Photograph by Judy Lutz Spencer

As the GOP-controlled Congress takes a new look at agricultural policy, Illinois farmers consider their options

Sure as autumn winds whip across the prairie, it's the season for farm policy revisions in Washington. But this year, the winds of change could wither many programs Illinois farmers rely on to see them through a harvest.

Though Congress has just begun a five-year rewrite of the Farm Bill, already there is support for scaling back decades-old government programs aimed at stabilizing farm income and the nation's food supply. The mood for reform is on the rise as farmers — whose numbers continue to dwindle — have seen their political clout decline. And it comes at the crest of an ideological rebellion against agricultural subsidies, which, critics believe, stifle market forces and cost taxpayers needless billions.

Frustration with current farm policy ranges from the scope of environmental regulations to the size of the federal bureaucracy. But the harshest criticism is reserved for the roughly $10 billion in annual direct subsidies. Many of these programs were launched in the midst of the Great Depression. At their heart is a simple bargain: The government supports farmers who grow certain crops — such as corn and wheat — by sending a check whenever market prices for those crops are too low. But in return, it requires farmers to grow less — chiefly by taking acres out of cultivation — in order to keep prices up and the government's costs down.

But conservative critics believe there are numerous problems with that system. For starters, they argue, it restrains production just at a time when America's farmers should be growing more and selling more overseas. Instead, farmers have missed opportunities that foreign competitors have seized. For every American acre idled, they estimate, an acre has been brought into production abroad. Further, the system rewards farmers for growing the wrong crops. Each year, they plant the same subsidized crop — what has been called "farming the program" — rather than growing what the market calls for. By

October 19951 Illinois Issues/17

this logic, eliminating subsidies would make farming more market-driven and, therefore, more competitive on the global stage.

There is more than a kernel of truth to the argument, but such a shift would have a significant impact on Illinois. In 1993 (the last year for which figures are available), the state's farmers reaped a collective $8 billion in gross farm income. And government-subsidized crops generated much of that income. The state is one of the nation's biggest producers of corn, which is heavily subsidized by Washington, and the top producer of soybeans, which benefit from federal commodity loans. As the fifth biggest recipient of Washington's largesse, Illinois farmers in recent years have gotten government payments amounting to about 6 percent of gross incomes, or as much as a third of net incomes.

Those who fear the loss of such payments might take comfort in the words of Harold Guither, professor of agricultural policy at the University of Illinois at Urbana-Champaign. He observes that policy usually develops in a mode more "evolutionary than revolutionary" — no matter how high the reformist decibels in Washington. And he should know. He has watched a few farm bills unfold in his time. But even so, there is a general consensus among Illinois' congressional delegates that a shake-up is coming.

U.S. Rep. Tom Ewing of Pontiac, the state's top Republican on the House Agriculture Committee, already foresees cuts, as do many of his central Illinois constituents. Returning from the recent August recess in his district, he noted: "In this part of Illinois, where we have some of the richest agricultural land in the country, there is an acceptance that federal government programs are going to go down, that there will be less payment from the government to farmers." Farmers, he says, have come to expect that change. "They see it as a continuing trend of past policy, not as having the rug dragged out from them." Democratic Rep. Richard Durbin of Springfield concurs. One of the state's more experienced legislators on farm policy, he observed that "we will have fewer dollars on price supports, and we will be challenged on the basics of how those dollars are handed out."

How many fewer dollars? Proposals have ranged from Senate Agriculture Committee Chairman Richard Lugar's — $15 billion in cuts in five years — to President Bill Clinton's "do no harm" proposal, which would slice about $3 billion from the budget during the same period. The final determinate, however, will not be the ideological twists behind farm policy, but the budget debate currently heating up on Capitol Hill.

Farmers have come to expect fewer dollars from the government

That is why much attention has focused recently on the House, where Newt Gingrich's troops have stuck to the terms of the spring budget resolution. That plan called for $13.4 billion worth of subsidy cuts over seven years — before the details of farm policy were even considered. The figure was generated by Republican efforts to balance the budget by the year 2002. To stick to that goal, legislators are faced with a choice of hollowing out existing programs, or coming up with something entirely new. Republican House Agriculture Committee Chairman Pat Roberts took the latter option with his Freedom to Farm proposal. Described as a "starting point" by its backers, the bill was voted down by the committee in late September. Negotiations were continuing on a compromise.

The Wichita Eagle had called Roberts' bill "workable," and the Chicago Tribune had described it as "a thoughtful first step in the right direction." But such plaudits didn't obscure the plan's radical innovations. Most significantly, it would abolish current subsidies — which are calculated each year based on prices and output — and replace them with a single lump sum. The payments would be fixed and would decline steadily over a period of seven years. Thus, in 2002, total federal subsidy and export outlays would be $5 billion, in contrast to the $10 billion spent now.

The beauty of the proposal — from a federal budget-maker's perspective — is that it would allow the government to calculate in advance exactly how much it will spend, year by year. But another attraction is that it would do away with the existing acreage-idling programs. So farmers would be able to grow as much as they want. It also would allow farmers to plant a choice of crops — without jeopardizing their payments — providing the kind of flexibility farmers have long sought. (In a survey last year, two-thirds of farmers listed flexibility as a top priority.)

Even so, in Illinois, the bill got a mixed reception. The Illinois Corn Growers Association described it as "the best of the proposals so far on the table." But Ewing, who did not co-sponsor the bill, was a little less sanguine. Although he applauds the idea of greater planting flexibility, he maintains the Roberts plan goes too far in eliminating federal controls over total production. Similar concerns, he noted, have been aired by many farmers in his district. "I'd say there are about 10 percent who think it's the best thing since sliced bread, and 10 percent who adamantly oppose it. The rest range from lukewarm to ambivalent." The Illinois Farm Bureau also expressed reservations. Although the Bureau has been a promoter of market-oriented reforms, it has likewise argued the Roberts bill goes too far in certain directions. For example, it would reduce government payments to something that looks very much like a welfare check. By separating payments from what the farmer actually grows, a subsidy begins to look like an undeserved handout — and that could ultimately spell political death for the future of government payments. Another concern, shared with Ewing, is that the bill goes too far in dismantling government controls over production. Farm policy is not only intended to stabilize farmers' incomes, notes David Downs, a central Illinois farmer and active Bureau member, it also must guarantee a stable supply of food. The Freedom to Farm Act would eliminate the government's ability to do that. "If there was a massive surplus, the government needs the tools to reduce it. If there was

18/October 1995/Illinois Issues

a shortage, we need the tools to increase production."

Beyond these concerns, there are other more fundamental criticisms about the current system and the likely reforms. For example, Rep. Durbin has long believed that too large a proportion of subsidies goes to corporate farms rather than to family farms. He argues if subsidies are going to be cut, it's even more important that the right people get the government's help. "I'm worried about the impact on the family farm," he says, "but I do not lose any sleep over the large investors who hold farmland among their portfolios of stocks and bonds."

Failing to support the incomes of America's family farmers, he adds, will have an adverse effect on the local economy. "They are the backbone of the rural economy. And any step that reduces their income will also reduce the value of their land." That, in turn, will reduce the assessed level for tax purposes and limit the dollars flowing to local school districts and governments. So the net result will be "a dramatic change in the profile of rural America."

Whether that will come to pass, of course, depends on many factors. It is indeed possible, as supporters of radical reform contend, that lost income from subsidies will be replaced by increased production when idle acres are brought back online. But that would depend on prices and export demand.

The upshot, of course, is that it is too soon to make useful projections. A lot more has to happen in Congress. Indeed, hammering out the future of subsidies is only the first stage of the debate. After that, legislators will have to tackle other key components of the Farm Bill, such as export subsidies, programs aimed at land conservation and various food and nutrition programs, including food stamps. The haggling will likely keep lawmakers busy well into the end of the year.

In the meantime, with harvest in full swing, Illinois farmers will have to stop worrying about events in Washington, and get on with a few strategic cuts of their own.

Edward Field, who lives in Chicago, is a reporter in the Midwest bureau of The Economist. He has written about U.S. agricultural policy for the London-based magazine.

New risks, new opportunities Though the final revisions in national agriculture policy are not yet set, one change is a certainty: Farm income will be more dependent on the open market. That means farmers will face more risk in what is already a risky business. For example, there will be a smaller safety net on prices and less chance for a government bailout in the case of crop failure. So what will farmers do? They will have to turn to the private sector for help. That means buying insurance to cover a crop while it's in the field, and making more use of futures and options contracts, which can protect them from price fluctuations. And that will mean an opportunity for the Chicago Board of Trade, which, as the nation's pre-eminent agricultural exchange, also has a lot at stake in the Farm Bill rewrite. Pat Arbor, the head of the exchange, says: "As subsidies are reduced and the safety net is lowered, there's more risk. And where there is more risk, there's more demand for the hedging instruments at the CBOT." For several years now, the CBOT has been working with the Department of Agriculture to teach farmers how to better use the markets to handle "price" risk — that is, the chance that prices will slump at the time the farmer wantsto sell his crops. Under the government's Options Pilot Program, farmers have been encouraged to buy "put" options on the exchange that afford the farmer the right to sell his crops at a chosen guaranteed price. In effect, the options serve much the same purpose as the government's support prices, which allow the farmer to sell his crops at a price pre-fixed by Washington. The CBOT program has been expanded twice since it began in 1993, and exchange officials hope that it will survive in the 1995 Farm Bill. But even if it doesn't, they are confident that cuts in existing government price support programs will encourage more farmers to use the exchange. (Only about 10 percent of all farmers use futures and options now.) Meanwhile, a more far-reaching opportunity may lie just around the comer. One hope shared by farmers and policy-makers alike is that the private sector eventually will be able to do more to handle "production" risk. That risk is the peril that a crop may be stricken by something like a hailstorm or a drought. The present system of crop insurance can't really handle such risk, without heavy federal underwriting, so the search is on for a new private sector alternative. With that in mind, the CBOT this year launched the first-ever contracts to enable users to hedge against fluctuations in production. The contracts are known as "yield insurance" futures and options. Fanners themselves probably won't buy the contracts because they are too large in scope. But crop insurers and elevators are likely to, and then offer individually tailored contracts and policies. These businesses then could offer risk management to farmers in more user-friendly packages. The CBOT, which experienced some modest success with the prototype this year, plans to launch more such contracts. Ultimately, the concept of the yield future may be rolled into a new government pilot program that would make use of both price options and yield options. The idea is one-stop shopping for farmers who want to guarantee a minimum income for the crop year. That was part of the goal that government had when it first created a national farm policy. The plan is supported by the Illinois Corn Growers Association and the Illinois Farm Bureau. Legislation is currently being drafted to create the income insurance pilot program. Its future now lies in the hands of lobbyists. But, of course, the one risk that nobody can insure against is the uncertainty of Washington politics. Edward Field

October 1995/Illinois Issues/19