By Reuters September 20, 2011
President Barack Obama on Monday proposed to end a “direct payment” subsidy that gives $5 billion a year to farmers regardless of need, as part of his larger effort to reduce the federal budget deficit.
Direct payments, created in 1996 as a temporary measure, will be the largest farm subsidy this year and terminating them would be a dramatic re-shaping of the U.S. farm program.
Traditional price support programs, which are triggered by low grain prices, are idle this year because of record high crop prices.
Opponents of the direct payments say they help bankroll large operators who out-bid small and medium-size growers for land and equipment. Defenders say the payments are one leg of a federal tripod that stabilizes the farm sector
The White House said the subsidy is “unnecessary” as more than half of recipients have incomes above $100,000 a year. In a blog, White House rural advisor Doug McKalip said elimination of the subsidy was common-sense reform.
Elimination of direct payments would save $30 billion over a decade and crop insurance reforms would save $8.3 billion, said the White House. It also suggested cuts of $2 billion in stewardship programs and renewal of a disaster program that expires on Oct 1 for net savings of $33 billion.
Republican farm-state lawmakers said Obama should have looked at land stewardship and public nutrition programs rather than proposing hefty cuts to farm and crop insurance subsidies.
“For example, cutting $8 billion from crop insurance puts the entire program at risk,” said House Agriculture Committee chairman Frank Lucas of Oklahoma and Kansas Sen Pat Roberts, Republican leader on the Senate Agriculture Committee.
Discussion of farm reform usually is put off until a new farm law is being written. But the congressional drive for large savings could force earlier-than-usual debate.
Direct payments were tabbed months ago as a target for reduction or elimination. Some farm groups hope to shift money from the payments into programs that compensate farm losses.
“We think the program is politically vulnerable,” said analyst Mark McMinimy of MF Global. “But just how the program may be altered and how quickly changes will go into effect are still very much open questions.”
The National Corn Growers said it was concerned the cuts would undermine farmers’ ability to buy crop insurance to offset high and volatile market prices.
“While direct payments may be impacted, we are going to find a way to have a safety net in place,” said Agriculture Secretary Tom Vilsack to the National Restaurant Association.
The government pays roughly 60 percent of the premium for crop insurance. The White House would reduce the subsidy by two basis points on policies with a federal subsidy above 50 percent, for savings estimated at $2 billion.
More than 90 percent of policyholders opt for higher levels of coverage.
The White House also would lower the rate of return to insurers to 12 percent, from the current 14 percent, to save $2 billion. It would cap administrative expenses at $900 million a year, adjusted for inflation, to save $3.7 billion, and set the premium for catastrophic coverage more accurately, saving $600 million.
Senate Budget Committee chairman Kent Conrad said Obama asked “for larger agriculture cuts than are necessary or appropriate” and could impair drafting of the 2012 farm law.
Without the direct payment, the budget for farm supports would be half or less than current spending.
copyright Reuters 2011
(Reporting by Charles Abbott; Editing by Bob Burgdorfer)