Senate Farm Bill “Shallow Loss” Program Not as Bad as Conservatives Say

The conservative American Enterprise Institute howls that the Senate version of the Farm Bill is full of tricks to hide increased spending and anti-free market subsidies. AEI praises the Senate for eliminating the Direct Payments program ($5 billion of savings!), but they decry the new safety net, the Shallow Loss Agricultural Risk Coverage (ARC) program:

...this program essentially guarantees that farmers receive approximately 89% of their expected incomes — a program about which no other business in America could dream. In effect, the program would issue payments to farmers when crop prices (and thus revenues) fall [Vincent Smith, "A New Bait and Switch Farm Bill," American Enterprise Institute: AEIdeas, 2013.05.31].

Grocery stores? Car dealers? Anyone else on Main Street care for a federal guarantee that you will receive 89% of your expected income?

This new entitlement program is supposed to cost less than the subsidies the Senate farm bill eliminates... but Smith says that only happens if crop prices remain at their current highs:

Using the assumption that crop prices will remain at or close to recent record highs, the Congressional Budget Office estimates that the new program would cost $2.372 billion per year. Combine that with the $5 billion Direct Payments cuts, a few other items, and the sequestration savings, and the bill appears to save $2.4 billion annually overall. But if crop prices move back toward their long-run averages, ARC’s costs would balloon to $7 billion or more annually. Under this scenario, the total cost of the Senate Bill would be more than $3 billion more than the previous farm bill, if sequestration is not counted [Smith, 2013.05.31].

I agree with some of my conservative friends that we should end subsidies for big business, be it Big Ag, Big Oil, Big Recruiter, you name it. But the AEI overstates the costs of this new farm entitlement program. According to a University of Illinois brief published by the Corn and Soybean Digest, ARC would base payments on an Olympic average of the last five years of crop prices multiplied by a similar average of local yields. So in the first year of a price drop, farmers would receive the largest ARC payment, and cost for the government could indeed go up. But once that year enters the Olympic average, ARC payments decline. If crop prices settle back to the historical average that AEI fears, ARC payments would use that restored average as their benchmark, and within five years, payments would drop below predicted levels.

Further reducing the cost is ARC's coverage of only a portion of losses. ARC covers only a 10% band of loss, between 89% and 79% of expected revenue. If crop price times yield drops below 79% of the Olympic average, farmers receive no additional subsidy. That's the "shallow loss" part of the plan, beyond which I suppose crop insurance would pick up the tab. Even within that shallow loss band, ARC makes payment based on factors: farmers get 80% payment for planted acres and 45% payment for acres they couldn't plant.

The Senate farm bill still contains handouts for farmers, and there are plenty of conservative and liberal reasons to say we should not prioritize such handouts for one favored industry. But AEI overstates its cost argument against the Shallow Loss Agricultural Risk Coverage program.