Farmers who favor continuation of federal commodity payments should come away from Tuesday's election feeling good, says Otto Doering, a Purdue University agricultural economist.
While Republicans regained control of the U.S. House of Representatives and Democrats held onto the majority in the Senate, the new agricultural committees in each chamber aren't likely to touch farm subsidy programs, says Doering, a farm policy specialist. There's even a good chance both committees will abandon attempts by current House Agriculture Committee Chairman Collin Peterson (D-MN) to eliminate direct payments, he says.
"Congressman Peterson's desire is to back off direct payments and, instead, strengthen counter-cyclical payments to make agricultural subsidies more reasonable and fair to the public," Doering says. "I think that's dead meat at this point as farm groups rally again to preserve the direct payment, particularly in this time of high commodity prices."
Counter-cyclical payments date back to 1933 and are traditional price support subsidies provided to qualifying crop farmers when the prices for their crops are lower than a specified level. The payments were replaced in 1996 by direct payments, which qualifying farmers receive regardless of whether crop prices are high or low. Congress reintroduced counter-cyclical payments in 2000 and have left the two subsidies in place ever since.
Direct payments are expected to be considered when Congress takes up a new farm bill next year – if farm legislation is debated at all, Doering says.
Federal spending on farm income subsidies is about $20 billion/year. Farmers are receiving the payments this year despite enjoying high prices for corn, soybeans and wheat. Even with high land rental rates, fertilizer and equipment prices, farmers can make a living with current crop prices, Doering says.
"The Republican House leadership indicates it will keep the direct payments fully intact even when prices are high," he says. "However, recognize that one of the leaders of the tea party movement is Dick Armey of Texas, a former whip for the Republican House under Newt Gingrich. There is nothing on earth that Armey hates more than agricultural subsidies. So we may see change."
Where will cuts/additions be made?
Two related federal subsidies also could be on the docket for the 112th Congress, Doering says. Ethanol plants receive assistance to produce the biofuel, while its retail price is buoyed by a 45¢/gal. subsidy. Congressional action on both subsidies is complicated by the Renewable Fuels Standard (RFS), a federal law that mandates the increased production of biofuels.
"The ethanol subsidy ends in January, and Congress is going to have to decide what to do with it," Doering says.
"The RFS requires gasoline blenders to blend a certain amount of ethanol with their gasoline. It's 10% now, but the push is to take it to 12% or even 15%. The law requires that enough ethanol be purchased by the gasoline blenders to meet the standard's requirement. So they, in effect, have to force up the price of ethanol enough so that ethanol plants are actually able to produce ethanol at a profit so they can operate."
Doering predicts political and ideological differences between the divided House and Senate will stall movement on climate-change issues, trade policy and economic stimulus legislation.
An energy conservation bill by Indiana Sen. Richard Lugar, intended to reduce the country's dependence on foreign oil and encourage more efficient electricity use, might not get a congressional hearing, Doering says.
He also fears that Washington could enact risky import tariffs as a means of tackling the U.S. trade imbalance and fail to make the necessary investments in technology and the labor force to regain a competitive global edge.
"I think we've gotten tremendous splits of values on a lot of these issues to the point where there is a refusal to walk sort of a common-sense road down the middle," Doering says. "Whatever we see in terms of stimulus of the economy through expansion by the Federal Reserve, reduction in spending and whatever else isn't going to bring about much change.
"We are now at the bottom of the hole and there is nothing that the Republicans or Democrats can do at this point to dig us out of the hole quickly. We're in a hole that we've been digging ourselves into for at least 20 years."