Government aid helps protect farmers against unpredictable elements, but is it really necessary?

“It’s just a waste of time having a discussion about it,” said Steinkamp, co-owner of Vanderburgh County-based Steinkamp Farms. “Why do you want to talk about something that’s not going to be around anytime?”

Steinkamp is sitting in the home office from which he does long-term planning out of planting season. As he speaks, a neighbor’s chickens skitter about outside among large tractor tires, trucks and buildings warehousing farm equipment.

Direct payments are big business, the largest of taxpayer-funded federal commodity subsidies that have funneled about $350 million to farmers in Vanderburgh and surrounding counties since the mid-1990s. Taxpayers have paid Steinkamp Farms nearly $1.2 million. Nationwide, farmers collected about $81 billion in two versions of the program.

The checks go out regardless of whether a farmer is planting anything. It doesn’t matter whether the harvest was good or bad. Economic need isn’t a factor, either. The payments are calculated on a complex formula based on past farm acreage and average yield — not current market prices.

While eligible farmers do have some flexibility in the commodity crops they may plant to respond to market conditions, that doesn’t address what critics see as the chief fallacy of the taxpayer-funded direct payment program:

Not only may farmers collect the money without planting any crops, it is not necessary for them to be farmers at all. What matters is what was once grown on the land, how much was grown and who presently owns the land.

“It’s really just a wealth transfer,” said David DeGennaro, legislative and policy analyst for Environmental Working Group, a Washington D.C.-based nonprofit that tracks farm subsidies. “It’s extra income for farmers that really is not tied to helping their production. It’s basically a gift from the government.”

Circumstances have made continuing direct payments beyond this year a hard sell. However, critics warn that costly new subsidies in the failed Senate and House 2012 farm bills likely will be resurrected this spring in negotiations on a new five-year farm bill.

For direct payments, it is simply a case of bad timing and bad optics.

At a time when the Congressional Budget Office projects a 2013 ”baseline” federal budget deficit of $845 billion, direct payments cost U.S. taxpayers about $5 billion a year.

Meanwhile, crop prices remain high amid record levels of net farm income. The USDA’s Economic Research Service reports that median farm operator household income exceeded median U.S. household income by 14 percent — $57,050 compared with $50,054 — in 2011. Mean farm household income was more than 25 percent higher than mean U.S. household income.

Against this backdrop, policymakers have been poised for months to finally bring down the curtain on direct payments.

The U.S. Senate proposed to eliminate the payments in the traditional five-year farm bill it passed last year to replace the 2008 farm bill, which was set to expire at the end of 2012. So did the U.S. House of Representatives’ Agriculture Committee, whose version of the roughly half-trillion-dollar farm bill never made it to the House floor for a vote. In addition, President Barack Obama’s administration has proposed eliminating direct payments.

Just last month, two House members unsuccessfully proposed to use direct payments funding for Hurricane Sandy disaster relief.

Given the failure of the two houses to agree on a final new farm bill, Congress passed a nine-month partial extension of the 2008 farm bill that reauthorizes $5 billion in direct payments. The extension expires Sept. 30.

The likelihood that a new five-year farm bill will end direct payments is acknowledged by Steinkamp, one of Indiana’s two representatives to the American Soybean Association; Randy Kron, a Vanderburgh County farmer who serves as vice president of the Indiana Farm Bureau; and 8th district U.S. Rep. Larry Bucshon, who has an agricultural advisory committee composed of farmers.

Farm politics equation

You have to look to the past to understand how farmers view assistance from the federal government, said Randy Kron.

A farmer of corn and soybeans since 1983, Kron remembers a time when farmers needed taxpayer-funded direct payments like fish need water.

“If you look at the late ’80s, times were pretty lean in agriculture. There was pennies left, and that was about it,” Kron said in the kitchen of his farmhouse about a half-mile northwest of the Hornville Tavern.

In some years, Kron recalled, a farmer’s profit was less than his government subsidies.

“You weren’t even breaking even on the other part of it. The subsidies were the only thing keeping you alive and eating,” he said.

Things began to change in 1996, when newly ascendant congressional Republicans crafted the “Freedom to Farm” bill on the premise that farmers needed to be unshackled from farm subsidies and accompanying government restrictions on what crops they could grow. The renewed farm bill covering 1996 through 2002 included an initial form of direct payments that congressional and media advocates characterized as a temporary “market transition” tool to ease the shock for farmers while traditional farm subsidies phased out.

But a funny thing happened on the way to the free market.

Crop prices that skyrocketed in 1995 because of a major European drought fell back again, and farmers responded by asking the government for help. Congress more than doubled direct payments. By 2002, the payments had become a mainstay of U.S. farm policy.

Until now.

Today’s robust farm economy has radically altered the farm politics equation.

Kron now minimizes the importance of the $715,000-plus his farm operation has received in commodity subsidies since 1995. He says the roughly $24,000 he has received each of the past five years doesn’t make much difference when it costs “way more than” $500,000 to run his operation annually.

“In the scheme of things, it’s not that many dollars,” he said.

DeGennaro chuckled when asked how direct payments made the leap from “market transition” tool to established policy.

“I think (farmers) have very good advocates in Congress,” he said. “The farm lobby has been very successful in getting these things passed and then holding onto them — to the point where it seems almost like an entitlement, where they feel like this is their money and they deserve it — and it’s very hard for us to break into that mentality.”

A trade-off

Kron farms 2,000 acres in Vanderburgh and Gibson counties. He wouldn’t discuss his farm operation’s profitability, except to say it is “variable every year.” The operation expanded by one a year ago when Kron brought in his 22-year-old son, Ben.

In his capacity with the Farm Bureau, Kron travels the state, meeting farmers and keeping his finger on the pulse of Indiana’s agricultural sector.

The new reality, he declared, is that farmers are willing to give up their direct payments as long as the government maintains its commitment to federally subsidized crop insurance. It is an assertion echoed by Steinkamp and Bucshon.

“Farmers know the budget needs to be balanced, and they’re willing to make that sacrifice to do their share of helping the budget out,” Kron said.

Kron called federally subsidized crop insurance a “safety net for when we have a (drought) year like we went through in 2012.” He recited a litany of expenses. Putting out a corn crop costs about $500,000 per 1,000 acres. Exploding fuel costs and fertilizer prices only push the costs of farming higher.

Farmers still need help from the government, he said.

“When you’re putting that much money on the line, and Mother Nature doesn’t rain through May, June and July, and we’re used to getting $180, $190 (per) bushel corn, and we’re selling $30 bushel corn, it does real damage to the bottom line,” he said of the 2012 drought. “If there was ever a year to prove we need crop insurance, 2012 proved it.”

Venturing a guess that his farm operation has paid more in crop insurance premiums in the past decade than it received back, Kron said area farmers aren’t asking for an expansion of federally subsidized crop insurance.

“They want a continuation of the existing program,” he said. “They kind of want a shared pain from everybody. They don’t want to be the only one on the chopping block (by giving up direct payments).”

But the cost of federally subsidized crop insurance has not maintained over the past decade as crop values have increased — it has grown to the point that it is the largest way taxpayers subsidize farming today.

Its costs far surpass the $5 billion annually spent on direct payments.

The Government Accountability Office, an investigative arm of Congress, last year reported that the government spent about $7.3 billion subsidizing farmer insurance premiums in 2011 — up from $951 million in 2000. DeGennaro said the true figure is more than $9 billion when the costs of paying insurance companies to administer the policies — reimbursing private insurers for selling and servicing the coverage — is added in.

Former USDA Chief Economist Keith Collins told the House Agriculture Committee in May that more than 265 million acres — more than 80 percent of farmed acreage in America — were insured by government-subsidized liability coverage worth more than $114 billion in 2011. That’s up from 45 million acres and $6 billion in coverage in 1981.

Illustrating farmers’ growing reliance on federally subsidized crop insurance, the Congressional Budget Office estimates the program’s premium subsidy will cost taxpayers about $90 billion over the next decade.

Federally subsidized crop insurance is not a direct check the government gives to farmers, but it’s a subsidy nonetheless, DeGennaro said.

“In fact, the farmers pay reduced premiums, often about 60 percent,” DeGennaro said.

But supporters insist federally subsidized crop insurance is not a subsidy. They note that premiums go into a risk pool to pay for future losses.

Steinkamp’s farming operation, which he owns with his cousin, Tim, produces corn, soybeans and wheat on 3,000 acres in Perry and Union townships. He said it grosses more than $1 million annually and supports both of their families, including five children ages 14 to 20.

Federally subsidized crop insurance at least requires farmers to put some of the money on the table, Steinkamp said.

“The farmer can manage his risk if he knows what he’s guaranteed with his insurance,” he said. “And at the same time, it’s good from a budget aspect from the federal government’s side. They know how many dollars they’re putting into the subsidies so they can do appropriate budgeting.”

‘Shallow loss’

The problem with the proposed trade-off of direct payments for continued federally subsidized crop insurance, critics say, is that it is no trade-off at all.

Additional taxpayer-funded goodies in the failed 2012 House and Senate farm bills likely will re-emerge when Congress negotiates a new five-year farm bill this spring, said Emily Goff, an analyst at the Heritage Foundation.

The Washington, D.C.-based free market think tank calls farm subsidies “”the nation’s largest corporate welfare program.”

“The (failed 2012 farm) bills get rid of the direct payments program on the commodities side, but then on the insurance side, they add another program to further mitigate risk,” Goff said. “They’re essentially trying to subsidize out the risk of farming for farmers.”

Goff pointed to the Senate farm bill’s Agriculture Risk Coverage program, commonly referred to as “shallow loss” because it was designed to protect farmers from smaller — shallower — dips in income than existing federally subsidized crop insurance. The program would restrict payments to farmers with adjusted gross incomes of less than $750,000 over a three-year rolling average and cap annual payments at $50,000 per person or $100,000 for a married couple.

But Goff said the program’s trigger for receiving shallow loss payments — when revenues for a farmer of eligible crops fall below 90 percent of the preceding five years’ average level — would be too easy to pull.

“Right now especially, the five-year average of past farm revenue is already artificially high because crop prices and income have been so high. So if it drops even a little bit and returns to normal historical levels, these payments are going to kick in,” she said.

“Anyone can see intuitively that they wouldn’t be necessary because revenues would be falling back down to a normal average level from their currently high level. This program essentially further insures farmers from loss.”

There is evidence that shallow loss could get expensive.

The Congressional Budget Office in May projected that spending on shallow loss would cost $28.5 billion from 2013 to 2022 with payments averaging $3.2 billion annually.

Goff said the $3.2 billion estimate assumes average commodity prices remain at or near current record-high levels.

“But if prices subside to their average levels during the 1996—2011 period, taxpayers would be on the hook for $5 billion to $7.5 billion annually,” she wrote in a July 10 report. “Shallow loss could essentially negate any savings gained from eliminating the current commodity programs.”

The House Agriculture Committee’s version of the 2012 farm bill contains similar crop insurance provisions, which Goff said likely would be reconciled with the Senate version in the new five-year farm bill to be crafted this spring.

“At the high-level talking point, on the one side you’re able to wave a flashing object and say, ‘We’re getting rid of direct payments,’ and the other hand is adding a new program. It’s prudent to look at this thing on net,” she said.

This is dependency

Glancing at the empty corn and soybean fields just outside his window, Randy Kron gives voice to the insecurity every farmer feels.

“We live by weather,” he said. “There are just a lot of things that are out of control of the average farmer, and a lot of them are political, that happen in D.C. — and that’s trade issues and things.”

Kron lets his voice trail off before picking up steam again. He is animated now.

“The (federally subsidized) crop insurance is to take some of the volatility of the weather out. It keeps some farmers in business,” he said. “How important is it to all of us to have farmers or vital agriculture here producing food versus growing it somewhere else and importing it? There is a value to that, too.

“Do you want the food growing here in this country by farmers who are your neighbors and ones you know, or do you want it imported from some foreign country?”

Such is the degree to which Steinkamp feels dependent on federal subsidies that he declares his livelihood “is affected by the stroke of a pen in Washington, D.C.”

Steinkamp contemplates the farm bill, a mammoth half-trillion-dollar package of legislation that functions in essence as the federal government’s agriculture policy. He said several times — correctly — that roughly 80 percent of the cost goes to nutrition programs, food stamps going to tens of millions of people. The legislation also authorizes or funds such things as ethanol production, broadband deployment, soil conservation and education programs for young farmers.

“Without a farm bill, I can’t plan the next five years of my life because I don’t know what the government’s going to do that’s going to change my bottom line,” Steinkamp said.

“So once they have the farm bill, then I know how they’re going to treat me for this time period so then I can plan capital improvements on my farm, capital equipment purchases, whether we want to try to expand our operation or contract our operation or start a new operation.”

Although House Agriculture Committee Chairman Rep. Frank Lucas has declared that direct payments in the farm bill extension will be made, Steinkamp isn’t counting on anything.

“It’s all based on whether they have the money,” he said, noting that Congress must first debate tax increases and budget cuts to cut a deal to avert $1.2 trillion in automatic cuts that could kick in on March 1.

Steinkamp perceives a growing disconnect between farmers and the legislators who make national farm policy.

“People that are making the laws don’t understand how agriculture works, because most of them have never been on a farm,” he said. “You talk to the legislators now, and their grandpa might have farmed, or their great grandpa might have farmed or had some relationship with agriculture ...”

Kron comes back again and again to federally subsidized crop insurance, likening it to an investment in America’s future.

“I’ve had several younger ones tell me, if it wasn’t for crop insurance this year, they wouldn’t be in business — and the last thing we want to do is put some of the younger farmers out of business that are the future of agriculture,” he said.

Looking forward

If farmers are ever to uncleave themselves from dependence on federal tax dollars, says the Heritage Foundation, they must learn to think anew.

Acknowledging that long-established federal farm subsidies will not be eliminated quickly or without a fight, the free market think tank has unveiled a multi-point agenda founded on the premise that farmers can manage risk without relying heavily on taxpayers.

Incremental reforms include limiting farm subsidies to farmers whose adjusted gross incomes do not exceed $250,000 — the current number is $750,000 — and limiting total subsidies to $250,000 per farm. Heritage also advocates limiting the number of subsidies a farmer may receive and barring farmers who don’t purchase private crop insurance from receiving federal disaster payments.

Heritage points out that some of the risks associated with farming, such as those accompanying hail and other weather-related crop damage, are insured by private companies without subsidized premiums. More insurance alternatives would materialize with the elimination of government subsidies, the group says, because the subsidies standardize available insurance products.

Farmers “should be employing private insurance to help guard against the risks of their business without taxpayers footing any portion of the bill,” stated a Jan. 14 Heritage report.

Federally subsidized crop insurance is bad policy, Heritage says, because the exemption it gives farmers from paying the full costs of their actions encourages them to take more risks or not manage risk responsibly.

But the practical reality is that a purely free market farm policy agenda would encounter fierce resistance in Congress and from farm industry lobbyists.

Bucshon agreed it is time for taxpayer-funded direct payments to cease — but he also calls for “a very solid (federally subsidized) crop insurance program that supports our agricultural community in times of droughts and things like that.”

“It’s very clear for the stability of agriculture in the United States that the federal government needs to be involved in a solid crop insurance program that supports America’s farmers,” said the 8th district congressman, who represents Vanderburgh, Warrick, Gibson and Posey counties.

Bucshon said he isn’t familiar with the House or Senate shallow loss proposals and can offer no opinions on them until he is.

Contemplating failure

Perhaps anticipating the opposition, farm subsidy critics have cannily sought to align themselves with America’s small farmer.

Their argument: Because many subsidies are based in part on farm size, larger agricultural operations with higher earnings get more benefits than the smaller, more financially vulnerable family farms that subsidies are intended to protect.

Citing USDA data, critics argue that direct payments have disproportionately benefited the largest and most profitable farm operations.

According to USDA data cited by EWG, 41 percent of farms in Indiana did not collect subsidy payments from 1995 through 2011. Ten percent of farms collected 74 percent of all subsidies.

Heritage analyst Diane Katz cited an obvious negative effect on small farms.

“When you hand people money irrespective of what they’re doing and irrespective of what current prices are, it messes up all the signals that the market sends in terms of supply and demand,” Katz said.

“Direct payments allow, particularly larger farms, to access greater levels of credit (to expand or upgrade their operations). That raises the price of farmland and other agricultural inputs, other elements of agriculture, supplies and hardware and all that kind of stuff — and that also has the effect of increasing prices and crowding out smaller farms.”

Could farmers survive if farm subsidies were not maintained at their current level?

“If (farmers) are running operations that are so inefficient or so dependent on government largesse, is that in taxpayers’ interests?” Katz said. “Because not only are the crops they’re growing costing taxpayers in subsidies, but the subsidy programs in general are raising the cost of commodities, and so taxpayers are paying twice.”

USDA Economic Research Service data indicate the number of farms in America has shrunk from 6.8 million in 1935 to 2.2 million in 2010. At the same time, the amount of land in farms declined by less than 13 percent. That means fewer, but larger, farms. USDA data indicate the number of 1,000-plus acre farms increased 14 percent between 1982 and 2002.

“We’re still rich with farms,” Katz said. “This is not to say that (failure) wouldn’t be personally tragic to (farmers) perhaps, but in terms of public policy you’ve got to look at what the benefits are and the costs are — and if one of the costs is that some farms may go out of business without government subsidies, you also have to look at the benefit of that, which is that taxpayers are not paying higher subsidies and higher food costs.”

But farmer Joe Steinkamp cannot see a day without subsidies — not even if taxpayer funding for federally subsidized crop insurance were withdrawn.

“It may be too cost-prohibitive for me to buy crop insurance without the federal subsidy,” Steinkamp said. “So if it’s too cost-prohibitive, then I just may not buy it at all.

“I might go without crop insurance and self-insure — but if I have a disaster, if there’s a drought like (last) year and all the farmers are going broke, what’s the federal government going to do?”

Steinkamp offered an answer to his own question — an answer based on long experience.

“They’ll probably step in and have some kind of disaster program based on some (historical formula) and prop them up and send the farmers back out for another year,” he said. “We’re all about food security and safety.”