Payments by the federal government to producers of agricultural products for the purpose of stabilizing food prices, ensuring plentiful food production, guaranteeing farmers' basic incomes, and generally strengthening the agricultural segment of the national economy.
Proponents of agriculture subsidies point to several reasons why they are necessary. They claim that the country's food supply is too critical to the nation's well-being to be governed by uncontrolled market forces. They also contend that in order 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, 6U.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 governmentlicensed 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. They also cite the great advances in per capita production since the New Deal revisions in farm policy as evidence of the success of agriculture subsidies.
In addition, supporters 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 came to be known as the Freedom to Farm Act (Pub.L. 104–127, Apr. 4, 1996, 110 Stat. 888). This act threatened to spell the end of agriculture subsidies, as it set out a plan to phase out subsidies by 2003. The six-year period, however, contradicted the avowed purpose of the 1996 act. The law sought to soften the blow to farmers by increasing subsidies through the use of market transition payments. These payments differed from traditional subsidies because they were not tied to commodity prices, so even if the market price rose the farmers would receive payments. In addition, the payment schedules were almost three times higher than the amounts paid out in previous farm bills.
Advocates of a free market without subsidies were angered as Congress started to back away from the basic concept of the Freedom to Farm Act. As farm incomes started to fall in 1998, members of both political parties agreed to authorize additional funds for farm subsidies. This process continued through 2001 as farmers cited bad weather, natural disasters, and other forces for a decline in farm income.
In addition, the 1996 law authorized a dairy "compact" for six New England states. This provision sets a minimum farm price for milk consumed in the six New England states. When federally regulated milk prices drop below the compact price, processors are required to pay farmers the difference. Midwest dairy farmers have argued this is unfair because the compact erects a trade barrier and encourages New England farmers to overproduce milk.
The Farm Security and Rural Investment Act of 2002 (Farm Bill 2002), Pub.L. 107–171, May 13, 2002, 116 Stat. 134, which sets agriculture policy for six years, made clear that subsidies would not wither away. In fact, subsidies are projected to grow during the six years and could reach $200 billion for the period. Some in Congress lamented the retreat from the Freedom to Farm Act, but others faced the political reality that agribusiness and family farmers are a potent lobbying force that few congressional representatives want to frustrate.
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.
Agriculture Department. Available online at <www.usda.gov> (accessed May 29, 2003).
Cochrane, Willard, and Mary Ryan. 1976. American Farm Policy, 1948–1973. Minneapolis: Univ. of Minnesota Press.
Helmberger, Peter G. 1991. Economic Analysis of Farm Programs. New York: McGraw-Hill.
Rapp, David. 1988. How the United States Got into Agriculture: And Why It Can't Get Out. Washington, D.C.: Congressional Quarterly Press.
Rehka, Mehra. 1989. "Winners and Losers in the U.S. Sugar Program." Resources 94 (winter).
Wuerthner, George, and Mollie Matteson, eds. 2002. Welfare Ranching: The Subsidized Destruction of the American West. Washington, D.C.: Island Press.
Agricultural Price Supports
AGRICULTURAL PRICE SUPPORTS
AGRICULTURAL PRICE SUPPORTS. Introduced to meet the emergency of the Great Depression, agricultural price supports have persisted as a critical, if controversial, element of farm regulation. The Commodity Credit Corporation (CCC) was incorporated on 17 October 1933 to administer the system of price supports. Farmers received short-term loans, typically lasting twelve or eighteen months, of an amount that was determined by multiplying a fixed price per unit (such as a bushel of corn or a bale of cotton) by the quantity of crop they put up for collateral. The loans also carried a non-recourse clause. If at anytime the market price rose above the fixed price used to calculate the loan, a farmer could pay off the loan and sell the crop on the open market. If the market price dropped below the fixed price, then once the loan expired, farmers could pay off their debt by forfeiting their crop to the CCC. This meant farmers had no reason to accept a lower market price; thus, the fixed price acted as a minimum price on the market.
In 1933, policy makers intended the CCC to provide immediate relief, as prices of cash crops, such as corn, cotton, and wheat, had fallen by more than half their 1929 levels. The CCC, in trying to raise prices and farmers' incomes, worked alongside two other regulatory agencies. The Agricultural Adjustment Administration (AAA) paid farmers to replace cash crops with soil-conserving crops. This reduced the supply of cash crops reaching the markets and helped bolster prices. The Farm Credit Administration (FCA) refinanced thousands of farm mortgages in 1934 and 1935, thereby reducing the burden of farmers' debts relative to their incomes. Together these three agencies provided a measure of relief, but their initiatives did not help those families most in need of aid. In the 1930s, some one to two million farmers earned less than $500 a year. The impact of this trio of regulatory agencies was felt instead among financially secure farmers, but even then, the regulatory agencies proved controversial for their effect on markets.
The controversy surrounding price supports turned on the distinction between their short-term (static) effect as compared to their long-term (dynamic) impact. Viewed in the short term, price supports interfered with markets by raising prices above their equilibrium. The artificially high prices resulted in vast surpluses at government warehouses and worked to sustain farmers who otherwise would not have been able to compete with their more efficient rivals. Viewed from a long-term perspective, prior to the coming of New Deal regulation, farmers had faced the possibility of wide swings in prices for their cash crops. Price supports stabilized the long-term trend in prices and this altered farmers' investment climate. Farmers had always labored in highly competitive markets and this continued with the coming of New Deal regulation. With prices stable, though, farmers showed a new willingness to invest in land and expensive machinery. The competitiveness had not changed, but farmers' responses to it had. Whereas gains in labor productivity in the farm sector had been small prior to 1930, from the 1930s through the 1970s, labor productivity rose more than 4 percent annually—a rate that exceeded almost all other parts of the U.S. economy.
Price supports also conditioned which farmers survived and on what terms. Ironically, as long as prices eluded the goal of New Deal policy makers and tended to fall, price supports and credit programs created conditions that fostered farmers' investments in land and technology. Further, those farmers who could not survive the new terms of competition sold out in the face of rising land prices. Foreclosure came to just a few. Conversely, when prices met the intent of policy makers and rose above the CCC's price support levels in the 1970s, farmers who had accumulated debt found themselves at risk to failure when prices suddenly retreated, and by the mid-1980s foreclosures were concentrated among commercial, debt-ridden operators. During the 1980s, political sentiment swung sharply against price regulation in a variety of industries. Members of Congress debated whether to eliminate price supports, and despite calls for a return to the free market, in 2002 farmers could still count on the CCC's loans.
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———. The USDA Web site for its price support division. Available at http://www.fsa.usda.gov/dafp/psd/default.htm.
Farm subsidies are monetary transfers from taxpayers and consumers to producers of agricultural commodities, and they are mostly a characteristic of high- and middle-income countries. They were first introduced in the United States on a large scale shortly after the 1929 crisis, mainly in response to fears of inadequate food supplies (Gardner 2002). Since then, subsidies have been renewed by the U.S. Congress every five to six years under legislation, the so-called Farm Bills. Farm subsidies were introduced in Europe after World War II, again as means to prevent food shortages, and were institutionalized after the introduction of the Common Agricultural Policy following the Treaty of Rome. Other countries with considerable levels of farm subsidies are Korea, Japan, Mexico, and Turkey. Farm subsidies achieved their objective of increasing food availability. However, despite huge food surpluses during the last three decades of the twentieth century, not only have they remained in place but they have been increased and applied to more commodities.
Based on their source of funding, farm subsidies are categorized as either taxpayer financed or consumer financed. Taxpayer-financed subsidies are direct transfers from the treasury to commodity producers; most payments are based on quantity produced or area planted, while some are based on input use or other requirements, such as conservation measures. However, because these types of subsidies cause considerable distortions to world commodity markets, countries have attempted to decouple payments from current production and instead give subsidies in the form of direct income support as a way to make them less trade distortionary (Baffes and de Gorter 2005). Consumer-financed subsidies are typically associated with tariffs imposed on imports or subsidies on exports.
Farm subsidies are monitored by the Organization of Economic Cooperation and Development (OECD), which publishes detailed figures each year. During 2002–2005 total transfers to agricultural producers or consumers of agricultural products in OECD countries averaged $357 billion, of which 56 percent were financed by consumers, while the remaining 46 percent were financed by taxpayers. The European Union accounts for 39 percent of subsidies, while the United States and Japan account for 27 percent and 16 percent, respectively. The remaining 17 percent are accounted for by Korea, Turkey, Mexico, and Canada. On a commodity basis, the largest beneficiary is the milk industry, followed by producers of beef, rice, and wheat.
Because farm subsidies induce overproduction, which in turn depresses world prices, there have been attempts to limit them (Aksoy and Beghin 2004). Limiting the level of farm subsidies was first considered during the Uruguay Round (1986–1994) of multilateral trade negotiations under the aegis of the General Agreement of Tariffs and Trade (GATT). It was agreed that taxpayer-financed subsidies with the most distortionary impact on trade would be gradually reduced from their 1986–1988 level. It was also agreed that export subsidies should be eliminated, while tariffs on imports should be reduced by approximately one-third of their initial level. However, because the formulas for calculating such reductions were complicated, most countries were able to fulfill their obligations by changing the nature of subsidies rather than undertaking real reductions. The issue of subsidies was reconsidered during the Doha Development Agenda, which was launched in 2001. However, farm subsidies turned out to be one of the most contentious issues of the agenda, and the negotiations were suspended.
Aksoy, M. Ataman, and John C. Beghin. 2004. Global Agricultural Trade and Developing Countries . Washington, DC: World Bank.
Baffes, John, and Harry de Gorter. 2005. Disciplining Agricultural Support through Decoupling. Policy Research Working Paper 3533. Washington, DC: World Bank.
Gardner, Bruce L. 2002. American Agriculture in the Twentieth Century: How It Flourished and What It Cost. Cambridge, MA: Harvard University Press.