The Covid-19 CARES Act: What Should Be Done for U.S. Farms?

The Covid-19 CARES Act: What Should Be Done for U.S. Farms?
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Like other businesses, farmers and ranchers are facing short-run adverse effects of the COVID-19 crisis and longer-term recession challenges. One important difference is that farming is considered an essential activity, and unlike many service businesses, farms are not being asked to shut down their operations. Despite this, Congress has included in the CARES Act bailout an additional $23.5 billion for the agricultural sector. Ensuring that these funds are targeted to farm households in need should be a priority.

While some farmers may need additional COVID-19 help, many farm businesses already benefit from long-standing subsidy programs, and the new compensation should be commensurate with actual damages to avoid further distortions to the market. Price and revenue support programs authorized by successive farm bills are likely to funnel substantial payments to farms producing milk, corn, cotton, wheat, soybean, peas, lentils and other crops. Large crop-insurance-authorized subsidies are also already available for almost every commercially grown commodity, including horticultural (fruits, vegetables, and garden plants), livestock and dairy products.

In addition, over the past two years the Trump administration has paid $28 billion in supplementary ad hoc farm subsidies to compensate producers of over 40 agricultural commodities for losses caused by trade wars.

The households running farm businesses also earn a lot of money off the farm. On average about 80% of their total income comes from other sources such as jobs in town or small businesses they own. Small businesses and other jobs account for more than 60% of their incomes. Farm households who have lost off-farm jobs, and whose outside businesses need help, are eligible for the programs designed to keep small businesses open and their workers employed. These include the new small business loan program that turns loans into subsidies if the money is used to keep workers on payrolls, the direct payments of $1,200 for each adult and $500 for each child, and increased unemployment compensation for family members who have lost jobs.

Instead of a large decline in the overall demand for food, which is remarkably unchanged by changes in household incomes, the challenges farm businesses face today are disruptions to supply chains and some commodity specific price shocks. Severe restrictions on the movement of migrant labor from Mexico and other Central American counties are likely to create harvesting challenges for specific farm operations, including Georgia peach and California strawberry growers. Dairy farms are confronted by a shift away from milk and dairy product bulk purchases by restaurants and schools. Instead families make smaller individual purchases. Cotton growers are losing export markets, and small-scale fruits and vegetable producers have lost access to farmers markets where they sell their produce. Some of these farm businesses may soon need additional help.

However, data from previous farm programs clearly show that most subsidy payments flow to farms needing little or no help from the federal government. Over 80 percent of payments under current farm programs go to farm households whose incomes on average are much higher than those of non-farm families, and whose wealth on average is more than ten times greater than the wealth of the average American household. Ensuring that the additional CARES Act funds are disbursed to farmers who are truly in need is crucial. While the Secretary of Agriculture, Sonny Purdue, recently stated that CARES Acts funds should be distributed equitably, presumably across a wide range of commodities, historically, support has not been directed to the neediest farm families.

Another concern is whether the new programs used to distribute the CARES Act funds will distort agricultural production decisions, which could lead to trade related problems, and waste scarce resources. Farmers will be planting their crops over the next few months. If subsidy payments are provided, which seems likely, they should not be linked in any way to the production of specific commodities, and should not encourage farmers to plant corn instead of soybeans, wheat instead of barley, or turn pasture into cropland. Lower prices and supply chain challenges for many crops may only last for a few weeks or months during the planting period and not during the harvest and marketing cycle.

It would be better to direct these CARES Act resources to ensure that supply chains are operating efficiently. By introducing programs to enable farm businesses to hire adequate numbers of workers to milk their cows and harvest their fruits and vegetables for example. A second concern is to enable the agricultural sector to keep their access to major overseas markets in Japan, China, Europe and other countries. Last but not least, the CARES Act agricultural support funds should be used to guarantee food banks have the ability to use efficient markets to buy all the food they need to feed the millions of Americans currently in dire financial straits.

Vincent H. Smith is Director of Agriculture Studies at the American Enterprise Institute (AEI) and Professor of Economics at Montana State University. Joseph W. Glauber is a Visiting Fellow at AEI and a Senior Research Fellow at the International Food Policy Research Institute.

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