HOW TO CUT U.S. FARM SPENDING The government should quit paying crop subsidies and instead fashion a straightforward welfare program for farmers who can't hack it in the open market.
By Lee Smith REPORTER ASSOCIATE Lucretia Marmon

(FORTUNE Magazine) – HOW ABOUT a few tunes on behalf of city dudes, Willie Nelson? The gritty, bighearted country-and-western singer has sponsored Farm Aid concerts around the country and has raised more than $8 million for farmers suffering such calamities as drought in the South, floods in the Midwest, and foreclosures just about everywhere. But in fiscal 1986 U.S. taxpayers sent rural America more than $25 billion. That's more than five times as much as the federal government spent on all major urban programs, ranging from mass transit to downtown reconstruction. What has run up that huge tab is the Food Security Act of 1985, designed to solve the country's chronic agricultural problem -- too many farmers producing too much -- by recapturing lost export markets. So staggering and unexpected is the cost that when the 100th Congress convenes next year it will likely look for a cheaper way out. For now the U.S. is swamped with subsidized grain and is storing it in old ammunition bunkers and scrubbed-out oil tanks. Two Midwestern Democrats want to replace the law with one that would eliminate farm subsidies and instead sustain farmers by forcing up the price of farm products. That in turn would raise the prices consumers pay for food. A better alternative would be for Congress to acknowledge that its farm program is in essence a welfare program, and that a more realistic name for the Food Security Act would be the Farm Income Security Act. Accepting that, Congress should target a farm welfare program at the needy, reduce what it is currently spending by at least half, and phase the program out over the next ten years. The trouble with the Food Security Act is its assumption that reversing wrongheaded government policy reverses history as well, turning it back to the boom years of the 1970s. Starting with the big Soviet wheat purchases of 1972, the world grain market began to swell. As oil prices rose, petroleum exporters such as Venezuela and Mexico improved their diets by eating more chicken and pork, much of it fed with American soybean meal and sorghum. By 1980 the U.S. accounted for 55% of the world's wheat and feed-grain trade. Not only farmers but also their bankers and those who make fertilizer, railway cars, and grain elevators found it easy to believe the compelling myth that it was America's destiny to feed the world. But from the perspective of foreign customers the price of U.S. grain was soaring out of reach. High interest rates made the dollar strong, which in turn made American foodstuffs expensive for foreigners. The other item on this troubled menu was the government's program to drive up the price of American grain and thereby, it hoped, farm income. ''We were behaving like the Saudis of the grain world,'' says Neil E. Harl, an Iowa State University economist. THE PRINCIPAL TOOL for jacking up farm income was the commodity loan program. Putting up their harvested crops as collateral, farmers could borrow from the government at a predetermined ''loan rate,'' or price per bushel. They held the grain off the market until the market price rose to the loan rate. If it didn't, farmers could ''repay'' the loans simply by defaulting and turning the crops over to the government. To qualify for loans, farmers had to agree to leave a portion of their land idle at times, a device intended to reduce supply and drive up prices. The world reacted much the way it had to OPEC oil prices. It consumed less American grain and looked for other sources. By 1985 the U.S. share of wheat and feed-grain exports had dropped to 38%. Better seed, fertilizer, and machinery would have carried the ''green revolution'' around the globe anyhow, but U.S. policy spread it that much faster. Food importers like India found it cheaper to invest in the new techniques and grow more of their own wheat than buy from the U.S. Thailand, the U.S.'s biggest rival in the world rice trade, kept its costs down, improved the quality of its rice, and captured the South American market. Competitors like Brazil and Argentina, desperate to earn foreign exchange to pay their debts, planted every field in sight. At the same time, the recession of the early 1980s dulled the world's appetite. Nigerians who are earning less for their oil and Chileans making less from their copper can't afford all the food they once imported. The Food Security Act attempts to undo the damage of the loan support program by gradually eliminating it and relying on another device, the target price. As before, the farmer agrees to keep part of his land idle. Instead of turning over the wheat he grows to the government, the farmer can sell it on the market at the going world price, currently $2.40 to $2.80 a bushel. The government then gives him a deficiency payment equal to the difference between the market price and a target price set by Congress. Supposedly the target price bears a resemblance to what it costs to grow the grain. Actually, it is whatever Farm Belt legislators can get for their constituents. This year the target price is $4.38 a bushel. The strategy is to lure former customers from abroad back into the store. The initial impact was to keep even some present customers outside for a while. By signing the bill last December, the President in effect announced to the world that the U.S. would begin a fire sale on grain in the summer when the new crops would come to market. Naturally, regular buyers held back their orders and waited for the bargains. In May and July the U.S. ran agricultural trade deficits for the first time in more than 15 years, as the amount of imported coffee, cheese, wine, and other goods exceeded exports of cotton and grain. The deficit was probably temporary and the Department of Agriculture expects the U.S. to wind up about $6 billion on the plus side for the year. But the figures stunned a lot of Americans who assumed that no matter what other trade troubles the U.S. had, it could at least keep ringing up surpluses in farm produce. If it is allowed to run its full five-year course, the Food Security Act may well restore some of the country's lost market share. But the cost will be stupendous. When Congress debated the budget in early 1985, it looked as though the program would cost about $35 billion over the first three years. By the time President Reagan signed it into law last December, he thought it would cost $52 billion over the same period. Now the Congressional Budget Office forecasts the three-year cost to be $70 billion or so. Even that guess may be low. The reason for the rising estimates is simple enough. The world keeps gathering in enormous harvests, and demand remains weak. So the gap between market price and target price yawns wide. With the exception of sub-Saharan Africa, where famine creates the illusion of global hunger, the world is awash in food these days. Much of Eastern Europe has become self-sufficient. Western Europe subsidizes its farmers and grows more than it can consume. India has become so bountiful that it exports wheat. China sells corn. Even Saudi Arabia, in a haughty display of independence, grows and exports wheat, at a stiff cost in subsidies. Canada is about to harvest its biggest wheat crop ever. And the U.S., its warehouses overflowing, is now collecting 210 million tons of corn nobody needs. NOW THAT the U.S. has decided to battle for its lost markets, other countries are not going to abandon the huge investments they made in agriculture back when U.S. food was pricey. ''We seem to think we're going to starve the competition out,'' says Dale Hathaway, an Under Secretary of Agriculture in the Carter Administration. ''It won't work.'' Cutthroat competition strains alliances and gives comfort to foes. In August the U.S. infuriated Australia and Canada when it offered to subsidize the sale of almost four million tons of grain to Russia, a gesture that required the Reagan Administration to swallow its ideology with an embarrassing gulp. But the Soviets snubbed the offer, apparently because it wasn't generous enough, and will buy from other suppliers like the Canadians and the French. A few acts of nature and politics could make world demand jump. Crop failures in the Soviet Union would make a big difference. Debtor nations would probably get their appetites back if banks would extend them major new loans, as U.S. Treasury Secretary James A. Baker has urged, or forgive them part of their existing loans, as Senator Bill Bradley has suggested. But only the most buoyant optimist would count on those events to rescue the Food Security Act. When Congress reconvenes, it will likely add up the numbers again and conclude that it has put a big hole in the budget. The simplest way to cut farm spending would be to reduce target prices. But that would yank down farm income. So Senator Tom Harkin of Iowa and Representative Richard A. Gephardt of Missouri have created a scheme that would keep farm income high by drastically shrinking the size of crops. Their plan, which they sentimentally call the Save the Family Farm Act, would let farmers vote for mandatory limits on the amount of land they could plant. If farmers approved, 35% of the country's 375 million acres of cropland, the good along with the bad, might be forced out of production. Reducing supply would drive up the price of everything from cornflakes to filet mignon. Harkin and Gephardt's pitch is that while consumers would pay more, taxpayers would save billions. A generation ago farmers didn't think much of mandatory controls, but in a test referendum this summer 54% of the wheat farmers who voted favored them. Controls suffer from two big drawbacks. They require towering tariff walls to keep cheaper foreign grain out of the country. Erecting those barriers would mean an abrupt reversal of trade policy for the U.S., which has been arguing with the Europeans and the Japanese that they should stop shielding their farmers from market forces. More important, by pushing up prices the U.S. would surrender as an international competitor in agriculture, one of the few remaining sectors in which the U.S. has clear advantages. Just because the U.S. can no longer dominate the grain trade doesn't mean that it can't still be a major player. The U.S. has excellent climate and soil, generally well-managed farms, and a river system that looks as though it was designed with grain transportation in mind. Beyond that, the U.S. has invested heavily in railway cars, barges, grain elevators, and ports. Perhaps its principal handicap is the cost of its farmland, bid up in the boom days. But those prices have fallen dramatically in the past few years. An acre of prime Iowa cornfield that cost $390 in 1971, and sold for $2,000 in 1981, goes for about $850 today. Tangles of subsidies make country-by-country cost comparisons difficult, but the Office of Technology Assessment recently took a stab at figuring out for Congress which nations are the most efficient producers. Among the conclusions: The U.S. can produce wheat for a third less than Australia, an emerging competitor; the cheapest place to grow corn is not on those acres celebrated by Rodgers and Hammerstein but around the city of Pergamino in the lush Argentine Pampa; but the U.S. Corn Belt can grow soybeans cheaper than Pergamino. ''Overall,'' says the OTA, ''a large percentage of U.S. farms are competitive with the most efficient producers in the world.'' As a supplier the U.S. has an edge in other respects. One reason the Soviet Union buys wheat from its archenemy is that when the U.S. promises to deliver half a million tons of No. 2 winter wheat in Odessa the week of April 11, it generally arrives on time. The Argentines, who have only one suitable and overworked port, are often late. IN LIGHT OF these statistics, abandoning the world market by taking one- third of our arable land out of production sounds like the kind of weird idea that could only come up in an election year. A better alternative to the Food Security Act would be the immediate elimination of price supports. Farmers could produce what they wanted and sell it at home and overseas at market rates. At the same time, the government should establish a straightforward welfare program for farmers who can't survive that kind of competition. Economists and politicians who favor farm welfare schemes generally refer to them with euphemisms, such as ''decoupling.'' By that they mean that the government should separate benefits from production. Pete du Pont, the former governor of Delaware who wants to be the Republican nominee for President in 1988, would phase out aid to farmers over five years. Each year, regardless of whether they grew anything or not, farmers would receive a declining percentage of the payment they got the year before. The shortcoming of du Pont's idea is that it would help the rich and the needy alike. And the neediest will require more than five years to adjust. Better would be a modification of du Pont's plan that would focus help on the most distressed and for a longer period, probably ten years. Kenneth R. Farrell, director of the National Center for Food and Agricultural Policy, an independent Washington research group, maintains that farmers can be separated into three groups, two of which don't require federal aid. The country's 280,000 largest farms, those with revenues of $100,000 a year or more, can get along by themselves. Some are corporate, but the great majority are family farms or, commonly these days, single farms run by several families related by blood and marriage. They include 100,000-acre spreads of rice in California and 1,000-acre corn farms in Iowa. Some of these farmers are deeply in debt because they expanded too ambitiously. But their long-term prospects are good, so they can work out their cash flow problems with their banks. A second group of farmers who can go it alone are the 1.5 million or so part-time operators, who produce about 20% of the U.S. crop. Perhaps a part- timer is an assembly line worker at a General Motors plant in Anderson, Indiana, who farms 200 acres of soybeans on the side. He, too, qualifies for target price payments, even though the $30,000 or so in wages plus benefits he receives from GM provide comfortably for him and his family. The suffering farmers by and large are those in the middle, the 500,000 or more who farm full time but have too little land to be world-class competitors. According to Iowa State's Harl, a corn farm in Iowa has to reach a size of 640 acres before the machinery can be used at peak efficiency. Yet the average size of Iowa farms is less than 300 acres. That means a lot of Iowans are fighting a losing battle against Argentina. NOT ALL small farmers will fail. Many will rent neighboring fields in order to achieve economies of scale. Others will send their wives out to work and find part-time jobs themselves. But the little farm with no outside income is probably finished. Not all will mourn its passing. ''Memories are selective, so we tend to look back on small farms with nostalgia,'' says Paul Barkley, a Washington State University economist who grew up on one. ''But it is an abysmally hard life.'' An agricultural program should be aimed at getting people off those farms. Even if every farm family in that squeezed middle group were handed $25,000 a year, a little less than the median income of nonfarm families, the cost would be only half of what the federal government is spending on the Food Security Act. The money shouldn't be distributed randomly, however. Those who get it should have to pass a means test, qualifying on such factors as debt, family size, and prospects for getting jobs in town. Prime candidates for help would be some of the citizens of Albia, Iowa, a strapped community of 4,100 in the southern part of the state, where the rolling terrain is not well suited for the corn many grow anyhow. ''A lot of older farmers are saying they'd like to quit but can't get out,'' says Ralph Goode, owner of Goode Seed & Feed Co. The departures of two industrial employers, an auto-parts maker and a screen door manufacturer, have left Albians with few alternatives. The government could help some younger farmers resettle and older ones retire. Many of the nation's farmers consider the prospect of welfare repugnant. They prefer incentive programs like the Food Security Act that pay them more for working harder and producing food that no one can eat. For the other 97% of the population it is better to have a welfare program the country can afford than an incentive plan it can't.