Is U.S. Agricultural Policy Economically Damaging?

From Thinking Outside the Boxe’s London Correspondent

         

Every year, the U.S. government gives out about $25 billion in subsidies to farmers around the country. Considering the current budget deficit problems in the U.S., is it worth paying out so much to farmers, or is the current system only damaging the economy even further?

 

In theory, farm subsidies are an excellent idea. Farmers do some of the most important and most underappreciated work in the United States, ensuring a consistent food supply to all parts of the country. As farmers’ work is highly susceptible to risk factors such as floods, storms and drought, farm subsidies provide a safety net to ensure that farmers are able to feed the nation without putting their own financial security at risk. According to FoodFirst.org, crop prices have been steadily decreasing for the past 60 years, and the U.S. government uses a “price floor” system that compares current prices to a baseline standard and hands out direct payments to farmers to compensate them if prices fall below that line. With farm subsidies, the U.S. government can support small farms that would be unable to exist under this level of financial uncertainty. Despite the large figure spent on farm subsidies, the U.S. also manages this relatively cheaply: although agriculture makes up 4.6% of the U.S.’s gross domestic product, the subsidies only account for less the 0.25% of the annual budget.

 

However, farm subsidies currently fail to provide any real support to farmers in need. The majority of crops are ineligible for subsidies, with 90% of the money going to farmers of wheat, cotton, corn, soybeans and rice. Even when considering only these crops, the subsidies go almost exclusively to large agribusinesses and fail to reach the small, local farmers that people might imagine when considering a subsidy system. According to the Environmental Working Group, 10% of the U.S.’s largest and richest farms collect 75% of federal farm subsidies; these farms have an average income of $200,000 a year. This occurs because farm subsidies are currently tied to the amount of crop produced, meaning that the largest farms automatically receive the greatest payouts. From one perspective, this makes sense: farms that plant more of a crop undergo greater financial risk, and so deserve greater financial assistance if the gamble does not pay off. However, the current subsidy system does not only pay farmers if their crops fail, but as a default handout every year, without any consideration of individual financial need, meaning that taxpayer money does not go to the struggling individual farmers, but to big businesses.

 

Indeed, many critics of the current subsidy system suggest that it is causing greater harm to the agricultural economy (and so, indirectly, to small farmers) than help. Because subsidies are paid per amount of crop produced, farmers can increase the subsidies received, and so their income, by planting more and more of the main five subsidy crops. This leads to overproduction, which drives down prices and in turn creates a greater demand for subsidies. According to The Heritage Foundation, this vicious circle is destroying small-scale agriculture and having a detrimental effect on global agriculture as a whole. In 1996, for example, when the “floor price” of soybeans rose from $4.92 per bushel to $5.26 per bushel, farmers planted an additional 8 million acres of the crop, causing a 33% decline in prices over the following two years.

 

The current subsidy system is also locking potential new farmers out of the business. Because subsidies are tied to the acreage each farm has available for crops, they have inflated the value of farmland by 30%, according to the Heritage Foundation. As this places farmland out of the price range of most young people, the average age of farmers in the U.S. has now risen to 55, and most of the farmland that goes on sale is bought up by agribusinesses that use their large subsidies to buy out smaller family farms. Although the existence of these large agribusinesses might increase efficiency in the agricultural market, it also decreases competition, and certainly isn’t what people imagine when they agree to spend part of their income on subsidies for farmers.

 

However, this does not mean that the U.S. government should scrap farm subsidies altogether. Although the Heritage Foundation argues that the farms do not need subsidies, as the average household income of a farmer is well above the national average at $81,420, this conclusion ignores the fact that these statistics include agribusinesses who produce crops on mass and receive large subsidies, outweighing and overshadowing the significantly lower earnings of small farmers when the average income is calculated. Similarly, while new farms currently fail at 1/6th of the rate of other non-farm businesses, this success may be directly connected to the government subsidies that make farming a (relatively) secure financial venture. Without any subsidies to support new farms, these statistics would be quite different. The situation of U.S. farmers is also not comparable to cases in other countries where subsidies have been eradicated completely. Although both Australia and New Zealand managed to successfully eliminate farm subsidies in the 1970s and 1980s, farmers in these countries do not have to be concerned by extreme unpredictable weather such as hurricanes and tornadoes that can completely destroy a farm’s entire earnings for the year.

 

Despite the failings of the current system, farming is a financially risky business, and one that must flourish. Supermarket shelves will not fill themselves, and the U.S. should not be reliant on other nations for a majority of its agricultural needs. We should therefore reform our farming subsidies to remove the ties to acreage farmed and instead take into account the financial need of the individual recipients.

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