December 6, 2011

Sweetening the Deal for CAFOs: Hidden Subsidies for IFAP in the 2012 Farm Bill

Patrick Baron

Patrick Baron

CLF-Lerner Fellow

Center for a Livable Future

How are concentrated animal feeding operations (CAFOs) profiting from Farm Bill subsidy programs targeted at U.S. crop farmers? How are these “hidden subsidies” for industrial farm animal production (IFAP) hurting more sustainable food animal producers? The answers to these questions lie—and are at stake—in the convoluted world of the 2012 Farm Bill legislation.

To say that the Farm Bill is both large and complex is understating the obvious. This legislation impacts every aspect of our food system. One role that the Farm Bill has is to dole out billions to subsidize various producers and industries of the U.S. food economy. A large portion of these programs subsidize crop production. The largest recipients of the most federal dollars through these programs are corn and soybean producers. Nominally, these programs are in place to protect U.S. farmers of these crops from market instability. In reality, these programs also further entrench the U.S. food system in a model that promotes overproduction of these crops with the ultimate effect of keeping prices for these products cheap.

From Controlling Supply to Decreasing Costs

Until the 1980s, Farm Bill subsidy programs were focused on controlling supply— the government purchased surplus produce in times of excess and paid farmers to allow crop fields to lay fallow in government set-aside programs. These interventions largely served to keep prices high, which allowed farmers to make a profit (Ray, De La Torre, Ugarte, Miller, 2003). Since the ‘80s, and especially since the 1996 Farm Bill, agricultural policy shifted away from supply control to decreasing costs and risks for mass production of commodity crops. After the passage of the 1996 Farm Bill, feed grain production increased as prices dropped for the next ten years. Corn production increased 28% and soybeans increased 42%. During that same period, corn prices fell 32% and soybeans prices fell about 21% (ERC, 2005). Farm Bill subsidy payments to commodity crop producers also shifted during this time as a reaction to these falling prices, now with a focus on keeping farmers afloat financially while farm profits fell precipitously. Spending on programs like loan deficiency payments for farmers whose production costs exceeded their sale prices allowed farmers to continue to overproduce even as market prices fell (Ray, De La Torre, Ugarte, Miller, 2003).Essentially, crop subsidies as they have existed for the last fifteen years mainly serve to prop up an insolvent business model.

How CAFOs benefit

Who wins in this push to maintain low prices for feed crops? There’s an argument that crop subsidies have actually contributed to global price instability, and have made crop farming in the U.S. inherently unprofitable—a subject for another time. The real beneficiaries of low market prices are the largest consumers of U.S. corn and soybeans: CAFOs. Corn and soybeans are the primary constituents of the feed given to animals on CAFOs, and feed expenses are these operations’ largest input cost. The subsidy programs for feed crops are, in fact, federal spending that represents a huge windfall for IFAP.  One study estimated total savings to CAFOs through these indirect subsidies at $3.86 billion/year from 1997 to 2005 (Starmer, Wise, 2007).

Ethanol, Climate Change, Rising Demand and Feed Grain Prices

Food and grain prices worldwide have been rising since the dramatic spike in 2008, due to several different factors. The World Bank has a good summary here. Note that current prices are only 3% below the June, 2008 peak. Ethanol and crop fuel production has contributed to rising global grain prices. A payout for some farmers, this change has created financial challenges for the CAFO industry, whose fate is linked inextricably to feed prices. Extreme weather and changes to local ecosystems that are the result of global climate change have caused additional stresses on crop production worldwide, and contributed to rising grain prices. Along with increasing worldwide demand for grain and, in particular, for meat, these issues have caused global grain prices to rise dramatically in the last few years. The move to increase spending on Farm Bill programs that perpetuate the agricultural system of overproduction and low market prices can be seen as an attempt to buffer CAFOs from rising grain prices.

A Closer Look

To gain a clearer picture of how particular changes in the 2011 Farm Bill budget may affect the U.S. food system, the CLF has created the Farm Bill Budget Visualizer, a web-based app. Using the Visualizer, we can see the spending that has indirect impacts on the bottom line for CAFOs and IFAP industries.

 

 

This screenshot shows the breakdown of all programs affecting IFAP through feed grains. The relative sizes of the boxes represent the portion of total spending disbursed to that program. Colors represent how directly the program affects IFAP (light green indicates a direct relationship, darker shades represent a secondary or partial connection, grey indicates no connection). Note that this graphic is presented with the large SNAP food-assistance program omitted in order to see the rest of the programs in more detail. This is not to minimize the importance of the SNAP program.  SNAP funds that help recipients purchase meat are another indirect way that the Farm Bill incentivizes IFAP—again, an interesting topic for another time.

Beyond showing the scope of the readily apparent crop subsidies (such as the nearly $5 billion in direct payments to crop farmers, the vast bulk of which goes to corn and soybean farmers), the Visualizer can help in picturing the broad and often less-than-obvious ways in which different Farm Bill programs underwrite production costs.  Crop insurance represents the largest block of spending relating to feed grains and IFAP. These payments include spending to reduce insurance premium costs for farmers and to provide reimbursement to private insurance companies in the event of crop loss. Overall, this program is designed to reduce the financial risks of high-yield crop production for farmers and the companies that insure against their losses. This is an important program for attempting to insulate the U.S. system of corn and soybean production from the threat of climate change and the increasing frequency of adverse weather conditions driving the increase of feed crop prices. Using the visualizer, we see spending on crop insurance increased 46.0% over the previous year in the 2011 Bill to almost $10 billion.

The Agricultural Disaster Relief Fund (ADRF), and the Supplemental Revenue Assistance Program (SURE) both contribute to crop overproduction by buffering farmers against financial losses from crop failure. Spending on ADRF and SURE saw a year-over-year increase of 42.9% and 32.1% in the 2011 budget, respectively.

As mentioned before, these cost-control subsidies did not initially drive down commodity crop prices. Instead they were the federal response to keep crop farmers afloat once the de-regulatory policies put in place in the 1996 Farm Bill (and for at least a decade prior to then) pivoted away from supply-side control and allowed the bottom to drop out on the market for feed crops, destroying the profit margin for crop farmers. Inasmuch as these subsidies now maintain this broken system, they hinder the ability of any alternative production methods, less reliant on cheap animal feed, to fulfill the need for a more sustainable, durable, and fiscally sound system of food animal production.

Hurting the Market for Alternatives

CAFOs require cheap grain prices to keep costs low. The subsidy programs promoting overproduction of feed crops have quietly underwritten the expansion of CAFOs in the U.S. over the last several decades. In addition, these programs put more sustainable producers that don’t use subsidized feed crops to the same extent as CAFOs (i.e. farms using pasture-based, pasture-finished or non-grain forage systems) at a competitive disadvantage. Rising grain costs due to ethanol production, global warming, increasing global demand, and other factors could make alternative models more fiscally attractive. However, the current system of de-regulatory policies and the resulting compensatory system of feed crop subsidies, (along with other Farm Bill incentives that lower IFAP costs) makes CAFOs appear to be more economical than they actually are. This slows the ability of more sustainable alternatives to gain market share. An accurate and thorough accounting of the true costs of IFAP is needed as policymakers decide how to proceed on this important and complicated issue.

References:

Ray, D., D. De La Torre Ugarte, and K. Tiller. 2003. Rethinking US agricultural policy: Changing course to secure farmer livelihoods worldwide. Agricultural Policy Analysis Center, University of Tennessee.
Economic Research Service (ERS). 2005. Historic and recent costs and returns. USDA.
Starmer, E., and T.A. Wise. 2007a. Living high on the hog: Factory farms, federal policy, and the structural transformation of swine production. Working paper no. 07-04. Global Development and Environment Institute, Tufts University.

4 Comments

  1. Interesting article! Do you know how much of the production costs are tied up in animal feed? It probably depends on the animal type.

  2. My rebuttal to this blog is about 4 pages long. I may post it at zspace (click my name). Basically my criticism is that it’s based upon widespread views that are false and misleading because they misunderstand the farm bill. The sources at the end are great ones, but are misunderstood.

    Farm prices have gone down and down, but not because of subsidies. I prove this 4 ways in “Michael Pollan Rebuttal.” It’s because of the lack of price responsiveness on both supply and demand sides. Consumers don’t eat 4, 5, 6 meals because farm commodity prices are low, nor do farmers cease planting their whole farms. Agribusiness buyers (& CAFOs) know that the key policy to use this in their favor was to lower and eliminate price floors and supply management. The real solution is the Food from Family Farms Act of the National Family Farm Coalition, which is similar to the price floor proposal in Daryll Ray’s document. No subsidies were ever needed, except to compensate farmers for bad farm bills. Even with subsidies, farmers got less and less. Recent farm prices are much higher than the lowest prices ever in history, (1998-2005) but are still very low compared to the record highs, or even the top half of all prices in history (adjusted for inflation). Mere subsidy reforms are pro-agribusiness, as they maintain low prices for CAFOs.

  3. Pingback: How the Next Farm Bill Will Hurt Sustainable Agriculture – and Help Industrial Farms

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