Severity of the 2012 drought will no doubt draw calls for law makers to pass some sort of ad hoc disaster aid legislation. Fairly early in the drought, analysts began drawing comparisons to 1988. As heat intensified and crops withered, chatter surfaced as to whether 2012 conditions are as bad as the 1930s. Such comparisons intensify pressure for Congress to provide disaster aid.
Law makers should tread carefully.
A colleague asked whether disaster payments would undermine the crop insurance system. My colleague was focusing on moral hazard. Moral hazard is a situation where parties tend to take undue risks because they do not bear the full costs of taking that risk.
Any number of farm bills stretching back 25 years have contained legislation improving federal crop insurance. Those "improvements" include taxpayers picking up 65% or so of the tab for the premiums on federally subsidized products. At one time, taxpayers also foot the bill for all of the administrative costs on federally subsidized products. Those costs could run another 20% to 22% of the premium.
As politicians crafted those farm bills they admonished farmers to learn how to use tax payer subsidized crop insurance to manage weather/production risk because ad hoc disaster aid legislation would be no more. When disaster struck, those hardest hit contacted their legislators. Almost no politician can resist passing out tax payer dollars to constituents in hopes that Washington largess will buy a vote, especially in an election year and the election might be close. Such disaster bills encouraged farmers to take undue risks because they "knew" Washington would bail them out if the going got tough enough.
Call me a slow learner. Over several farm bill cycles I wrote stories passing on to farmers the Congressional admonishment to buy crop insurance because no aid would come in event of disaster. After being proven wrong three or four times with ad hoc disaster legislation, I stopped writing such stories.
Will politicians craft disaster aid this go around? That question reminds me of a sign once seen in a lobbyist's office. It read, "Those who know politics best, forecast least."
Politicians may be able point to beefed-up crop insurance to justify not yielding to provide row crop disaster assistance. Making that same argument for not aiding livestock producers is more difficult. The short-term pain on livestock producers is at least as severe as on crop producers even if they have livestock gross margin insurance. Breeding herd liquidations may well have serious impacts on livestock producers long after the crop sector has mounted a recovery. The recovery in crops could come as early as next year, provided we do not have a repeat drought. Consumers will likely face higher food prices, particularly meat prices, indefinitely. Cow liquidations, which provide lean beef, may result in the lowest hamburger prices of the decade lying immediately ahead. Drought is also stressing a host of fruit, vegetable and specialty crop growers. Each one has a vote and can get a congress person's ear.
If politicians yield to provide ad hoc disaster aid to livestock, pressure will intensify to provide aid to row crops as well.
Politicians could make one move that would ease pressure on livestock feed prices without calling it direct disaster aid. That move would be easing the ethanol mandate in the renewable fuels standard.
Corn is about 79% of the cost to produce ethanol. Corn prices are up 50%. Relatively cheap oil caps gasoline prices. Ethanol margins look almost as dismal as the corn crop. The food advocates in the food vs. fuel debate will surely point out that requiring ethanol producers to operate at losses simply to meet a government mandate lacks logic. Granted rising co-product prices do ease some of the squeeze on ethanol margins.
From livestock producers' standpoint easing the ethanol mandate makes perfect sense. A coalition is pushing legislation – the "Renewable Fuels Standard Flexibility Act" (H.R. 3097). It would require a biannual review of ending corn stocks relative to their total use. The farther the stocks-to-use ratio falls below 10%, the more the proposed legislation would ease the renewable fuels mandate.
Unfortunately, politicians may not be able to navigate the political mine field to pass such legislation.