumes a good bit of the annual payment.
The CRP is a variation on the Soil Bank program of previous decades. Our nation produces basic commodities (corn, wheat, soybeans, cotton) in surplus, so taking acres out of production puts some of that productive capacity “in the bank” for a future time when it might be needed. I support this form of conservation subsidy as a legitimate federal activity because it is in the national interest to keep some farmland in reserve for a time of need.
CRP is the only federal program in which farmers are paid not to produce, but the payments are too small to cause a wholesale rush into the program, and the penalties for early withdrawal are substantial.
2. Disaster. The threshold of what qualifies as a disaster has clearly been declining over the past few decades. A disaster used to be something in the caliber of a hurricane or an earthquake. Now it’s just a year when it doesn’t rain very much. Drought in the West isn’t so much a disaster as a recurring condition, so the public has a reasonable gripe that a lot of the government’s ag budget is being spent on relatively minor “disasters” rather than the occasional cataclysm. But if the governor declares a part of the state a disaster area due to drought, farmers and ranchers can apply for both low interest loans and direct payments.
During the drought of 2002, many ranchers were forced to sell their cattle. Many received a nasty surprise when they did their taxes for that year and learned that the income from the sale of the cattle was taxable as capital gain, because in many cases the ranchers had little or no cost basis in the cows they sold. A temporary provision allowed ranchers to re-purchase cows within a certain time-frame and essentially transfer the basis of their prior herd to the new herd, thus avoiding the tax bite. But most ranchers in this situation lacked the capital to purchase a new herd. Some ranchers pointed out that, even if they could, they couldn’t purchase cows of equal genetic quality that were as well adapted to their ranches as the previous herd.
The ranching business itself might qualify for disaster payments even in a “good” year. Almost all cattle ranching operations are subsidized by their owners to an extent that dwarfs anything supplied by the feds or the state. The cattle rancher’s fundamental dilemma is that his money turns over slowly. From the time a cow is bred to the time the calf is sold, is about 2 years. In that two years, the rancher incurs cash costs something like this: $160 interest ($1,000 cow at 8% interest — the current operating loan rate), $400 for four tons of hay (winter feed for two winters), $100 grazing costs (assuming discount public lands summer pastures), and $50 for supplements, vet bills, charges to replacement stock, and death loss. The calf needs to sell for about $700 just to break even, and currently the market is near that level. Which means if someone gave you a good working ranch worth a couple of million, you might put a few bucks in your pocket every year.
Most cattle ranches are heavily subsidized by an outside “cash cow” business. The willingness of people to personally subsidize their ranching business is part of the reason beef is relatively cheap at the supermarket. Before we jump on local ranchers for receiving money from Uncle Sam, consider how much that rancher is paying out of pocket just to be in the business.
3. Price supports.Under provisions of the Farm Security Act of 2002, a farmer can receive a payment for program commodities based on the difference between the target price (established by the government) and the market price (established by supply and demand). This is known as a “deficiency payment.” For example, if the target price for wheat is $4.00 a bushel, and the market is $3.50 a bushel, a grower in the program can receive a payment for $.50 a bushel. The payment is tied to the farmer’s base acres, which are calculated from the historical acres the farmer planted in the program crop. Because the market price fluctuates, the deficiency payment also fluctuates. If the market price exceeds the target price, no deficiency payment is made.
PRICE SUPPORTS came out of the fencerow-to- fencerow production policy of the early 1970s (after the 1973 oil embargo and discussed at length in a previous column, The Butz Hole), which supports prices rather than reducing acres in production, which clearly contributes to commodity surpluses. Thus it is often referred to as “the cheap food policy.”
In reality, price supports are an indirect subsidy to the consumer, because the cheap food that flows from the policy provides the average U.S. citizen with a reliable supply of groceries for a mere 8% (Farm and Food Facts, ’06) of his or her annual income. In other parts of the world, consumers pay as much as 80% of their income for food.
Cheap food has resulted in an economic schematic in the U.S. in which housing takes roughly 40% of our income, transportation 18%. If you consider that homes, cars, and many consumer goods in the U.S. are financed at credit card rates of at least 12%, more consumer income goes to pay the interest accruing on the sum of housing, auto, and consumer goods than is spent on food.
Because of the flow-through benefit of ag subsidies to cheap food, consumers really shouldn’t be barking too loudly about those checks paid to farmers and ranchers. Unless they’re anxious to start paying $15 for a loaf of bread.
John Mattingly is a recovering farmer who abides in greater Moffat.
