How Subsidies are really calculated, sort of

by: Brad Wilson

Wed Jan 06, 2010 at 20:25:17 PM PST

So, here's an example of the farm program for four Iowa farms.    It's based upon two of our farms (which have different historical numbers, and other typical examples).  I've rounded off the numbers and given identical (example) farm sizes.

COUNTERCYCLICAL                                    Farm A        Farm B        Farm C        Farm D
Farm tillable acres                                       300            300             300            300
Corn Base (historical acreage)                      265            163            150            120
Percent of Corn Base                                     85%           85%          85%          85%
Corn Yield (historical as adjusted by FSA)        130          140          130          140
*Countercyclical Payment rate example        $0.36          $0.36        $0.36        $0.36
Subsidy: Base x 85% x Yield x rate            $10,331         $6,843     $5,848        $5,038

These farms may get corn yeilds of 180 bushels or more today.  These government program historical yields (as reduced by FSA) may be too high for Iowa averages.  The actual subsidy gap of 36 cents is one example.  

ERS estimates that in 2005 farmers lost 85 cents per harvested bushel, not counting subsidies.

Losses in 2005 not counting subsidies            Farm A        Farm B        Farm C        Farm D
losses per bu. (ERS US av.)                              ($0.85)        ($0.85)        ($0.85)        ($0.85)
Total losses                                                       ($40,545)      ($24,939)  ($22,950)   ($18,360)

You see here  how losing money on more corn leads to bigger losses.  If you add a zero to bump it up to 3,000 acres, the losses and need for subsidies to compensate for them increases, though there are economies of size.  This has been confusing to outsiders.  Over all, ERS found that corn lost money vs. full costs every year 1981 through 2005 except 1996.  Giving partial compensations for these losses (which are caused by a low/no price floors and supply management, not by subsidies) has been a huge scandal, as the real beneficiaries, the buyers of below cost grain for a quarter century, those benefitting by the billions per corporation, have been rarely mentioned (ie. by EWG, mainstream media, mainline churches, progressive blogs or the food movement). (Has this been explained at this blog, if I search the archives?)

Hopefully these simplifications, flawed though they are, can help answer the quote below from a food leader who misunderstood the farm program.

          "Do you have any risk at all in growing corn in Iowa?"  (ie. given your huge subsidies on top)

Lisa Brenneis, director of the film, "Eat at Bill's: Life in the Monterey Market," to Iowa farmers, while attending a local foods conference in Cedar Rapids Iowa in about 2008.

See more examples of how to calculate subsidies for Iowa here:  http://www.extension.iastate.e...  Note that ISU's example for direct payments does not use any market price (as none is needed), the one for countercyclical payment uses a corn price of $2.12, above the loan rate.  For LDP a market price of $1.72 is used since that would be low enough to be below the loan rate.  

But note that my family had 7¢ corn in about 1932, and in constant dollars, that would be about $1.00/bu. today.   The $0.29 "season average price" for corn we had in 1931 and 1932 would be about $3.50 to $4.00 in today's dollars, by my calculations.

For specific data on losses, even with subsidies for corn and several other crops (each crop averaged below zero even with subsidies overall for the years studied) see the link below.  Scroll down to "Effects of Government Programs on Costs and Returns" and download the spreadsheets.  http://www.ers.usda.gov/Data/C...  

The alternative to part of the DCP (Direct and Countercyclical Program) subsidies is the ACRE program (Average Crop Revenlue Election).  Only 8.5% of US farm are in ACRE (representing 15.6 percent of acres) signed up for ACRE (www.fsa.usda.gov/Internet/FSA_File/dcp_enrol_rpt_state_10022009.xls).  Note that by having two different programs with two different sets of odds for getting the most benefits, USDA pays out less to the portion that makes the bad choice, spreading USDA's risk.  Depending upon future market conditions, either ACRE or DCP will prove to be a worse choice than the other.

Here are some good early articles on the ACRE program by Daryll E. Ray at APAC and Steve Suppan at IATP.  They explain the choice in general terms.

ACR: Strong safety net when prices are high but snaps when prices fall, Daryll E. Ray, APAC, http://agpolicy.org/weekcol/37...

"Revenue Based Countercyclicals: A Poor Substitute," IATP, http://www.agobservatory.org/l...

"Revenue-based countercyclical payments:  U.S policy disaster relief?" Steve Suppan,  IATP, http://www.iatp.org/iatp/publi...