Letter from Langdon: Agri-Executives Like Me

The argument used to be that farms needed to get bigger to survive. How'd that work out for GM?

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No offense intended to my farmer friends, but one way to view our farmers might be to compare them to General Motors. GM has the capacity to manufacture more cars than it can ever market. When dealers’ lots sit full for too long GM has a sale. 

That’s sort of the way farming works. Over the years I’ve sold my crops for what it cost to grow them, sometimes even less.  Many times.

U.S. carmakers didn’t make too many of the wrong cars because of government incentives, but the whole point of farm programs has been to guarantee abundant supplies of food without starving the farmers who produce it. During the ‘90s, payment limits were established — then increased — so that bigger farms could afford to grow more grain, oil seeds, and cotton for even cheaper prices.

It worked, because grain prices became very cheap.

In the past, some subsidies have been limited to specific dollar amounts regardless of a farm’s income. Some subsidies weren’t limited at all. President Obama recently got the attention of farmers when he proposed limiting farm subsidies by a farmer’s wealth.

The problem with the president’s suggestion wasn’t that it might save $9.8 billion over 10 years as proposed, but that it specified gross income of $500,000 as the new limit. It’s not unusual for farms to have gross incomes that high — but net income, the money left after paying expenses, is what determines whether a farmer is doing well or just paying the bills.

USDA/Economic Research Service
Direct government payments to farmers are projected to fall from $12.4 billion in 2008 to an average of less than $10 billion annually in 2009 to 2018.

According to one study in North Dakota, except for 2007 and perhaps 2008, typical net farm incomes are only 15 to 20% of gross income. Add in depreciation and it could be even less.

Today’s average farm size is approaching 1,000 acres. Thanks to the unbridled speculation of the last two years, a lot of farms that size probably meet or exceeded the President’s $500,000 limit. With increasing cost of seed, fuel and fertilizer, it’s also safe to say these farmers have also seen added expenses. 

With the budget under fire and the economy sinking following two years of historically strong returns for some farms, opponents of farm programs see an opening.  Using gross income as an unbending measure of a farm’s need for help plays right into their hands.

Most of the U.S. Department of Agriculture’s budget is devoted to food programs for schools and the poor, rural development grants, loans, and administration. The Obama administration is seeking to increase USDA spending in 2010 overall by 9%, to $32.9 billion. None of that increase will go toward agriculture subsidies.

In 2009, about $8.8 billion might be spent for all farm payments; it will undoubtedly be less in 2010. Overall payments are capped at $250,000 per farm, total. But when you add in the $500,000 cap on gross income, it seems unlikely that many farms would collect the maximum. Unless, that is, farm markets melt down in the same way financial markets have.

Also, a large portion of USDA’s budget consists of loans to farmers and rural communities that are ultimately repaid with interest. Quoting USDA budget figures without separating loans from grants and subsidies is misleading, especially when compared to other non-lending government agencies whose expenses are just that, expenses that are never returned to the Treasury. 

USDA gets a lot of its money back.

USDA says that the new limits will only affect 4% of farms. But the largest farms in America account for most grain production. That’s why large grain farms collect larger subsidies, while small farms of less than 400 acres collect very little. Livestock farms and ranches are totally unaffected because they aren’t directly subsidized.

My ’58 executive vehicle. I wish I still had it.

There have been many years when my total net income consisted  of the amount of money USDA paid to me. My real income equalled my federal payment. Those were the years when my work and investment supported big food corporations, livestock growers, and dairies, with cheap grain.

So far lawmakers have done little to help the most stressed agricultural businesses: small and medium sized dairies that have lost the advantage of inexpensive feed. The USDA and Congress haven’t addressed the issue of rising costs of all farm production. There has been a lot of saber rattling about the World Trade Organization and the disadvantages American farmers face when competing against the rising numbers of subsidized foreign food imports. But little concrete action. One issue in particular  that is important to American farmers is Country of Origin Labeling (COOL), which would require foods to identify where they were produced. USDA is still trying to toughen this law in the face of growing opposition from big meat packers and the WTO.

A big part of the problem with farm subsidies is the WTO. Trade rules require that payments to farmers be made without regard to prices paid for crops. The argument is that if government payments subsidize cheap crop prices that distorts free trade. In effect, when the U.S. joined the WTO, we lost the ability to direct funds where and when they were needed here at home. Farmers were sent direct payments to subsidize personal income instead of replacing money lost from low crop prices. Now we pay money to some farmers who may not need it, while denying vital support to those who are failing as a result of low prices. 

(The USDA is still writing rules for a new law called ACRE (Average Crop Revenue Election). ACRE uses average prices in preceding years to set payments when grain prices fall too far. Future battles over payment limits and WTO compliance will center on programs like ACRE.)

There is only so much land to devote to any one agricultural pursuit. Production has grown on some fronts through research and public policy mandates, but slowly, certainly no faster than the population of the world has grown. That’s why we import food even as we grow corn and soybeans to turn into fuel, and as U.S. livestock numbers decline as Canadian numbers grow.  Unfortunately Congressional inattention to some areas of food production has made it easier for unfair competition to mount, especially in livestock markets. 

Ultimately, it is the amount of available, arable land, water, and hospitable climate that determine what and how much we produce. Even with USDA incentives, the only real way to dramatically increase supplies of any one food commodity is at the expense of another commodity, or through imports. 

There are those who argue that General Motors-sized farms with corporate efficiencies of scale are the only solution. That argument is no longer as compelling as it once was, especially not when large farms demand their share of subsidies while GM is on the public dole. One thing is true, America’s family farms do have some of the same problems found at GM:  unfunded retirement, rising healthcare costs and unsold production.

On the other hand, how many Detroit CEO’s will work all year for pennies on the dollar without benefits or an expense account? 

The short answer is “only agri-executives” like me.

 

 

 

 

 

 

 

 

 

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