Center of the Earth
columnist: DigitalBob

Topic: Economics
Iowa's Corn Welfare

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As the nation watches Iowa anxiously for who the most likely next President will be, let's take a moment to look where your tax money is going.

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by DigitalBob
(Libertarian)
Monday, December 31, 2007

In the process of learning how our leaders are elected, it doesn't make sense that Iowa should be first.  They have a predominantly white population, mostly agriculture, no sea ports, not much heavy industry.  I don't think Iowa mirrors most of the country. 

That being said, choosing Iowa first must be completely political.  Like in All The President's Men, I tried to follow the money.  I found it leads to corn subsidies. 

The 2007 Farm Bill Extension Act promises $286 billion to many agricultural projects over the next five years.  Mostly the bill extends existing spending from the 2002 bill--business as usual.  There were a few tweaks, but it's like a grossly obese person pledging to loose weight by switching to diet pop.  Congress needs to put down the Cheesy Poofs.

Looking back at which commodities are subsidized, I used the database maintained by the Environmental Working Group.  They purport that subsidizing agriculture hurts the environment.  That makes sense.  When you subsidize something you get more of it.  If food is grown when there is no market for it, we waste fuel and land--as well as tax money

From their website, these are the projected direct payments by state over the next five years:

Source: Environmental Working Group (http://farm.ewg.org/sites/farmbill2007/)

I've only showed those states that get the top 50% of the subsidies.  States not shown get the other half.   Clicking on the Iowa link in the table above, you see which commodity gets the most....

Source: Environmental Working Group (http://farm.ewg.org/sites/farmbill2007/)

Wow, corn with 79.5%.  I didn't think it was that much. 

I know what your saying, "Gee, Bob, it's only two billion dollars.  Why so upset?"  I know.  It's only $2 billion out of $34 billion for the whole program. $12 billion of that goes to farm businesses.  If you have a million dollars in the bank, write a check to your favorite Iowa farmer.

I have nothing against family farms or even corporate farms.  I do have a problem with where my tax dollars go.  Who are bellying up to that multi-million dollar trough?  Although not all these below are getting all their payments for corn alone,  here are the top 10 largest recipients of farm subsidies between 2003 and 2005 in Iowa:

Source: Environmental Working Group (http://farm.ewg.org/sites/farmbill2007/)

Excuse me while I cry a river.  The top one, "Advanced Pork," cracks me up as the only honest one.

If you feel left out,  there are numbers like these for many other states, right off of www.mulchblog.com. 

All Commodity Direct Payments Are Unnecessary

I did not stutter.  We already have a market-based solution that can determine the fair price for a commodity, with out the need for government.  In fact we've had this mechanism in this country for over 150 years.  Farmers can also make use of this system.  If a farmer knows how to spend a one million dollar government subsidy, he can pick up the phone and place an order with a commodity broker.

At the Chicago Board of Trade, you can participate voluntarily in providing capital for farmers.  Their corn page gives you up-to-date prices and instructions in how to invest in future prices of corn.

Depending on your opinion of the price for a commodity in the future, you can buy or sell a future corn contract.  If you think the price will go up, but don't want to commit to buying the future now, you can buy a call option.  If you think the price will go down and don't own the future, you can buy a put option. 

Futures and their options are different than stocks.  You don't own shares.  You gamble on future prices.  Instead of stock specialists, who are there to keep order, commodity trades provide that beautiful chaos that is the heart and soul of free enterprise.

When a farmer sells a corn future, he's agreeing to deliver so much corn to the market at a fixed price some time in the future.  He's trading the risk of growing and marketing it for a known price.  If the price goes down, he's covered. 

With the futures contract in hand, he can go to a banker and get a loan.  It's proof that the farmer can sell his product and pay back the loan--even if the market price drops.  The banker might use the futures contract as collateral.

If the farmer is willing to take on some of the risk himself, he can partially hedge his yield.  This way part of his output will have a guaranteed market, and the other part is open to risk.  It's up to the farmer.

As an investor, you can trade the futures contract, speculate on them with options, trade the basis (the difference between futures and the spot market) or play with swaps of other contracts, such as corn meal and ethanol.  The whole derivatives market is fascinating.  It's well tuned and reacts quickly to new information.  It's all the things the government is not. 

Not only does this work for corn, but there are futures markets for oil, currencies, interest rates, bonds, stock indexes, and anything else on which the government thinks it needs a monopoly.  Let the marketplace work!

The Soviet Union  had a hard time feeding its people during the 1970s, with their central planning.  Our central planning is causing overplanting and waste.

How does the Government Skew the Market?

The government encourages planting of selected crops, providing low-cost loans, crop insurance, research, weather forecasts, fuel and pesticides.  When yields go up and demand stays the same, the prices drop.  The upper price limit is a ceiling.

In a good year, the government will send direct payments to famers to buy their crop from them.  The farmer can dump the crop or agree not to grow.  For environmental reasons, it can pay farmers for land that should never be used.   By creating an artificial shortage, the prices will go up.  The lower price limit is a floor.

In both cases, there is a transfer of wealth from the taxpayer to the farmer.

When the market is aware of a floor or ceiling, it stops trading.  For instance, if corn is trading at $4.50 per bushel and the floor is $4.00, there will be no volume for put options at $3.75, nor will there be any futures traded there.  Even if one farmer is more efficient than his neighbor, that corn isn't coming  to market.  What does will gets higher food prices.

But more people complain not so much when prices are low, but when prices are high. 

When we see cheap ethanol at the pump, it's probably made with subsidized corn.  Although ethanol is a "green" fuel, it may not be the best fuel.  It still puts out hydrocarbons.  It  has a lower energy output than octane made from crude oil.  It could be made from other crops, like sugar beets, artichokes and cane sugar.  But when corn is so cheap, why look at other things that rot?  It's cheapness is an illusion.  We're still paying for it.  And one presidential candidate wants to subsidize it more.

I'm convinced it's because law makers are reacting to the howls of their constituents, instead of having a clue about the markets.

What about Natural Disasters?

The price of the commodities will fluctuate in response to supply and demand--regardless of conditions.  Farmers need to be shrewd businessmen and should take up crop insurance and flood insurance.  Each state has farm bureaus that can provide that information.  Insurance companies will make a visit--as long as the government doesn't undersell them. 

What about Unfair Competition from Overseas?

Again, the futures market gives you a fixed price for your crop before you plant.  If the market for your commodity doesn't exist, especially if the evil Brazilians are supporting sugar beets, you can still plant wheat or soybeans or something else.  A businessman who continues in an unprofitable venture is his fault,  not that of the taxpayer.  If this country is going to retaliate, we need a declaration of war.  Instead of bombs, we are using food as a weapon.

If another country is waging a food war, we can deal with that through punitive temporary tariffs.  But if we do nothing, our consumption could end up bankrupting the foreign country.  In the meantime, our farmers could switch to planting something that's more in demand.

When our government uses trade sanctions against another country, it's denying our farmers and manufacturers a market.  For political reasons, we end up waging a war on our own farmers.  Just ask those shrimp farmers in Texas who want to sell their products to Cuba.  Some would argue that they are entitled for a reimbursement.

What about the family farmer?

What about him?  Even family farms are incorporated for tax purposes.  The guy with 20 acres and a mule might want to start taking night classes at the community college.  I was a good Vax programmer, but I had to learn Unix in the early '90s.  When the marketplace says your skills or your products are obsolete, it's time for a change.

We have many family businesses in this country that are not subsidized.  Who sponsors the car dealership, the Subway sandwich shop, the local newspaper, the cleaning service, etc.?  I'd include the post office, but we do subsidize that one, but not as much.

Organizations like Farm Aid have brought to the attention the plight of family farms.  Donate to them generously.  I trust private groups to get the money to the right place far more than the government.  If we were taxed less, there would be more money available for Farm Aid.  If government interference was removed, we would have more products and farmers entering the market.

You're free to support any cause you believe in, but don't take money from my family to give it to yours or your friends.

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2007 DigitalBob, all rights reserved.
Published: Monday, December 31, 2007
Last modified: Monday, December 31, 2007

The views expressed in this article are those of DigitalBob only and do not represent the views of Nolan Chart, LLC or its affiliates. DigitalBob is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

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