December 27, 2011 1:43 pm

Republicans target farm subsidies in Iowa

In previous US elections, it was political suicide to campaign in Iowa – the first battleground of presidential races – against subsidies for corn-based ethanol, an issue of keen interest in the strongly agricultural state.

Barack Obama – whose win in Iowa’s 2008 caucus helped propel him to the White House – was an enthusiastic supporter of the industry, holding several campaign stops in ethanol plants in what was then a fast-growing industry.

Hillary Clinton, who opposed ethanol subsidies before she launched her bid for the Democratic nomination, performed a U-turn and came out forcefully in support of the industry. Mr Obama’s Republican rival, John McCain, publicly opposed ethanol subsidies, a stance that helps explain why he came fourth in Iowa’s GOP caucus.

Yet in this electoral cycle, opposing federal support for the industry – and for broader agricultural subsidies – is both common and anything but a hindrance.

Ron Paul, the libertarian Republican congressman who has led several recent polls ahead of the January 3 caucus, has argued that ethanol subsidies are unconstitutional and unaffordable. Quizzed by a member of a local ethanol-producers group at the Iowa state fair in August, Mr Paul was unequivocal. “No appropriations and no mandates,” he told the questioner.

Similarly, Rick Perry, the Texas governor also vying for the nomination, favours ending all federal subsidies and production mandates. In 2008, he backed an effort to end ethanol subsidies on behalf of Texas cattle producers, who have seen their grain costs soar in recent years as ethanol production has helped push up corn prices.

Michele Bachmann, the Minnesota Congresswoman, has also voted against ethanol subsidies in the past, criticising the 2008 farm bill for being “loaded with unbelievably outrageous pork and subsidies for agricultural business and ethanol growers”.

Net farm income graphic

The ability of candidates to be popular in Iowa while opposing federal support for ethanol indicates how much the political debate has changed in the past four years. The Hawkeye State may be the US’s biggest corn and soyabean producer, but strictly agricultural issues have not featured prominently in the campaign.

In part that is because following the economic downturn, the top issue on the minds of voters in is the $15tn federal debt. It is also because farmers, who are enjoying a boom in crop prices and farmland, generally have less to worry about than their urban counterparts.

In the past few years, while America’s non-farm economy has been battered by slumping demand, high unemployment and competition from emerging markets, the rural sector has been enjoying its most profitable period in decades.

Although input costs such as fertiliser, feed and land rents have risen, high grain prices nevertheless enabled US farmers to earn record profits of more than $100bn this year, up 28 per cent from 2010, according to the US Department of Agriculture.

The farm sector accounts for less than 6 per cent of Iowa’s gross domestic product, but its effect is also felt in agricultural-related industries such as farm-equipment manufacturing, freight transport and rural banking.

For example, John Deere, the world’s biggest tractor-maker, has seen strong demand and is forecasting that its sales will increase by 15 per cent next year.

The boom is also pushing up the price of Iowa farmland, which is among the most productive in the US. Prices rose by about one-third this year – significant in a state where more than 90 per cent of the land is used for raising crops.

Given the size of the federal debt and the healthy state of the rural economy, many farmers expect cuts in the financial support they have long received from the US government. Farmers received government payments of about $10.6bn this year, a 14 per cent decrease from 2010, according to the USDA, but a large sum at a time when most farmers say they can get by without aid and the federal government needs to cut spending.

“When we do our financial planning, we assume we won’t be getting any subsidies in the coming years, and most farmers do the same,” says Chad Keppy, a fourth-generation farmer who grows corn and soyabeans on 2,000 acres in Eldridge, Iowa, 160 miles east of Des Moines.

In the case of ethanol, 30 years of federal subsidies will end this week, after the US Congress declined to renew either the 45 cent a gallon subsidy, which costs some $6bn a year, or a 54 cent a gallon tariff on Brazilian ethanol imports.

While those in the ethanol industry say they can survive without subsidies, they are deeply worried that Congress might also scrap a mandate aimed at boosting ethanol production that targets output of 15bn gallons of renewable fuels in 2015, rising to 36bn gallons by 2022.

The Iowa caucus comes as the farm lobby is campaigning in Washington to continue crop subsidies. The current farm bill expires in 2012, and Congress is widely expected to scrap the 15-year-old system of paying farm owners fixed annual payments.

While some of the money saved will help reduce federal spending, the farming lobby is pressing for new government programmes to protect growers against declines in yields or commodity prices.

However, government bail-outs are unpopular, particularly with Republicans. Mitt Romney, the former Massachusetts governor widely seen as the frontrunner for the Republican nomination, has suggested that he might support wholesale cuts to farm subsidies. Asked on the campaign trail about the issue, he said: “I’m not running for office based on making promises of handing out money.”

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