Agriculture Subsidies

Agriculture subsidies are government programs providing benefits to farmers for the purpose of stabilizing food prices, ensuring plentiful food production, and guaranteeing farmers' basic incomes.

The premises behind agriculture subsidies are that the nation's food supply is too critical to the nation's well-being to be governed by uncontrolled market forces and that to keep a steady food supply, farmers' incomes must be somewhat stable, or many farms would go out of business during difficult economic times. These premises are not accepted by all lawmakers and are the subject of continual debate. Critics argue that the subsidies are exceedingly expensive and do not achieve the desired market stability.

The U.S. government first initiated efforts to control the agriculture economy during the Great Depression of the late 1920s and early 1930s. During this period, farm prices collapsed, and farmers became increasingly desperate in attempts to salvage their livelihood, sometimes staging violent protests. President Herbert Hoover made several failed attempts to shore up prices and stabilize the market, including the disastrous Hawley-Smoot Tariff Act of 1930, 6 U.S.C.A. § 1, 19 U.S.C.A. § 6 et seq., which created a limited tariff to protect farmers from competition from foreign products. The tariff set in motion a worldwide wave of protective tariffs, greatly exacerbating the global economic panic and resulting in drastically decreased export markets for U.S. commodities.

After the Hawley-Smoot Tariff Act of 1930, tariffs were not a widely supported method of subsidizing most agricultural products. The model for post-Hawley-Smoot farm subsidies is the Agricultural Adjustment Act of 1933 (AAA), 7 U.S.C.A. § 601 et seq., passed by President Franklin D. Roosevelt and the New Deal Congress. The AAA implemented some ideas that became staples of agriculture subsidy programs to the present day, including provisions allowing the government to control production by paying farmers to reduce the number of acres in cultivation; purchase surplus products; regulate the marketing of certain crops; guarantee minimum payments to farmers for some products; and make loans to farmers using only their unharvested crops as collateral.

The government also has attempted to stabilize agricultural markets by subsidizing the export of U.S. agricultural products and by signing international agreements designed to promote agricultural exports. In the 1950s and 1960s, the government took major steps to increase exports, including the adoption of the Agricultural Trade Development and Assistance Act of 1954, 7 U.S.C.A. § 1427 et seq., and the General Agreement on Tariffs and Trade (GATT). Such measures resulted in widened markets for U.S. agricultural products.

The GATT, a multination agreement intended to reduce international trade impediments and decrease the potential for tariff-based trade wars, has undergone several revisions during its history. Agriculture subsidies and tariffs have often been a source of great debate in these revisions. During the Uruguay round of modifications, GATT members could not agree on this issue. The stalemate nearly resulted in a renewed tariff war and the abandonment of the agreement during the 1980s and 1990s. At one point, farmers in France staged violent demonstrations when that country agreed to lower its subsidies and open its markets to imports.

Some export-based policies have had drawbacks. In 1972, the Nixon administration announced a monumental agreement with the Soviet Union whereby the Soviet Union would purchase virtually all surplus grain produced in the United States. U.S. grain and food prices escalated rapidly owing to this new demand, causing great public skepticism about the deal, except in the rural United States, where farm values and incomes escalated.

Another method used by the government to subsidize agricultural products is the combination of target prices, deficiency payments, and mandatory acreage reduction. This approach is used primarily for corn and wheat, the main U.S. grain crops. Under this method, the government sets an ideal price, or target price, for a commodity. If the market price falls below that target price, the government pays the farmer the difference — that is, makes a deficiency payment to the farmer. This prevents the farmer from being forced to sell the product at a price deemed unfairly low by the government, and supports the farmer's income during difficult economic periods. Programs using this method are not mandatory, so the farmer must enlist in one to be involved. In return for a guaranteed minimum income and price stability, the farmer normally is required to take a specified portion of land out of production — that is, make a mandatory acreage reduction — at least for program commodities.

In any given year, it is impossible to predict how expensive the deficiency payment programs will be, because weather conditions and uncontrolled market forces often greatly affect prices. These types of agriculture subsidies often have been quite expensive, especially during years when market prices are low owing to high production and low exports. To reduce the government's cash payments to farmers during one particularly disastrous market swing, the Reagan administration implemented the Payment in Kind (PIK) Program in 1983. Under the PIK Program, instead of paying farmers with cash, the government paid them with certificates good for federal surplus grain. Farmers could then exchange the certificates for actual grain or trade them like stock certificates. PIK, combined with a drought in 1983, succeeded in reducing the cash cost of the deficiency payment programs and the excessive grain surplus.

In the dairy industry, the government subsidizes milk production by agreeing to purchase milk from processors at a predetermined price. Dairy farmers receive no direct deficiency payments; rather, they receive from their processor a milk check that includes the federal money.

The international community often attacks the U.S. dairy subsidy programs as predatory, although similar and even greater subsidies are given to many dairy farmers in European communities. U.S. dairy producers claim that until the other producing nations drop their subsidies, it would be economic suicide for the United States to lower subsidies.

The government also subsidizes agriculture through nonrecourse loans. With this type of subsidy, the government loans money to farmers using the farmers' future harvest as collateral. The government sets a per-bushel loan rate at which farmers can borrow money prior to harvest, so that they can hold their crops for later sale when the market price rises. The government determines how much a farmer can borrow by multiplying the loan rate (which is usually equal to the government target price for the crop) by the farmer's base acreage (which is determined by calculating the number of acres the farmer planted of a target crop over several years, and multiplying that total by the farmer's average yield). The crop is the collateral for the loan, and the farmer can either repay the loan in cash and sell the crop, or default and forfeit the crop to the government. If the market price is lower than the loan rate or target price, or if the farmer's actual production rate is below the farmer's base acreage rate, the government's only recourse for recouping part of its loan is to take the collateral crop. This subsidy is used primarily for corn and wheat, with a modified form of the program applying to soybeans, rice, and cotton.

The government still enforces restrictive tariffs to subsidize certain domestic crops, especially sugar, for which the U.S. tariff virtually eliminates all foreign imports. The tariff protects U.S. sugar producers and costs the government little, but opponents argue that the cost of this domestic monopoly is passed on to consumers, who are forced to pay sugar prices almost four times higher than the world market rates, to the benefit of a few large sugar manufacturers.

For peanuts and tobacco, the government allows legal monopolies for a few government-licensed growers, and imposes large tariffs on imports of these products. Also, cigarette companies are allowed to help determine the price of tobacco and the volume of foreign imports, creating a dual-monopoly relationship between tobacco growers and the cigarette industry.

Supporters of subsidies attribute the relatively low cost of food and the stability of food production to the assistance of the federal government. They say that if agriculture subsidies did not exist, food prices would vary wildly from year to year, and that many farmers would be unable to support themselves through market lows and weather catastrophes. Supporters often state that government support for family farms keeps farm monopolies from dominating production and raising prices. Supporters cite the great advances in per capita production since the New Deal revisions in farm policy as evidence of the success of agriculture subsidies.

Supporters also point out that the government has encouraged soil conservation through subsidies. They point to laws such as the Soil Conservation and Domestic Allotment Act of 1936, 7 U.S.C.A. § 608-1 et seq., 16 U.S.C.A. § 590 et seq., which required that farmers who received income subsidies plant soil-conserving crops like legumes rather than soil-depleting crops such as corn, and that farmers use contour crop-stripping methods to hinder soil erosion resulting from water runoff.

Opponents of agriculture subsidies say the farm economy is overly dependent on government, and that market forces would be a more efficient and inexpensive method of regulating production and market price. They contend that in the 1970s and 1980s, up to 30 percent of farmers' incomes were made up of government payments, primarily during years when guaranteed deficiency payments ballooned, and that farm programs have become the third largest federal program expense, behind Social Security and Medicare.

Another primary criticism of farm commodity programs, especially corn and wheat programs, is that they encourage farmers to expand their operation in order to acquire more base acres and higher guaranteed government payments. Opponents believe that this leads to a concentration of production in the hands of fewer and fewer farm corporations, and actually undermines the concept of family farms. Opponents also state that although a primary goal of agriculture subsidies always has been to control production, most programs have had little success in doing so because farmers who are paid to keep part of their land out of production tend to remove the least productive acres.

The Republican Congress of 1994-95 proposed large cuts in farm subsidies as a means to reduce the federal deficit. In March 1996 Congress passed the Federal Agriculture Improvement and Reform Act, which provides for agriculture subsidies to be phased out by 2003.

Many environmentalists opposed farm subsidies for different reasons. Corn and wheat programs came under attack by environmental groups. These groups claimed that the base acreage and deficiency payment system encouraged farmers to produce soil-depleting and erosion-prone crops such as corn year after year, even if the market offered a better price for a different crop. Soil depletion and the need to increase average yields led to heavy use of chemical fertilizers, which in turn added to soil and water pollution.

Over the past few decades, agriculture subsidies were a significant and controversial part of the federal budget. Often, the subsidy programs had disparate and contradictory goals. On one hand, the federal government wanted to ensure an adequate, inexpensive food supply. On the other, it wanted to provide farmers with a degree of market certainty and a decent price for their goods. Overriding these goals were mounting pressures to keep the federal budget in check and to promote the export of U.S. products in an ever more intertwined world economy. This delicate balancing act caused much debate and discussion, as well as intensive lobbying efforts by various interest groups.

See: Agricultural Law; Agriculture Department.

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An agricultural subsidy is a governmental subsidy paid to farmers to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities on international markets. Examples of such commodities include wheat, feed grains (grain used as fodder, such as maize, sorghum, barley, and oats), cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.

Agricultural subsidies by region

European Union

Main article: Common Agricultural Policy

See also: Intervention storage

Japan

Main article: Agriculture, forestry, and fishing in Japan

Japan is best known for having agricultural subsidies put on its rice industry, with the reasoning behind such moves being cultural.^{[citation needed]}

United States

The U.S. Agricultural Department is required by law (various U.S. farm bills which are passed every few years) to subsidize over two dozen commodities. Between 1996 and 2002, an average of $16 billion/year was paid by programs authorized by various U.S. farm bills dating back to the Agricultural Adjustment Act of 1933, the Agricultural Act of 1949, and the Commodity Credit Corporation, among others.^{[citation needed]}

The beneficiaries of the subsidies have changed as agriculture in the United States has changed. In the 1930s, about 25% of the country's population resided on the nation's 6,000,000 small farms. By 1997, 157,000 large farms accounted for 72% of farm sales, with only 2% of the U.S. population residing on farms.

The subsidy programs give farmers extra money for their crops, as well as guarantee a price floor. For instance in the 2002 Farm Bill, for every bushel of wheat sold farmers were paid an extra 52 cents and guaranteed a price of 3.86 from 2002–03 and 3.92 from 2004–2007.^[1] That is, if the price of wheat in 2002 was 3.80 farmers would get an extra 58 cents per bushel (52 cents plus the $0.06 price difference).

The following is the subsidies by crop in 2004 in the United States.

Commodity	US Dollars (in Millions)	Percentage of Total
Feed Grains	2,841	35.4
Upland and ElS Cotton	1,420	17.7
Wheat	1,173	14.6
Rice	1,130	14.1
Soybeans and products	610	7.6
Dairy	295	3.7
Peanuts	259	3.2
Sugar	61	0.8
Minor Oilseeds	29	0.4
Tobacco	18	0.2
Wool and Mohair	12	0.1
Vegetable Oil products	11	0.1
Honey	3	0.0
Other Crops	160	2.0
Total	8,022	100

Source USDA 2006 Fiscal Year Budget^[2]

Benefits

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The majority of the arguments in favor of agricultural subsidies are based largely on social and cultural values. Farm subsidies have the effect of transferring income from the general tax payers to farm owners. There is a common perception in many countries that farmers are among the hard working poor, thus there is often public support for using tax dollars to supplement farmers' incomes. (In most developed countries however, the majority of farm owners are not poor, and many are quite wealthy. Also, in many cases farm subsidies benefit rich farmers at least as much, and sometimes significantly more than poor farmers.)

It is also argued in some countries that without support from government, domestic farmers would not be able to compete with foreign imports. Removing subsidies would therefore drive domestic farmers out of business, leaving the country with a much smaller (or possibly non existent) agriculture industry. The loss of the domestic farming industry is often seen as undesirable on a variety of grounds, including increases in (short term) unemployment, and the loss of a traditional cultural way of life. A country that is unable to domestically produce enough food to feed its people, may also be more vulnerable to trade pressure.

Depending on the nature of the subsidies, agricultural subsidies may have the effect of increasing agricultural production and/or driving down domestic food prices. This means domestic producers would pay less for their food. It can not be argued that this makes consumers in general better off, since it was their own taxes that paid for the subsidies in the first place (see below). However, it may benefit certain consumers in particular. Compared with wealthier individuals, poor people generally pay a smaller proportion of their income in taxes, and they generally spend a larger proportion of their income on food. Thus lower food prices, financed through tax revenues, will provide larger benefits for the poor, than for the wealthy. In this respect, agriculture subsidies could be considered a (very indirect) means of transferring wealth to lower income individuals. As noted below though, the net effects on national income are likely to be negative, and this would not generally be considered an efficient way of transferring money to the poor.

Agricultural subsidies, resulting in lower food prices, and domestic overproduction, can also provide benefits for the poor in other ways. In the 1960s, President Lyndon B. Johnson made food surpluses a weapon in the war on poverty. Since then, food has been donated to poor urban areas in the United States. Also, both critics and proponents of the WTO have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries.^[3][4] In other cases though, export subsidies from developed countries can drive third world farmers out of business, or lower the prices they can receive for their crops, which will ultimately increase poverty in developing countries.

Some proponents of agricultural subsidies argue that they are necessary because of the fluctuating nature of the agricultural industry. Domestic crop yield can fluctuate considerably depending on the local weather. International crop prices also fluctuate considerably depending on weather and other factors affecting crop yields in foreign countries. As a result of these fluctuations in production levels and prices, there could be very large variations in farm revenues between years. Price support and income guarantees can help to smooth farmers' income over time and ensure that farmers are not required to maintain a hefty float from year to year in order to maintain a consistent income. Critics note, though, that there are other ways of smoothing income (such as insurance programs) that do not rely on substantial government financial support.

Criticism

It has been suggested that some of the information in this article's "Criticism" or "Controversy" section(s) be merged into other sections to achieve a more neutral presentation. (Discuss)

One criticism of subsidy comes from proponents advocating the economic theory of the free market, stating that subsidies are against the principles of free and fair trade. For example, poor store owners do not receive relief from the market and therefore neither should poor farmers. Furthermore, justification of subsidies from the uncertain nature of the weather can be countered by considering that many other areas of economy experience equivalent risks for which the free market does provide solutions (for example, insurance).

Critics of agricultural subsidies argue further that they promote poverty in developing countries, by artificially driving down world crop prices^[5]. Agriculture is one of the few areas where developing countries have a comparative advantage. This makes developing countries into dependent buyers of food from wealthy countries, causing local farmers to lose their land rather than allowing them to develop their own agriculture and therefore self-sufficiency. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade negotiations stalled because the US refused to cut subsidies to a level where other countries' non-subsidised exports would have been competitive.^[6]

Economists strongly rebuke the benefits of reduced retail prices derived from subsidising over-production. If the government were to subsidize car manufacturers to produce more cars then this would indeed lower the showroom price but it would be the consumer's own money collected through tax that would be used to fund the over-production. Even worse, subsididies are a deadweight loss to the welfare in the aggregate economy due to the misallocation of production spending caused by the price distortion in agricultural products. Also, in the hypothetical case that lower retail costs would outweigh the additional production costs, the manufacturers would simply lower their prices themselves until they are at a point of maximum profitability.

In America, critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl at the Heritage Foundation showed that nearly three quarters of subsidy money goes to the top 10% of recipients.^[7] Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. The discrepancy is only widening. Since 1990, payments to large farms have nearly tripled, while payments to small farms have remained constant.^[8] Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies—which they can use to buy even more small farms."^[9] Critics also note that, in America, over 90% of money goes to staple crops of corn, wheat, soybeans and rice while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy has provisions encourage local varieties and pays out subsidies based upon total area and not production. Although, in fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms.^[10]

Subsidies are often given in conjunction with strict laws reducing their benefit to farmers. For example, UK farmers have difficulty competing with Argentinian farmers, not only with higher labour costs, but with enforced meat tracability overheads from the same government.

See also

• Agricultural policy
• Price support

External links

• Rethinking the Export-Import Bank by Aaron Lukas and Ian Vásquez

• Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry

• Why Congress Should Repeal Sugar Subsidy

• Ten Reasons to Cut Farm Subsidies by Chris Edwards

• Should the United States Cut Its Farm Subsidies? - Daniel Griswold, director of the Cato Institute’s Center for Trade Policy Studies, and Bob Young, chief economist for the American Farm Bureau, debate whether the United States should be subsidizing its farmers

• Farm Security: The mohair of the dog that bites you - Comedy writer Dave Barry on farm subsidies

• You Are What You Grow - Article on farm subsidies from The New York Times.

• Kick All Agricultural Subsidies (kickAAS) - a campaign run by The Guardian newspaper in the UK

• Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers by Daniel Griswold, Stephen Slivinski, and Christopher Preble (September 5, 2005).

• Still at the Federal Trough: Farm Subsidies for the Rich and Famous Shattered Records in 2001- a paper presented by The Heritage Foundation arguing that farm subsidies are corporate welfare and do not benefit small family farms.

• Environmental Working Group's Farm Subsidy Database

References

1. ^ The 2002 Farm Bill: Title 1 Commodity Programs. USDA (2002-05-22). Retrieved on 2006-12-2006.
2. ^ USDA Budget Summary 2006. Farm and Foreign Agriculture Services.
3. ^ Panagariya, Arvind (2005–12). Liberalizing Agriculture. Foreign Affairs. Retrieved on 2006-12-26.
4. ^ Center for Economic and policy research (2005-11-22). World Bank's Claims on WTO Doha Round Clarified. Press release.
5. ^ Andrew Cassel (2002-5-6). Why U.S. Farm Subsidies Are Bad for the World. Philadelphia Inquirer. Retrieved on 2007-7-20.
6. ^ US blamed as Trade Talks end in acrimony. Financial Times (2006-7-24). Retrieved on 2006-12-26.
7. ^ Riedl, Brian M. (2002-4-30). Still at the Federal Trough: Farm subsidies for the rich and famous shattered records in 2002. Heritage Foundation. Retrieved on 2006-12-27.
8. ^ Farm Programs: Information on Recipients of Federal Payments 14. US General Accounting Office (2001–06). Retrieved on 2006-12-27.
9. ^ Riedl, Brian M. (2002-4-30). Still at the Federal Trough: Farm subsidies for the rich and famous shattered records in 2002. Heritage Foundation. Retrieved on 2006-12-27.
10. ^ Farm Programs: Information on Recipients of Federal Payments 15. US General Accounting Office (2001–06). Retrieved on 2006-12-27.

• Farm Commodity Programs: A Short Primer, a Congressional Research Service Report for Congress, June 20, 2002.

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