A Case Against Farm Subsidies

This guest blog is written by Sterling Stoddard, a student at the University of Idaho. Sterling is majoring in Agribusiness in the College of Agriculture and Life Sciences. Stoddard is the President of the Young Americans for Liberty-U of I chapter. He is from Grace, Idaho in Caribou County. His family farms 3500 acres, 2500 acres of malt barley and 1000 acres of potatoes. Sterling plans on entering into farm management upon graduation.


OVERVIEW

In a country that despises massive debt, government programs seem to be ever growing. The government seems to have the mindset of continuing status quo and trying to use centralized planning to run our nation’s economy. If history has shown us anything, it’s that in a highly competitive market industrialists love to turn to the government to protect themselves from competition and give themselves an advantage, agriculture is no exception.

Each year the USDA pays out between $10 and $30 billion is cash subsidies to farmers and farmland owners. These account for over 800,000 people. However, the largest producers receive the most in benefits.

Federal subsidies in agriculture have a long history although subsidies were relatively small until the 1920's. The majority of subsidies came in the form of conducting research and gathering statistics for the industry. As part of FDR's ingenious idea known as 'The New Deal,' farm subsidies grew to include commodity price supports and production controls, marketing orders to limit competition, import barriers, and crop insurance. Agriculture was in no way the only industry to be heavily regulated in the 30’s. Unlike agriculture, many other industries have been deregulated and have seen great success.

Today, farmers represent a small portion of the population but they still have a very strong lobby. One reason is that farm-state legislators have co-opted the support of urban legislators, who seek increased subsidies in agriculture bills for programs such as food stamps. Legislators in favor of environmental subsidies have also been co-opted as supporters of farm bills. Unfortunately the support for the common tax payer isn’t near as strong.

This industry welfare program is especially costly to tax payers. Since it consists largely of government actions to hold up the price of crops, it is paid partly by taxes and higher food prices. Higher food prices have the effect of a regressive tax, since low-income people spend a greater portion of their income on food.

The game that the government plays with farm subsidies is a vicious cycle. Subsidies induce farmers to overproduce, which pushes down prices and creates political demands for further subsidies. Subsidies inflate land prices in rural America. The flow of subsidies from Washington hinders farmers from innovating, cutting costs, diversifying their land use, taking the actions needed to prosper in a competitive global economy.

EXAMPLES OF SUBSIDIES

Recently, direct payments have been among the largest form of subsidies. Direct payments are cash payments for producers of: wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. Direct payments were intended to be transitional, a way to wean farmers from old-fashioned price guarantee programs. Unfortunately, direct payments have not been reduced over time as originally planned. Direct payments are based on a historical measure of the farm’s acrage used for production and are NOT related to current production or prices. The Washington Post estimated that between 2000 and 2006 the USDA handed out $1.3 billion in direct payments to people who do not farm. The newspaper pointed to thousands of acres of land previously used for rice growing in Texas.

Marketing Loans were created as a part of the 'New Deal.' They were meant to be, like most farm subsidies, a temporary solution. Yet, they still exist 70 years later. Marketing Loans create a price floor for crops (same ones covered in direct payments). Price floors in agriculture and all industry creates incentive for producers to overproduce. Under the program, farmers take loans with their crops as collateral. This allows farmers to keep the loan, and forfeit their low value crop. Tax payers are then stuck with the loan cost and the cost to store the crop. Farmers don’t receive subsidies from the marketing loan program only when crop prices are low, they have become experts at working the system to maximize their subsidies every year. Farmers can lock in high government benefits when seasonal prices are low, and then sell their crops when market prices are higher.

Countercyclical Payments are a classic example of agriculture receiving special protection that most industries don’t, and shouldn’t, receive. Countercyclical payments are basically a price guarantee which allows for over production because farmers are receiving a payment that is higher then what the market allows so they will produce more then what the market allows.

My personal favorite subsidy is Conservation Subsidies. The largest conservation subsidy program is the Conservation Reserve Program, which was created in 1985 to idle millions of acres of farmland. Under CRP, farmers are paid to not grow crops, but to cultivate ground cover such as grass or trees on retired acres. A large share of land idled under the CRP is owned by retired farmers, thus one does not even have to be a working farmer to get these subsidies. In Idaho, Shoshone Bannock Tribe was the 2nd largest recipient of farm subsidies in 2009. Shoshone Bannock Tribe received $510,364 in total payments, $503,629 was in Conservation Subsidies. In 2009 Shoshone Bannock Tribe received over half a million dollars to do absolutely nothing!

REASON TO REPEAL

Farm subsidies are a clear example of redistribution of wealth. In this case it’s distributing wealth from less income to more income. The average farmer income is higher than the average American’s income. Ten percent of all farmers collected 74 percent of all subsidies. Top 10% based on size of producer received $29,675 average per year between 1995 and 2009 while the bottom 80% receive $579 average per year between 1995 and 2009. The largest recipients of these subsidies are the largest producers. The myth that these program are meant to help the small farm just doesn’t hold water.

Farm subsidies hurt the overall economy. In most industries, prices are set by the balance of supply and demand. Profits signal investment opportunities while downturn results in innovation and cost cutting. However, these market mechanisms are not found in a government controlled industry like agriculture. As a result, federal agricultural policies produce substantial “deadweight losses” and reduced U.S. incomes. What does result is overproduction, overuse of marginal farmland, and land price inflation.

Like all government subsidies programs, farm subsidies are prone to waste and scandal. Farm programs are subject to bureaucratic inefficiencies, recipient fraud, and congressional pork-barrel politics. The Government Accountability Office (GAO)found that as much as half a billion dollars in farm subsidies are paid improperly or fraudulently each year. Farmers create complex legal structures to get around legal subsidy limits. Another reason why large producers receive a disproportionately high amount of subsidies is because they have the recourses to get through the legal hoops that the small producer doesn’t have.

Farm subsidies damage U.S. trade relations. U.S. and European farm subsidies and agricultural import barriers are a serious hurdle to making progress in global trade agreements. Free trade helps global economic stability and security. "If goods don’t cross borders, soldiers will." The World Trade Organization (WTO) estimates that even a one-third drop in all tariffs around the world would boost global output by $686 billion, including $164 billion for the United States.

Farming would see great success without subsidies. It is true that agriculture would change with the repealing of farm subsidies. Different crops would be planted, land usage would change, and some farms would go bankrupt. However a stronger and more innovative industry would likely emerge having greater resilience to shocks and downturns. It’s important to remember that commodities that are covered by subsidies only account for about 36% of all production. Most farm production isn’t even currently eligible for subsidies and they still strive within a free market.

Agriculture has changed a lot since the days farm subsidies were established. USDA figures show that only 38 percent of farm households consider farming their primary occupation. So the majority of farm households earn the bulk of their income from non-farm sources which creates financial stability. An interesting example of farmers prospering without subsidies is in New Zealand. That nation ended its farm subsidies in 1984, which was a bold stroke because the country is four times more dependent on farming than is the United States. The changes were initially met with fierce resistance, but New Zealand farm productivity, profitability, and output have soared since the reforms. New Zealand’s farmers have cut costs, diversified their land use, sought off-farm income, and developed niche markets such as kiwifruit.

In my opinion it has become obvious that it is time to largely cut government programs to help fix our problems in this country and I think agriculture subsidies and trade barriers are a clear place to start.