Farm Bill Increasing Market Distortion

Crop insurance was clearly the theme of the 2012 Farm Bill hearing held last week in Dodge City, Kan. But underlying the testimonies and conversations at the hearing was an even more thorny issue: How bad are we willing to distort markets as direct payments get taken to the chopping block?

Unfortunately, more market distortion is precisely where we are headed. While direct payments drew a lot of fire from the public for being “welfare for farmers” since farmers did nothing to receive them, they were the cleanest way to deliver subsidies: Plant what you want and market how you want. It was simple, plain and out in the open.

But with the direct payment being ushered out the door amid budget cuts, it’s invariably going to be replaced with a plan that’s not only less transparent, but more distorting. That’s where crop insurance comes in.

Under subsidized crop insurance, the taxpayer funds about 60% of the premium paid by farmers. But not all crops are treated equally. How much treatment a crop gets ultimately depends on the level of influence a commodity organization has when writing the bill, says Bruce Babcock, agricultural economist at Iowa State University who developed one of the first revenue insurance products.

Under the current format, the government covers the risk of some crops, but not others. And of the crops the program does cover, there is an obvious bias – something that groups like EWG are already ringing the warning bell about.

But despite the distortion crop insurance causes in farming, many are calling for the government to strengthen that program even more.

Is there a downside to this somewhere? As a young farmer, crop insurance subsidies have helped me curtail my production cost and decrease my risk. This past year was a perfect example with my milo crop being totaled by +100 degree heat and high winds.

But, just because farming can be high risk in some years doesn’t mean all risk should be taken out of the business. Eventually, every farmer needs to feel pain for making a bad decision. Basic economic principles are violated when pain is no longer inflicted for poor decision making.

Luther Tweeten, renowned agricultural economist at The Ohio State University, also points out that the unbalanced structure of crop insurance results in increased production of some crops – an issue the WTO might take great interest in. Competing countries could challenge crop insurance in a WTO court as giving U.S. producers unfair advantages of certain commodities.

The shallow-loss, commodity-specific approach that covers even minor losses, but of only specific crops, currently has the strong support of some commodity groups. But, this approach, which takes the risk out of farming for a few select crops while discouraging innovation of other crops, is pushing the farm bill in the opposite direction of the free market principles established in Freedom to Farm.

A deep-loss, whole-farm revenue approach that covers only catastrophic losses and does not discriminate between crops would be the least distorting method in place of the direct payment.

And, it allows the farmer to do the most important thing when it comes to running a business – failing for making bad decisions. As one young farmer who testified at the hearing said, crop insurance is important, but the government should never guarantee a profit. Unfortunately, though, minimizing distortion and letting the marketplace function is not a primary concern in the new farm bill.