Instead of saving money on crop subsidies, the 2014 farm law will cost far more than anticipated, says economist Vince Smith of Montana State University. Under pressure to save money, Congress replaced the “direct payment” subsidy in 2014 with the insurance-like Agricultural Risk Coverage and the traditionally styled Price Loss Coverage subsidies. ARC and PLC were forecast to cost nearly $13 billion during the life of the farm law but now are estimated at $24.5 billion, an 89 percent increase, said Smith, who compared the 2014 CBO “score” of the farm bill with the most recent CBO projections.
“Taxpayers will spend $11.6 billion more on ARC and PLC subsidy payments than the CBO estimated in their January 2014 baseline,” said Smith in an analysis published by the think tank American Enterprise Institute.
The average cost of ARC and PLC would be $6.1 billion a year, well above the annual $4.9 billion spent on the direct payment, which was made to grain, cotton and soybean growers regardless of need. Because CBO estimated ARC and PLC would cost $3.2 billion a year, the House and Senate Agriculture committees were credited with helping to reduce the deficit and were able to use part of the projected savings to expand the federally subsidized crop insurance program.
“Most of the cost-saving claims made by the … committees were specious,” wrote Smith, who said they were derived from a CBO baseline that presumed record-high commodity prices would continue for years into the future. CBO’s forecasts of average corn, wheat and soybeans were notably higher than estimated by USDA or the think tank Food and Agricultural Policy Research Institute.
At an AEI luncheon, Smith said he believed committee leaders knew the estimates of cost savings were overly optimistic but happily used them to write farm supports that were as generous as possible.
Economist Bruce Babcock of Iowa State University said ARC and PLC were constructed with formulas and references that assured large payments when the agricultural boom ended. “It’s not risk management, it’s transfer maximization,” said Babcock, who was part of a panel of farm bill experts that spoke at the luncheon.
Cotton growers are pressing USDA and farm-state lawmakers to create a subsidy for cottonseed, harvested from cotton bolls at the same time as cotton lint, to offset the lowest cotton prices since 2009. Cottonseed traditionally is a minor source of revenue for growers but “it would be a big revenue source” under the industry’s proposal, said economist Dan Sumner of UC-Davis. “Most agricultural economists would think that expanding subsidies for cotton growers is not a reasonable economic policy.” The program could cost $1 billion a year.
A cottonseed payment might invite a WTO challenge, said Joe Glauber, former USDA chief economist. For a WTO panel, the question might be whether the subsidy unfairly would encourage cotton production rather than if it distorts world trade. “That’s a tougher bar to argue against,” said Glauber.