A new working paper from the American Enterprise Institute (AEI) suggests crop insurance provisions in the House version of the 2012 Farm Bill could end up costing taxpayers over $20 billion, far more than the Direct Payments program in the current bill.

The report is authored by agricultural economists Vince Smith from Montana State University, Bruce Babcock from Iowa State University and Barry Goodwin from North Carolina State University, as part of a project titled “American Boondoggle: Fixing the 2012 Farm Bill.”

According to the report, many agricultural organizations and others in Washington, DC have come to realize the $5 billion-per-year Direct Payments program is not politically viable. The House Agricultural Committee’s version of the farm bill essentially replaces Direct Payments with a Price Loss Coverage (PLC) program, which would be managed by the USDA Farm Service Agency. Also under the provisions of the House proposed bill, farmers could participate in a new, subsidized insurance-based program called the Supplementary Coverage Option (SCO). The SCO program would be managed by the USDA Risk Management Agency and covers shallow losses when yields and revenues fall below 90 percent of their recent averages on a county basis.

The authors reached the following conclusions about the potential costs of these insurance provisions in the House Agricultural Committee’s proposed bill:

  • If crop prices remain close to current high levels, expenditures on PLC subsidies would be relatively modest, about $1.1 billion annually. But if crop prices decline to recent 15-year average levels, subsidy costs could exceed $18 billion per year, almost four times the current cost of subsidies paid under the Direct Payments program.
  • The heavily subsidized SCO is estimated to cost taxpayers about $2.6 billion a year for the five crops considered in this analysis (corn, soybeans, wheat, rice and peanuts) if prices remain at current levels, and about $1.5 billion if prices moderate towards their recent historical average levels.
  • If crop prices moderate towards their recent fifteen-year historical average levels, the House PLC and SCO programs combined will cost taxpayers over $20 billion a year, more than all current spending on farm-oriented programs including publicly funded R&D and education programs, subsidized crop insurance, direct payments, disaster aid, and loan rate programs.
  • Rice and peanut producers, who lobbied intensively for the House PLC program, would receive substantial benefits. Under the CBO baseline forecasts of expected prices, peanut and rice producers would receive average annual subsidies of about $68 on every acre they plant. If crop prices moderated towards their fifteen-year historical average levels, per acre PLC payments would increase to $224 for peanuts and $327 for rice.
  • The PLC and SCO programs would be new and potentially very lucrative entitlement programs that, with subsidies tied to farm acreage, would provide the greatest benefits to the largest farmers.
  • The authors also warn that these programs could have adverse implications for U.S. trade relations, possibly resulting in World Trade Organization disputes, reduced exports of agricultural products or other retaliatory measures.

“In economic times that genuinely require the federal government to be fiscally responsible,” the authors conclude, “it is difficult to see why Congress would support the introduction of the PLC and SCO proposed by the House Agricultural Committee or, for that matter, the Average Revenue Coverage shallow loss program proposed in the Senate 2012 Farm Bill which, to a greater or lesser degree, shares all of the same drawbacks.”

Read the full report from the American Enterprise Institute.