The farm problem. Sounds pretty simple and straightforward. The farm problem is what lawmakers and much of America are debating as Congress attempts to pass a new farm bill to replace the controversial 1996 Freedom to Farm law, which expires later this year. The House and Senate have separate proposals that would increase planned spending on farm-related programs by more than $70 billion over the next 10 years.
Get past the cover of either proposal, and the farm problem gets fuzzy quickly. The Senate bill is better than 900 pages long, the House version almost 400 pages. Included are literally dozens and dozens of wide-ranging programs covering crop support, environmental protection, rural development, agricultural trade and trade promotion, nutrition, research and education.
"The problem? I'm not sure [lawmakers] know. It's so entangled with politics and favors that I think the reality of [identifying the problem] doesn't even occur to them," said Foster Mooney, a sheep and vegetable farmer in Chisago City, Minn. Given all the lobbyists and special interests jockeying for position in the new law, Mooney said, "if the right thing comes out, it's truly a coincidence."
Though often unwieldy in wording and imposing in implementation, the intent of farms bills past and present is to achieve a singular outcome: provide a better safety net-particularly an income net—that protects U.S. farmers when they lose their footing because of a host of perils.
The biggest banana peel of the last half-decade has been low commodity prices, which has caused farmers' net income from sales to drop from more than $50 billion in 1997 to about $35 billion just two years later. Income has only been inching up since; in 2002, net income from farm sales is forecast to be $40 billion, according to the Economic Research Service (ERS), a research arm of the US Department of Agriculture (USDA).
During this time, government has provided the yeast to help farmers' income rise to more comfortable levels. Since 1997, farmers have received more than $80 billion in direct government payments, including better than $20 billion in each of the last three years.
Most agree something needs to be done in the next farm bill to help struggling farmers. But the discussion about exactly what to do quickly splinters, even among farmers. "You ain't going to get two of them to agree," Mooney said.
That even holds true for farmers in the same sector. "Somebody in California wants something different than [a farmer] in Wisconsin. A farmer with 500 cows wants something different than one with 700 cows," said Shane Goplin, who is working with his older brother to take over their father's 700-head dairy operation in Osseo, Wis. "We can't unite on one specific thing we need. Somebody complains that somebody's getting more. It's like organizing a pack of wild dogs."
That might be part of the reason why farm policy is so unwieldy. "We in ag do not always agree and we cannot always get what we think would be ideal from Congress," said Dan DeBuff, a family wheat farmer in, appropriately enough, Wheatland County in central Montana. "So we end up asking for something that we think we can get, and this sometimes takes us backwards because we have no long-term, comprehensive plan."
Said one small farmer in Minnesota, "Federal farm policy has a tiger by the tail and does not know how to let go of it."
But while political camps arm-wrestle over final funding and other program details for mending the farm safety net, in the end the core of the new farm law will likely push forward a 70-year legacy of federal policy to support, and sometimes even guarantee, farm income. This policy predisposition has managed a few major victories. But so too has such policy missed many of its targets and created a bushel basket of unintended consequences.
Planting the seeds of support
Farm income support has been around since 1933, when Congress introduced price supports and supply restrictions with the Agricultural Adjustment Act, the first comprehensive government effort to raise and stabilize farm prices and incomes. Since then, taxpayers have spent $560 billion (in constant 2000 dollars) to support farm prices and incomes, according to different government and academic sources. Since 1950, government support has averaged about $9 billion annually.
The motivation of the 1933 law was clear. Average farm income at the time was about half that of other workers. That's no longer the case today, as average income among farm households—better than $60,000—now exceeds that of the average US household. However, most farm households get the majority of their income from off-farm jobs. Without government payments the last several years, many district farmers would look like volunteers, having earned little or nothing for their work.
One source with a North Dakota farm agency said that "without government payments, state farmers would be flat broke." He's not kidding. In 1999 and 2000, North Dakota farmers had net income from farming of not quite $1.3 billion, according to USDA data. During those years, farmers received almost $1.1 billion from various government programs, according to the Environmental Working Group, a Washington, D.C., research organization, which conducted an exhaustive analysis of subsidy payments to individual farmers.
They would also have plenty of company on the tractor. During the same period, Montana farmers actually saw government receipts (almost $1 billion) exceed their net income of about $800 million. Government payments made up about 95 percent of Minnesota farmers' net income of $3 billion; for Wisconsin farmers, it was about 85 percent. South Dakota bucked the trend somewhat with only about 60 percent of net income coming from government in 1999 and 2000.
Although it had opposite designs, the lame-duck Freedom to Farm law ultimately reinforced the nation's desire to help farmers in hard times. It cut away much of the formal, structured safety net of price floors and other supports in favor of a more market-oriented, supply-and-demand approach. It took off the federal yoke of supply management, unleashing farmers to plant as they pleased at a time when commodity prices were high.
Blessed with good growing conditions, commodity farmers saw bumper crops several years running. Combined with a simultaneous downturn in the Asian economy—a major importer for US farmers—supplies skyrocketed and prices plunged. Stripped of traditional government supports, farm income fell like a sack of potatoes starting in 1998, and Congress fashioned a makeshift safety net—a parachute for free-falling farmers, really—out of annual emergency aid packages.
One source with a North Dakota farm agency said that "without government payments, state farmers would be flat broke." He's not kidding. ... They would also have plenty of company on the tractor.
Farmers and lawmakers are now asking for farm support without the head-rush. "Farm income protection is a fundamental part of the farm bill," said Iowa's US Sen. Tom Harkin, chair of the Agriculture Committee that spearheaded the current Senate proposal, in a September hearing. "We need a better system to provide adequate income protection without requiring annual emergency legislation."
Farm organizations have also lobbied heavily for a stronger safety net. In testimony to the House Agriculture Committee, National Farmers Union President Leland Swenson said the "only responsible way" to meet existing farm needs was for government to develop "an adequate and workable safety net for producers," while also helping to increase demand and improve commodity prices.
Most farmers feel similarly. A survey of farmers in 27 states (including the Dakotas) by the nonprofit Farm Foundation, in Oakbrook, Ill., found that 80 percent of respondents want the government to provide a farm income safety net and 78 percent want government to maintain or increase farm spending.
That sentiment also came out in contacts with several dozen farmers and farm advocates via phone and e-mail. "Price protection and income support to farmers are central to the [farm bill] debate," according to Eric Aasmundstad, president of the North Dakota Farm Bureau.
As such, a major goal of the new farm bill is to make income support more overt. For all their complexity and length, both the House and Senate proposals use a policy tripod—backed with a majority of the available funding—to put farmers on firmer financial ground.
First, it would keep in place the fixed, lump-sum payments made to some farmers under Freedom to Farm that, ironically, were originally intended to transition farmers away from government assistance altogether. It also continues the marketing assistance loan program, which has evolved into a de facto price-floor program (see "A fair price for whom?"). The third leg is a countercyclical element whereby government payments kick in predictably and proactively when farm prices or incomes go south.
While such a mechanism is technically new in farm policy, several sources pointed out that emergency ad hoc payments the last four years have acted as countercyclical payments. The new law, said Anne Effland, a social science analyst with the ERs, will likely regularize how [federal] money is being distributed."
There's a hole in my policy bucket
But despite the best policy intentions, and despite what averages and generalizations seem to say about farm income, federal policy in this area is as much sieve as safety net, with gaps and inconsistencies that ultimately funnel most of the assistance to certain types of farmers.
For starters, the farm problem debate implies that assistance should be available to all farmers of food and fiber. Although planned-program and emergency payments have gone to apple, cranberry, sheep, potato, dairy and other farmers in recent years, policy has long had a strong bias for so-called principal or base commodities—wheat, corn, barley, oats, sorghum, rice, cotton and oilseeds (mainly soybeans).
An ERs report noted that principal crops accounted for just one-fifth of total farm cash receipts in 2000, "but are associated with nearly all direct government payments." As much as two-thirds of principal crop payments go to corn and wheat farmers because of their sheer volume.
That commodity predisposition favors district states in a big way. There are close to 100 million acres of cropland in the district (including all of Wisconsin and excluding Michigan's Upper Peninsula), and principal crops are grown on about 75 percent, according to USDA figures.
That translates into a bountiful harvest of government support. In district states (not including Michigan), 65 percent of farmers receive government payments, including about 75 percent of all farmers in the Dakotas, according to analysis of the 1997 Census of Agriculture by the Environmental Working Group. Nationwide, about 40 percent of farmers receive payments. In 1999, Minnesota, North Dakota and South Dakota all made the top 10 states in total government payments (see map).
In contrast, consider California farmers. With about $25 billion in annual farm production, and ranking among the top two states in 40 different commodities (mostly fruits and vegetables), it is easily the nation's largest agricultural state. The value of California's almond exports alone is more than the combined value of Montana's and North Dakota's top export, wheat. Yet fewer than 10 percent of its farmers receive assistance.
Current farm policy also funnels most government support to large farms—the result of payments being based (depending on the program) on past and current production, again, of principal crops. Higher production equals a bigger government check. In 2000, just 8 percent of farms—those with sales over $250,000—took home about half of all government payments.
Many defend the system as a common-sense way to ensure proper food supply. "Fact is the 300,000 or so farmers who receive the majority of assistance also produce the majority of food and fiber in this country and the world. Those that receive small amounts of assistance do so because they are small operations," said Tim Dufault, a farmer of wheat, pinto beans, soybeans, alfalfa and sugar beets on 1,700 acres near Crookston, Minnesota.
Various lawmakers have proposed widening the safety net to include farmers of nonprincipal crops, and redirecting proportionately more resources to smaller operations. But the farm bill template in both houses of Congress continues to favor large-scale, principal-crop farms. Although some changes are likely in the new farm bill, principal crops will remain king of the payment pile.
Any widening of the safety net must also deal politically with flip-flopped fiscal conditions. Farm bills were originally proposed when the federal government was forecasting hefty surpluses; thanks to the current economic slump, it's now staring at deficits. Failing to get a farm bill passed late last year means that it will also have to battle additional nonfarm spending proposals for a rapidly shrinking pot of federal money.
And behind door number three
Aside from the fact that the existing safety net misses a majority of farmers, the legacy of farm income support has also created a host of unintended consequences.
Land values, for example, are often bid up and largely paid for by the government payments. Despite volatile and mostly low crop prices from 1989 to 1999, land values in the Northern Great Plains (the Dakotas and eastern Montana) increased by 10 percent, which the ERs attributed to a "sudden and substantial rise in government payments" during this time. The agency also estimated that land values nationwide from 1999 to 2001 could be about 25 percent lower without government payments.
This bidding war, in turn, makes it harder for young farmers to get started because government payments are "reflected in a higher price to buy or lease the farmland," according to a report last year by the General Accounting Office. Often only established farmers are able to acquire the limited amount of farmland that becomes available in a given year, the report said. "Accordingly, many young farmers acquire farmland from family members through inheritance or as a gift."
In 1991, about 9 percent of all farmers (almost 200,000) were younger than 35. By 1999, that figure dropped to just 120,000. Once established, young farmers also tend to have smaller farms, which means they receive less government assistance when payments are based on volume.
Rising land values aren't all bad for farmers, as payments made to farmers who own and operate land are capitalized into the value of the property itself—a forced savings plan where government payments are deposited into a land-bank, if you will. But at this point the safety net intentions of farm policy also become a little less clear, because the average net worth is higher across virtually all farm types—small and large, part time and full time—compared with that of the average US household, mostly because of land holdings. The net worth of large and very large farms—which receive the bulk of government payments—is three and five times higher, respectively, than the US average, according to the USDA.
A fair amount of government payments are also leaking into nonfarmer pockets. ERs has estimated that nonoperator landlords (people who own farmland and rent to farmers) receive around 13 percent of all direct government farm payments. According to Jeffrey Hopkins, an ERs researcher who has studied farm income, "Most people I talk to assume that all, or nearly all, of the [government] payments are in practice passed through to landowners who are aware of cash rental markets in their area."
Already, about 42 percent of all farmland in the nation is in the hands of nonoperators, a trend that is growing in every district state, according to USDA figures. In the last two decades, farmland owned by nonoperators in Minnesota increased by 30 percent, or 3 million acres; in North Dakota, they gobbled up more than 4 million acres and now own better than 21 million acres, or about half of the state's farmland.
"Should we penalize those who produce the food for America
and many others—those who saw the future coming and prepared
by trying to be competitive in a world market? ... If [farm policy]
is to be a social program, we should separate that from ag policy."
—Dan DeBuff, Family Farmer
Stamps, baseball cards, farming
Lawmakers and the general public seem to be ardent supporters of the small family farm. Problem is, nobody can agree on what that means.
"What is a large farm? Most farmers will tell you a large farm is one that is 100 acres more than they farm," said Dufault, the northwestern Minnesota farmer, whose wife works off the farm full time to make ends meet.
Maybe more to the point, targeting small family farmers for public assistance brings its own policy baggage. Somewhat arbitrarily, the USDA considers any farm with less than $250,000 in sales to be small, a classification that includes more than 90 percent of farms. But fully three-quarters of all farms have sales of less than $50,000, and half have sales under $10,000—the equivalent of selling a truckful of cattle or harvesting several dozen acres of your favorite commodity.
Of the nation's 2 million farm operations, fewer than two of every five report that farming is their main occupation (though not all are considered full time) and a disproportionate share are found on large farms. USDA analysis found that 85 percent of US farms "are typically small, do not require a full-time commitment from the operator and do not provide the majority of the farm household's income." About 70 percent of the 1.3 million farms that receive no government payments have sales of $10,000 or less.
Targeting small farms for more public support, therefore, would likely mean pulling the safety net out from under large farms and full-time farmers and putting it under mostly part-time farmers. Such a policy shift doesn't sit well with DeBuff, the Montana family farmer who's been at it since 1966, growing his wheat operation to 16,000 acres today, who said ag policy needs to "redefine family farm or quit using the term."
"Should we penalize those who produce the food for America and many others—those who saw the future coming and prepared by trying to be competitive in a world market?" DeBuff asked rhetorically. "The small [farmers] will not expand. They are making a good living doing something else and have no desire to become competitive. The lawyer, the doctor or teacher who has a farm with a $10,000 gross [farm income] should not be protected by farm policy or tax policy. This is a hobby. ... If [farm policy] is to be a social program, we should separate that from ag policy."
While the notion of large-scale farming might not square with the public's own farm nostalgia, small farms with sales even under $100,000 often offer little means for survival. USDA data show that the average full-time farmer with sales of less than $100,000—the rough equivalent of harvesting about 400 acres of corn—receives virtually no net income from farming and depends on off-farm jobs for all household income. But as farm sales increase above $100,000, farm households derive an increasing portion of their income from the farm itself.
"There's no way a farmer can make a living on that small a scale," said Nancy Johnson, who has been farming with her husband for 21 years in Milbank, a town of about 3,600 in northeastern South Dakota, about 10 miles from the Minnesota border. They have a feedlot with room for 4,000 head of cattle, and they farm 1,200 acres of corn and alfalfa that they market through the feedlot. While federal farm policy "is trying to keep the farmer in business," many farmers going out of business "are not running an efficient operation," Johnson said, part of which is related to size. "I don't think you can make a living unless you're farming a thousand acres."
A long, slow shift?
Despite all the wrangling, all the debate, all the finger-pointing over who gets what, from a broader view the new farm law from Washington will likely be much of the same, with small changes on the margin.
That doesn't necessarily mean that farm policy is going back to the past. Anne Effland, the social science analyst with the ERs, suggested that the 1996 bill was a significant break with past policy—at least on paper, if not in execution—by exposing farmers to greater supply-and-demand forces, and might signal a larger policy transition that is likely to take years to fully unfurl. While many point to the 1933 law as the official shift to farm income policy in the United States, "it didn't come out of nowhere," Effland pointed out. Rather, the debate started in the 1920s and was accelerated by the Great Depression.
A similar debate about income-support policy goes back as far as the 1950s. "There's been a lot of disagreement for a long time," Effland said. Current farm proposals might return philosophically to pre-1996 farm bills, but Effland said that pieces of the 1996 bill remain—like flexible planting, which is widely applauded by farmers—that set the groundwork for future changes.
"It's hard when you're in the middle of change to know what direction you're going to go."
Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.