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Growers Reap Benefits Even in Good Years
Crops That Sell High Qualify for Payments

By Dan Morgan, Sarah Cohen and Gilbert M. Gaul
Washington Post Staff Writers
Monday, July 3, 2006

EDEN, Md. -- Roger L. Richardson, a vigorous 72-year-old who grows corn on 1,500 acres of prime Eastern Shore farmland, had a good year in 2005. Thanks to smart planning, shrewd investing and a little luck, he grossed a healthy $500,000 for his crop.

But the federal government treated him as if he needed help and paid him $75,000.

The money came from a little-known, 20-year-old U.S. Agriculture Department program that was intended to boost farmers' incomes when prices are low.

The farmers do not have to sell at distressed prices to collect the money. They can bank the government payments and sell when prices are higher.

Since September, the program has cost taxpayers $4.8 billion. Most of that money -- $3.8 billion -- went to farmers such as Richardson who sold at higher prices, according to a Washington Post analysis of USDA payment data.

The subsidy is called the loan deficiency payment. Although it has cost taxpayers $29 billion since 1998, it is virtually unknown outside farm country. But in rural America, the LDP is a topic at backyard barbecues and local diners along with the high school football team and the weather. Despite its name, it is neither a loan nor, in many cases, payment for a deficiency. It is just cash paid to farmers when market prices dip below the government-set minimum, or floor, if only for a single day.

The LDP has become so ingrained in farmland finances that farmers sometimes wish for market prices to drop so they can capture a larger subsidy.

"In the fall of the year, we find the farmer wanting the price to go down," John Fletcher, a Missouri grain dealer, told Congress last year. "It's almost unnatural."

Corn farmers collected the LDP on 90 percent of their crop last year, but most did not suffer the losses that traditional subsidies are meant to offset. Some collected hundreds of thousands of dollars.

"Most smart farmers are cashing in on it," said Bruce A. Babcock, director of the Center for Agricultural and Rural Development at Iowa State University. "It shows me that farmers are being overcompensated."

The LDP bears little resemblance to the original price-support system, created in 1938 to help millions of desperate farmers during the Depression. The government then propped up prices by buying grain and cotton whenever the market dipped below a government-set floor.

But by the 1980s, the government had accumulated huge stockpiles of commodities that it could not sell abroad. With the backing of Southern rice- and cotton-state lawmakers, Congress in 1985 came up with a way to protect farmers from low prices: the LDP. The government encouraged farmers to sell their crops on the market and paid them cash when prices fell below the floor.

This reduced the stockpiles and made U.S. farm products a better buy abroad. But few foresaw where the program would end up, according to Arkansas Secretary of Agriculture Richard E. Bell, who lobbied for the change as president of the state's largest rice cooperative.

When corn prices fell in the late 1990s, the cash payments to farmers soared.

'Location, Location . . .'

Roger Richardson's experience with his corn farm in Maryland's Worcester County illustrates one way farmers take advantage of the LDP.

After harvesting his corn last summer, Richardson stored 190,000 bushels in silos that he owns with other farmers. He then waited for prices to rise. He had reason to be hopeful because the corn-dependent Delmarva poultry industry pays a premium to lock up local supplies for chicken feed.

Meanwhile, in the Midwest, prices briefly dropped to their lowest level in five years after Hurricane Katrina. The storm stalled grain barges up and down the Mississippi. Huge yellow piles lay in fields outside stuffed grain elevators, and a sign outside one elevator said, "Blame it on Katrina."

The drop in prices brought the government's safety net -- the LDP -- into play.

In DeKalb County, Ill., the subsidy had reached 46 cents a bushel one day in September. (The LDP for each county is calculated by subtracting the USDA's daily estimate of the local market price from the government's floor, which is set each year and was $1.98 a bushel in DeKalb.)

Yet in one of the oddities of the system, across the country on the Eastern Shore, where corn market prices were much higher, the subsidy was about the same: 48 cents. It hovered around that level for the next two months.

To book the subsidy being paid on a particular date, Richardson simply had to walk into the local USDA office in Snow Hill, Md., with the ability to prove that he owned a harvested corn crop. He applied for the subsidy for different portions of his crop on several days throughout the fall.

By December, feed mills on the Eastern Shore had begun running short, and prices were rising. Richardson began selling for an average $2.60 a bushel. That was about 50 cents more than the price quoted in Chicago, the national benchmark. Richardson cashed in because of his ability to store grain until it was needed and his proximity to the mills.

"It's like real estate," he said. "It's location, location, location."

The LDP subsidy that he had already booked would bring his total take to more than $3 a bushel -- he made $75,000 from the LDP alone.

The paradox of paying roughly equal subsidies regardless of local conditions was a deliberate policy devised by Congress. In 2002, it directed the USDA to "minimize" the difference in LDP subsidies across states and between counties -- and, in effect, across the country.

"We were trying to make certain that you wouldn't have a farmer receiving 5, 10, 15 cents less than another farmer across the river or the county line," said former representative Charles W. Stenholm (D-Tex.).

Lawmakers are frequently deluged by complaints from farm constituents who are outraged by a higher LDP across state or county borders. The lawmakers, in turn, lean on the USDA.

In June 2002, for example, South Dakota's senators demanded that an injustice be corrected: Corn farmers in Iowa were getting 9 cents a bushel while those just across the border in South Dakota were getting 7 cents.

"These inequities are more than just numbers because for farmers they could make the difference between profit and loss," wrote Sens. Tim Johnson (D) and Thomas A. Daschle (D) in a two-page, single-spaced letter to then-Agriculture Secretary Ann M. Veneman obtained under the Freedom of Information Act.

Efforts to equalize the subsidies fall to a staff of 10 officials housed in the USDA's Commodity Office in suburban Kansas City. Every workday, they check with online services, call grain elevators across the Midwest and poll 19 major grain markets, where large merchants and food processors go to buy.

Then, in a 4 p.m. ritual, the USDA officials gather around a conference table with an open phone line to headquarters in Washington. Poring over maps and prices, the group sets the next day's LDP for corn, wheat and 15 other commodities in more than 3,000 counties.

Officials add a few cents in one county and take away in another, when the research shows that subsidies in different areas would be too far apart.

"Congress gave us conflicting requirements," said Bert Farrish, director of the USDA's Commodity Office in Washington. "We have to minimize the difference in benefits across state and county lines, but administer it in a way that reflects local markets as closely as we can."

Stenholm acknowledges the problems but believes it all evens out.

"There's no way you're going to get a national program that works perfectly," he said. "Some get an advantage, some get a disadvantage. And you hope over 10 years it balances out."

Financial Hedging

Increasingly, farmers have learned to lock in their subsidies when prices are low and sell when prices are higher.

For last year's crop, farmers sold their corn for an average of $1.90 per bushel, only 5 cents below the national floor price. But they received an LDP averaging 44 cents, government payment records show. The difference amounted to $3.8 billion.

The same thing happened in 2004, when the LDP was 27 cents even though the price farmers received when they sold their crops was above the floor. The windfall for farmers was $2.7 billion.

One reason for the discrepancy is that farmers have adopted modern methods to limit their financial risk.

"A farmer who plays it right can make a bundle at times," said Daniel A. Sumner, an agricultural economist at the University of California at Davis.

One who played it right last year was Michael T. Sullivan, who produces a million bushels of corn annually with his three sons in Franklin, Minn. He thrived even during the depressed post-Katrina market.

Well before the storm, Sullivan said, the family had arranged to sell three-quarters of its crop to a local grain elevator for about $2 a bushel. The practice, called "forward contracting," is increasingly common and helps insulate farmers from the market's routine ups and downs.

On top of their contracted price, the Sullivans got the subsidy: $292,054 for that same corn, according to payment records.

Sullivan considers the LDP a godsend, given the uncertainties of farming. "Without it, Main Street Minnesota would have no money to keep the economy rolling," he said.

Richardson also makes no apologies for taking the government money. He contends that the LDP helps keep him and other farmers afloat by offsetting rising energy costs. Maryland farmers, he adds, deserve higher subsidies because they have higher costs and lower yields than Midwestern farmers.

"Without the LDP last year, farmers would have been in deep water," he said recently. As a large farmer, he said, "You handle a lot of dollars, but that's no panacea."

The bigger the farm, the bigger the payouts.

Walker Place, an operation based in Danville, Ill., that farms in 23 counties in six states, has received $3.4 million in LDP checks over the past decade, including $491,726 on the 2005 corn crop, government records show.

Stephanie Walker Spiros, who helps run the sprawling family farm empire, acknowledged that the system has flaws. But she defends it as necessary to cushion other farmers who do not have access to sophisticated financial hedges, and to buttress the farm economy in bad years.

"It's a protection in years of depressed prices," she said.

But the payments for corn alone have grown, from $1 billion for the 1998 crop to $4.3 billion for last year's, even though the average price farmers received for a bushel has remained near or above the government floor for the past five years.

U.S. farmers can also make up for declining prices with higher yields. They now harvest 20 percent more corn from each acre than just a decade ago, and yields in the past three years were the highest ever, according to USDA statistics.

'Paper Corn'

Riding his combine through the heart of Illinois corn and soybean country early last October, Mackinaw farmer John Kuhfuss personified the business-savvy farmer who profits from the LDP.

Kuhfuss is a modest-size farmer by Illinois standards. He sharecrops 1,000 acres of corn and soybeans, splitting the revenue and the government payments with several landowners.

Still, he uses a financial adviser and a commodity broker to help hedge his farming risks with options and futures contracts at the Chicago Board of Trade and Chicago Mercantile Exchange. Farmers call that "paper corn."

It is a different world from that of the 1970s, when his father, the late William J. Kuhfuss, was president of the American Farm Bureau, the nation's largest farm group.

"When he started farming, he hitched a couple of horses to a wagon, hauled his corn to the nearest railroad siding and sold it for whatever the cash offer was -- and in the Depression it was cheaper to burn corn than sell it," Kuhfuss said.

He talked his father into his first contract on the corn futures market -- and he came out a winner.

Now the son uses the lingo of the trader as much as that of the farmer, throwing around terms such as "strike price," "puts" and "calls." He looks for opportunities to sell his crop more than a year before it is harvested.

"I'm perfectly willing to plan a year out," he said. "Sometimes there are opportunities there."

In spring 2005 he had seized such an opportunity and sold 30,000 bushels of corn to a local elevator for $2.25 a bushel. By October, with buyers offering only $1.70 a bushel, that decision looked smart.

With his price assured, Kuhfuss made another smart decision: "I LPDed all my corn at over 40 cents a bushel," he said.

He said he and his partners netted nearly $40,000 in LDP on their 500 acres of corn. They were not alone. On the days he received his checks, other Illinois corn farmers netted $36.5 million.

In Lincoln, Ill., not far from Kuhfuss's place, the farmer-owned Kruger grain elevator was at full-harvest tilt.

General manager Hugh Whelan was keeping a close eye on the LDP.

"The best thing for farmers now is for the market to go lower," he said. But then Whelan put on his taxpayer's hat:

"It's going to take a lot of dollars to pay that LDP."

Global Impact

Today, farm price supports, especially the LDP, are under serious attack.

Last year at the economic summit of the Group of Eight leading industrial nations in Gleneagles, Scotland, President Bush shocked U.S. farm organizations by proposing that certain farm subsidies by rich industrial nations be eliminated. That would mean the end, or drastic scaling back, of the LDP.

The main objection to the LDP is that it hurts world commodity prices by encouraging overproduction.

Farmers abroad lose because "the LDP causes us to grow more corn than we otherwise would," said Sumner, the University of California economist. He advised Brazil when it successfully argued to the World Trade Organization last year that the LDP and other U.S. subsidies depress world cotton prices.

Negotiations over a new world trade deal broke up in disarray Saturday after the United States and other countries deadlocked on the issue of reducing farm subsidies.

Lawmakers from Midwestern farm states -- most of which backed Bush in the past two presidential elections -- have vowed to defend the LDP.

Supporters say it has helped the U.S. trade balance and has encouraged the efficient marketing of grain. Moreover, they say, European and Asian nations subsidize their agriculture at even higher levels.

Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) has warned U.S. trade negotiators not to bow to foreign pressure unless they win major concessions for U.S. agriculture.

"We're not going to buy a pig in a poke," he said.

Researcher Alice Crites contributed to this report.

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