In February, the Congressional Budget Office released “baseline” projections for mandatory Department of Agriculture farm and food programs in the 2023 Farm Bill. These measures follow unprecedented spending for farm support during the Trump administration. Now legislators are jockeying over raising the debt ceiling.

Farm subsidies include:

• Direct payments : Paid at a set rate every year regardless of conditions.

• Counter-cyclical payments : Triggered when market prices fall below certain thresholds.

• A new revenue assurance program : Provides for overall profitability for a given crop.

• Marketing loans : Offer very favorable terms whereby farmers can realize tremendous gains through loan deficiency payments (LDPs) and commodity certificates.

• Disaster payments : Recoup large losses due to natural phenomena. The government subsidizes crop insurance to further insulate farmers from risk.

At the center of many of these programs are two arms of the US Department of Agriculture: The Commodity Credit Corporation (CCC) and the Federal Crop Insurance Corporation (FCIC). The CCC aids farms and takes measures to control the prices of commodities. The FCIC works with private insurers to run the nation’s crop insurance system. Both came out of the Great Depression.

Both are also considered mandatory spending in terms of federal budget purposes, meaning their budgets are handled largely outside of the congressional appropriations process.

According to EWG Research, between 1995 and 2021, the top 10 percent of farm subsidy recipients that received the largest payments received over 78 percent of commodity program subsidies, and the top 1 percent received 27 percent of payments. Their latest iteration shows federal farm subsidies between 1995 and 2021 total $478 billion. 

Subsidies usually not only go to only the biggest farms, but critics of the way subsidies are allocated say they not only bolster oligopolies, but they also distort food markets in developing countries by the provision of in-kind food aid. Monetization of U.S. in-kind food aid is the sale of food commodities purchased in and shipped from the United States and sold for local currency in a recipient country by “cooperating sponsors”, thus undercutting developing economies.

For all of the supposed mitigation of inflationary pricing that farm subsidies are supposed to combat, why has inflation of food been such a problem?

Some economists say that a risky loophole in Dodd-Frank is being exploited by big multinational banks. Footnote 563 of the CFTC Federal Register, which primarily focuses on foreign swaps trades.

Unlike futures contracts, which are ostensibly just promises to buy or sell commodities at a later date, swaps aren’t traded on one of the big commodity exchanges. Swaps are one-to-one deals. Almost all of them involve a big Wall Street or private-equity firm. These derivatives are essentially bets on commodity prices, interest rates, or even inflation itself.

For instance, a commodity swap is a type of derivative contract where two parties agree to exchange cash flows dependent on the price of an underlying commodity. This allows two parties to exchange (or swap) cash flows that are dependent on the price of an underlying asset.

Footnote 563 of the CFTC Federal Register states “The Commission agrees with commenters who stated that Transaction-Level Requirements should not apply if a non-U.S. swap dealer or non-U.S. MSP relies on a written representation by a non-U.S. counterparty that its obligations under the swap are not guaranteed with recourse by a U.S. person. Such an approach is consistent with Commission practice in other contexts such as the external business conduct rules.”

The CFTC’s own website even states that the loophole is massive not only to “the extent that a non-U.S. swap entity can rely on substituted compliance that is not available to a U.S. swap entity, [but] it may enjoy certain cost advantages”.

On March 24 of last year, Public Citizen Energy Program Director Tyson Slocum wrote that, “The past two years have seen an extraordinary surge in commodities market volatility.” He cites “evidence of excessive [Wall Street] speculation.”

Over-the-Counter derivatives (“swaps”) is widely viewed as a principal cause of the 2008 worldwide financial meltdown and, in the case of commodities, is widely acknowledged as having a major effect on inflation on everything from oil to food in the United States. The current administration has yet to broach the economic impact of these issues.

The loophole found in footnote 563 of the CFTC Federal Register not only allows a wholesale run-up of global commodity prices which overwhelms healthy price-setting, but it also doesn’t protect against defaults.