At least some U.S. farm subsidies are decoupled from production decisions.
Dan Morgan, Gilbert M. Gaul and Sarah Cohen report in this morning's Washington Post: Farm Program Pays $1.3 Billion to People Who Don't Farm:
Even though Donald R. Matthews put his sprawling new residence in the heart of rice country, he is no farmer. He is a 67-year-old asphalt contractor who wanted to build a dream house for his wife of 40 years.
Yet under a federal agriculture program approved by Congress, his 18-acre suburban lot receives about $1,300 in annual "direct payments," because years ago the land was used to grow rice.
Matthews is not alone. Nationwide, the federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all, according to an analysis of government records by The Washington Post....
The Department of Agriculture's Economic Research Service magazine, Amber Waves, has an article on decoupling in the February 2003 issue (Farm Payments: Decoupled Payments Increase Households' Well-Being, Not Production , Mary E. Burfisher and Jeffrey Hopkins):
Nearly all industrial countries provide subsidies to their farmers, often for the purpose of maintaining income from farming or reducing income variability. Traditionally, subsidies in the U.S. and elsewhere have linked payments to current prices and production so as to compensate producers more when market prices for key commodities are low. Such subsidies distort, or alter, the signals sent by market prices alone because, depending on the eligibility rules of specific programs, producers can garner more payments or reduce their revenue risk simply by producing more of the supported commodity.
In the 1996 Federal Agriculture Improvement and Reform (FAIR) Act, the U.S. revamped its farm support and introduced a farm payment that breaks the links between the amounts paid to farmers, their level of production, and market prices. The new support mechanism, called a Production Flexibility Contract (PFC), was a lump-sum cash payment to farm operators based on their historical participation in commodity support programs (see Implementation of the PFC Program). PFCs have been called decoupled payments because of their implementation rules. They were fixed payments announced in advance for the duration of the FAIR Act (1996-2002). No decision by the farmer nor change in market prices could have altered the size of the lump-sum payment. PFCs transferred nearly $36 billion to eligible producers over the 1996-2002 period, with an average annual payment per recipient household of about $9,000.
When the FAIR Act was adopted, PFCs were expected to be the primary subsidy program for U.S. producers. However, the decline in market prices during the FAIR Act led to the increased use of marketing loan benefits that compensate producers for low prices. Moreover, low world commodity prices resulted in additional, ad hoc emergency government support to agriculture. These payments reduced the role of PFC benefits relative to total commodity program spending; PFCs ultimately accounted for only about one-third of total payments to farmers over the life of the FAIR Act.
Decoupled payments are being continued in the 2002 Farm Security and Rural Investment (FSRI) Act. Now called "direct payments," they are expected to amount to about $5 billion annually and will expand beyond the traditional program crops (feed grains, wheat, rice, and cotton) to include historical production of oilseeds and peanuts. Other payments to farmers in the FSRI Act will be from environmental programs and programs that are triggered by low market prices, including countercyclical payments and the marketing loan program.
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