Farm Subsidies with Pros, Cons, and Impact

How Farm Subsidies Affect You

Crop irrigation
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 Photo by Harald Sund / Getty Images

Farm subsidies are federal government funds paid to U.S. agribusinesses. They help reduce the risk farmers endure from the weather, commodities brokers, and disruptions in demand. But they have evolved to become very complex. As a result, only large producers can take advantage of them.

Out of all the crops that farmers grow, the government only subsidizes five commodities. They are corn, soybeans, wheat, cotton, and rice.

These grains provide 80 percent of the world's caloric needs. Grains can also be stored and affordably shipped.

The top five states receiving subsidies are Texas, Nebraska, Kansas, Arkansas, and Illinois. In 2017, they received 38.5 percent of the $7.2 billion distributed.

There are smaller subsidies for peanuts, sorghum, and mohair. Producers of meat, fruits, and vegetables can only benefit from crop insurance and disaster relief. Between 1995 and 2017, $369.7 billion was paid out.

Summary of the U.S. Farm Industry

In 2015, the food industry made up 5.5 percent of the U.S. economy. It employed 11 percent of workers. Farming contributed 1 percent of gross domestic product and employed 13 percent of workers.

Corn is the nation's biggest crop. Over 15 billion bushels were grown in 2017, with 15 percent exported. The corn belt is Indiana, Illinois, Iowa, Missouri, Nebraska, and Kansas. A third of Iowa's economy depends on farming.

California produces the most food by value. Most of it is almonds, wine, dairy, walnuts, and pistachios. These aren't subsidized.

There are 2.1 million U.S. farms, of which 97 percent are family-owned. There is a competitive advantage to understanding local soil conditions and weather patterns. Families pass this lore on from generation to generation.

Three percent are large farms defined as having an income of $1 million or more. Most of U.S. vegetable and dairy sales come from these large farms. Most farms focus on one commodity.

Almost one out of five were started in the last decade. Many of these are small farms that focus on local or organic foods.

Pros

America's food supply must be protected from extreme weather like droughts, tornadoes, and hurricanes. The government has a role in ensuring food production during wars, recessions, and other economic crises. Food production is more important to the nation's welfare than other business products.

Farms are susceptible to commodity price dips. Commodities traders determine the prices on an open exchange. They trade futures contracts that promise to buy or sell at an agreed upon price on a specific date. Farmers can take their chances on what the price will be when it's time to harvest. Or they can lock in a price with a futures contract. Either way, they are betting that their costs will be lower than their future revenue.

Since these contracts are all priced in U.S. dollars, the value of the dollar will also affect farmers' revenue. If the dollar value rises, then foreign buyers won't want to buy as much because it costs more in their currency.

Crops and animals are vulnerable to pathogens, diseases, and weather. In 2012, droughts forced farmers to slaughter cattle that had become too expensive to feed. In 2015, egg prices skyrocketed 17.8 percent due to the Avian Influenza. In 2018, Hurricanes caused temporary price spikes as the production of pecans, chickens, and hogs were impacted.

Farmers rely on loans. They borrow in the spring to plant seeds and pay the debt in the fall when they sell their harvest. This makes farming feel like a gamble. An emergency expense or several years of low prices can be catastrophic. Many farms can't even survive two years of bad luck without going under.

Farms can't move. They can go out of business if a local processor cancels their contracts or goes out of business.

Cons

U.S. farms are located in one of the world's most favorable geographic regions. It has rich soil, abundant rainfall, and access to rivers for irrigation when rainfall fails. Today's farms have all the advantages of modern businesses. They have highly trained labor, computerized equipment, and cutting-edge chemical research in fertilizers and seeds.

All industries face their own peculiar challenges. Agriculture faces no more risk than other industries. Some argue that it shouldn't receive any preferential treatments.

Subsidies act like a regressive tax that helps high-income businesses, not poor rural farmers. Most of the money goes toward large agribusinesses. Between 1995 and 2017, the top 10 percent of recipients received 77 percent of the $205.4 billion doled out. The top 1 percent received 26 percent of the payments. That averages out to $1.7 million per company. Fifty people on the Forbes 400 list of the wealthiest Americans received farm subsidies. On the other hand, 62 percent of U.S. farms did not receive any subsidies.

U.S. farm subsidies block global trade. The Doha Round of trade talks and the Transatlantic Trade and Investment Partnership failed because of U.S. and European farm subsidies. Doha would have eliminated tariffs between every country in the World Trade Organization. The TTIP would have lowered trade barriers between the United States and the European Union. It would have increased U.S. GDP by 5 percent and the EU's by 3.4 percent.

History

Below is an abridged history of the agriculture industry in the United States:

  • 1862: Agriculture has long attracted federal support. The Homestead Act in 1862 granted land in the west to settlers willing to farm it. The Morrill Act of 1862 funded colleges of agriculture. The Federal Farm Loan Act made government loans available to farmers. It made sure there was enough food during World War I. It became the Farm Credit System.
  • 1929: The Agricultural Marketing Act of 1929 created the Federal Farm Board. It tried to keep crop prices from crashing. It asked farmers to limit crops, which didn't work. It bought and stockpiled crops to limit supplies. It became the Farm Credit Administration in 1933.
  • 1934: The Soil Conservation & Domestic Allotment Act paid farmers to plant soil-building crops, like beans and grasses, to counteract the drought. The Rural Electrification Act provided loans to farming cooperatives to generate electricity for their rural areas. The Resettlement Administration trained farmers and adjusted farm debt payments. It bought 10 million acres of submarginal farmland and paid farmers to convert it to pasture, preserves, or parks. It also resettled farmers onto better land and taught them modern conservation and farming techniques.
  • 1937: The Farm Tenancy Act created the Farmers’ Home Corporation to provide loans for tenant farmers to buy their farms. The Farm Security Administration replaced the Resettlement Administration to provide loans and training for farmers.
  • 1938: The New Agricultural Adjustment Act remedied the 1933 AAA. This price support system lasted until the 1990s. The federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure supply did not exceed demand. The government subsidized farmers to keep croplands idle in order to prevent overproduction. It also bought excess crops. It then either stored them or gave them away to feed low-income people throughout the world. By 1999, farm subsidies had reached a record $22 billion
  • 2001-2006: Farm subsidies tapered off a bit, averaging $19 billion a year. Of this, about 15 percent was wasteful, unnecessary, or redundant. Between 1995 and 2010, farm subsidies had ballooned to $52 billion a year on average.
  • During the recession, as lawmakers looked for ways to cut the budget, many asked, "Do corn growers need subsidies?"
  • 2011-2012: In 2011, a record 14 billion bushels of corn were produced. In 2012, 94 million acres of corn were scheduled to be planted. This was more than in any year since World War II.
  • 2017: Large farms dominated the industry. Farms generating $1 million or more in sales produced two-thirds of the nation's agricultural output. Only 4 percent of farms were that large. Big farms gobbled up small ones that couldn't compete. They relied on economies of scale to produce more food at a cheaper price. That sent prices down even more, putting more small farmers out of business. The 2012 budget proposed a 22 percent cut to farm subsidies, including the $5 billion direct payment program. The House budget also proposed $180 billion in cuts to the farm subsidy program. But $133 billion cut the food stamp program, affecting 8 million consumers, not farmers. 
  • December 12, 2018: Congress approved a five-year farm bill. It provided $867 billion over 10 years. It covers the food-stamp program for low-income families, farm subsidies, and research efforts. The Trump administration is increasing work requirements for those receiving food stamps.

How Farm Subsidies Affect the Economy

The federal crop insurance program may be encouraging farmers to plant crops that aren't drought resistant. The insurance program encourages them to plant the same crops year after year, regardless of crop yield. As a result, it keeps them from switching to drought-resistant crops.

This worsens drought in the Midwest. Between 2006 and 2015, the Midwest was in an extended drought. Global warming is expected to worsen that condition. The number of 100-degree-plus days is projected to quadruple by 2050.

The drought is forcing farmers to drain the groundwater from the Ogallala Aquifer eight times faster than rain is putting it back. The Aquifer stretches from South Dakota to Texas. It supplies 30 percent of the nation's irrigation water. At the current rate of use, it will dry up within the century. Parts of the Texas Panhandle are already running dry. Scientists say it would take 6,000 years for rain to refill the aquifer.

Corn for cattle feed is the most significant culprit, fattening 40 percent of the nation's grain-fed beef. Other subsidies encourage farmers to grow corn for ethanol biofuel. The number of ethanol production facilities in the High Plains region has doubled. That drains an additional 120 billion gallons a year from the aquifer. 

Subsidies for Texas cotton is $3 billion a year. It's shipped to China, where it's made into the cheap clothing sold in American stores.

Farm subsidies bills include food stamp funding. That ensures urban members of Congress will support the farm subsidy bills.

How They Affect You

Grains are the most heavily subsidized, making them cheaper than vegetables and fruits. As a result, grains make up one-fourth of the average American diet. Oil, usually made from corn, soybeans, and canola, contributed another quarter. Fruits and vegetables are less than 10 percent.

More than 6 percent of farm subsidies go toward four "junk food" components: corn syrup, high-fructose corn syrup, corn starch, and soy oils. It seems the federal government subsidizes food that contributes to America's obesity problem. 

Most developed countries have farm subsidies. It gives farmers in those countries an unfair trade advantage. The World Trade Organization limits the amount of subsidized grains that countries can add to global stockpiles to lower this edge. But it also reduces the amount of food available in a shortage. That increases food price volatility