European Affairs

We reported that some suburban homeowners in Texas were getting checks from the government simply because rice had once been grown in backyards where their children now played. Corn growers harvested a near-record crop in 2005, but still were paid about $3.8 billion more in government price guarantees than was needed to give them the minimum price per bushel. And we showed how farm subsidies were driving up real estate prices in the heartland, making it costly for young farmers to rent or buy farmland.


Nonetheless, it is far from clear whether newspaper series, increasing pressure from U.S. trading partners, or a rising chorus of domestic critics will result in significant reform when the agricultural committees in Congress write a new multi-year farm bill this summer. President Ronald Reagan’s Budget Director, David Stockman, once described the farm program as “the worst nonsense of all in the budget.” But Stockman had little success trying to change it. While the system may seem crazy when taken as a whole, it is really a carefully constructed composite of many interrelated parts, each defended by a parochial interest with lobbying muscle. In an era of blogs, cell phones and wireless communication, the sturdy old farm bloc remains among the most powerful in Congress.

Trade officials of the European Union and developing countries learned that lesson anew over the last two years, as reducing agricultural subsidies and protections became the main sticking point in negotiations on a new trade deal. The United States has not been solely responsible for the deadlock. Neither the EU nor the developing bloc, which includes emerging economic powers such as India, have showed much inclination to reduce their high protective tariffs and other barriers (such as questionable import restrictions on genetically modified grains). Many countries have also taken a hard line in their demands that they be allowed to continue protections for dozens of “sensitive” commodities (such as certain regional French cheeses), and developing countries have echoed (and expanded) this demand for an opt-out in seeking continued protection of “special” products alleged to be crucial to the livelihoods of subsistence farmers.

Even so, the United States has done little to address its own trade distorting sins, which clearly work to the disadvantage of foreign farmers. Bruce Babcock, a professor at Iowa State University, in the agricultural heartland, has christened the U.S. system “risk free farming.” What he has in mind can be illustrated by the story of a rational reform that ended up being derailed by politics. In 1996, in an effort to move U.S. agriculture away from subsidies that encourage overproduction and distort trade, the government introduced an annual allowance for farmers that was unrelated to what they grow. But political pressures caused Congress to backtrack and restore additional payments when prices were low. Alas, this cautionary tale is far from unique, and the result is a hybrid system that enables farmers to reap big payments even in years when they have bumper crops.

As these distortions sink in with the public thanks to the flow of more and better information, pressures are rising for an overhaul of the farm sector based on its new economic realities. In the 1930s, when the system was created, per capita farm income was only a third that of the rest of the population. In 2003, the owners of the largest family farms reported an average household income of $214,300, more than three times that of average U.S. households. Domestic and global demand for U.S. agricultural products to make products ranging from ethanol to T-shirts is strong and likely to remain so. While city dwellers may still have images of debt-ridden U.S. farm families struggling against the elements, the reality is different: today’s businessmen farmers are as familiar with spreadsheets as spreaders. Many utilize GPS technology in seed planting, drive equipment costing up to $250,000 and hedge their risks in the options markets.

This “risk free” system is increasingly out of place in a global economy in which the watch-words are risk, adjustment and change.In many ways, the system underestimates the adaptability of America’s businessmen-farmers. John Phipps, an Illinois grain farmer we met, is not untypical. His operation grossed In 2003, the owners of the largest family farms reported an average household income of $214,300, more than three times that of average U.S. households nearly half a million dollars in 2005, putting him in the top 3 percent of farmers.Yet the U.S. government still paid him $120,000. “It’s embarrassing,” Phipps told us. “The government is basically saying I’m incompetent and need help.”

How to explain the entrenched nature of traditional farm subsidies even as farming enters a new era? For one thing, the benefits are heavily tilted toward farmers growing just five crops (corn, wheat, rice, cotton and soybeans) in a handful of states of political importance to both parties in Congress. The Gulf States that produce cotton and rice have long been the Republican Party’s base in the House of Representatives. And Senate Democrats have a large bloc from the corn and wheat growing states of the upper Great Plains and Midwest. For rural areas that haven’t attracted new 21st century industries, agriculture is still an economic lifeline. Ask growers of wheat and canola in North Dakota, or a franchised farm-implement dealer in central Mississippi cotton country. (It is worth noting that the president of the American Farm Bureau Federation, the largest U.S. farm lobby, is a Texas rice grower who is on record against substantial changes in the current program.)

Our analysis of U.S. Department of Agriculture data showed that a middle group of more than 130,000 farms received $25,000 to $100,000 in 2005. That is serious money, and it ripples through local economies, adding to farmers’ purchasing power at stores and fattening deposits at local banks. No wonder, then, that the farm bloc is “committed and focused,” says former Congressman Cal Dooley, a fourth-generation farmer and now the head of the Food Products Association, who is now lobbying for a fundamental redesign of farm policy.

It was against this background that the Bush administration in January unveiled its plan for a new farm bill that is arguably the most important in years. To an unusual degree, the interest in this bill extends far beyond the parochially minded agricultural committees in Congress. As Agriculture Secretary Mike Johanns made clear — and congressional leaders agree — it will be as much an energy bill as a farm bill, providing funding for a rapid expansion of bio-fuels and research on ways to extract fuel from prairie grasses. The administration wants to heavy up spending by $8 billion over the next decade on soil and water conservation programs, including federal cost sharing on projects that help dairy and cattlemen meet federal clean-water requirements. The conservation funding is meant to woo support from cattlemen and growers of fruits and vegetables, two groups who are demanding a larger share of the pie of federal resources that have been heavily skewed toward “traditional” staple crops in previous farm bills.

Groups as diverse as church organizations and the conservative Club for Growth are pushing for an overhaul, citing the impact of subsidies on poor foreign farmers and costs to U.S. taxpayers. Looming over the entire debate are threats of retaliation by U.S. trading partners if Congress is unable to slash subsidies. (Brazil has already won its trade claim against U.S. cotton subsidies and Canada has indicated it will challenge U.S. corn supports.) For that reason, the administration’s proposals are being scrutinized by trade negotiators in Europe and elsewhere for evidence of U.S. intentions in any last-minute push for a breakthrough in the Doha round.

A wild card has appeared in the form of a sudden surge in corn prices due to the green-driven demand for ethanol. How this new market will affect the outcome of the farm bill and the wider trade debate is not yet entirely clear. Key officials in the U.S. mission to the EU contend that high corn prices will make farmers less dependent on subsidies (not only in the U.S. but also in Europe) and could make reforms easier, especially in Congress. On the other hand, the exploding domestic market (next year corn consumption for ethanol will overtake and exceed the value of U.S. corn exports) means farmers may care less about a trade deal that would reduce foreign tariffs on their exported crops.

Viewed in terms of bolstering hopes for a last-minute breakthrough in the Doha round, the Bush administration’s farm bill was something of a disappointment. Johanns passed up a chance to propose an overhaul of the sugar program, which has long been at the center of trade frictions between the United States and the rest of the world.

U.S. sugar-producers are currently protected by a complex system that uses import quotas, price supports and annual acreage allocations to keep prices of raw cane above 18 cents per pound and beet sugar above 22.9 cents per pound - a significant premium on world free market prices. Johanns has confided that he does not believe the program can be sustained after the United States opens its borders to Mexican sugar next January, under the North American Free Trade Agreement. With that perspective in mind, a number of economists have argued for a “buy-out” of sugar growers that would provide support for them during a transition to a free sugar market. Instead, Johanns proposed only minor tinkering involving the acreage allotments. Politically, this may have been realistic. A leading congressional advocate for sugar-beet industries happens to be the newly installed chairman of the House Agriculture Committee, Minnesota Democrat Collin Peterson.

Johanns also ducked a confrontation with the dairy industry, whose political punch can be measured by the fact that its lobbying expenditures run into tens of millions of dollars annually. According to the WTO scoring system, U.S. dairy producers collect about $4.5 billion a year more than they would if they received the world price for milk and dairy products. That is thanks to a bewildering web of protections and subsidies that includes tariffs, a $9.90 per hundredweight program of price supports, direct “milk income loss” payments and regional “milk marketing orders” that equalize prices. This bureaucratic creation may have made sense when government intervention was needed to protect millions of tiny dairy farmers from exploitation by processors. It is an anachronism now that milk products come to consumers almost entirely through enormous processors firms that themselves buy from huge dairy cooperatives representing 5,000-cow herds.

European officials were quick to decry the Bush administration’s farm bill proposals as too little and too late. But in many ways the administration’s plan has the advantage of being politically shrewd and therefore realistic. Payments linked to the prices of what farmers produce - deemed market distorting by the WTO — would decline by $8.2 billion over the next decade.

Johanns has made clear that he is engaged in a fairly straightforward game of political bribery. Recipients of traditional farm payments would have their price guarantees cut, but would recoup most or all of that through a WTO-friendly cash allowance unrelated to their farming. Cotton growers, a mainstay in southern “red states,” would see their allowances almost double. Congressional leaders have been wary, however, of letting any potentially unsettling process of change get traction in a complex system that has been fine-tuned by practice. But Johanns believes that the farm lobby, despite tough talk, will accept some change rather than have it imposed by WTO rulings — or congressional reformers outside the agricultural committees.

All this should be good news for trade negotiators since what is needed is not more or even better ideas about how to redesign the farm sector—plenty of those exist in think tanks and academia. Instead, what is needed for U.S. reform is the kind of political trade-offs that alone can make a deal materialize. Seen in that perspective, the current U.S. blueprints for the farm bill contain some tangible reforms and some realistic calculations about their feasibility. They deserve considered scrutiny: they may amount to a real opportunity for global agricultural change.

All of this may be coming too late. Already, there are looming indications that the new Democratic-controlled Congress may be preparing to balk at renewing the “fast-track” authority of the White House over trade talks. Loss of the presidential prerogative to be able to confront Congress with an “all-or-nothing” trade package would obviously dissuade U.S. domestic lobbies and foreign governments from contemplating a gamble on changing domestic farm programs in the hope of seeing a better overall global deal emerge. Still, pressures for changing the ramshackle U.S. farm policy are on the boil.

It would be ironic if President George Bush, a Texas oil man who has shown little interest in agricultural issues, ended with a legacy of helping to bring about a forward-looking farm bill that eased trade frictions and paved the way for a new era in U.S. agriculture.


This article was published in European Affairs: Volume number 8, Issue number 1 in the Spring of 2007.