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Green thumbs: the PiK and Roll and other scams from the farm belt; the ingenious ways farmers milk government subsidy programs.

GREEN THUMBS:

THE PIK AND ROLL AND OTHER SCAMS FROM THE FARM BELT

The Future Farmers of America wants its young members to have the rich experience of tilling the soil. So in its classrooms across rural America, 416,000 high-school-aged students learn the right time to sow, the best ways to reap, and the skill that every modern farmer needs--how to harvest cash from the federal till.

Today's FFA concentrates on the business side of agriculture, according to spokesman Jeri Mattics. In Princeton, California, the local FFA chapter enrolled their 60-acre rice field in the federal price support program--and received $7,087 from the U.S. Department of Agriculture, according to the National Taxpayers' Union. Princeton High's FFA advisor, Andy Ferrendelli, called it "a learning experience,' noting that "they go out and get loans just like other farmers around here.'

Students who learn to plow the markets and federal programs can win blue ribbons. Last year, FFA's fiber crop winner was Allen Lewis, a student cotton farmer from Tennessee. Lewis, a high-school senior, used all available government programs and reported profits of a little over $15,000 for his year-long project. In his own down-home way he told the judges, "The key is determining my break-even point . . . I analyze the market situation and act accordingly.'

The kids are learning just how rich the soil can be. Everyone knows about the growth of farm subsidies--which cost the federal treasury $26 billion last year and now account for nearly one-third of farmers' income. Less well-known are the financial gymnastics farmers go through to cash in. Unlike city-dwellers who need a helping hand, farmers do not receive their government aid in a tidy monthly check. The Agriculture Department has a labyrinth of programs to raise prices, cut acreage, and promote exports. It's a nutty system, which lets the wealthiest farmers reap huge benefits while the poor are not helped enough. It is also turning farming into a perverse game in which the farmer who survives is not necessarily the most productive, but the one most adept at exploiting loopholes in subsidy programs. Farmers who once spent their time figuring out how to get rid of grub worms and boll weevils now rise early to tap their PCs, calculating how to get the most from the federal government. "To put it very bluntly,' an Iowa farmer told the Des Moines Register, "if you're not farming the government today, you're not doing a very good job.'

Here are five ways farmers improve their government yields:

The Combo Platter

To play the farm subsidy game, you have to know the rules. They vary a bit depending on your crop, but for all of them, from sorghum to soybeans, from cotton to corn, there's just one object: manipulating the price.

Uncle Sam does that for you. In consultation with lobbyists and the USDA, the House and Senate agriculture committees set a "target price.' This is what all the interests agree farmers ought to get for their crops. Congress also sets a lower price, called the "loan rate.' This is supposed to approximate what farmers would get for crops under normal, if regrettable, market conditions. In fact, true market prices are usually, but not always, much lower than the loan rate.

Though created out of thin air in Washington, these two prices are as real to farmers as high and low tide are to fishermen. Farmers receive a "deficiency payment'--please don't call it a subsidy-- that is the difference between these government-invented prices. In June, the deficiency payment per bushel of corn was 75 cents, so the average large family farm, which produces 214,852 bushels of corn a year, was eligible for a $161,000 deficiency payment.

That's just for starters. Only a lazy farmer sits on his porch, counting his deficiency payments. The enterprising yeoman keeps the subsidy but also gets himself a loan from the government-owned Commodity Credit Corporation. The idea behind these loans is to give farmers enough money to keep them afloat until prices rise. That same farm was eligible for a $490,000 loan. The catch is, this loan rate happens to be 40 percent higher than the local market rate for corn. (The annual loan rate for all crops has been running 50 percent higher.)

With loan in hand, the farmer can either pay it back in cash or simply forfeit the collateral (the grain) to the CCC and keep the loan. If he holds onto the grain, he must pay for the storage and the principal and interest. Not an appetizing thought.

So Farmer Brown orders up The Combo Platter: he turns the crop over to the government, keeps that loan money and collects the original deficiency payment. Farmer Brown, therefore, is eligible for $651,000 for a crop that would have brought him about half that much on the market. Smiling, he's not alone and he's done nothing illegal. Over the past three years, half the farmers who took out CCC loans gave their grain to Uncle Sam--and kept the money.

The Prince of Liechtenstein Means Test

Anyone can farm government loans, even if they're rich. That's not cheating; that's the way the program is supposed to work.

Federal agriculture loans are linked to the size of a farmer's crop, not to whether the farmer needs the money. There's no fussing with messy means tests. The bigger the crop, the bigger the loan. "There is no denying that some large, profitable farms receive large government payments and loans, but that is to be expected. Program benefits, such as deficiency payments, are determined by the number of bushels or other units produced,' explains USDA official Jim Johnson. It doesn't matter if you're Ernest & Julio Gallo or Ma Joad.

No wonder in 1985 64 percent of farm subsidies went to the largest 21 percent of farms.

The rich are equally entitled to special marketing loans. This kind of borrowing is not only profitable, but downright patriotic. These marketing loans were meant to help our nation's rice and cotton farmers (the only crops eligible) stand tall against foreign competition. Under the program, they can peddle their long grain or puffy instant rice overseas at absurdly low prices. The Feds make up the difference between what they get on the Manila market and what they would have gotten in Memphis.

Farmer Brown can take out a "loan' from the government at the loan rate ($6.84 per hundredweight of rice), and then pay it back at that low foreign price ($3.50 per hundredweight). He's only paying back half of what the government lent him. Nothing is stopping him from collecting a deficiency payment either.

Congress recognized that this program was more than a bit hypocritical. It was a textbook case of dumping on foreign markets, precisely the kind of practice that makes us so annoyed at the Japanese. So rather than ignite a trade war, Congress bit the bullet on marketing loans: it expanded them to include rice and cotton sold in this country. A program once meant to show the flag now subsidizes the rice an Arkansas farmer sells in Vermont.

All this has been like rain after a drought to the nation's rice and cotton agribusinessmen. For instance, the J.G. Boswell, Co. in California's San Joaquin Valley picked up a quick $20 million last year. But it's not just Americans who have benefitted from this flag-waving program. Because the programs sudsidize the price of all rice and cotton grown in the United States, any foreigner who grows here gets federal aid. Last year, the Crown Prince of Liechtenstein collected $2.2 million in subsidies for his interest in a Texas rice farm larger than his native country.

Congress has long been conscious of the bad press caused when the very rich receive subsidies. In the early seventies Congress imposed a cap-- currently $250,000--on the amount any one person can get back from the government after he sells his crop. But the caps don't make the crown prince sweat at the baccarat table. Marketing loans start out as regular CCC loans, on which there are no limits. If the prince and his Texas associates feel cramped by the cap, they can just forfeit their crop and pocket the multi-million "marketing' loan.

People Who Need People

Next time you're driving along a rural highway and see a leather-skinned man, riding a tractor, wiping his brow, and plowing his field, don't assume he's a farmer. He may be a farmer-entity.

When Congress imposed per-person payment limits, it left the secretary of agriculture to define just what "person' would mean. Subsequent USDA regulations conferred personhood on any legal entity, including individuals, joint ventures, limited partnerships, corporations, associations, trusts, or estates. Though legally corporations have some of the same rights as people, most federal laws manage to make necessary distinctions between the two. We don't, for instance, tax people and corporations at the same rate or under the same rules. Not making that distinction in agriculture left a hole as big as all outdoors, one particularly useful to large cotton farmers--with powerful friends in Congress--who felt squeezed by the limit. When USDA tried to patch the hole with new regulations a few years later, Congress ripped it open again, mandating that USDA stick to the old definition.

Like Sybil, today's farmer can establish as many legal identities as he wants and have each one receive money up to the limit. If a farmer and his sister run a farm together as a corporation they can each collect up to $250,000 in individual payments, plus another $250,000 for their corporation.

It is perfectly legal to have dozens of corporations living under one roof. General Accounting Office investigators found a 5,841 acre farm (they won't say where) operated by a father, his four sons, and one daughter. They qualified for $595,000 worth of payments even before he decided to have some corporate offspring. Afterwards, his new farm family included the same six people plus 15 brand-new corporations formed through various combinations of the family members. The grand total: 21 "people' qualifying for government assistance. In 1986, the family collected a $1.05 million deficiency payment. Farmers used to need large families so that there would be hands to do the chores. Now each new bundle of joy means a small corporate empire.

This farm-multiplication scheme makes agriculture an attractive investment. According to the GAO, one farm management company broke up a 6,660 acre farm into 28 separate tracts, and rented them to investors, each of whom could receive subsidies. The farm's total federal take became $1.4 million: it would have been only $50,000 if owned by a single company. In 1985, there were $20 million in payments to foreign-owned farms.

Just as New York breeds literary trends, the South hatches federal farm subsidy scams. Back in the seventies, the people who had the most to gain from people-multiplying were those with the biggest subsidies to protect: southern rice and cotton farmers, with their relatively large land holdings and perennially low commodity prices. The most complicated of these multiplying schemes was dubbed the "Mississippi Christmas Tree.' As corn, wheat, and other grain prices fell in the eighties, the Mississippi Christmas Tree moved north and west, with devastating results on the federal treasury. Between 1984 and 1986, almost 9,000 new "people' were reorganized onto the USDA payment rolls. The number of persons receiving deficiency payments at or near the limit climbed from 4,300 in 1983 to 29,000 two years later. This, of course, created a booming new business for rural barristers; the technique's spread, one USDA official told the National Journal, is a "welfare program for lawyers.' By 1989, GAO estimates that all the paper-shuffling could cost the government $2.3 billion.

Quid Pro Dough

Farmers and agribusiness executives argue that huge payments are misleading because farmers face a serious quid pro quo for joining one subsidy program. They point to the USDA requirement that participating farmers leave a certain percentage of their land fallow. The "set-aside' requirement ranges from 35 percent for rice farmers to 20 percent for corn. Ostensibly, the farmer trades much of his productive capacity-- and profit--for a generous government check.

But any farmer with a truly green thumb can beat the set-aside. You may have heard that some farmers commonly qualify for government aid by counting as "set-aside' land they can't use anyway, such as acres with rocky or sandy soil, land that tends to flood, or fields that are left fallow because of normal conservation practices. In an interview with the Des Moines Register, former Rep. Cooper Evans dubbed this "an almost universal practice, one that I, too, have felt compelled to follow with my own farmland. The wettest part of my whole property is all set aside.'

Using still another dodge, farmers qualify for subsidy programs by setting aside land not to lie fallow but to produce forage for their livestock. So Farmer Brown could fulfill his set aside requirement for the corn subsidy program by planting hay on 20 percent of his land. Or, under a separate farm subsidy program called the "50-92' plan, a farmer can collect deficiency payments on 92 percent of his land for agreeing to set aside--and, if he wishes, grow forage on--50 percent of it.

Then there are cases of outright fraud. In California, a farmer got more than $4 million in subsidies for "idling' 14,000 acres that were submerged under nine feet of water. In Iowa, two different farmers counted the same 103-acre piece of land in their set asides.

Finally, some farmers use special seed, extra fertilizers, pesticides, herbicides, and machinery to increase the amount of crop they can produce per acre. Although this technique seems less devious, it achieves the same end as the others: it allows farmers to qualify for billions from federal programs intended to reduce production while at the same time enabling them to increase production. That, in turn, lowers prices further, necessitating more government spending and more set asides.

Pik and Roll

It seemed like a great idea. The government's Commodity Credit Corporation was loaded with surplus grain from loan forfeitures; the farmers had billions in subsidies coming. Aha! said the Reagan administration in 1983: instead of cash, we'll make farmers take some of their subsidies in grain, which they can then go out and sell or keep. (It's called the "Payment in Kind' program, or PiK for short.) That proved a logistical nightmare. So rather than the grain itself, last year farmers started getting "PiK certificates' good for a set amount of grain. Farmers could sell or trade these certificates like coupons or securities. So far, so good.

The government's mistake was letting farmers use PiK certificates to pay back their government loans. Now there's a thriving market of farmers who spend their days trading PiK certificates at the government's expense.

The simplest PiK scheme, the PiK and Roll (named for a basketball play) works like this. The government gives Farmer Brown part of his deficiency payment--say, $2,200--in PiK certificates. He can sell his certificates or trade them in at a nearby CCC warehouse for $2,200 worth of grain at the local market price--1,000 bushels if the price is $2.20 a bushel. But Farmer Brown has taken out a $3,500 loan with the CCC by putting up 1,000 bushels of his own grain as collateral at a loan rate of $3.50. Normally he'll have to pay that $3,500 back (with interest) or forfeit his grain. Under the PiK program, he can settle his loan with his PiK certificates on a bushel for bushel, rather than a dollar for dollar basis. In other words, he's turned $2,200 in PiK certificates into $3,500 in debt relief--courtesy of Uncle Sam. (It's like buying shoes at K-Mart and exchanging them for cash at Gucci.) Plus, he still has the 1,000 bushels of grain to sell on the market or to feed his livestock.

But that's nickel and dime stuff. The real money is in the mushrooming PiK certificate marketplace. For a variety of reasons--all farmers don't take out CCC loans, and loan rates for grain aren't always higher than local market prices--many farmers don't PiK and roll their certificates. Instead, they sell them, at a handsome premium, to farmers who don't have enough certificates to retire their loans. PiK certificates are tied to local grain prices, and grain prices vary from place-to-place; so there's profit in buying certificates where they're less valuable and selling them where they're more valuable. Naturally, clever farmers have started moonlighting as PiK brokers. Jon Drozd, an Allegan, Michigan farmer recently profiled in Farm Futures, says he and a partner have earned $2,000 for a half-day's work brokering PiKs and selling financial advice to farmers who havent's figured out the PiK racket. "Business has been crazy lately,' he told the magazine. The overhead is minimal: just a phone, a calculator, a pick-up to visit farmers, and a revolving line of credit from a local bank. Says Drozd's banker: "Now and then we remind Jon to keep his mind on the home farm.'

Farm Futures also featured an example that would make Ivan Boesky reach for a hoe. "How to Make $31,937 in an Afternoon' described a Michigan farmer going about his pecuniary chores. He drove to the local USDA office, took out a CCC loan of $132,480, and then paid it back minutes later with $92,880 worth of PiK certificates. Subtracting the $7,663 premium he paid for the funny money, the farmer cleared a profit of $31,937 for a few hours of paper work, all on the government's tab. Better yet, he still had the grain. Farm Futures referred to this as part of a farmer's "marketing strategy.'

Ailing farmers do benefit from PiK and Roll. But it's a crazy way to help the poor. The government has no control over how much money leaves its coffers by this route, let alone who gets it. PiK and Roll encourages farmers to take out CCC loans as an investment device rather than as a stop-gap to get through hard times. Like most numbers rackets, PiK and Roll benefits wealthy farmers most because they can afford to buy extra PiK certificates in bulk.

Welfare Reform

The farm program is a piece of Swiss cheese for a relatively simple reason--neither farmers nor their representatives can bring themselves to call farm supports welfare. So the government pays the subsidy indirectly by using the system of target prices and loans to manipulate the prices farmers get for their crops. Sometimes this broadbrush approach helps struggling farmers, but that's purely incidental. There is no means test on price supports.

The solution is just as simple, a plan called "decoupling,' which is being pushed by Senators David Boren of Oklahoma and Rudy Boschwitz of Minnesota. The plan would "decouple' government farm support programs from the market. "The goal of decoupling is to make the farmer's planting decision entirely neutral from the government program,' says a pamphlet from Boschwitz's office. Farmers would plant according to what the market would bear. If that doesn't bring in enough money to feed the family and pay for costs, the government would do what it does for others in need--send a check. Because their payments would be tied to past production, there's no incentive to fabricate new farms, spawn new corporations, or buy grain in other states to make more money.

A system of direct income support would make government dependency less easy for farmers to swallow. They could no longer kid themselves that the farm program merely provided them with a "fair price.' Many farm groups oppose the plan on the grounds that it would turn the farm program into welfare, to which Boschwitz replies: "Farmers are getting benefits now and they would get benefits under my plan. What's the difference? If they call my plan "welfare,' what do they call the current programs?'
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Author:Pasley, Jeffrey L.
Publication:Washington Monthly
Date:Sep 1, 1987
Words:3356
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