A record U.S. harvest has pushed crop prices so low that taxpayers may pay billions of dollars more to subsidize farmers than anticipated just months ago, thanks in part to changes Congress approved this year.
Lawmakers passed a five-year farm law in February and hailed its projected savings in subsidies of $14 billion over a decade. The forecast was based on farmers getting paid more for their crops. Instead, prices have fallen and may trigger subsidies the law aimed to reduce.
“This was a bill based on false premises of fake savings,” said Josh Sewell, a policy analyst with Taxpayers for Common Sense in Washington. “The prices Congress used to calculate the bill’s cost were divorced from reality.”
The bill, one of the few bipartisan measures Congress passed this year, could end up costing taxpayers billions of dollars more than expected after legislators bet commodity prices would stay high and states would end programs that qualified them for higher food stamp spending.
In reauthorizing farm policies, Democrats and Republicans crafted a compromise to overhaul programs that protect farmers from market swings or bad weather. The law replaced direct payments with programs tied to price and revenue, and raised the threshold at which farmers would get a subsidy when commodity prices fall.
Further savings were projected from spending less on food stamps, based on an assumption states would exit an aid program as eligibility rules were tightened. Most states, however, defied predictions of budget analysts and increased their contributions to “heat-and-eat” aid programs, erasing much of $8.6 billion in projected savings.
“It’s very premature to speculate about the farm bill savings when major programs haven’t even gone into effect yet,” Rachel McCleery, spokeswoman for Senate Agriculture Chairwoman Debbie Stabenow, a Michigan Democrat, said in an e-mail. Farmers will have until March to select from new subsidy options.
A drop in crop prices, combined with subsidies added in the new bill, may more than double payments in 2015 from what lawmakers anticipated, according to one estimate. Making matters worse, the government has proposed lowering a requirement to blend corn-based ethanol into gasoline, which may reduce demand for the grain.
Payments to growers of corn, peanuts and other crops may reach $6.5 billion for this year’s harvest, or about $4 billion more than lawmakers anticipated in the farm bill, said Vincent Smith, director of the Agricultural Marketing Policy Center at Montana State University.
U.S. farmers are growing more corn than ever. The USDA this month estimated a record yield of 174.2 bushels an acre. Such bumper crops may lower Deere & Co. tractor sales along with Monsanto Co. seed revenues, agricultural economists said.
“If we keep producing the way we have, we will see some very low prices, and we will be in for a scary time,” said Harwood Schaffer, an economist at the Agricultural Policy Analysis Center at the University of Tennessee.
Congress this year increased the prices that would prompt government subsidies, making such payouts both potentially larger and quicker to kick in.
Previously, corn farmers were paid when the price fell below $2.63 a bushel. Now, support may start when prices slump under $3.70. On the day the bill passed, corn traded at $4.3575.
Futures traded in Chicago closed Oct. 16 at $3.5225 a bushel, below the new trigger and above the previous benchmark. The price is down 10 percent this year, and touched a five-year low $3.1825 on Oct. 1. The USDA predicts an average price in the year ending Aug. 31 of $3.40, the lowest since 2006.
Wheat, the fourth-biggest crop, is below the threshold for subsidies. Rice and peanuts crop prices also may spur payments, as harvests outstrip demand, Smith said.
Some producers could be at risk, said Chip Bowling, who grows 1,600 acres of corn, soybeans, wheat and sorghum near Newburg, Maryland, about 30 miles south of Washington. He said low prices may be short-lived as buyers, including ethanol plants, step in to generate more demand.
Bowling, who sells grain to nearby Perdue Farms Inc. for chicken feed, this year started supplying a biofuels plant that opened near Richmond, Virginia.
“Farmers are going to receive more in government subsidies than we anticipated,” said Bowling, president of the National Corn Growers Association advocacy group. “We didn’t need corn at $8, but we don’t need at $3 where it is now either. It needs to be $5 or $6 a bushel for a farmer to make a living on it.”
Crop sales overseas should pick up as prices fall and renewed demand for feed should boost the farm economy, Agriculture Secretary Tom Vilsack said in an interview last month. “I’m not pessimistic about the situation,” he said.
Agricultural trade in 2015 will be $144.5 billion, second- highest on record, the USDA said in August. Record pork exports in April drove hog futures to a quarter-century high.