By Daren Bakst at The Heritage Foundation
Last year, Congress created two major programs for farmers that, not surprisingly, will shatter Congressional Budget Office’s (CBO) cost projections. Taxpayers’ liability for these programs is open-ended because a widely-supported limit on costs to protect taxpayers didn’t make it in the final farm bill. Congress should put an end to this liability immediately.
The 2014 farm bill eliminated the infamous direct payments program that gave farmers subsidies regardless of need. However, it also created two new programs that are likely to be even more expensive.
Farmers can participate in either the Agricultural Risk Coverage or Price Loss Coverage programs on a crop-by-crop basis. The Agricultural Risk Coverage program covers shallow losses (i.e. minor losses) incurred by farmers. The Price Loss Coverage program provides payments to farmers when commodity prices fall below a fixed reference price set in law. This program set the reference prices so high that, for some commodities (such as corn), payments were likely to be triggered from the outset.
Critics of these programs warned that assuming prices would stay at or near record highs was a mistake because prices would likely decline. As a result, the programs would incur far greater costs than projected.
Even before the farm bill passed, corn and wheat prices had already dropped significantly. CBO was using outdated price projections, and Congress failed to wait a couple of weeks until the U.S. Department of Agriculture could provide more updated price projections.
That was some costly impatience. Between using assumptions that did not reflect declining prices and setting reference prices in the Price Loss Coverage program far too high, Congress almost ensured that the new programs would cost far more than projected.
Sure enough, the new programs are shattering cost projections and will likely be more expensive than the projected costs (about $4.5 billion annually) of the old direct payments program. Right before the 2014 farm bill’s passage, CBO projected the new programs would cost taxpayers $3.6 billion annually over their first five years. Its just released (January 2015) report, however, projects, annual costs of $5.3 billion. That’s a 47 percent increase, less than a year after passage of the farm bill.
Even these numbers are very conservative. Some well-respected experts are estimating that these new programs will cost as much as $8 billion in the first year alone. That would be more than double the $3.8 billion originally projected by CBO for the first year.
Agriculture Secretary Vilsack recently explained, “Well, with crop and commodity prices coming down rather precipitously in the last 12 months, it’s anticipated we’re actually going to have to spend a lot more on ARC [Agricultural Risk Coverage] and PLC [Price Loss Coverage].”
He’s right. But it should be noted that when Secretary Vilsack says “we’re” going to have to spend a lot more, he really means “taxpayers.”
The House in a bipartisan manner recognized the potential risk that could exist for taxpayers due to these programs. An amendment to the original House farm bill that would have capped the costs of these programs overwhelmingly passed. While the original House farm bill was never passed, the bill that did get through the House maintained the cost cap provision.
Inexcusably, the provision was removed when the House and Senate worked out the final farm bill. Taxpayers are going to pay the price for this action. Congress should immediately pass a cap similar to the one originally included by the House. It would have capped the costs at 110 percent of the CBO projections. A new cap should be based on CBO’s projections right before passage of the farm bill.
As much as legislators are touting that they got rid of direct payments, they should be embarrassed that these two new programs will likely cost even more than what direct payments were projected to cost. At a minimum, Congress should develop a cap for these programs that limits total costs for the five-year bill to what direct payments were projected to cost, about $22.5 billion.Make no mistake, these new programs should be repealed. They are costly, unnecessary, and provide subsidies that effectively eliminate most risk, even normal business risk. In the interim though, Congress can provide some immediate protection for taxpayers by creating a common-sense cap.
– Daren Bakst is a research fellow specializing in agricultural policy.
Originally appeared in The American Thinker
