Subsidies for the rich

Farm Program Pays $1.3 Billion to People Who Don't Farm

By Dan Morgan, Gilbert M. Gaul and Sarah Cohen
Washington Post Staff Writers
Sunday, July 2, 2006; A01

EL CAMPO, Tex. -- Even though Donald R. Matthews put his sprawling new residence in the heart of rice country, he is no farmer. He is a 67-year-old asphalt contractor who wanted to build a dream house for his wife of 40 years.

Yet under a federal agriculture program approved by Congress, his 18-acre suburban lot receives about $1,300 in annual "direct payments," because years ago the land was used to grow rice.

Matthews is not alone. Nationwide, the federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all, according to an analysis of government records by The Washington Post.

Some of them collect hundreds of thousands of dollars without planting a seed. Mary Anna Hudson, 87, from the River Oaks neighborhood in Houston, has received $191,000 over the past decade. For Houston surgeon Jimmy Frank Howell, the total was $490,709.

"I don't agree with the government's policy," said Matthews, who wanted to give the money back but was told it would just go to other landowners. "They give all of this money to landowners who don't even farm, while real farmers can't afford to get started. It's wrong."

The checks to Matthews and other landowners were intended 10 years ago as a first step toward eventually eliminating costly, decades-old farm subsidies. Instead, the payments have grown into an even larger subsidy that benefits millionaire landowners, foreign speculators and absentee landlords, as well as farmers.

Most of the money goes to real farmers who grow crops on their land, but they are under no obligation to grow the crop being subsidized. They can switch to a different crop or raise cattle or even grow a stand of timber -- and still get the government payments. The cash comes with so few restrictions that subdivision developers who buy farmland advertise that homeowners can collect farm subsidies on their new back yards.

The payments now account for nearly half of the nation's expanding agricultural subsidy system, a complex web that has little basis in fairness or efficiency. What began in the 1930s as a limited safety net for working farmers has swollen into a far-flung infrastructure of entitlements that has cost $172 billion over the past decade. In 2005 alone, when pretax farm profits were at a near-record $72 billion, the federal government handed out more than $25 billion in aid, almost 50 percent more than the amount it pays to families receiving welfare.

The Post's nine-month investigation found farm subsidy programs that have become so all-encompassing and generous that they have taken much of the risk out of farming for the increasingly wealthy individuals who dominate it.

The farm payments have also altered the landscape and culture of the Farm Belt, pushing up land prices and favoring large, wealthy operators.

The system pays farmers a subsidy to protect against low prices even when they sell their crops at higher prices. It makes "emergency disaster payments" for crops that fail even as it provides subsidized insurance to protect against those failures.

And it pays people such as Matthews for merely owning land that was once farmed.

"We're simply administering it the way Congress established," said John A. Johnson, a top official at the U.S. Agriculture Department.

Today, even key farm-state figures believe the direct-payment program needs a major overhaul.

"This was an unintended consequence of the farm bill," said former representative Charles W. Stenholm, the west Texas Democrat who was once the ranking member on the House Agriculture Committee. "Instead of maintaining a rice industry in Texas, we basically contributed to its demise."

Freedom to Farm
The program that pays Matthews was the central feature of a landmark 1996 farm law that was meant to be a break with the farm handouts of the past. Subsidies began when the Roosevelt administration stepped forward to support millions of Depression-era farmers suffering from low prices. By the early 1990s, U.S. agriculture was a productive marvel, yet was still mired in government controls and awash in complex subsidies.

When the Republicans took control of Congress in 1995, they brought a new free-market philosophy toward farm policy. In a break with 60 years of farm protections, they promoted the idea that farmers should be allowed to grow crops without restrictions, standing or falling on their own. The result was the 1996 bill, which the Republicans called Freedom to Farm.

The idea was to finally remove government limits on planting and phase out subsidies. But GOP leaders had to make a trade-off to get the votes: They offered farmers annual fixed cash payments as a way of weaning them off subsidies.

That sweetener was needed to win over wheat-state Democrats -- led by Senate Minority Leader Tom Daschle (S.D.) -- and GOP House members from rice and cotton districts. Wheat growers alone stood to receive $1.4 billion in the first year. The payments for rice growers were increased by $52 million at the last minute in an effort to win support from Sen. David Pryor (D-Ark.).

The new payments were calculated on a farm's "base acres," or production dating to 1981. For example, if a farmer had planted 400 acres of rice, he was entitled to a check of about $100 an acre, or $40,000, every year. The amount per acre varied depending on past production.

The payments were unrestricted -- farmers got them whether or not they grew any crops, or whether prices were high or low.

Owners could do almost anything they wanted with their land, as long as they did not develop it. They could leave it fallow or rent it for pasture. They could set up a hunting retreat. Or, as happened in some Louisiana parishes, landowners could collect payments while planting stands of commercial timber.

Supporters said these annual payments gave farmers the flexibility to switch from one crop to another as market conditions changed, or even to sit it out in a year of low prices. In addition, the payments fit with international trade rules that frown on traditional price supports.

The annual payments were dubbed "transitional" and were supposed to decline over seven years. Many lawmakers assumed they would eventually end. But two years later, farm prices fell sharply, and the Republican-led Congress gave in to the farm lobby.

Sen. Thad Cochran (R-Miss.) used his power as chairman of the Appropriations subcommittee on agriculture to push through $3 billion in "emergency" assistance to grain, cotton and dairy farmers. That was only the beginning of a retreat by Republicans fearing retribution at the polls in key "red" states with broad farm constituencies.

"The original intent was to make a step in the direction of eliminating farm programs," said then-House Majority Leader Richard K. Armey (R-Tex.), who led an unsuccessful fight in the 1990s to trim the subsidies. "By 1998, there was no zeal left."

Instead of cutting, Congress ended up expanding the program, now known as direct and countercyclical payments. A program intended to cost $36 billion over seven years instead topped $54 billion.

"The farm policy we're pursuing now has no rhyme or reason, and we're just sending big checks to big farmers," said Gary Mitchell, now a family farmer in Kansas who was once a top aide to then-Rep. Pat Roberts (R-Kan.), the 1996 bill's House sponsor. "They're living off their welfare checks."

Efforts to overhaul the farm subsidy network have been repeatedly thwarted by powerful farm-state lawmakers in Congress allied with agricultural interests.

"The strength of the farm lobby in this town is really unbelievable," Armey said. "I don't think there's a smaller group of constituents that has a bigger influence."

'Cowboy Starter Kits'
Farmers and landowners benefited from the 1996 law whether their land once grew wheat, corn, cotton or any of the other subsidized crops. But nowhere is the impact more evident than in the sunbaked Texas rice country that spreads southwest from Houston to the Colorado River and east to the Gulf of Mexico.

In 1981, the Texas rice belt extended over about 600,000 acres. By last year, USDA records show, the amount of planted rice had shrunk to 202,000 acres, partly because landowners were able to get farm payments even if no rice was grown on their land.

In fact, so many landowners and farmers are collecting money on their former ricelands -- $37 million last year alone -- that the acres no longer used for rice outnumber the planted ones.

"So many wealthy people are getting so much money off this, it's going to be hard to cut," said Michael Wollam, a rice farmer from Brazoria County.

At a housing development rising from old rice fields on the outskirts of El Campo, 70 miles southwest of Houston, local real estate broker John K. Petty purchased a 75-acre tract from investors in July 2002. He held on to it for a few months, then carved it up and resold it for housing.

"At one time, the area was all farmed in rice," Petty said. Now, the dusty tract is perfect for what he calls "cowboy starter kits," residential tracts owned by nonfarmers but still large enough to keep a horse in the back yard.

Petty informed potential buyers that because their land had once been an active rice field, they could collect an annual payment from the USDA on the portion that was not developed. They did not have to grow rice or anything else.

"If you have 10 acres and build a house on one, you can continue to get farm payments on those other nine acres without farming," the USDA's Johnson said.

Petty used it as a selling point.

"Does it increase the marketability?" Petty asked. "Sure it does."

Duane Korenek bought 17 acres at the site and is building a house. Korenek said it was "common knowledge around here" that the new owners could collect farm payments. He has received about $2,550, USDA records show.

A few hundred yards up a gravel and dirt road, oilman Rene Hamman purchased 20 acres in May 2003. His two-story house and garage sit on part of the land and are appraised at $338,140, records show. His payments have been about $4,500, according to USDA records. "The money is free," Hamman, 48, said, adding that he thought the money should go to real farmers. "You don't have to do anything but keep the ground."

When Donald Matthews bought his 18-acre tract from Petty in 2002, he never expected to receive farm subsidies on his property, appraised at $381,000.

"I was informed by Mr. Petty that there was a 'rice base' and I was entitled. I said, 'What do you mean I'm entitled? I'm not going to farm rice.' "

But nine of Matthews's acres are classified as agricultural land, for which he has received more than $5,000, records show.

Matthews said he originally was not going to take the money. But he said Petty told him that it would just go to other landowners. "I thought, heck, why should I do that? I wasn't going to give it to somebody else to put in their pocket." Instead, he uses the money to fund scholarships at the county fair and two local high schools, he said.

"Still, I get money I don't think I'm entitled to," he said.

In some Texas counties, the federal payments open the door to another benefit: property tax reductions.

"When a property owner receives a federal payment, the land is considered agricultural use and is assessed at that lower rate," explained Tylene Gamble, the chief appraiser for Wharton County, where El Campo is located. The discount can be dramatic. For example, she said, a parcel might be assessed at $55 an acre for agricultural use but $3,000 for regular use. "It's big," Gamble said.

Gamble is trying to enforce local rules that require landowners to actually farm to qualify for the lower tax rate. But she is hampered by the federal government's definition of farming, "which does not require you to actually farm. There is a conflict there between the federal definition and our definition," she said.

Gary Underwood, director of agricultural appraisals for sprawling Harris County, which includes Houston, said owners are building $500,000 houses on old rice fields and qualifying for tax breaks.

He singled out one tract where the owner built a 4,000-square-foot single-story house on five acres in Katy, a booming suburb. The house sits on one acre. The other four acres get a tax break and a farm payment. "I can't touch him," Underwood said.

The Big Landowners
The large landowners who control vast sections of the once-sprawling rice fields outside Houston have been some of the biggest beneficiaries of the 1996 law, USDA records show.

Diana Morton Hudson is a corporate securities lawyer whose 87-year-old mother, Mary Anna Hudson, owns an interest in two tracts of land in nearby Matagorda County. USDA records show that Mary Anna Hudson has received $191,000 since 1997 on land she doesn't farm. "We just pay someone to mow it, and it just sits there," Diana Hudson said.

Later, she added: "I'm a corporate securities lawyer. I couldn't even locate these two parcels in Matagorda."

Houston heart surgeon Jimmy Frank Howell has received $490,709 since 1996 in payments tied to old rice tracts on a vast ranch near Raywood in Liberty County where he now raises cattle, USDA records show. The last rice produced on the 10,000-acre property was "probably over 10 years ago," according to Susan Cotton, Howell's business manager. "We're not rice producers anymore."

For Guy F. Stovall III, an El Campo banker who helps oversee thousands of acres of family lands in Wharton, Matagorda and Jackson counties, the 1996 farm law was a chance to get out of rice farming and convert properties inherited from his grandparents to other uses.

But 10 years later, taxpayers are still paying for the transition. Records show the land owned by Stovall and two trusts set up by his grandparents have generated $1.8 million in rice subsidies since 1996.

Stovall stopped growing rice and began renting the land for grazing cattle. The family continues to grow some crops, such as sorghum and soybeans.

Stovall said that is exactly the kind of transition Congress intended with Freedom to Farm. He estimates that 50 to 60 percent of his government payments go to soil, water and other improvements, such as filling in irrigation ditches and putting up fences.

"There are bullfrogs where there were none, and we're starting to see quail," he said. "There are less chemicals flowing into our bays, and it reminds me of the environment when I was a kid."

'Hell of a Deal'
Among the most fervent critics of the annual payments are hundreds of Texas farmers who rent land on which they grow rice. Under the rules, tenants receive the money if they operate the farms. But landlords can simply increase rents to capture those payments.

Other landlords have evicted the tenants from land they had farmed for years. Then the landowners can collect the checks themselves, even if they do not farm.

Congress "made slaves out of every farmer who was a tenant," said Stephen J. Zapalac, a former Matagorda County rice farmer who now runs a farm credit office in Bay City.

In 1998, Zapalac was leasing 2,500 acres, most of it for rice farming. One landlord canceled a lease for 1,400 acres in 1998, he said, and a second cancellation followed for the rest in 2004.

"As soon as they figured they could take the payments, they said, 'I don't need you anymore,' " he said. "They were renting me land for $40 an acre, but they could get $125 an acre from the government."

Some of the rice land he lost has been turned into pasture for cattle, while the landlord continues to receive the rice money.

"You can sell the calves and still stick the rice payment in your pocket," Zapalac said. "It's a hell of a deal."

For years, Rex Bailey III, a rugged 6-foot-5 rice farmer, sharecropped near Angleton, Tex., an arrangement in which he and his landlord divided the costs and shared in profits and government payments.

"It was all based on what was produced," he said. "We shared the risk."

That changed in 2002, when the owners of one tract changed their arrangement with Bailey, 55, from sharecropping to a fixed annual rent, pegged to capture the $90 an acre that the government was paying him on 214 acres.

"A lot of landlords increased their rental rates to equal or exceed the direct payments," Bailey said. "They know what the payment is, so that's what the rent is. Even though the payment is in my name, I turn around and give it to" the owner.

In 2004, the property was sold to Shin Shan Chu, an elderly investor who lives in Vancouver, Canada. Once a year, Bailey, who still grows rice on part of the 4,000 acres, cuts a $25,000 check and sends it to Chu, whom he has never met.

Reached by telephone, Chu said he hoped to eventually "develop some residential buildings there. It's very nice land, very flat, very close to the city."

Chu, who also owns and leases 17,000 acres of farmland in west Texas, grew up in mainland China and Taiwan, worked in electronics and moved to Vancouver 36 years ago. He described himself as nearly 80.

"It's just an investment," he said of his farm holdings. "I'm waiting for the money."

Researchers Alice Crites and Don Pohlman contributed to this report.