Why Discount Retailers Don't Like the New Farm Bill

On Feb. 4, the Senate passed a $1 trillion Farm Bill that includes $8 billion in cuts to food stamps. Discount retailers have come to rely on food stamp revenue and retailers like Wal-mart are already blaming lower earnings on cuts made in November.

Feb 10, 2014 at 10:26AM

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.

So what's a retailer like Wal-Mart to do?
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B Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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