Outside the Box: How the biggest farms are getting more per acre in trade-war subsidies

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American farmers are benefiting from over $24 billion in new subsidies as compensation for lost sales caused by the on-going U.S.-China trade war.

The American Enterprise Institute estimates those payments are three to four times bigger than actual losses. Ironically, most of the monies are going to the biggest and richest farms who already receive the lion’s share of federal crop insurance program subsidies and don’t need financial help.

To better explain the system: Imagine buying fire insurance for your home, with premiums heavily subsidized by the government, then, having your house accidentally set on fire by the government as a result of a feud with a foreign government. Despite your subsidized insurance, you complain vociferously to your congressional delegation, demanding an end to the feud before it causes further damage. While the feuding continues, you discover that the government will now compensate you for the damage at twice the value of the actual loss. In addition, you are still able to collect your regular insurance indemnity. Not bad you think. You are no longer angry.

Substitute “farmers” for “homeowners” and you have the Trump administration’s plan to pacify 200,000 crop and hog farmers affected by the U.S. trade war with China.

The Trump administration’s $15.9 billion subsidy response to compensate farmers for trade war losses is included in the 2019 Market Facilitation Program (MFP). The MFP is not subject to Congressional approval because of a relatively obscure legislative provision that gives Sonny Purdue, the agriculture secretary, considerable discretion in spending taxpayer monies.

Two important components of the MFP should cause concern. First, farmers are able to double-dip across multiple federal programs to cover the same losses. Most U.S. farmers already purchase heavily subsidized federal crop insurance to insure against revenue losses resulting from lower commodity prices. This is especially true for U.S. soybean and corn producers who, in addition to crop insurance payments, will receive about 70% of the total $14.9 billion MFP payments for 2019 losses.

Second, there are effectively no caps on subsidies to individual farms. The 2018 Farm Bill allowed each family “member” to be eligible for up to $125,000 in federal subsidy payments. It also changed the rules from a maximum of two people to an unlimited number of “family members.” This change enables large farms legally to obtain hundreds of thousands and even millions of dollars in MFP payments.

Where does the MFP money go? To find out, we use information from the USDA Agricultural Resource Management Survey (ARMS) which tracks planting and production per farm, for each crop eligible to receive MFP payments, as well as crop insurance, and other subsidies. ARMS is the only nationally representative farm-level survey that includes financial, production, and demographic information to evaluate the distribution of payments from the MFP.

As shown in the tables below, the money mostly goes to a tiny number of very large farms. The top 20% of farms, as measured by crop sales, received 73% of all MFP payments in 2018 and 69% in 2019. They also received 76% of all crop insurance subsidies. Clearly, MFP and crop insurance subsidies are heavily concentrated on the largest farms.

As the second table shows, the largest 10% of farms on average will get about $170,000 this year from the MFP and crop insurance programs. These farm businesses are well positioned to manage financial risks, with annual sales in excess of $1.7 million and an average net worth of about $6.25 million. In 2019, they received about $85 per acre in MFP and crop insurance subsidies.

In contrast, in 2019, midsize farms, with average sales of about $45,000, will get $9,802 in subsidies. Despite their financial vulnerability, they only received about $56 per acre in MFP and crop insurance subsidies.

Democratic members of the Senate Agricultural Committee recently released a highly critical report of the 2019 Market Facilitation Program (MFP). The Senate report provides evidence that the MFP has (1) overcompensated farmers for trade losses, (2) mostly paid wealthy farms, many of which are foreign-owned, and (3) distributed the MFP payments among farms and commodities with little or no relationship to financial stress indicators. These findings are not surprising, given the long history of ad hoc U.S. disaster programs fueled by political convenience.

The Trump administration’s stated objective for the trade war subsidy (MFP) payments is to provide “assistance to farmers and ranchers with commodities directly impacted by the unjustified foreign retaliatory tariffs, resulting in the loss of traditional export markets,” notionally to stabilize farms facing serious financial risks. The actual distribution of the MFP payments flows to the largest and wealthiest farms that face the least risk of bankruptcy, and those payments go well beyond the actual damage to U.S. farms. Throwing money to the largest farms may be good politics for some, but this misuse of taxpayer funds should worry us all.

Eric Belasco is a visiting scholar at the American Enterprise Institute and an associate professor of economics at Montana State University. Vincent H. Smith is the director of agricultural studies at the AEI and a professor of economics at Montana State University.