Why Discount Retailers Don't Like the New Farm Bill

Government subsidies aren't new in the world of agriculture, but the discount retail industry was just starting to capitalize on the increase in food stamps when the rug was pulled out from under them. Now retailers are feeling the brunt of recent cuts in government spending, and the new Farm Bill just cut an additional $8 billion out of the SNAP budget.

SNAP effect
On Jan. 31, Wal-mart Stores (NYSE: WMT  ) published the following message: "We now anticipate that our underlying EPS for the fourth quarter of fiscal 2014 will be at or slightly below the low end of our range." According to the CFO, the sales impact from the reduction in SNAP benefits was greater than the company anticipated.

The Supplemental Nutrition Assistance Program, or SNAP, was specifically designed to assist low-income people. According to the USDA, over 47 million Americans were beneficiaries of SNAP in 2013 -- the cost of the program was just under $80 billion.

Wal-mart isn't the only discount retailer that accepts food stamps. Dollar Tree Stores (NASDAQ: DLTR  ) sales increased 3.1% in the third quarter. It attributes most of that growth to consumables, which includes frozen and refrigerated food. One of the company's stated initiatives is to increase the number of stores that can accept food stamps.

As the company explains in the last earnings report, "we accept food stamps... in approximately 4,560 qualified stores compared to approximately 4,150 stores at October 27, 2012. SNAP benefits will be lower for recipients after November 1, 2013; however, we do not expect the effect on our sales to be material." Dollar Tree, like Wal-mart, may be surprised at the impact the reduction in SNAP benefits has on sales.

Kraft Foods' CEO told the Financial Times that he opposes cuts to food stamp programs because food stamp users "are a big part of our audience."

In an earnings call, the CEO of Big Lots (NYSE: BIG  ) said, "There's no debating that a growing percentage of the consumer base is economically stressed and becoming more dependent on the government assistance. In each of the last two years over 6 million Americans have been added to snap (the Federal Food Stamps Program) resulting in the neighborhood of 15 percent or more of our total population being enrolled in this program."

Clearly, food stamps have become an increasingly important source of revenue for discount retailers over the past few years.

A brief history of food stamps
A quick look into the past can help understand where we are today.

The first food stamp program started in May 1939. It permitted Americans to buy orange stamps that could be redeemed for food. The first administrator for the program was Milo Perkins. "We got a picture of a gorge," said Perkins, "with farm surpluses on one cliff and under-nourished city folks with outstretched hands on the other. We set out to find a practical way to build a bridge across that chasm." Peak participation in the program was 4 million at a total cost of $262 million to taxpayers.

The program ended in 1943, but in 1961, in response to a campaign promise, President Kennedy's first Executive Order called for a new food stamp program. In 1964, Johnson asked Congress to make the food stamp program permanent and the bill was passed.

The program grew to 15 million participants by 1974, but in 1977 the program came under increased scrutiny from both Democratic and Republican lawmakers. Republicans wanted to tighten controls, while Democrats wanted to streamline the process. The Republicans won the battle in the early 80's, but The Hunger Prevention Act of 1988 reinstated many of those cutbacks.

In 2007, the U.S. economy lapsed into recession and program participation increased to 25.6 million. In 2008, the program changed its name to SNAP and as of October 2013, there were over 47 million participants -- that's approximately 1 in every 6 people. 

The 2009 Recovery Act increased SNAP assistance temporarily due to the economy, but that increase ended on Nov. 1, 2013. The effects of those cuts are outlined in the chart below.


SNAP Cut by Household Size Beginning November 2013
  ARRA Maximum Benefits Through Oct. 2013 Maximum Benefits Beginning Nov. 2013 Monthly Cut Total Cut FY 2014
Household of 1 $200 $189 -$11 -$121
Household of 2 $367 $347 -$20 -$220
Household of 3 $526 $497 -$29 -$319
Household of 4 $668 $632 -$36 -$396

Source:  U.S. Department of Agriculture, "SNAP – Fiscal Year 2014 Cost-of-Living Adjustments and ARRA Sunset Impact on Allotments," August 1, 2013.

What effect does the Farm Bill have?
The Farm Bill will add to these cuts. On Jan. 29, the House passed the Farm Bill, and on Feb. 4 the Senate approved it. The bill had been delayed because of fights over cuts to SNAP.

Last June, the bill was voted on with $20 billion in cuts but failed. The new compromise is an $8 billion reduction to SNAP. The bill also left out some of the more draconian provisions such as the imposition of work requirements, drug testing, a ban for felons, and financial incentives to those states that reduce participant levels.

The Foolish bottom line
SNAP has already caused the nation's largest discount retailer to decrease earnings guidance. The new Farm Bill promises an additional $8 billion in cuts as well, so the pain is hardly over. Those retailers that were counting on food stamps for sales growth are going to have to come up with additional revenue streams in order to meet their earnings targets this year. Even those retailers that don't accept food stamps, or sell food, will be affected as customers have less disposable income. It's not a question of if discount retailers will be affected, it's a question of how much and how long.

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  • Report this Comment On February 11, 2014, at 11:01 AM, mkcmarine wrote:

    $347.00 a month to feed a family of two. If you don't shop at Wal Mart or big box stores then you are a fool and if you can't support you family with $347.00 just for food , then you must be a liberal democrat.

  • Report this Comment On February 11, 2014, at 11:28 PM, Freddyfreebe1 wrote:

    If food stamp people think they are getting good prices for food at walmart, they sure can't read or know how to do the math.

  • Report this Comment On February 12, 2014, at 6:11 AM, youstink wrote:

    by reducing S.N.A.P., the effect will be to LOWER FOOD PRICES. No longer will Oreo's sell for $3.99. That's because people no longer can afford to buy them, so they can snack while watching Wayne Brady every morning instead of working....duh

  • Report this Comment On February 12, 2014, at 6:16 AM, youstink wrote:

    All Companies Love the Welfare State. It's a No Brainer.

  • Report this Comment On February 12, 2014, at 6:38 PM, peckbill wrote:

    So, a combined net worth of 124.5 million gutted food aid for the poor while making sure they got their personal pork, which clearly they do not need for survival.

    These Republicans voted to give themselves subsidies after they managed to split nutritional aid bills from the farm subsidies (dividing the country again – urban versus rural) after House Republicans couldn’t get their act together and Boehner refused to lead, again.

    That debacle led Nancy Pelosi to refer to House Republicans as amateur hour.

    Don’t worry, Republicans did exactly what you imagine they would do in this instance. Now that they got rid of the hungry people, they took their new FARRM Act and figured why not give most of the $196 billion to big agro business:

    Republicans tried to claim that the passage of the farm provisions was done to help family farms, but this Farm Bill is loaded with pork and handouts for the wealthy and corporations. Farmers with incomes over $250,000 will receive one third of the crop insurance money. This Republican House passed windfall for millionaires and corporations comes at a time when net farm income is projected to reach it highest level since 1973.

    Representative Miller’s office noted, “14 Republican members of Congress, who each voted for a Farm Bill that excluded a nutrition title for the first time in four decades, have received more than $7.2 million in government farm subsidies, or an average of $515,279 in handouts. At the same time, they have a combined net worth of as much as $124.5 million, according to public records.

    In stark contrast, the typical household receiving aid under the farm bill through the Supplemental Nutrition Assistance Program (SNAP), has a gross monthly income of only $744, and their average monthly SNAP benefit—which every member detailed in this report voted against extending— is just $281.”

    These Republicans are:

    Rep.RobertAderholt(R-AL)

    Rep.BlakeFarenthold(R-TX)

    Rep.StephenFincher(R_TN)

    Rep.VickyHartzler(R-MO)

    Rep.JohnKline(R-MN)

    Rep.DougLaMalfa(R-CA)

    Rep.TomLatham(R-IA)

    Rep.FrankLucas(R-OK)

    Rep.CynthiaLummis(R-WY)

    RepRandyNeugebauer(R-TX)

    Rep.KristiNoem(R-SD)

    Rep.MarlinStutzman(R-IN)

    Rep.MacThornberry(R-TX)

    Rep. David Valadao (R-CA)

    Miller called this a new low, even for this Congress, saying in a statement, “It’s outrageous that some members of Congress feel it is ok to vote for their own taxpayer subsidies but against critical nutrition assistance for 47 million Americans. It’s bad enough that the House of Representatives didn’t pass a Farm Bill that included authorization for sorely-needed nutrition programs, but to see members of Congress approving their own benefits at the expense of the working poor is a new low, even for this Congress.”

    A new low, indeed. Welfare for the wealthy, redistribution for the elite, and nothing for the rest of the country. Republican austerity explained in action.

  • Report this Comment On February 12, 2014, at 6:43 PM, peckbill wrote:

    One of the hottest social and economic problems in America, today, is poverty. Poverty is at or above 16% (I personally think it is higher because many in poverty are not counted) this percentage total is about 3,450% higher than poverty was in the early 1960s. Economic experts blame poverty, depending on which political party is in power, on the federal government. They are partially correct. Poverty is the direct cause of bad government (both political parties), bad advice from self proclaimed economic experts (like the idiots of FOX news), and advisors to people in politics that have been given the power, by vote of the people, to make decisions that care for the health and welfare of all Americans. The main problem is power hungry and greedy politicians that really do not care one iota about the health and welfare of the people, 1) a law that totally penalizes only the poor. The law cut food stamps and monetary assistance by over 800 million dollars that would help the poor (over 850,000 poor people will be greatly affected by reduction in services) 2), the law gives government (taxpayer) money directly to insurance companies and the farmers to pay insurance premiums and guarantees insurance premiums to the farm subsidy recipients this federal money is paid whether there is a good crop year or a bad year, 3) the law eliminates the reporting requirement that subsidy money(whether it be crop control or insurance assistance) paid to members of Congress (this amount of money is in the millions and they no longer have to report the subsidy income), 4) the poor people are effected by more than $85.00 per month in reduction of federal assistance. Contrary to the belief of self professed experts, a low income leads to poverty, 5) congress lies to the people about what the reductions effect in the United States. Every poor individual that relies on food stamps and/or monetary assistance is penalized while the farm subsidy affects very few of the rich). Greed, on the part of politicians, business owners and other well off people who really do not care about Americans is the biggest enemy of the American dream. There is neither one political party nor individual group of, so called experts, that is to blame for poverty in America; the problem rests with all of the Congress. An excellent start is to clean out the Congress from top to bottom and for the President to select people to fill important vacancies to be knowledgeable of the programs and not select based on friendship and/or favors owed.

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