This is a must read article: Crop Prices Erode Farm Subsidy Program

(I was going to post this last earlier this week, but I got tied up on some local board of education matters. This article is a keeper on the history and current status farm subsidies and agricultural bills in Congress.)

From The Wall Street Journal:

Business is humming in this typical Midwestern farm town, with its bronze statue of Lincoln overlooking the courthouse square.

Land prices are way up and so are bank deposits, as high corn and soybean prices mean local farmers are making the most money in their lives. At Sloan Implement, which sells John Deere tractors, "This could be our best year ever," says chief executive Tom Sloan.

An exception to the boom is the local office of the U.S. Agriculture Department, the dispensary of federal payments to farmers from an array of arcane programs with names like "loan deficiency" and "milk income loss." On a recent afternoon, the parking lot in front of the squat brick building behind a Chinese restaurant was nearly empty.

The reason: Payments from America's primary farm-subsidy program, dating from the 1930s, have stopped here. Grain prices are far too high to trigger payouts under the program's "price support" formula. The market, in other words, has done what decades of political wrangling couldn't: slash farm subsidies.

Though the subsidy payments always ebbed and flowed with crop prices, many economists are convinced that what is happening now is different. A fundamental upward shift in crop prices is creating the real possibility that Midwestern farmers won't ever again qualify for the primary form of farm subsidy.

There remain other types of subsidies, which continue to pay out because they aren't linked to market prices. But high prices are undermining political support for those programs, especially as Congress and the White House get serious about restraining federal spending, amid trillion-dollar deficits and a political brouhaha over the federal debt ceiling.

Government checks to farmers have shrunk to about $11 billion annually—half what they were six years ago—and they could shrink by roughly half again if Washington goes through with calls to eliminate a second major type of farm aid that costs the government about $5 billion annually.

"Subsidies are just eroding away," said J. Mark Welch, an economist at Texas A&M University.

Critics have long attacked farm subsidies as wasteful and obsolete. Some $760 billion in federal spending ago, they were created to tackle rural poverty during the Depression era, when a quarter of Americans lived on farms. Today, less than 1% of the population is in farming. The typical farmer works many more acres than in years past, thanks partly to ever-more-powerful tractors and harvesting combines, the newest of which steer themselves.

The bulk of the federal subsidy money flows to farmers who are wealthier than the typical U.S. taxpayer. The Environmental Working Group, a Washington activist organization that wants subsidy dollars shifted to conservation programs, maintains a database that shows 10% of farms getting 74% of the federal money. Small farmers receive smaller payments simply because they work fewer acres.

The programs long were protected by one of the few bipartisan coalitions left in Washington—politicians of both parties from major farming states.

The recently elevated focus in Washington on federal spending has changed the calculus. The Senate has already voted to end ethanol tax credits. Farmer groups, resigned to deep cuts, are pitching alternative subsidy programs that they say would cost taxpayers less.

"The old days are through," says Agriculture Secretary Tom Vilsack, a former Democratic governor of Iowa. "There are no sacred cows. Everything is on the table."

That is a matter of concern to some. While the current crop prices mean subsidy checks aren't much missed by farmers, some agricultural economists worry about what will happen next time the historically volatile farm economy contracts. "The safety net for U.S. farmers in the past has been a story and half" below them, says economist Steve Elmore at DuPont Co., a producer of seeds and chemicals. "It is still there, but it's now eight stories away."

For decades, while crop prices languished but operating costs rose, many growers counted on these subsidies to survive. For most of their careers, farmers in Shelby County, 200 miles south of Chicago, depended on government payments for roughly half of their income. In some years, a line of farmers seeking federal loans stretched into the USDA office's parking lot.

The global grain markets shifted in 2006 when Washington began to require that the oil industry mix billions of gallons of corn-derived ethanol with gasoline annually. Around the same time, rising numbers of middle-class consumers in emerging economies such as China began seeking more grain-fed meat and milk, boosting demand for soybeans, pork and, most recently, corn from the U.S.

The way the main Depression-era subsidy program works is that Congress sets a "target price" for certain crops, and when market prices are below it, the government sends growers a check for the difference.

Today's target prices reflect the largely depressed crop markets that prevailed from the late 1970s until 2005—corn averaging roughly $2 a bushel year after year, and soybeans around $6.

But corn now sells for about $7 a bushel in Shelby County, far above the subsidy program's target price of $2.63. Soybeans fetch about $13 a bushel here, versus a $6 target price. So no price-support checks are going out.

While the current prices could easily retreat, if only because they spur farmers around the globe to produce more, many economists doubt that prices will fall all the way back down to levels that trigger federal checks, at least over the next decade. The Congressional Budget Office, as it prepares 10-year forecasts of government spending, sees very little in the way of price-support payments to Midwestern farmers.

"We don't envision farmers here ever seeing a price-support check again," said Darrel Good, a University of Illinois economist. "It's the end of an era."

The USDA still ships billions of dollars annually to farmers for various other programs, such as payments for keeping highly erodible land in grass rather than row crops. It subsidizes crop insurance. Still, federal payments to farmers are expected to fall to about $10.6 billion this year, compared with $24.4 billion in 2005.

In Shelby County, whose roughly 3,400 farmers typically used to share about $25 million a year from the government, the figure is down to about $8 million now.

A five-year federal law governing farm subsidies is up for renewal during 2012. Few see much chance that legislators would raise the price-support program's target prices high enough to start triggering payments under that subsidy program again.

The other major subsidy program, unrelated to market prices, is a remnant of a failed 1996 experiment by a Republican-led Congress to wean farmers off federal aid. Farmers were supposed to receive fixed, but declining, checks for seven years and then be left to the whims of the market. But in the seventh year, instead of letting the payments expire, Congress turned them into a program of set payments, based on the amount and type of crops that particular farms had historically produced. Legislators in both parties are gunning for the fixed-subsidy program, which costs the government about $5 billion annually.

Here in Shelby County, population 21,803, the dim outlook for future subsidies is rattling nerves. Few expect the current high crop prices to last, and farmers' costs for fuel, seed, equipment and agricultural chemicals have soared.

In Windsor, Ill., a $300,000 corn bin is under construction at a grain elevator managed by Matt Bennett, 36, who on a recent day was watching corn and soybean prices blink on his computer screen while trucks pulled alongside his office to dump their loads.

"I understand why the public is skeptical about subsidies to farmers," said Mr. Bennett, who also farms himself, with his father. "Times are good."

But, he added, "this will change. It always does."

Many here say they want the federal budget reined in, but worry that both farming and doing business with farmers will get more volatile. That includes extending them credit. "You feel more comfortable lending money to a farmer for 20 years when there is a price-based support system," said John Widdersheim, vice president of the 116-year-old Shelby County State Bank. "In some years in the past, price supports have had a huge impact for us."

Tim Lenz, a lanky 43-year-old farmer in Strasburg, Ill., said he was willing to forgo the $38,000 in fixed-price subsidies that annually flows to the 2,600 acres of farmland he works.

"It's pure profit to me, but I can't defend it when we're doing so well," Mr. Lenz said, sitting in the upstairs office of a cavernous white sheet-metal "machine shed" he built last year. The $200,000 building houses tractors, two grain combines and other equipment.

"It was a 20-year-long struggle to break even, and now we are making a decent return," said Mr. Lenz, whose annual gross revenue has climbed to about $1.4 million, roughly double what it was five years ago, thanks to rising prices and better crop yields.

A registered Republican, Mr. Lenz said he thinks subsidy spending should shrink even if it would mean that some farmers don't survive the next farm-economy downturn, thus speeding up the consolidation of family farming operations. "I hope I survive," he said. But like Mr. Bennett, Mr. Lenz said the government shouldn't completely end its programs, because of farming's notorious sudden swings in prices and weather.

"We don't think we should be paid when we don't need the money, but we do need a safety net," he said. "Farming is still a risky business."

Meanwhile, workers in the USDA's county offices, seeing the handwriting on the wall, are campaigning for new things to do, now that there aren't any price-support payments to dispense. One idea is to give them responsibility for federally subsidized crop insurance, currently handled by private companies. Because crop values are higher, the amount the federal government spends annually on crop insurance is forecast to climb above $7 billion by 2013, up 60% from last year.

"Sure, we worry about our jobs," said Roger West, who leads the USDA's branch in Shelbyville, one of 2,246 county offices around the country. "We've kept a lot of farmers going over the years. But it's not clear if the farm lobby has the political power to keep the programs anymore."