Contrary to critics, the new Farm Security and Rural Investment Act of 2002 is neither budget busting nor trade distorting. The measure provides much-needed support for American farmers who supply the lowest-cost, highest-quality supply of food and fiber in the world.
The Congressional Budget Office has stated that spending under this act will not exceed the cap imposed by a binding congressional budget resolution. Also, spending under the new farm law cannot fail U.S. obligations under the World Trade Organization (WTO) agreements. The act includes “circuit breaker” provisions requiring automatic benefits reductions if the U.S. violates those commitments.
Still, some nations have complained and are threatening to retaliate. Their challenge is without merit. The new farm law does not authorize U.S. export subsidies, and the domestic subsidies actually are lower than the combination of outlays authorized by its predecessor, the “Freedom to Farm” act, and emergency appropriations the past several years. If it should become necessary to reduce farm program benefits as a result of new WTO talks that are underway, any reductions in U.S. farm payments should be commensurate with reductions of other WTO signatory countries. In most cases, their spending on farm subsidies exceeds ours by orders of magnitude. If all subsidies for all nations were reduced or removed in unison there is every reason to believe that a strong, viable U.S. agriculture could be maintained – but certainly not if U.S. programs are eliminated unilaterally.
Some critics believe the new U.S. farm law will encumber U.S. negotiators in these talks. This nation’s experience in negotiating arms reductions suggests very strongly that negotiating from strength breeds success. The surest way to perpetuate the already unfair global imbalance in farm subsidies is for the U.S. to reduce or eliminate its farm programs and beg other nations to follow our lead. With our negotiating leverage gone, they would have no incentive to do so. For the U.S. to reduce or eliminate farm program benefits unilaterally is tantamount to permitting foreign treasuries to bankrupt American farmers and ranchers while our government does nothing to help. Meanwhile, all Americans would become as dependent on foreign food and fiber as we are on foreign oil.
Another criticism of the new farm law involves program payment distribution.
One inaccurate supposition – that the top 10 percent of recipients get two-thirds of the farm program payments – stems from misleading information posted on an environmental advocacy organization’s web site. For example, that organization counts any marketing cooperative as a single recipient when, in fact, these payments are only channeled through the cooperatives to thousands of individual farmers. This type of misleading information incited a feeding frenzy among some members of the mainstream news media seemingly more intent on berating farm programs than factual reporting.
The new farm law’s program eligibility provisions represent significant reform. Program participation is denied to high-income persons such as media moguls, professional athletes and others unless at least three-fourths of the income is from farming. Large farms will continue to be eligible for program benefits, but reduced payment limits have been established. Naturally these larger enterprises receive a larger percentage of total program payments than smaller farms. That’s because they account for a much larger percentage of total U.S. production.
Large farms still need this support because the efficiencies attained by their economies of scale do not guarantee profitability. For example, when the “Freedom to Farm” act passed in 1995, commodity prices were high in relation to historical norms and the dollar’s value was at a reasonable level in relation to foreign currencies. It was widely believed then that farm programs could be phased out without major damage to U.S. agriculture. However, commodity prices plummeted and reached historic lows for some, including cotton. That, combined with a rising dollar value, has wreaked havoc on U.S. agricultural competitiveness. In fact, many larger-than-average farms – some among the best managed in the Cotton Belt – found it unfeasible to continue operations in 2002 despite being eligible for farm program benefits.
Finally, some are concerned the new farm act will stimulate commodity overproduction. There is no greater production incentive in this measure than the “Freedom to Farm” act it replaces. Increases in loan rates are modest and remain well below production costs. Moreover, the fixed and counter-cyclical (i.e., providing for higher payments when prices are low) support is decoupled from production, meaning a farmer does not have to plant a crop to receive the payments. The motivation for decoupling even the counter-cyclical payments was to remove any payment-related incentive for producing covered commodities.
The role of a sound farm program is to offer farmers and ranchers meaningful price protection and provide stability to the rural economic fabric. I believe the Farm Security and Rural Investment Act of 2002 will do just that.