Demand for cover crops is already here: subsidies need to focus on farmers

Policy circles have long pondered the potential for subsidizing cover crops. As both a potential source of supplemental farm income and an intuitive solution to runoff and soil issues, the practice has recently become something of an ideal policy issue in Iowa in recent years, staying on the good side of both parties.

The trouble is, cover cropping can be a gamble. The risks of overwintering, attracting insects, and competing with staple crops make the investment too great a risk for some, despite their positive environmental impact and potential return on investment.

Subsidies are a fast-rising proposal to address that risk, but its hardly an adequate response for anyone involved. To properly incentivize a wide transition to cover cropping, subsidies will need more nuance than Iowa has used in the past. To subsidize effectively, Iowa must focus three key steps.

1. Start big, and slowly wind back

The history of Iowa’s farm subsidies is the history of favorites. The state’s programs have focused on lowering the cost of products already in demand. Ethanol, wind energy, and disaster payments are all great examples: the demand is already in place for gas, electricity and crop insurance, the state funding only serves to make the desired products more accessible than alternatives.

Cover crops will require a different approach. The demand for winter rye as an example, is primarily limited to breweries. Subsidies aiming to create new demand will have to be great enough to incentivize new markets for that product.

That means they’ll need to start big, like a stimulus package for a specific item. Sticking with the winter rye example, a massive out-of-the gates subsidy for winter rye that substantially lowered its market price, let’s say by 15% in Iowa, would change a lot of numbers in other businesses.

With a drop like that, the math starts looking favorable for small independent breweries to start businesses. Flour companies would start turning to Iowa for their product as the price change offsets shipping costs. Livestock farmers in other states (without corn subsidies) might start turning to rye-based animal feed supplements.

All of these additions to the Iowa economy would then gradually become more self-sustaining as they grow their customer base and supply infrastructure. As that happens, subsidies can be slowly eased back to a more sustainable number, gradually relieving the budgetary stress without disrupting the market they’ve spawned.

To be clear: the result still is likely to be a net loss for state budgets. It’s unlikely that a few product-specific subsidies would fully absorb the blow of such a high-cost initiative. And while it’s unusual for an economic policy not to have a plan to pay for itself, that’s not the point for sustainability-focused policy. In fact, when compared to other environmental policy, the fact that it generates any short-term returns at all is easily a win.

2. Go beyond consumer-based adjustments.

Subsidies generally go one of two ways. The first approach is perhaps the most familiar to Iowans: taxpayer dollars are spent to lower the cost of a product for consumers, which inflates its demand. While this approach works well for ethanol, made from corn and soy that farms were already growing, it may not be sufficient to convince people to grow less traditional crops.

Thus the second approach: subsidies that lower the cost for farmers. Government dollars could be used to artificially lower the price of seeds for cover crops, thus lowering the risk required to begin using cover crops and minimizing a barrier to entry. This is a more popular approach in other countries with still-developing economies, but could be applied intuitively to an emerging individual market.

While this would lower the cost of entry to family farms, it would also encourage a shift in corporate farming practices as well. Although “big ag” already has the profit margins to overcome cover cropping’s barrier to entry, it has no incentive to do so because profits on other products (corn, soy) mean ag companies don’t have to take any risks if they don’t want to. It is only by making that risk as small as possible that cover cropping will become more desirable to farms of any size.

The best part is, seed subsidies for non-traditional crops like mustard seed and winter rye would require minimal investment of taxpayer dollars. Because non-traditional crops like mustard seed and winter rye are in so low demand in the status quo, subsidies could focus on maintaining already-low seed costs, instead of artificially trying to lower them all at once.

Admittedly, this would be a somewhat unconventional approach in the U.S. Most policy studies on the effect of seed subsidies focus on data gathered from developing economies in sub-Saharan Africa, namely Malawi. Despite its lack of American mileage, however, the data suggests seed subsidies result in the market development needed to diversify a region’s resource portfolio, an explicit goals of cover crop policy.

3. Subsidize the insurance

As a universally-used service, crop insurance is by far one of the most common risk management resources in the history of agriculture. The trouble is, as the cover crop market develops, the high risks associated with wintering plants will likely make rates higher than some can afford.

To offset this, some subsidy money should be allocated to cover crop insurance. Crop insurance subsidies already exist and are a substantial chunk of Iowa’s subsidy spending right now, it’s just important to know that insurance on cover crops is likely to take more spending to effectively offset.

This is another example of an expense likely to fade over time, just because of the way insurance works: the more people buy in, the better everyone’s rates become. Heavy subsidies would again only remain “heavy” for a short time as people buy into cover crops, with the government money required to make that insurance accessible will gradually shrink over the years.

It’s also an example of making things work not just for consumers, but for farmers. Again, it’s essential that policymakers hoping to incentivize cover crops realize that they’ll need to win over farmers to do so, and helping them out directly is the best way to do that.

Comments: Kalen.McCain@southeastiowaunion.com