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Farmers, budget hawks eye $5 billion year subsidy
8:09pm EST By Charles Abbott

WASHINGTON (Reuters) - A direct payment subsidy that guarantees farmers $5 billion a year is the most prominent target in agriculture's complex web of subsidies as budget-cutting Republicans flex their new legislative muscle in the House of Representatives.

Created in 1996, the subsidy is a point of dispute in farm country. Some farm groups want Congress to eliminate direct payments as part of an overhaul of farm policy due next year while others would keep it.

The new Republican majority says it will unveil in coming weeks how it will cut spending by $60 billion this year. House Budget Committee chairman Paul Ryan says cuts of more than $100 billion would be made in 2012.

Farm subsidies, including those propping up the ethanol industry, are usually criticized as lavish, but because of the strong farm lobby, often prove hard to tackle for lawmakers.

A farm lobbyist said cuts in farm supports are a likely demand. Food stamp enrollment is at a record high so it would be hard to cut spending there. Food stamps and farm subsidies are run by the Agriculture Department.

"You can't exclude the possibility agriculture will be asked to make a contribution," said analyst Mark McMinimy of the consultants MF Global. Direct payments could be a target, he said, because the farm sector is booming, thanks to near-record grain, soybean and cotton prices.

The Obama administration revisions to the federally subsidized crop insurance program are expected to provide $4 billion over 10 years for deficit reduction.

"I would suggest that is a fairly significant cut," said Bob Stallman, president of the largest U.S. farm group. "We're getting down to the point where there's not much left to cut" in farm spending.

Farm subsidies, including land stewardship, are forecast for $10 billion this year -- half of 2005's total -- out of a federal budget of $1.34 trillion. Public nutrition programs, chiefly food stamps and school meals, were projected for $94 billion last year, roughly two-thirds of all USDA spending.

Direct payments account for half of farm supports because they are paid under a formula based on past production of grain, cotton and soybeans and vary little. Spending on other crop subsidies, such as price supports, is down because market prices are far above the federally guaranteed price.

Defenders say direct payments stabilize farmer revenue -- important in dealing with lenders. Critics say the money would be better spent on programs that help growers deal with low prices or crop failures.

"Free money is popular," said the Environmental Working Group, which wants more money for land stewardship, in criticizing direct payments. Craig Lang, president of the Iowa Farm Bureau, says funding for direct payments should be used for an insurance-like program to protect farm revenue. The idea is likely to be discussed this week at the annual meeting of the 6 million-member American Farm Bureau Federation, in Atlanta. "If you don't provide something that makes sense, you're going to be cut," Lang said during an interview. "The sure thing (direct payments) is not a sure thing anymore."

Direct payments are popular in the U.S. South and Plains. Cotton and rice growers say revenue protection programs are not available at attractive prices in their areas. Wheat growers say price supports are too scanty when production costs are up. Corn and soybean growers in the Midwest worry more about low prices than crop failures, so they lean toward revenue plans.

Any spending cuts adopted this year could affect the amount of money available for next year's review of farm law. Funding already will be tight. Some $9 billion in programs, including a disaster-relief fund, run out of money when the 2008 farm law expires. Agriculture economist Pat Westhoff at a University of Missouri think tank said "it's a possibility" that austere funding could prompt a pruning of the U.S. farm program, which serves a variety of objectives. But he cautioned there is no clearly defined replacement. House Agriculture chairman Frank Lucas would use the 2008 law as a model for the new farm bill.

Farm spending flows in three channels -- traditional crop subsidies to counter-act low price, payments linked to land stewardship, and crop insurance and insurance-like programs that safeguard farmer revenue. Roughly equal amounts will be spent on each approach in coming years.

Small-farm activist Ferd Hoefner said one way to cut spending would be to set a flexible cap on direct payments. It would allow large payments when prices are low and rein in payments when market prices are high. By law, the maximum payment is $40,000 a person.

(Reporting by Charles Abbott; Editing by Diane Craft)