Agriculture in Turmoil : Farm Policy: Sowing Seeds of Paradox

On the broad, flat plain of California’s San Joaquin Valley, surveyor-straight lines of young cotton plants are sprouting, forming thin green ribbons that stretch along the ground with military precision.

In Illinois and Iowa, in Kansas and Nebraska, farmers are piloting tractors and planters across bumpy prairie fields, celebrating the spring by sowing corn and soybeans in orderly rows.

But the burst of activity, the uniformity of the fields and the young plants standing at attention belie the chaos and confusion that is scrambling American agriculture.

Contradictions, inconsistencies and conflicts in Washington’s agricultural, tax and foreign policies are helping to speed hundreds of thousands of family farms toward extinction.

Farmers Producing More

For example, in a time of troubling surpluses, reduced foreign trade and increased world competition, American farmers are hard at work this spring producing even more.

In the Midwest they are planting what could be a near-record corn harvest, even though there is a surplus of corn, and corn prices are below last year’s depressed prices and below the cost of production. The annual wheat harvest will begin next month on the southern High Plains. Barring a spring weather disaster, experts are predicting a record or near-record harvest that will add to mountains of market-depressing wheat already in storage.

Farther west, in California’s Central Valley, vines are loaded with bunches of young raisin grapes, even as farm cooperatives struggle to store last year’s abundant supplies in stacks of wooden bins standing side-by-side along narrow paths, stacks so large that they look like subdivisions of new houses.

Large surpluses contribute to the economic turmoil that is driving family farmers out of business and forcing a dramatic restructuring of agriculture, America’s largest industry. But, though it is among the most visible, overproduction in the face of surpluses is only one of the contradictions of American agriculture.

The “contradictions are all coming home to roost this year,” Rep. Leon E. Panetta (D-Carmel Valley), a member of the House Agriculture Committee, said.

Counterproductive and conflicting federal laws and policies abound in agriculture to the point where they sometimes sound like “Alice in Wonderland” creations.

For example, there are:

--Tax policies that encourage investors to begin raising unneeded, irrigated crops on easily erodible soil in Nebraska using scarce water at the same time the government is fighting soil erosion and looking for ways to conserve that water.

--Agriculture programs that guarantee dairy farmers a set price for their milk, no matter how much they produce, and federal tax breaks for investors who own dairy cows producing surplus milk.

--Federal programs that benefit the large farms and small hobby farms while Congress proclaims “that the maintenance of the family farm system of agriculture is essential to the social well-being of the nation and the competitive production of adequate supplies of food and fiber . . . (and) that any significant expansion of non-family owned large-scale corporate farming enterprises will be detrimental to the national welfare.”

“There ain’t nobody responsible, nobody accountable; the situation is so confused,” Allen Paul, president of the Agriculture Council of America, said. “We just don’t have an integrated (farm) policy.”

Congress will again wrestle with many of these inconsistencies in the coming months as it tries to write legislation outlining American farm policy for the next four years.

One of agriculture’s biggest problems is overproduction. The American farmer--helped by hybrid seeds, fertilizer, insecticides, herbicides and weather--is the world’s most efficient producer of food.

Huge surpluses of feed grains depress crop prices. To compensate, farmers try to grow more, hoping to overcome low prices by selling more grain. Periodically, the government tries to cope with this paradox by paying farmers not to produce.

This year, for example, Midwest corn farmers will be eligible for subsidies if they set aside or idle 10% of their cropland, theoretically reducing production by 10%. In fact, this federal program is likely to have only a marginal impact on the size of the harvest rather than reducing this year’s crop by one tenth.

“The acres a farmer takes out of production are his poorest acres,” Royce A. Hinton, a farm management specialist at the University of Illinois, said. “There’s no requirement in the program that the acres have to be of average productivity. The only requirement is that there was corn planted on the land in the last three years.”

Farmers tend to pick their least productive land or land that is inconvenient to farm for these types of programs, reducing the program’s goal of cutting production. At the same time, they generally use the fertilizer they save on the unplanted 10% of their land on the ground they do sow, increasing their yields there.

“To maximize farm income, you have to try to produce as much as you can on the land you have,” Hinton said.

“The government has set up a system under which dumb farmers will produce themselves into oblivion,” said Jim Riordan, agricultural aide to Iowa’s lieutenant governor and himself a farmer. He said large farmers with extensive land holdings can afford to idle more acres annually than small farmers and, as a result, collect higher federal payments.

Agricultural economists generally believe that farm programs, instead of reducing land in production, should reduce the number of bushels a farmer can market.

“If you really wanted to control supply, you’d have a program that had quota in terms of bushels instead of acres,” Hinton said.

While the government is paying farmers to reduce production, federal tax laws are encouraging investment in facilities that increase production. Farming the tax code has become a popular tax shelter for urban money.

A study published early this year by Congress’ Joint Economic Committee found that the use of federal tax laws by persons who were technically not farmers “increased supplies and lowered prices for some farm commodities in particular, and possibly for all farm commodities in general.”

The same report said the tax laws have encouraged sufficient outside investment to drive up farmland prices (until the farm economy began to turn sour in the early 1980s) and encouraged the growth of very large and very small farms “at the expense of medium-sized family farms.”

“Farming has more tax-sheltered opportunities than most other industries,” Chuck Hassebrook, an analyst at the Center for Rural Affairs, said. “And the impacts are often counter to the stated objectives of agricultural policy.”

One example of tax policies that counter agricultural policies can be seen in Nebraska’s rolling sandhills.

Ideally, this easily erodible land should be covered with grass and used for grazing. The sandhills are neither suited nor needed for crops.

But investors have found this a good place to farm the tax code and to shelter income earned elsewhere.

Investors’ Outline

Hassebrook, who studies the impact of federal tax policies on agriculture, provided this outline:

After buying sandhill land, investors bulldoze it, flattening hills and ridges. This qualifies as a “conservation expense” under federal tax rules because it is a land-leveling activity. Once flat, this semi-arid land needs water. Using investment credits, investors then install irrigation equipment. Often it costs more than the land.

This equipment may last 15 years or more, but tax laws allow it to be depreciated in five years--a handsome tax benefit since the water immediately increases the value of the land. Water for the irrigation equipment comes from the Ogallala Aquifer, in effect a subsurface lake of fresh water that the federal government and Midwestern states are trying to save from depletion.

At the same time, the federal government allows investors and farmers who deplete water from this precious aquifer a tax depletion allowance.

‘Self-Defeating Policy’

“It’s a pretty self-defeating policy . . . another one of those paradoxes,” Ron Krupicka, director of small farm research for the Center for Rural Affairs, said.

Once the land is improved, investors plant a crop, usually corn, a crop so plentiful that almost annually the same federal government that supplied the tax benefits to the investor is paying other farmers to cut back on their production.

To add to the absurdity of this situation, investors eventually become eligible for government subsidies on their corn crops, and once they have taken their maximum tax benefits from the land they have been able to sell the improved land at a profit. Of course, these profits qualify as capital gains, leaving 60% of the profit tax free.

The net effect of this entire process in the last several years has been to increase the amount of cropland, increase the amount of corn produced annually, increase erosion and water-depletion problems, drive land prices down across the Midwest and reduce the income of third- and fourth-generation farmers who are now faced with bankruptcy or foreclosure.

The impact of tax breaks and subsidies can be seen in other agricultural enterprises. “Any time you make something a tax shelter it’s going to attract investment,” Hassebrook said. That is what happened when in the 1970s changes in tax laws allowed buildings used to raise hogs to be depreciated or written off in five rather than the traditional 18 years.

As a result, investors looking for tax shelters began pumping money into hog production facilities. That greatly expanded the number of hogs being raised and marketed and made it difficult for smaller farmers who could not afford the sophisticated facilities to compete, driving many of them out of business. Just between 1980 and 1982, Hassebrook said, the number of pork producers declined by 30%--most of them smaller producers.

Farming is attractive as a tax shelter because, for income tax purposes, the definition of a farmer is anyone “engaged in the business of farming.”

“A farmer does not have to live on a farm, nor depend upon farming as a livelihood to any degree” to be considered a farmer for tax purposes, the Joint Economic Committee report said. For example, a stockbroker in New York City who is a limited partner in a dairy farm in New Mexico is a farmer. A physician in Seattle who rents farmland in Iowa to a local farmer on a sharecrop basis is also a farmer.

The dairy industry provides both an example of how subsidies help farmers and how tax laws help investors. Milk ranks as one of the most subsidized agricultural commodities. The government guarantees that it will buy all excess milk production at a fixed price. This has cost taxpayers more than $1 billion a year since 1979. In 1982, payments for surplus milk reached a record $2.6 billion, or about $13,000 per commercial dairy farmer, according to the U.S. Agriculture Department.

At the same time, tax laws offered accelerated depreciation to expand dairies and depreciation allowances on cows that produce milk but are classified as breeding stock. Dairy farmers and investors also can sell the calves born to dairy cows at a profit.

Farmers generally say they want federal tax codes changed so that only farmers who work the land can benefit from tax laws designed to enhance agriculture.

“We’ll take a complete revision of the tax codes, absolutely eliminating the outside investor from farming,” Robert J. Mullins, executive director of legislative services for the National Farmers Union, said.

Even with the nation’s big surpluses of dairy products in 1982 and 1983, the Reagan Administration repeatedly balked at reducing government supplies through sales to the Chinese, who were interested in obtaining milk products for the first time, opening a potential new market.

Eventually, Agriculture Secretary John R. Block said in congressional testimony that the Administration was putting dairy product sales to China “on hold” as a way to force that country to meet its obligation to buy 6 million tons of grain. The dairy product sales were never made. Taxpayers footed the storage bills.

Even with the huge federal expenditures for surplus milk products, small dairy farms have been vanishing, giving way to larger and larger operations--a pattern repeated in just about every major commodity. There were 2 million farms with dairy cows in 1959 and only 300,000 in 1983. Commercial dairy farms declined from 600,000 to 200,000 in the same period.

“It is neither the policy nor the intent of Congress that agricultural and agricultural-related programs be administered exclusively for family farm operations,” the 1981 Farm Bill reads. “But it is the policy and express intent of Congress that no such program be administered in a manner that will place the family farm operation at an unfair economic disadvantage.”

“It has always been advantageous for (Congress) members to argue that programs are serving the family farm,” Rep. Panetta said. “Unfortunately, programs have not been designed for family farms but to serve all of agriculture. The result is, big farms are getting bigger and family farms are drowning.”

Researcher Wendy Leopold contributed to this story.