Agricultural Subsidies

  • Chris Edwards
October 7, 2016

The U.S. Department of Agriculture (USDA) spends $25 billion or more a year on subsidies for farm businesses. The particular amount each year depends on the market prices of crops and other factors. Most agricultural subsidies go to farmers of a handful of major crops, including wheat, corn, soybeans, rice, and cotton. Roughly a million farmers and landowners receive federal subsidies, but the payments are heavily tilted toward the largest producers.

Some farm subsidy programs counter adverse fluctuations in prices, revenues, and production. Other programs subsidize farmers' conservation efforts, insurance coverage, product marketing, export sales, research and development, and other activities. Agriculture is no riskier than many other industries, yet the government has created a uniquely large welfare system for farmers.

Farm subsidies are costly to taxpayers, they distort the economy, and they harm the environment. Subsidies induce farmers to overproduce, which pushes down prices and creates political demands for more subsidies. And subsidies hinder farmers from innovating, cutting costs, diversifying their land use, and taking other actions needed to prosper in the competitive global economy.

Brief History of Farm Subsidies

Agriculture has long attracted federal government support. One of the first subsidy programs for agriculture was the Morrill Act of 1862, which established the land-grant colleges. That was followed by the Hatch Act of 1887, which funded agricultural research, and by the Smith-Lever Act of 1914, which funded agricultural education. In 1916 the Federal Farm Loan Act created cooperative "land banks" to provide loans to farmers. That developed into today's Farm Credit System, which is a government-sponsored financial system with more than $250 billion in assets.

Nonetheless, federal subsidies to agriculture were still quite small going into the 1920s. The USDA was focused on producing statistics, funding research, and responding to problems such as pest infestations. But calls for direct subsidies to farmers began to intensify, and in 1929 the Agricultural Marketing Act created the Federal Farm Board, which tried to raise commodity prices by stockpiling production.1 After spending $500 million, this first major farm boondoggle was abolished in 1933.

Many farm programs were enacted during the 1930s, beginning with the Agricultural Adjustment Act of 1933. New Deal programs included commodity price supports and production controls, marketing orders to limit competition, import barriers, and crop insurance. The particular features of farm programs have changed over the past eight decades, but the central planning philosophy behind them has not. U.S. agricultural policies remain stuck in the past, despite the ongoing economic damage and high taxpayer costs.

Between the 1940s and the 1980s, Congress occasionally considered farm reforms, usually when commodity prices were high, but then reverted to subsidy expansions when prices were lower.2 In the 1980s, the Reagan administration proposed major cuts to farm subsidies, but farm finances were in bad shape at the time, which prompted Congress to increase farm support, not reduce it.

Agricultural subsidies have never made economic sense, but farmer interests have held sway in Congress. While farmers represent just a small share of the population today, the farm lobby is as strong as ever. One reason is that farm-state legislators have co-opted the support of urban legislators, who seek subsidies in farm bills for programs such as food stamps. Some environmentalists are co-opted to support farm bills because of the inclusion of conservation subsidies. As a result, Congress routinely votes to expand the USDA's budget.

Congress did enact pro-market reforms under the "Freedom to Farm" law of 1996. The law allowed farmers greater flexibility in planting and moved toward reliance on market supply and demand. But Congress reversed course in the late 1990s and passed a series of supplemental farm subsidy bills. As a result, subsidies that were expected to cost $47 billion over the seven years of the 1996 law ended up costing $121 billion.3

In 2002 Congress enacted a farm bill that further reversed the 1996 reforms. The law increased projected subsidy payments, added new crops to the subsidy rolls, and created a new price guarantee scheme called the "countercyclical" program. The 2002 law increased projected subsidy payments by 74 percent over 10 years.4

In 2008 Congress overrode a presidential veto to enact farm legislation that added further subsidies. The law created a permanent disaster program and added a revenue protection program for farmers to lock in profits from high commodity prices. It added a sugar-to-ethanol program to help keep sugar prices artificially high, and it added new subsidies for "specialty crops" such as fruits and vegetables.

In 2014 Congress passed another huge farm bill. The bill changed the structure of subsidies, but did not cut the overall level of benefits. The law ended the direct payment program, the countercyclical program, and the Average Crop Revenue Election program. However, it expanded the largest farm subsidy program — crop insurance — and it added two new subsidy programs, the Agricultural Risk Coverage (ARC) program and the Price Loss Coverage (PLC) program.

When the 2014 farm bill was passed, supporters claimed that it would save taxpayer money, but the opposite has happened. It is clear now that the ARC and PLC programs will cost billions of dollars a year more than originally estimated.5 The cost of crop insurance is also rising.

All of these subsidies ensure that farm incomes are much higher than the incomes of most Americans. Farm programs are welfare for the well-to-do, and they induce overproduction, inflate land prices, and harm the environment. They should be ended, and American farmers should stand on their own two feet in the marketplace.

Eight Types of Farm Subsidy

1. Insurance. Crop insurance run by the USDA's Risk Management Agency has become the largest farm program with annual outlays of about $8 billion.6 Subsidized insurance protects against various business risks, such as adverse weather, low production, and low revenues. It covers more than 100 crops, but corn, cotton, soybeans, and wheat are the main ones. It subsidizes both insurance premiums and the administrative costs of the 19 private insurance companies that offer policies to farmers.

The companies receive the subsidies, and they earn excess profits from the high premiums they charge. Farmers also benefit because the USDA pays about 60 percent of the premium costs, according to the Government Accountability Office.7 Indeed, economist Bruce Babcock finds that most farmers make money on insurance over time, receiving more in claims than they pay in premiums.8

Congress channels the largest portion of farm subsidies through the insurance program in order to obscure the identities of the wealthy recipients. Under prior farm programs, news stories often identified the millionaires receiving farm subsidies, which was embarrassing to Congress. Insurance subsidies are less transparent and they have no income limits, and so Congress has expanded the program over the years.

2. Agricultural Risk Coverage (ARC). This program pays subsidies to farmers if their revenue per acre, or alternately their county's revenue per acre, falls below a benchmark or guaranteed level. Generally, the lower are prices and revenues, the larger are the subsidies paid. More than 20 crops are covered, from wheat and corn to chickpeas and mustard. ARC subsidies fluctuate, but they will be about $7 billion in 2016.9

3. Price Loss Coverage (PLC). This program pays subsidies to farmers based on the average national price of each particular crop compared to the crop's reference price. The larger the fall in a crop's price below its reference price, the larger the payout to farmers. PLC subsidies also cover more than 20 crops. PLC subsidies fluctuate, but they will be about $2 billion in 2016.10

4. Conservation Programs. The USDA runs numerous farm conservation programs, which cost taxpayers more than $5 billion a year. The largest is the Conservation Reserve Program, which pays farmers about $1.7 billion a year to keep millions of acres of their lands out of production.

5. Marketing Loans. This is a price guarantee program that began in the New Deal era. The original idea was to give farmers a loan at harvest time so that they could hold their crops to sell at a higher price later on. But the program has evolved into just another subsidy program that delivers higher payments to farmers when market prices are low. These subsidies will cost about $400 million in 2016.

6. Disaster Aid. The government operates various disaster aid programs for different types of farmers, from wheat growers, to livestock producers, to orchard operators. In addition to permanent disaster programs, Congress sometimes distributes additional aid after adverse events. Disaster and supplemental aid costs about $1 to $2 billion a year.

7. Marketing and Export Promotion. The Agriculture Marketing Service spends about $1.2 billion a year on farm and food promotion activities. The Foreign Agricultural Service spends about $1.4 billion a year on a range of activities, including marketing U.S. farm and food products abroad through 93 foreign offices.

8. Research and Other Support. Most American industries fund their own research and development, but the government employs thousands of scientists and other experts to aid the agriculture industry. The USDA spends about $3 billion a year on agriculture and food research at more than 100 locations. The department also provides other support services, such as statistical information and economic studies.

Six Reasons to Repeal Farm Subsidies

1. Subsidies Redistribute Wealth Upwards. Farm subsidies transfer the earnings of taxpayers to well-off farm businesses and landowners. USDA data show that farm incomes have soared far above average U.S. incomes. In 2014 the average income of farm households was $134,164, which was 77 percent higher than the $75,738 average of all U.S. households.11 The same year, the median income of farm households was $81,637, which was 52 percent higher than the U.S. median of $53,657.12

While politicians claim to support small farmers, most farm subsidies go to the largest farms. Economist Vincent Smith found that the largest 15 percent of farm businesses receive more than 85 percent of all farm subsidies.13 Over the years, many billionaires have received farm subsidies because they were the owners of farmland. Prior to the 2014 farm bill, the Environmental Working Group (EWG) found that 50 people on the Forbes 400 list of the wealthiest Americans received farm subsidies.14 The new farm bill channels the largest share of subsidies through insurance companies, making it hard to determine the identities of recipients.15 But the GAO found last year that at least four recipients of crop insurance subsidies have a net worth or more than $1.5 billion.16

2. Subsidies Damage the Economy. The extent of government coddling and micromanagement of the agriculture industry is unique. In most industries, market prices balance supply and demand, profits steer investment, businesses take risks, and entrepreneurs innovate to improve quality and reduce costs. Those market mechanisms are blunted and undermined in U.S. agriculture causing a range of economic harms, including overproduction, distorted land use, distorted choice of crops, inflated land prices, and inadequate cost control.

3. Subsidies Are Prone to Scandal. Like all government subsidy programs, farm programs are subject to both bureaucratic waste and recipient fraud. One problem is that some farm subsidies are paid improperly as farmers create business structures to get around legal subsidy limits. Another problem is that Congress and the USDA distribute disaster payments in a careless manner, with payments going to farmers who do not need them. EWG found another boondoggle called the "prevented planting" program, which covers farmers for losses if conditions during a season prevent them from planting some areas. The group found that billions of dollars have been paid to farmers who would not normally have planted the areas included in their USDA claims.17

Perhaps the biggest scandal with regard to farm subsidies is that congressional agriculture committees include members who are active farmers and farmland owners. Those members have a direct financial stake whenever Congress votes to increase subsidies, which is an obvious conflict of interest.

4. Subsidies Undermine U.S. Trade Relations. Global stability and U.S. security are enhanced when less developed countries achieve economic growth. America can help by encouraging poor nations to adopt free markets and expand their international trade. However, U.S. and European farm subsidies and agricultural import barriers undermine progress on achieving open trading relationships. Federal sugar protections block freer trade within the Americas, for example, while enriching sugar growers and harming U.S. consumers and food companies that use sugar.

The Congressional Budget Office reviewed major studies examining the repeal of U.S. and foreign agricultural subsidies and trade barriers.18 It found that all of the studies concluded that both the U.S. and global economies would gain from such reforms. Trade liberalization would boost the exports of U.S. goods that are competitive on world markets, including many agricultural products, but U.S. farm subsidies and protections stand in the way of that goal.

5. Subsidies Harm the Environment. Federal farm policies damage the natural environment in numerous ways. Subsidies cause overproduction, which draws lower quality farmlands into active production. As a result, areas that might otherwise have been used for parks, forests, grasslands, and wetlands get locked into less efficient agricultural use.

Subsidies are also thought to induce the excessive use of fertilizers and pesticides. Producers on marginal lands that have poorer soils and climates tend to use more fertilizers and pesticides, which can cause water contamination problems. Sugar cane production has expanded in Florida because of the federal sugar program, for example, and the phosphorous in fertilizers used by the growers causes damage to the Everglades.

6. Agriculture Would Thrive without Subsidies. If U.S. farm subsidies were ended and agricultural markets deregulated, farming would change. Different crops would be planted, land usage would change, and some farm businesses would contract while others would expand. But a stronger and more innovative industry would emerge that had greater resilience to market fluctuations. Private insurance, other financial tools, and diversification would help cover risks, as they do in other industries.

Another point to consider is that farm households today are better able to deal with market fluctuations than in the past. Many farm households earn the bulk of their income from nonfarm sources, which creates financial stability. USDA data show that about three-quarters of farm household income comes from off-farm sources.19

An interesting example of farmers prospering without subsidies is New Zealand. In 1984 that nation ended its farm subsidies, which was a bold stroke because it is four times more dependent on farming than is the United States. The changes were initially met with resistance, but New Zealand farm productivity, profitability, and output have risen since the reforms. New Zealand farmers cut costs, diversified land use, sought nonfarm income, and developed niche markets such as kiwi fruit.

Conclusions

The distortions caused by federal farm policies have long been recognized. In 1932 a member of Congress noted that the Agriculture Department spent "hundreds of millions a year to stimulate the production of farm products by every method, from irrigating waste lands to loaning and even giving money to the farmers, and simultaneously advising them that there is no adequate market for their crops, and that they should restrict production."20 That sort of folly is similar eight decades later, except that subsidies have increased from "hundreds of millions" to tens of billions of dollars.

The Federated Farmers of New Zealand argues that New Zealand's experience "thoroughly debunked the myth that the farming sector cannot prosper without government subsidies."21 That myth needs to be debunked in the United States as well.

Notes

1 James Bovard, "Hoover's Second Wrecking of American Agriculture," Future of Freedom Foundation, December 1, 2005.

2 David Orden, Robert Paarlberg, and Terry Roe, Policy Reform in American Agriculture (Chicago: University of Chicago Press, 1999).

3 Congressional Budget Office estimates cited in David Orden, Robert Paarlberg, and Terry Roe, Policy Reform in American Agriculture (Chicago: University of Chicago Press, 1999), pp. 152, 164.

4 Budget of the United States Government: Fiscal Year 2006 (Washington: Government Printing Office, 2005), p. 61.

5 Vincent H. Smith, "A Midterm Review of the 2014 Farm Bill," American Enterprise Institute, February 2016.

6 Budget of the United States Government, Fiscal Year 2017, Analytical Perspectives (Washington: Government Printing Office, 2016), Table 29-1.

7 Government Accountability Office, "Crop Insurance: Reducing Subsidies for Highest Income Participants Could Save Federal Dollars with Minimal Effect on the Program," GAO-15-356, March 2015.

8 Bruce A. Babcock, "Crop Insurance: A Lottery That's a Sure Bet," Environmental Working Group, February 2016.

9 Farm subsidy data at www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/governm....

10 Farm subsidy data at www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/governm....

11 Farm income data at www.ers.usda.gov/data-products/farm-household-income-and-characteristics.... See "historic data on mean and median farm operator household income and ratio of farm household to U.S. household income, 1960-2014."

12 Farm income data at www.ers.usda.gov/data-products/farm-household-income-and-characteristics.... See "historic data on mean and median farm operator household income and ratio of farm household to U.S. household income, 1960-2014."

13 Vincent H. Smith, "Cash Crop," Washington Examiner, May 11, 2015.

14 Robert Coleman, "The Rich Get Richer: 50 Billionaires Got Federal Farm Subsidies," Environmental Working Group, April 18, 2016.

15 Colin O'Neil, "Are Billionaires Getting Crop Insurance Subsidies?" Environmental Working Group, April 28, 2016.

16 Government Accountability Office, "Crop Insurance: Reducing Subsidies for Highest Income Participants Could Save Federal Dollars with Minimal Effect on the Program," GAO-15-356, March 2015.

17 Craig Cox, Soren Rundquist, and Anne Weir, "Boondoggle: Prevented Planting Insurance Plows Up Wetlands, Wastes $Billions," Environmental Working Group, April 28, 2015.

18 Congressional Budget Office, "Agricultural Trade Liberalization," November 20, 2006.

19 See "Farm Household Income and Characteristics" data at www.ers.usda.gov/data-products/farm-household-income-and-characteristics.... In particular, see the "principal farm operator household finances, 2010-2016F" dataset.

20 James M. Beck, Our Wonderland of Bureaucracy (New York: Macmillan, 1932), p. viii.

21 Quoted in Chris Edwards and Tad DeHaven, "Save the Farms — End the Subsidies," op-ed, Washington Post, March 3, 2002.

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