New farm bill subsidy could cost more than existing program, study warns

By Erik Wasson - 05/30/12 12:34 PM ET

The Senate Farm Bill coming to the floor early next month could greatly increase taxpayer spending on farm subsidies if commodity prices tank, a new report from the right-leaning American Enterprise Institute (AEI) out Wednesday warns.

The bill ends the current system of direct payments to farmers, which are made based on historic production and can go to farmers who no longer grow crops. In its place, the bill establishes an expanded crop insurance program to provide revenue to farmers when their income drops below 90 percent of insured baseline.

The Congressional Budget Office scored the Senate bill, co-authored by Senate Agriculture Committee Chairwoman Debbie Stabenow (D-Mich.) and ranking member Pat Roberts (R-Kan.), as cutting the deficit by $23.6 billion over 10 years.

AEI economists Vince Smith, Bruce Babcock and Barry Goodwin are warning that CBO is assuming current high commodity prices and that if prices take a sudden downturn, the taxpayer will be on the book.

CBO says the Stabenow-Roberts program would cost $2.6 billion per year. But the new study says that if crop prices return to average prices in the last decade, the costs could balloon to as much as $7.5 billion per year, depending on how farmers opt to use the system. Farmers can choose a per-farm baseline or a per-county baseline.

“Essentially, shallow-loss programs (including and perhaps especially the SR proposal) create a new entitlement situation for farmers that could cost taxpayers much more than the Direct Payments Program they would supplant,” the report states.

“Shallow-loss programs based on farm yields substantially increase the incentives for risky behavior because they further reduce the amount of hazard farmers face. Thus, from any rational policy perspective, farm-based shallow- loss programs are a bad idea,” it adds. “Although county-based shallow-loss programs do not have all the moral hazard problems associated with farm-based programs, they are likely to be extremely costly if commodity prices decline and will distort production decisions if they are based on planted acres.”