WASHINGTON, D.C. — The American Enterprise Institute (AEI) has come out with a report criticizing Price Loss Coverage (PLC) and supplementary insurance programs proposed for the latest farm bill, as being too generous to wealthier farmers and unfair to taxpayers.

The paper, authored by university ag economists Vincent Smith, Barry Goodwin and Bruce Babcock, is part of a series of papers and presentations by AEI called “American Boondoggle: Fixing the 2012 Farm Bill.” In their introduction, the authors stated farm groups realize the direct payments program is no longer politically viable, since it was, as they put it, such an obvious giveaway to relatively wealthy people.

As a result, they said farmer groups came to embrace so-called shallow loss programs, such as the Aggregate Revenue Coverage (ARC) program. ARC is included in the U.S. Senate’s version of the 2012 farm bill. But rice, cotton and peanut farmers in turn became concerned ARC wouldn’t give them as much as they had been getting under direct payments, so they lobbied the U.S. House for something that would be better for them.

“Representatives Frank Lucas (R-Okla.) and Colin Peterson (D-Minn.) complied with the wishes of the rice, peanut and cotton lobbies and, with the support of other (but not all) House Agricultural Committee members, introduced a Price Loss Coverage program,” the authors wrote. “In some important respects, the PLC ... is very close to being a new price support program.”

The House also included a supplementary insurance coverage program called Supplementary Coverage Option (SCO) in which farmers could participate, in addition to the PLC. SCO would kick in when yields and revenues fall below 90 percent of their recent average levels, on a countywide basis.

The House Ag Committee’s version of the farm bill also includes a shallow loss program, but is designed so farmers wouldn’t want to participate, since if they did they wouldn’t be able to participate in the SCO plan.

The purpose, said the paper’s authors, was to “stack the deck” in favor of the combined PLC and SCO plans, which are much more generous to rice, peanut and cotton farmers than the alternative. This comes “mainly at the perceived expense of producers of small grains and oilseed crops like corn, soybeans and wheat.”

The farmer’s PLC subsidy is the difference between the reference price and the national average price, multiplied by the farm’s predetermined per-acre yield and 85 percent of the total acres planted to the crop – but the details of the subsidy are complex.

The SCO plan helps a farmer pay for the “deductible” associated with a federally subsidized crop insurance plan. For example, a corn farmer with a crop insurance plan which triggers payments when the farm’s average yield falls below 75 percent of its expected level could buy insurance that would trigger payments when the countywide yield for corn falls below 90 percent of its expected or average level.

Had the farmer bought an 80 percent individual yield contract, its maximum SCO indemnity would be 5 percentage points smaller, the authors wrote. “Under the House bill’s SCO provisions, the farm only has to pay 30 percent of the actuarially fair premium for the contract,” they explained.

In addition, the authors stated insurance companies providing the plans are reimbursed for their administrative and operating expenses: “The taxpayers (and the budget deficit) are the ones who suffer. When the SCO is combined with the PLC, taxpayer losses are compounded while farm benefits increase substantially.”

The authors examined the potential costs of these programs from 2013-17 under two different scenarios: one uses prices that were used by the Congressional Budget Office (CBO) to make its estimates, and the other assumes prices will be at their average 15-year historical average levels, between 1996-2011.

They argued it’s quite possible the latter scenario could take place, given that many are pushing to have the federal Renewable Fuels Standard eliminated or suspended. In each case, five crops are included: corn, soybeans, wheat, rice and peanuts.

Under the first scenario, the House committee’s PLC program would cost an estimated $1.1 billion a year for the five-year period. Under the second scenario, the same program would “explode” to an estimated $18.8 billion a year.

Later in the report, they stated under the second scenario, PLC costs to taxpayers would be four times as great as they are under direct payments, which the PLC would replace.

The SCO plan would also be potentially costly, they said. If commodity prices remain at or near their high levels, farmers would receive $2.1 billion a year on average for the five-year period, and insurance companies providing the plans would receive about $500 million a year, as well. The subsidies would be about 40 percent lower if crop prices were to drop to their recent historical average levels.

Another problem with these programs, the authors argued, is they are policies that provide production incentives for crops and would thus be open to challenge by the World Trade Organization – and the authors concluded such charges would be difficult to refute.

Also, rice and peanut farmers would do especially well under either scenario, many times better than any other grower on a per-acre planted basis. According to the report, a rice or peanut farmer would receive an average subsidy of $68 for every planted acre.

“A rice or peanut producer who planted 1,000 acres would, therefore, receive an annual PLC check of $68,000 a year, about 40 percent more than the total income received by the median non-farm household in the United States,” the report stated. “If crop prices moderated towards their 15-year average levels, per-acre PLC payments would increase to $224 for peanuts and $327 for rice.” The entire report is available online to read at www.aei.org