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A bummer crop of subsidies

By Editorial Board,January 19, 2013

THE DROUGHT that struck the United States in 2012 affected about 80 percent of agricultural land, making it the most extensive such weather event since the 1950s, according to the Agriculture Department (USDA). Consumers will feel the impact of last year’s smaller harvests in the form of higher grocery prices this year. Yet the increases will be relatively modest — a half-percentage-point increase in food price inflation, according to USDA economic projections.

This is a tribute to the American farm sector’s productivity. As such, it is also a reminder of how far-fetched the rationale for federal agricultural subsidies — the threat of food shortages — really is. The most recent invocation of this phantom came amid the drought, when congressional boosters of the subsidy-marbled 2012 farm bill tried, without success, to exploit the dry spell.

In fact, farmers were well-protected against the drought — at significant cost to taxpayers. The vast majority of U.S. farmland is covered by crop insurance, which is heavily subsidized by the government. Washington pays 62 percent of farmers’ premiums — at a cost of $7 billion for the 2012 crop year. It reimburses administrative costs for the 15 insurance companies that sell the policies, to the tune of $1.4 billion in 2012, and also protects the companies against financial loss.

To be specific, the USDA announced Tuesday that the federal crop insurance program has paid $11.4 billion to cover 2012 farm losses so far. U.S. farmers could end up claiming $3.85 for every dollar in premiums, according to Kansas State University economist Art Barnaby. This, in a year when low interest rates have boosted the value of farmland and farmers overall earned $114 billion in net income, the second-highest total in the past three decades.

The government’s total cost for crop insurance could hit nearly $16 billion for 2012, an all-time record. Over the past decade, the program has cost $59.5 billion. Arguably, the existence of such lavish taxpayer protection magnified the losses from last year’s drought and other previous weather events, by inducing farmers to plant marginal acreage in the first place and reducing their incentive to set aside previous years’ earnings as a hedge. In addition to promoting excessive risk-taking, it favors big corporate farms over small family farms. The more crops you grow, the more premium support you get (up to a maximum subsidy rate of 80 percent).

In short, federally backed crop insurance has long since evolved into yet another form of corporate welfare, whose direct costs and perverse unintended consequences outweigh its purported public benefits. The 2012 farm bill would have compounded the error by expanding crop insurance to cover almost all farmers’ losses from price fluctuations as well as natural disasters. The bill’s failure affords lawmakers an opportunity to reform this increasingly wasteful program, and they should take it.