The "Bloated" Farm Bill

The irony is inescapable. Food riots are breaking out in many parts of the world and last week President Bush ordered $200 million in immediate aid to the poorest nations through the United States Agency for International Development.

At the same time, Congressional leaders are putting the finishing touches on the Farm Bill that has been the subject of so much controversy in recent months.

Details are expected to be released this week, but at an estimated cost of $300 billion over five years, the bill is expected to retain most of the subsidies to US farmers. Taking only a small step away from the Bush administration's "Food for Fuel" strategy, the bill is also expected to reduce the tax credit for ethanol producers from 51 cents per gallon to 45 cents, a 12% reduction.

The International Food Policy Research Institute estimates that biofuel production accounts for between one-quarter and one-third of the recent spike in global commodity prices, and the head of the UN World Food Program has said that an additional 100 million people, who did not need assistance six months ago, are now unable to purchase food.

I don't know how to calculate the impact of the 12% reduction in the ethanol subsidy, but it doesn't seem like this will do much for the 100 million people in need of assistance. Iowa State University economist Bruce Babcock has estimated that the reduced subsidy for conventional grain-based ethanol will lower the price of corn by less than 3 cents a bushel (less than 1%)

This isn't too surprising: spending 12% less on a bad idea doesn't make it a good idea.

On a positive note, although the bill under discussion is over budget by $10 billion, this is due to additional funding for national food aid programs in the U.S. The extra $10 billion would be offset mostly by additional fees on imports rather than additional taxes (Under federal budget rules Customs user fees do not count as taxes). So this will only affect Americans who buy imports, which is nearly everybody.

So, how much of the $10 billion will be paid by reducing payments to high-income farm operators and landlords? As things now stand, it appears that the final bill will have very little impact on subisdies that are now provided with few limitations. The current "soft" cap of $2.5 million doesn't even apply if 75 percent or more of the applicant's income derives from farming.

Last December, Sen. Byron Dorgan (D-N.D.) and Sen. Charles Grassley (R-IA) proposed an amendment to the House version (H.R.2419) that would have included payment limitations and a "hard" cap of $250,000 in adjusted gross income. Unfortunately, the Dorgan-Grassley amendment failed to achieve the 60% supermajority required for passage. Once again, 99 of 100 Senators voted, and only Sen. John McCain failed to vote. If McCain wanted to "take a stand" on this issue, he would have had to show up.

Even a "hard" cap of $500,000 would have reduced payments in 2006 by an estimated $230 million, and would have had an impact on less than 1 percent of farm operators who exceeded this level of income. These 10,000 farmers would still receive $30 million more than the $200 million we're contributing on a global basis to nations facing serious food shortages.

In a press conference today, President Bush criticized Congress for "considering a massive, bloated farm bill that would do little to solve the problem" of escalating costs for consumers, and he's right.

Still, it looks like a compromise Farm Bill being worked out in the House and Senate will make only minor changes in individual subsidies. Expect to see a soft cap of $500,000 on non-farm income, so large multi-million dollar farm operations can continue to receive payments. This will produce only minimal savings, but provides political cover for a Congress that is unwilling to face into the issue.

"Everybody took some cuts," according to Iowa Sen. Tom Harkin, chairman of the Senate Agriculture Committee.

Well, almost everybody.