American Enterprise Institute Report: 'Impact of Policy Design on Payment Concentration in Ad Hoc Disaster Relief'

WASHINGTON, Jan. 29 -- The American Enterprise Institute issued the following report on Jan. 28, 2021, by visiting scholar Eric J. Belasco, and Vincent H. Smith, visiting scholar and director in agriculture studies, entitled "Impact of Policy Design on Payment Concentration in Ad Hoc Disaster Relief: Lessons from Market Facilitation and Coronavirus Food Assistance Programs":

Here is an excerpt:

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Key Points

* The recent 2018 and 2019 Market Facilitation Programs (MFP) that compensate farmers for losses associated with Donald Trump's trade wars send over 60 percent of the monies to the largest 10 percent of all farms.

* The pandemic-driven Coronavirus Food Assistance Program (CFAP) benefits are similarly targeted to the largest farms.

* Small and medium-sized farms received modest payments under all those programs.

* The 2018 MFP and 2020 CFAP payments are even more heavily skewed toward large farms because they are based on a farm's production rather than area planted to eligible crops.

Executive Summary

This report examines the distributional implications of two recent ad hoc disaster aid programs, the 2018 and 2019 Market Facilitation Programs (MFP)--which have distinctly different program designs--and the federal crop insurance program. Farm-level data are used to estimate the relationship between farm size, measured by crop sales, and the distribution of program benefits. Results indicate payments are more concentrated on larger farms that receive higher per-acre payments under the 2018 MFP and federal crop insurance program. Under the Coronavirus Food Assistance Program, with a design similar to the 2018 MFP, payments are also more heavily concentrated on larger farms.

Introduction

Many industries have experienced catastrophic declines in revenues and profits because of the COVID-19 pandemic that to a greater or lesser extent have been mitigated by the provisions of emergency aid through the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. Most of those industries and companies have had limited or no experience with direct federal subsidies through disaster aid and other programs, although many have had extensive experience in lobbying about regulatory issues, tax policy, and other forms of federal support. In contrast, since 1942, agricultural producers have obtained an annual average of 13.3 percent of their real net cash income from direct government payments./1

Typically, government support payments to farmers have been linked to shortfalls in yields or relatively low prices for agricultural commodities through programs authorized by successive farm bills. However, since the 1970s, farmers have also regularly received ad hoc payments to compensate them for losses associated with exceptionally severe droughts, floods, hurricanes, and other natural perils./2 More recently, in 2018 and 2019, farmers have also received substantial ad hoc disaster payments through two separate and distinct Market Facilitation Programs (MFPs) to compensate them for losses associated with the Donald Trump administration's trade disputes with Canada, China, Mexico, the European Union, and other countries.

Under the 2018 and 2019 MFPs, US farmers and ranchers were paid $9.6 billion for losses in 2018 and $14.5 billion for losses in 2019. The Trump administration implemented these programs without congressional authorization using unallocated Commodity Credit Corporation (CCC) funds. The administration justified them as compensation for losses farmers incurred when China introduced higher tariffs on imports of US agricultural commodities in response to new US tariffs on steel, aluminum, and other commodities./3 The Coronavirus Food Assistance Program (CFAP), introduced on April 17, 2020, as part of the CARES Act, initially authorized up to $16 billion for payments to compensate farmers for losses linked directly to the COVID-19 pandemic during the 2020 agricultural marketing year. This new ad hoc disaster aid program immediately followed on the heels of the 2018 and 2019 MFPs.

While the two MFPs were associated with the same disruption (loss of access to export markets in China and elsewhere), they were implemented differently, providing a natural experiment to evaluate how the concentration of benefits among farmers is affected by changes in policy designs. The first MFP payments were limited to a handful of crops and two livestock commodities (hogs and dairy) with commodity-specific payment rates directly tied to commodity-specific prices and the farm's production of each eligible commodity. In that respect, the 2018 MFP was similar to the federal crop insurance program, which also directly links benefits to the value of a farm's crop production./4 The second MFP distributed payments based on total acres planted to all crops eligible for such subsidies at a generic per-acre payment rate established countywide.

Comparing the distributional outcomes of these two programs therefore could provide insights about the distributional impacts of program design relevant for current and future disaster aid declarations, including current and future COVID-19-related emergency aid programs. The CFAP, which had two phases,/5 has a similar design to the 2018 MFP in allocating payments among farmers and therefore seems likely to have a similar distribution of payments between large and small farm operations. Evidence presented in this report demonstrates the similarity in distributions between these two programs.

This report therefore explores the distribution of the 2018 and 2019 MFP subsidy payments, the CFAP payments, and, for comparison, the federal crop insurance program among farm businesses using data from the US Department of Agriculture (USDA) Agricultural Resource Management Survey (ARMS)/6 and, for the CFAP, the USDA Farm Service Agency (FSA). The ARMS is an annual nationally representative survey that provides financial, marketing, production, and resource use information at the individual farm level. We then compare the distributions of payments under each of the two MFPs estimated using the ARMS data with the distributions of actual payments, ordered by size of payment to each recipient farm business, using data on those payments obtained from the USDA FSA under a Freedom of Information Act (FOIA) request./7

We find that for each MFP, the results obtained using the ARMS and FSA data are relatively consistent. With the results from our analysis of the MFPs, we then use further data on payments made under the ad hoc COVID-19 CFAP, also obtained from the USDA FSA under a separate FOIA request,/8 to examine the distribution of those payments among farms. We find those results are consistent with the MFP analysis results.

Several findings are of interest. First, as has been the case for most federal subsidy programs over the past eight decades,/9 under both MFPs, the CFAP, and the federal crop insurance program, the largest 10 percent of farms received around half of all payments. Second, subsidy programs that directly link payments to the on-farm production of specific crops result in payments that are even more heavily skewed toward the largest farm businesses. These include the federal crop insurance program, the 2018 MFP, and the 2020 CFAP initiative. As Anton Bekkerman, Eric Belasco, and Vincent Smith reported, larger farm businesses tend to receive higher per-acre payments, most likely because of higher productivity levels./10 The 2019 MFP-- which linked subsidy payments to areas planted rather than farm-level, crop-specific production--resulted in a payment distribution somewhat less skewed to larger farm businesses.

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Notes

1. This measure does not include any measures of crop insurance premium subsidies or net indemnities, which, in recent years, have averaged about $6 billion a year. Eric J. Belasco, "Moving Agricultural Policy Forward: Or, There and Back Again," Journal of Agricultural and Resource Economics 45, no. 3 (2020): 397-409, https://ageconsearch.umn.edu/record/304764/files/JARE%2C45.3%2CSeptember2020%2C%231%2CBelasco%2C397-409.pdf.

2. Barry K. Goodwin and Vincent H. Smith, The Economics of Crop Insurance and Disaster Relief (Washington, DC: AEI Press, 1995); Vincent H. Smith and Joseph W. Glauber, "Agricultural Insurance in Developed Countries: Where Have We Been and Where Are We Going?," Applied Economic Perspectives and Policies 34, no. 3 (2012): 360-90, https://onlinelibrary.wiley.com/journal/20405804.

3. Joseph Glauber and Nathan Hendricks and Joseph Janzen, among others, have estimated that the 2018 and 2019 Market Facilitation Programs (MFP) substantially overcompensated producers of many commodities, up to and including soybeans, for any actual losses incurred because of trade dispute-related declines in their prices. Joseph W. Glauber, Agricultural Trade Aid: Implications and Consequences for U.S. Global Trade Relationships in the Context of the World Trade Organization, American Enterprise Institute, November 19, 2019, https://www.aei.org/research-products/report/agricultural-trade-aid-implications-and-consequences-for-us-global-trade-relationships-in-the-context-of-the-world-trade-organization/; and Joseph P. Janzen and Nathan P. Hendricks, "Are Farmers Made Whole by Trade Aid?," Applied Economic Perspectives and Policy 42, no. 2 (2020): 205-26, https://onlinelibrary.wiley.com/doi/ abs/10.1002/aepp.13045. The MFP payments were also widely viewed by many observers as measures the Donald Trump administration used to shore up political support for the president and his party among agricultural producers with respect to the 2018 midterm congressional elections and the 2020 presidential election. Philip Bump, "How Much Government Money Does Trump Plan to Spend on His Reelection?," Washington Post, October 8, 2020, https://www.washingtonpost.com/politics/2020/10/08/how-much-government-money-does-trump-plan-spend-his-reelection/; and Alan Rappeport, "Trump Funnels Record Subsidies to Farmers Ahead of Election Day," New York Times, October 12, 2020, https://www.nytimes.com/2020/10/12/us/politics/trump-farmers-subsidies.html.

4. While area-based federal crop insurance products link subsidy benefits to countywide yields, about 94 percent of all crops are insured under crop-specific multiple peril contracts in which insurance premium coverage, subsides, and indemnities are based on the farm's planted acres and yields. See, for example, Vincent H. Smith, Joseph W. Glauber, and Barry K. Goodwin, "The U.S. Federal Agricultural Insurance Program: Time for Reform?," in Agricultural Policy in Disarray, Volume II, ed. Vincent H. Smith, Joseph W. Glauber, and Barry K. Goodwin (Washington, DC: AEI Press, 2018): 71-107.

5. The initial Coronavirus Food Assistance Program (CFAP), widely known as CFAP1, was implemented between late May and mid-September 2020 and covered a relatively limited number of commodities including historically heavily subsidized large-acre crops such as corn, cotton, and wheat; beef cattle, hogs, and wool; and a few other specialty commodities such as frozen eggs. The second CFAP, initiated in late September 2020, expanded coverage to many other crops, including fruits, vegetables, and nuts, to compensate producers for price declines that occurred between January 13, 2020, and July 27, 2020, if such price declines exceeded 5 percent of the January price.

6. To ensure the Agricultural Resource Management Survey sample is nationally representative, observations are adjusted using stratified weights. These weights are also used in this report in estimating payment distributions by farm size.

7. Data provided for the MFP were received under Freedom of Information Act (FOIA) request 2020-FPAC-FSA-05508-F with data ending July 24, 2020. These data include individual recipient information accounting for all $8.6 billion payments under the 2018 MFP and 99 percent of the $14.509 billion under the 2019 MFP.

8. Data for CFAP payments were received under FOIA request 2020-FPAC-FSA-06416-F with data ending September 23, 2020. These data include $10.157 billion in payments, which amounts to 98 percent of the currently reported $10.377 billion in CFAP payments.

9. J. T. Bonnen, "The Distribution of Benefits from Selected U.S. Farm Programs," in Rural Poverty in the United States, National Advisory Commission on Rural Poverty, May 1968, 461-505; James D. Johnson and Sara D. Short, "Commodity Programs: Who Has Received the Benefits?," American Journal of Agricultural Economics 65, no. 5 (December 1983): 912-21, https://www.jstor.org/ stable/1240391?seq=1; Nigel D. Key and Michael J. Roberts, "Do Government Payments Influence Farm Size and Survival?," Journal of Agricultural and Resource Economics 32, no. 2 (August 2007): 330-48, https://www.jstor.org/stable/40987367?seq=1; Randall A. Kramer, "Federal Crop Insurance: 1938-82," Agricultural History 57, no. 2 (1983): 181-200, https://www.jstor.org/stable/3743155?seq=1; and Charles L. Schultze, The Distribution of Farm Subsidies: Who Gets the Benefits?, Brookings Institution, 1971.

10. Anton Bekkerman, Eric J. Belasco, and Vincent H. Smith, "Does Farm Size Matter? Distribution of Crop Insurance Subsidies and Government Program Payments Across U.S. Farms," Applied Economic Perspectives and Policy 41, no. 3 (2019): 498-518, https://ideas. repec.org/a/oup/apecpp/v41y2019i3p498-518.html.

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View full report at https://www.aei.org/wp-content/uploads/2021/01/The-Impact-of-Policy-Design-on-Payment-Concentration-in-Ad-Hoc-Disaster-Relief.pdf?x88519

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