Should Washington End Agriculture Subsidies?

Agricultural subsidies fundamentally disrupt the economics of farming and ranching, making both unprofitable, leading to monopolies and harming the environment. Eliminating them would be the cheapest and quickest environmental & wildlife measure possible.

NOTE: post originally appeared on WSJ.com July 12, 2015

The U.S. government has been protecting farmers against unpredictable hardships such as bad weather since the 1930s, when drought and the Great Depression devastated the nation’s agriculture industry.

Today, agricultural subsidies and insurance cost the U.S. taxpayers about $20 billion annually, according to the U.S. Government Accountability Office. That support has come under great scrutiny in recent years, with opponents complaining that most of the money goes to millionaire farmers and giant agribusinesses, not small family farms seeking to stay afloat.

Congress revamped some agriculture-support programs in 2014, eliminating a controversial system of direct payments to farmers, while providing farmers with more subsidized crop insurance.

But subsidy opponents weren’t satisfied. They say the government is still providing costly income support to an industry that doesn’t need it. Others disagree, saying farm subsidies provide U.S. consumers with necessary protection against food scarcity and high food prices.

Vincent H. Smith, a professor in the departments of agricultural economics and economics at Montana State University and a visiting scholar at the American Enterprise Institute, makes the case for letting farmers stand on their own. W. Robert Goodman, who was an extension agricultural economist at the Alabama Cooperative Extension System and an associate professor at Auburn University before retiring, explains why farm subsidies should be preserved.

YES: Farmers Don’t Need Them, and They Impede Innovation

By Vincent H. Smith

U.S. farmers don’t need support from U.S. taxpayers, either directly or through legislation that restricts the supply of a commodity to raise its price.

First, many people seem to believe that farmers, like the Joad family in John Steinbeck’s “The Grapes of Wrath,” are poor, when in fact the average farm household enjoys an income that is about 15% higher than that of the average nonfarm family. What’s more, the 10% to 15% of farm families that receive more than 85% of all farm subsidies—amounting to millions of dollars a year in a few cases—have annual household incomes many times as large as those of the average U.S. taxpayer. Some estimates suggest that the farmers who receive the bulk of all subsidies—many of whom mainly raise corn, cotton, rice, peanuts, soybeans and wheat—are worth somewhere between $6 million and $10 million on average.

Second, farming is anything but the risky business it is often portrayed to be. The sector certainly isn’t highly leveraged; the average debt-to-asset ratio in U.S. agriculture today is between 10% and 11%. And in contrast to the claims of the farm lobby and the private insurance companies (who take about $2 billion of taxpayer funds annually to deliver heavily subsidized crop insurance), competent farmers are perfectly capable of managing the year-to-year price and production risks they face.

Less than 1% of all farms (about one in every 200) go out of business in any given year, and the three main causes of those failures are catastrophic health-care costs, divorce and incredibly poor management. Fortune 100 companies and Main Street businesses face much riskier financial environments.

Third, farmers don’t need “stable” prices to stay in business, especially when stable means they can enjoy high prices but are protected from below-average prices through price-support programs. Most farmers are financially well-positioned to handle both price and production risks. Consider, for instance, that many livestock producers and fruit and vegetable growers run profitable and successful farms and provide plentiful supplies of produce to U.S. consumers without any significant support from the government.

Rational response

These days, crop-insurance subsidies are the major source of government largess for farmers. Some proponents say farmers wouldn’t be able to get crop loans without them. Anyone tempted to buy that argument should consider that before 1980, when crop insurance covered less than 20% of all operations because subsidies were small, banks made plenty of loans to farmers who didn’t have such coverage. They also make loans to livestock and fruit and vegetable producers who don’t have access to or don’t use crop insurance as a risk-management tool.

The problem with subsidized crop insurance is that it allows farmers to operate in ways that increase the risk of crop and other forms of financial loss because they know that any losses they incur will be covered by taxpayers. Farmers have responded rationally by, for example, planting crops on poor-quality land, cutting back on things like pesticides and fertilizer that reduce the risk of crop losses and reducing the extent to which they diversify their enterprises (for example, by jointly raising livestock and crops).

Subsidies also discourage farmers from being innovative and improving productivity. That’s because when any business is effectively guaranteed profits by the government, there is much less incentive to adopt new practices and technologies.

Granted, subsidies have had a modest effect on reducing soil erosion because farmers are required to file conservation plans to receive them, but many economists believe the same effect could have been achieved through other means.

Land-rich nation

The farm lobby may argue that subsidies lead to increased food output and lower prices for consumers, but that isn’t true when subsidies are considered as a whole. Some subsidy programs may produce that effect, but others do the opposite by taking farmland out of production for conservation purposes. And the idea that U.S. food security depends on government farm programs is an even weaker argument. As a land-rich nation, the U.S. is a net exporter of crops and food products and would be under any credible price scenario.

At about $20 billion a year, total spending on agricultural subsidies is a relatively small part of the overall federal budget. But wasteful government spending is still waste, and most farm subsidies are wasteful.

Dr. Smith is a professor in the departments of agricultural economics and economics at Montana State University and a visiting scholar at the American Enterprise Institute. He can be reached at reports@wsj.com.

NO: They Keep Farming Profitable and Stable

By W. Robert Goodman

Modern society is far removed from agriculture. With only a small percentage of the population engaged in food production, few understand the fragile nature of modern farming and why government farm subsidies are necessary to protect the public from scarcity and high food prices as the world’s population expands to a projected 11 billion people by 2100 from seven billion now.

Government subsidies help keep farming profitable and stable, allowing for the commercial finance of modern agriculture, the development of products and technologies that help farmers produce more food at a lower cost, and the preservation of production resources in case of future need.

Today’s farm subsidies don’t “pay farmers not to plant.” Instead, they come in the form of insurance. Under the 2014 farm bill, farmers buy crop insurance, and the premium is subsidized by the government. Fewer payments are made in years of normal yield and price, thus subsidy cost can be very low. But the insurance provides farmers with the income security necessary to secure the loans they need to produce crops.

Contrary to what some say, farming is “risky business”: Growing a single acre of corn in Iowa can cost over $500. With projected yield around 160 bushels and corn price around $3.30 per bushel, depending on weather, the profit margin farmers earn is small. But a farmer planting 1,000 acres of corn this year will need a “crop loan” of a half-million dollars. Getting a crop loan without insurance is like getting a loan without collateral. U.S. farmers will plant 89 million acres of corn in 2015. Financing this single crop will require about $45 billion. This is one reason why crop insurance, and crop-insurance subsidy, is necessary.

Nobel Peace Prize winner Norman Borlaug, known as “the father of the Green Revolution,” insisted that continuous increases in world food production must come through adoption of more efficient technology, not through increased acreage. It is this increased productivity that has allowed for the preservation of significant amounts of ecologically sensitive acreage around the world. Agriculture subsidies have promoted rapid advances in productivity by encouraging the development and adoption of modern farming methods and materials by farmers who may not have been willing to take the financial risk otherwise.

Farm subsidies also have resulted in a significant decrease in the rate of soil erosion from crop production. Since 1985, wind and water erosion rates of farmed land in the U.S. have declined more than 40% and are still trending downward, thanks to the development and widespread adoption of agricultural technology such as conservation tillage, establishment of streamside protection zones, and grass waterways and buffer strips. Farmers must agree to comply with these erosion-limiting practices to qualify for subsidies.

Even at $20 billion a year, the cost of farm subsidies is modest compared with federal spending. And much of that cost is offset because as agriculture subsidies keep food prices low, they become transfer payments made by taxpayers to consumers of agriculture commodities—or, in other words, themselves.

Like many products of the political process, agriculture subsidies are deeply flawed, in that farm policy hasn’t always kept up with rapidly changing economic and environmental conditions. But to those who complain that farm subsidies go to big companies and millionaires, my question is this: Shouldn’t those who produce the bulk of our food receive the bulk of farm payments? The fact is, large, efficient farms benefit the public by producing food at a much lower cost than would otherwise be possible.

We must continue to craft agriculture policy that provides incentives necessary to ensure world food security, while constantly seeking to improve the fairness, equity, and efficiency of those policies. In Franklin D. Roosevelt’s 1937 inaugural speech, he defended his proactive efforts to bring the country out of the Great Depression when he said, “We refused to leave the problems of our common welfare to be solved by the winds of chance and the hurricanes of disaster.” That sentiment is apt here.

Dr. Goodman, now retired, was an extension agricultural economist at the Alabama Cooperative Extension System and an associate professor at Auburn University. He can be reached at reports@wsj.com.

wsj.com · July 12, 2015

Whether it’s USDA, Federal Reserve, BLM, or wildlife departments, agency personnel like Dr. Goodman sincerely believe in what they do. No matter how badly they fail, their prescription is always the same: Double down, the medicine was fine but the dose wasn’t big enough.