Tales of an Unbalanced CBO #1: The Shallow-Loss Splurge

The Congressional Budget Office (CBO) recently estimated the Senate farm bill (S.3240) would save $23.6 billion over the next 10 years. In this era of supposed belt-tightening in Washington, this report seems to suggest Senators are moving in the right direction. Unfortunately, these numbers are dangerously misleading, based on a very rosy, and unlikely, scenario.

The bulk of CBO’s supposed savings stem from the elimination of the egregious direct payments program, which would be replaced by Agriculture Risk Coverage (ARC). Commonly referred to as shallow-loss, the program is a new crop insurance subsidy that covers revenue losses of 11% to 21%. It can be purchased on top of already existing crop insurance that covers 65% to 75% of revenue losses. Shallow-loss guarantees 90% of record revenue levels. According to the CBO:

“CBO estimates that spending for the new ARC program would total $28.5 billion over the 2013-2022 period. CBO estimates that ARC payments would average $3.2 billion per year; however, actual payments from year to year would probably vary considerably from that expected average payment.”

CBO’s estimation is based on the assumption that crop prices will hold relatively steady.   Incredibly, CBO is not allowed to take variables such as rising or falling crop prices into account when making their predictions; they can only assume current prices remain steady. For any number of reasons, including the ethanol mandate and its ripple effect, crop prices are still hovering near record levels (for example):

  • Corn: $5.67 per bushel (record: $6.88, August, 2011)
  • Wheat: $6.25 per bushel (record: $10.60, March, 2008)
  • Soybeans: $13.39 per bushel (record: $13.70, April, 2012)

It is possible that crop prices will continue to hover near where they are now, but a dip in crop prices spurred by the expiration of the ethanol mandate, a global recession or some other event would expose taxpayers to an incredible cost.

Fortunately, CBO is not the only source on this question. The American Enterprise Institute took these possibilities into account, and provided what is properly understood as a more realistic analysis (emphasis added):

“The Congressional Budget Office’s cost estimates assume that recent historically high prices will be sustained. However, program costs will balloon if corn, wheat, soybean, rice, and cotton prices return to the average levels observed between 1996 and 2011. If prices are calculated based on changes at the county-level taxpayers would be liable for $8.4 to $13.98 billion, depending on the rate of reimbursement. The Stabenow-Roberts shallow-loss proposal would likely cost taxpayers between $5 billion and $7 billion, depending on the mix of farm-based and county-based programs.”

Simply put, the new shallow loss program could cause taxpayers to be liable for up to $14 billion a year for the next 5 years, whereas we currently spend about $5 billion a year on direct payments.

There are two takeaway points from the dueling cost analyses: 1) replacing one subsidy with another is never a good idea, especially when reform is the goal; but replacing one subsidy with an even more expensive one is especially egregious; and, 2) until CBO’s model changes, their analysis of the farm bill should be taken with a grain of salt.

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