Sunday, August 21, 2011

Food programs and out-of-control federal spending

With so much news regarding the national debt featured prominently in the major media of late, I thought it might be worth while to look at the debt – and it’s attendant federal spending – from a uniquely agricultural perspective.
Many – perhaps most of you – reading this blog are engaged in the production of food. This being the case, two aspects of federal spending are perhaps more immediate to you than to others.

The first is federal spending on direct or indirect aid to farmers and ranchers.

The second is federal spending on food programs – that is to say, the amount of federal money given to people to purchase food.

These things are immediate and important to us (I too am engaged in food production) because they bear on the huge problem of the burgeoning national debt and how it relates to each of us directly. The problem of the debt is self-evident and important (or should be) to all Americans. More on this in a moment.

As food producers, we make up somewhere between one and two percent of the population, so the immediacy with which we view federal spending on farm/ranch support is not shared with the other 98-99 percent of the population.

Since nearly all federal spending on food programs is channeled through the USDA, and is therefore nearly always described as “ag spending” and equated with money paid directly to farmers and ranchers, food programs are of immediate concern to us as well.

While we represent at most two percent of the population, food programs give federal cash directly to more than 50 million Americans, fully one-sixth or about 17 percent of the population. Federal spending on food programs is therefore understandably immediate and important to those folks, too.

Now let’s look at the numbers associated with the federal debt, and since they are so large, let’s put them in a context we should all be able to understand. First the huge numbers:

Annual income for the United States: $2.17 trillion ($2,170,000,000,000)
Annual spending for the United States: $$3.82 trillion ($3,820,000,000,000)
Annual NEW DEBT for the United States: $1.65 trillion ($1,650,000,000,000)
Existing debt for the United States: $14.271 trillion ($14,271,000,000,000)
U.S. budget cuts from debt ceiling legislation: $38.5 billion ($38,500,000,000)

To get a good feel for these numbers, simply cut off the last eight zeroes and think about them as the annual budget for your family.

Your annual income: $21,700
The amount of money you actually spent: $38,200
Debt you added to your credit card: $16,500
Previous unpaid balance on your credit card: $142,710
Spending you decided to cut to “fix” your indebtedness: $385

Just imagine the conversation with your credit card company. “I know I’ll owe you more than $150,000 at the end of the year – my total earnings for seven years – but good news! I’m not going to charge any movie rentals from now on, so instead of charging $16,500 this year, I’ll only charge $16,115! Of course I’ll never be able to make any actual payments on what I owe you, but, I’m sure my kids will make it good someday…”

In keeping with this theme, let’s say we tell our credit card company that we’re actually prepared to exercise even more spending restraint. In addition to no longer charging movie rentals, we will also no longer make our annual donation of $328 to the local school’s lunch program. Therefore, we’ll argue, instead of borrowing $16,500, we’ll only borrow $15,787. We’ll still not make any payments to the credit card company, nor will we plan to ever make such payments. Someone will take care of that in the future. In the mean time, we’ll have reduced (albeit by a tiny fraction) our rate of borrowing. That’s fair, isn’t it? We're doing a good thing, right?

Okay, let’s turn away from the imaginary family and back to the federal budget. Using the same “chop off the last eight zeroes” method for the moment, we see that completely eliminating the USDA from the federal budget will have even less impact on the federal budget than the “cuts” derived from the most recent round of debt ceiling legislation. Put the zeroes back, and you see that getting rid of the USDA entirely cuts only $328 billion from federal spending.

Cutting the USDA won’t fix the problem. But cutting the USDA, particularly if it were done suddenly, would almost certainly cause terrible problems for rich and poor alike.

Firstly, more than 66 percent of the USDA budget goes to providing food for the poor. Think about that for a moment. During budget talks, it's always trendy for major media talking heads to regurgitate numbers showing that "rich" farmers are receiving unneeded "welfare" dollars from the federal government. The truth, however, is that for every three dollars of ag spending, two go directly into the electronic accounts of the 17 percent of Americans who qualify for food assistance. Of the remaining dollar, only about 60 cents go to farmers. The remaining 40 cents goes largely to bureaucratic overhead and to research. With the possible exception of military spending, which is done on an entirely different scale, I'd argue that it is in ag spending where the taxpayer gets, by far, the best return on investment. Nowhere on the planet is food less expensive, nowhere on the planet are the "poor" so very, very wealthy.

But out of control spending is destroying the U.S. economy, and with it the future of our country. I can see no good reason not to remove farmers and ranchers from the federal teat. So long as private crop insurance is available and so long as the government does not continue to manipulate commodity markets (in order to keep food prices artificially low), farmers and ranchers can do just fine.

But it took more than half a century to get where we are regarding federal support of farming and ranching. The weaning process will take time.

It'll take time as well to wean the poor from food programs. A sudden end to those programs would be catastrophic. The poor would no longer be able to buy food – at least not with government funds. Some would have to sell off personal possessions to buy food. Some would have to budget and scrimp and save. Some would starve.

Since food is the most inexpensive thing we buy in this country, you might ask yourself why more expensive items can’t be eliminated first? As I see it, every other federal program should be on the table as well. If we all share the burden of giving up some of our treasured federal cash, the pain will be negligible. But the weaning process should be gradual and well planned.

A sudden end to farm payments would cause many farmers to fail. Fewer farmers would produce less food, and prices would soar. In fact, not only would prices soar, real food shortages would occur. Genuine food insecurity would begin, ushering in hoarding, riots, and all manner of disruption.

Agricultural research would come to a stop, and with it the ability to continue increasing yields and fighting pests and weeds.

It’s clear that abruptly “slashing” the USDA would have serious unintended consequences.

My point in this essay is neither to advocate “slashing” government programs nor to imply that government programs, including the USDA, are too important to be cut.

The point is that cuts have to be made to save both the economy and the country, but they have to be made over time and with a full understanding of the disruptions many of the cuts will make.

In truth, there are very few segments of society who cannot live without federal entitlement dollars. However, a great many segments have become dependent over time on these entitlement programs.

In my mind, the best thing for all of us – farmers and ranchers and food program recipients – is to become completely independent of, and no longer rely on, government entitlement programs.

This would be a fundamental change for all of us, and change is scary. But try to think about a system where you are completely in charge of your farm or your ranch or (in the case of those mired in the depths of the food programs) your life.

Is there really that much downside to no longer being under the thumb of faceless Washington bureaucrats or beholden to the whims of “transformational” politicians?

Thursday, August 4, 2011

Food prices: home and abroad

Though food prices in the U.S. continue to trend higher, a report by the USDA’s Economic Research Service (ERS) shows that Americans continue to spend a smaller percentage of their disposable income at the grocery store than ever, and have by far smaller food budgets than citizens of any other nation.

U.S. retail prices for all food rose 1.8 percent in 2009 and 0.8 percent in 2010, numbers which include prices for both “food away from home” (restaurant meals, etc.) and “food at home” (retail-purchased food prepared and consumed at home – traditional home meals).

Food away from home prices rose 3.5 percent in 2009 and 1.3 percent in 2010. Food at home prices rose 0.5 percent in 2009 and 0.3 percent in 2010. These numbers are at least partly influenced by consumer purchasing habits; as away from home costs increased, many consumers reduced their consumption of restaurant meals and increased consumption of home-prepared meals. As demand for restaurant meals fell, restaurateurs lowered prices to draw more customers to their establishments.

Food prices are forecast to continue to rise over the next 24 months however, with all food increasing 3-4 percent in 2011 and 2.5-3.5 percent in 2012. Food away from home prices are forecast to rise 3-4 percent this year and 2-3 percent next year, while food at home prices are forecast to jump 3.5-4.5 percent this year and 3-4 percent in 2012.

A table of food price index changes is available online at

While food price increases are unwelcome, U.S. consumers spent only 9.4 percent of their disposable income on food last year, tying the record low percentage set in 2009. This figure is the lowest since 1929, the first year ERS began compiling annual food spending reports.

To put 9.4 percent of disposable income in historical perspective, Americans spent around a quarter of their income on food between 1929 and 1935 – ranging from 25.1 percent in 1933 to 23 percent in 1931 and 1932. Those numbers began to decline in 1936 and have generally trended down ever since, falling into the teens in 1936 and finally falling below 10 percent in 2000.

A table of food expenditures as a share of disposable income is available online at

In comparing U.S. food expenditures to those of other nations, a slightly different number is used – “Food Share of all Expenditures.” These numbers are derived from World Bank data and describe the total percentage of per capita gross national income spent on food rather than percentage of per capita disposable income. The latest published figures are for 2008.

U.S. consumers spent by far the lowest percentage of gross income on food at 5.9 percent. Consumers in other “high income” countries spent as follows: 7.7 percent in Singapore, 8.5 percent in the U.K., 9.9 percent in Germany, 12.5 percent in France, 13.6 percent in Japan, 14.3 percent in the Czech Republic, and 14.5 percent in South Korea.

Percentages in “upper middle income” countries ranged from 14.1 percent in Hungary to 31.8 percent in Romania. For consumers in “lower middle” and “low” income countries, food expenditures ranged from 24.1 percent in Brazil to 41.9 percent in Indonesia.

Though consumers in other countries around the globe continue to pay higher food prices and spend a larger proportion of their gross income on food than U.S. consumers, the overall global food bill has been trending down. In 2002, the percentage of gross income spent on food averaged 12 percent in high income countries, 26.1 percent in upper middle income countries, and 36.6 percent in lower middle and low income countries. In 2008 those percentages had fallen to 11.5 percent in upper income countries (down 0.5 percent), 21.5 percent in upper middle income countries (down 4.6 percent), and 33.9 percent in lower middle to low income countries (down 2.7 percent).

A table of worldwide food expenditure patterns is available online at

These numbers are remarkable but don’t, of course, tell the entire story. Global food cost data from 2008 to the present day is sketchy at best. Solid data analyses generally take 1-3 years to complete, so today’s real numbers are in some sense impossible to know. We can guess that the global economic downturn since 2008 has most likely increased food costs around the globe, though to precisely what extent it’s impossible to say just now. We also know that global food production numbers have been trending up in recent years as modern agricultural production techniques continue to trickle down into less industrialized, more agrarian societies.

The joker in the global food cost deck may well prove to be the health of the U.S. economy. If congress can find a way to get runaway spending under control, America’s economy will continue to drive the world economy. A healthy U.S. economy will ensure continued advances in agricultural production as ag sector profits in this country allow continued research, development and implementation of techniques and technologies to boost food production. Increased production will continue to trickle down to the poorest countries, easing hunger and raising the overall lot of humanity to unprecedented levels.

Failure of the U.S. economy may spell more than tough times for Americans. Without the driving force of a healthy U.S. economy, food production may begin to trend down both here and around the globe, perhaps raising the curtain on an unprecedented age of darkness.

Ag spending and the federal debt

With Congressional Republicans and Democrats locked in partisan battle over raising the country’s $14 Trillion debt ceiling, it’s worth taking a few moments to look at federal ag spending. Is USDA part of the problem? Can ag spending be trimmed? Or are the USDA and ag programs in general so vital to the national interest that they should be inviolable?
The debt ceiling isn’t causing the present economic crisis, it’s merely a symptom. The cause is Federal spending, which far exceeds Federal income, or revenue. Federal spending for 2011 will exceed $6 trillion. Federal revenue for 2011 will be $4.5 trillion. This leaves a $1.5 trillion deficit to be made good.

There are only two ways to make the deficit good – by cutting spending or by borrowing the money. In the past, Congress has almost always chosen to borrow. Though China and a few other countries have previously bought U.S. debt, there are few overseas takers these days for U.S. bonds. Today, in a complicated accounting scheme which would be unlawful for any but the Federal Government, the U.S. is borrowing from – itself.

The argument over raising the debt ceiling is actually an argument whether the government can write more I.O.U.’s to itself. This scheme is hardly sustainable, though most Republicans and Democrats favor it. At the bottom line, the only difference between the “plans” of each side is whether to make entirely cosmetic and temporary spending cuts.

Regardless of the outcome of this round of “crisis negotiations,” at some point the U.S. is going to have to quit spending more than it takes in in revenue. At that point, spending cuts will have to be made. Where the cuts will come from and the details of how the cuts will be managed are impossible to know at this time, however, the deeper the crisis is allowed to go before spending corrections are made, the more likely it becomes that the cuts will be imposed with little real planning. In such a situation, those affected by the cuts will be in for a rough ride.

In thinking about the best way to make spending cuts, let’s look at how the 2011 budget is being spent. These numbers aren’t precise, because no formal budget has been passed or implemented in two-and-a-half years. However, they are the best numbers available and are probably very close.

Of the $6 trillion spent in 2011, 16 percent went to defense, 14 percent to education, 18 percent to health care (primarily Medicare), 16 percent to pensions (primarily Social Security retirement), 11 percent to welfare, 5 percent to protection (Homeland Security, TSA, etc.), 5 percent to interest on the debt, 4 percent to transportation, and 2 percent to general government (which includes USDA).

The obvious question is where to do the cutting. I have my own ideas, but it might be better to begin with general ideas rather than specific examples.

When we look at any part of the budget, we need to keep in mind that it took time to get to the numbers we see today, and ideally, it should take time to roll the spending numbers back. The idea of “slashing” spending is attractive – massive across-the-board cuts would quickly solve the problem on the balance sheet. Immediate and drastic cuts would be hard on the people who have come to depend on government spending, though. And the list of those who would be adversely affected includes most Americans. Though not everyone receives welfare, nearly everyone depends on the government for things like defense, transportation infrastructure, police services, etc. Over the years we’ve all increasingly come to rely on government spending for the local education of our children and for supplemental retirement income and health care.

A good example of the complexity of cutting spending can be found in Federal agriculture spending, a topic of great interest to most who read The Business Farmer, but of little interest to the 99 percent of Americans who aren’t involved in agriculture.

The USDA budget is far less than one percent of the entire federal budget, at about $32.8 billion. Of this, only about 22 percent goes to farmers and ranchers as direct payments or crop insurance payments. A further 9 percent goes to conservation, with direct payments to many farmers and ranchers through various conservation programs. Yet 68 percent of the USDA budget goes to food welfare programs. So farmers and ranchers receive at most 31 cents of every Federal ag dollar, while “poor” people receive 68 cents of that dollar, which is less than 1 percent of Federal spending.

Unfortunately, a great many farmers and ranchers have come to depend on the USDA for survival. Without crop subsidies, insurance, and other Federal income, many farmers and ranchers would be unable to survive. If Federal ag spending were “slashed,” many farmers and ranchers would be out of business in short order. However, almost all farmers and ranchers would be able to adapt to cuts phased in over a number of years.

Farmers and ranchers make up about 1 percent of the U.S. population, yet they essentially provide all of the food consumed by the entire population. Therefore, an unintended consequence of precipitous cuts in Federal ag spending would very likely be food shortages – a crisis for which no one is prepared and which would probably be the biggest crisis ever faced by America.

The problem of reigning in Federal spending is complex, but the stakes are very high.