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"Analysis from Washington"- By Dan Morgan- Direct Payments

Direct Payments

By Dan Morgan- Dan is a special correspondent of The Washington Post and a Transatlantic Fellow at the German Marshall Fund of the United States. “Analysis from Washington” is posted exclusively at FarmPolicy.com.

Remember “Show me the money!” the line from “Jerry Maguire,” the 1996 film starring Tom Cruise as a sports agent undergoing a midlife crisis?

These days it’s a refrain heard by House Agriculture Committee Chairman Collin Peterson (D-Minn.) as he readies his proposal for a new multi-year farm bill.

Peterson needs to put enough money in the bill to satisfy a host of interests: fruit and vegetable growers, environmentalists, and advocates for nutrition programs, rural development and biofuels research. If these groups can’t live with the bill his committee writes they could try to rewrite it on the House floor. That would be a “recipe for chaos,” the chairman told reporters last week.

But where can he find the dollars to stave off an embarrassing challenge to his leadership? The congressional budget committees give him a fixed pot to work with, based on what they estimate is needed to continue existing programs. That leaves Peterson playing a zero sum game: Under new budget rules imposed by the Democrats, if he wants to add money one place he has to take it from somewhere else.

That’s why the chairman, along with some other influential groups, are eying a potential pot of gold: the more than $5 billion a year in automatic, annual allowances that goes to farmers on land growing staple crops.

These “direct payments” were the centerpiece of the 1996 farm bill, nicknamed Freedom to Farm. In return for giving up government payments when prices dipped below a target, farmers could plant what they wanted—or plant nothing at all – and still claim an annual allowance tied to what their land had produced in the past.

The “transition” payments declined over the first five years, and many assumed they would fade away. But in 2002, Congress increased them even as it restored the target price system.

Direct payments, according to USDA studies, have contributed to rising land prices. On rented farmland, landlords raise rents to “capture” the direct payments. Last year, some owners of “rice base” in Texas and along the Gulf Coast collected up to $100 an acre without planting a seed. Sen. Tom Harkin (D_Iowa) fumed publicly this month that such handouts cannot be justified to taxpayers.

Farm groups respond, justifiably, that the Texas rice situation is an anomaly. But Peterson has a much bigger concern. How will it look to taxpayers in a couple of years if Midwest corn farmers, flush from years of high, ethanol-driven corn prices, continue to collect the same old Freedom to Farm allowance of more than $20 an acre?

Peterson has a reputation as one of Congress’s staunchest defenders of traditional farm programs. But he’s also a conservative “Blue Dog” Democrat, a hawk on budget and deficit issues.

“Where do farmers get the idea that they are entitled to money from the government?” Peterson asked last week when I buttonholed him just off the House floor. Peterson, a farm state congressman, wants a strong safety net to catch farmers when weather or prices turn against them. But Peterson, the Blue Dog, is not for a gravy train.

By cutting back direct payments and tightening restrictions on who gets them, Peterson could free money for other priorities, such as a permanent program to cover weather losses. He could be more generous to fruit and vegetable growers in Texas, California and Florida. And he could fund biofuels research, a top priority of the Democratic leadership. That, in turn, could help get Speaker Nancy Pelosi (D-Calif.) behind the House Agriculture Committee’s bill if and when reform groups challenge it on the floor.

The National Farmers Union has already targeted direct payments. It favors replacing them with a permanent disaster program and a new kind of government safety net tied to prices and production costs.

“Direct payments are a legacy of Freedom to Farm that didn’t work,” said Tom Buis, NFU president. “They don’t give enough in times of need, and they are hard to defend when prices are high.”

Buis says that the NFU plan would save $2-3 billion a year and still provide a better safety net than exists now.

Other reform proposals would also eliminate direct payments over time.

Last week, Rep. Ron Kind (D-Wisc.) and Sen. Richard Lugar (R-Ind.) offered a plan that would do away with all subsidies, saving $20 billion in five years. Direct payments would decline, and end after five years. The direct payments would be deposited in individual Risk Management Accounts (RMAs), and the money could be used to purchase crop insurance, cover losses in bad years, or invest in conservation measures. Commodity price supports, including those for milk, would also end.

The assertion that subsidies are saving the family farm is a “bogus claim,” said Lugar. A Kind proposal to redirect billions of dollars from big commercial farms to conservation programs garnered 200 votes in 2001, but Peterson was cool to it.

“It doesn’t sound like something a whole lot of members of the agriculture committee would have an interest in,” he told reporters during a weekly teleconference.

Even so, pressures are strong on Peterson to write a more balanced bill. Reformers say 185 House members are cosponsoring various bills that would radically change the subsidy program and redirect the funds to other causes, spreading the benefits of the farm bill more widely.

Citigroup, the multinational banking giant, has also entered the fray with a far-reaching plan for a voluntary buy out of farmers’ direct payments. It figures the plan would save $18.9 billion in the next 10 years if half of those eligible signed up.

The plan assumes Congress won’t have the political will to simply end direct payments. But by offering a lump sum up front – or smaller guaranteed payments over 5 to 25 years – the program would fade out of existence. Citigroup would finance the buyout by selling bonds in the private market.

Citigroup officials hope to win support from key legislators such as Minority Leader John Boehner (R-Ohio), a long-time skeptic about farm subsidies.

Peterson said the idea was interesting, but added, “There’s no way something like that would be done by private enterprise.”

“To consider a revolutionary idea like that at this stage of the game is tough,” he added.

During a teleconference with reporters, Peterson stressed that he was trying to work with everyone. But he said, “In the end, it’s going to be members of the agriculture committee that write this bill.”

Meanwhile, proposals for reforming the subsidy program keep piling up in Congress, raising concerns on the House Agriculture Committee about a floor battle.

“Not even everyone on the agriculture committee understands the farm programs and how they fit together,” the chairman told me last week. “Can you imagine what would happen if you turn it over to the floor?”

By Dan Morgan