Agricultural Subsidy Programs
By Daniel A. Sumner
Government intervention in food and fiber commodity markets began long ago. The classic case of farm subsidy through trade barriers is the English Corn Laws, which for centuries regulated the import and export of grain in Great Britain and Ireland. They were repealed in 1846. Modern agricultural subsidy programs in the United States began with the New Deal and the Agricultural Adjustment Act of 1933. With trade barriers already in place for agricultural commodities and everything else, this law gave the government the power to set minimum prices and included government stock acquisition, land idling, and schemes to cut supplies by destroying livestock. Land idling and livestock destruction were sometimes mandatory and sometimes induced by compensation (Benedict 1953).
Since the early 1930s, governments of wealthier countries around the world have used a dizzying array of schemes to support and subsidize farmers. In poor countries, where a large fraction of the population is engaged in farming, governments have tended to tax and regulate agriculture. As incomes grew and the population on farms dwindled in such countries as South Korea and Taiwan, those countries’ governments shifted from penalizing farmers to subsidizing them and protecting them from imports. These countries, along with Japan, now have among the highest subsidy and protection rates in the world. Forms of farm support also differ by country and commodity, and different forms have different impacts on agriculture and the rest of the economy. This article reviews some of the major support forms and outlines their impacts. Although I often use the terms “support” and “subsidy” interchangeably, much government support of agriculture is not in the form of direct subsidy for farmer incomes or direct subsidy for production, but is indirect.
Economists have criticized farm subsidies on several counts. First, farm subsidies typically transfer income from consumers and taxpayers to relatively wealthy farmland owners and farm operators. Second, they impose net losses on society, often called deadweight losses, and have no clear broad social benefit (Alston and James 2002). Third, they impede movements toward more open international trade in commodities and thus impose net costs on the global economy (Johnson 1991; Sumner 2003).
Supporters of farm subsidies have argued that such programs stabilize agricultural commodity markets, aid low-income farmers, raise unduly low returns to farm investments, aid rural development, compensate for monopoly in farm input supply and farm marketing industries, help ensure national food security, offset farm subsidies provided by other countries, and provide various other services. However, economists who have tried to substantiate any of these benefits have been unable to do so (Gardner 1992; Johnson 1991; Wright 1995).
The U.S. government heavily subsidizes grains, oilseeds, cotton, sugar, and dairy products. Most other agriculture—including beef, pork, poultry, hay, fruits, tree nuts, and vegetables (accounting for about half of the total value of production)—receives only minimal government support. U.S. farm programs have cost about $20 billion per year in government budget outlays in recent years. But budget costs are not a particularly useful measure of the degree of support or subsidy. Some subsidy programs, such as import tariffs, actually generate tax revenue for the government but also impose costs on consumers that exceed the government’s revenue gain. According to Organization for Economic Cooperation and Development (OECD) figures, the average rate of “producer support estimate” for the heavily supported commodities in the United States ranges from about 55 percent of the value of production for sugar to about 22 percent for oilseeds. For the less-supported commodities the rate is typically below 5 percent.
Among OECD members (a group of high-income countries), “producer support estimate” rates average about 31 percent of total revenue for the main grain, oilseed, sugar, and livestock products. These estimates aggregate into a single index a large range of government programs, including price supports and trade barriers, that transfer benefits to farm producers and landlords. This index measures the size of the transfer in money terms but does not attempt to assess the programs’ effects on production or net income. The highest average rates of support are for rice (about 80 percent), where most of the support derives from trade barriers and direct payments. Support to farmers by Japan’s and Korea’s governments is a large part of the total world subsidy for rice. The highest national average support equivalent rates, across all major commodities, are offered in Norway, Switzerland, and Iceland, with average subsidies of about 65–75 percent of the value of production, and in Japan and Korea, with support rates of 60–65 percent. The lowest subsidy rates (less than 4 percent) are found in Australia and New Zealand. The average support rate in the European Union is about 35 percent of the value of production.
The forms of subsidy vary by country and commodity as well. The main forms of subsidy include: (1) direct payments to farmers and landlords; (2) price supports implemented with government purchases and storage; (3) regulations that set minimum prices by location, end use, or some other characteristic; (4) subsidies for such items as crop insurance, disaster response, credit, marketing, and irrigation water; (5) export subsidies; and (6) import barriers in the form of quotas, tariffs, or regulations. Often, supply control programs such as land-idling requirements, production quotas, or similar schemes accompany price supports or other programs. In addition, the governments of most wealthier nations provide aid for agricultural research and development, promotion, and some agricultural and rural infrastructure.
The impacts of the subsidies depend on their form. Farm subsidy programs typically transfer income from consumers and taxpayers to farm operators, especially to owners of farmland and other resources used in farm production. Evidence shows clearly, for example, that farm subsidies increase the rental rate on land to which rights to receive those payments are attached. In other words, subsidies to farming are often simply subsidies to landowners. For government-created assets such as production or marketing quotas or allotments, the market value is due entirely to government program benefits. When quotas limit production, commodity prices rise and raise the value of production rights assigned to quota owners. Such quota programs have often continued for decades (six decades in the case of the U.S. tobacco quota and more than three decades in the case of the California and Canadian dairy quotas). Interestingly, though, the asset price of the marketable quota is typically only four times the annual gain from owning the quota (Johnson 1991). This means that quota owners evidently are not confident that the program benefits will continue.
Farm subsidies stimulate additional production of government-favored commodities by raising incentives to use scarce land and farmer talent on some products rather than on others. The specifics of the government program determine the degree of production stimulus; real farm programs are usually much more complex than the per unit production subsidies or price supports described in textbooks. Eliminating a subsidy for just one crop would cause production of that crop to fall much more than if all crop subsidies were eliminated simultaneously. Because most farmland would remain in use, economists would expect relatively small adjustments in total U.S. agricultural production if all farm subsidies were eliminated together, although some shifts in the mix among commodities would occur.
Partly to limit the increased production caused by subsidies, the United States once required farmers to idle a part of their farmland in return for the subsidy. That practice is still used in the European Union and Japan. Recently, the United States has used three complex payment schemes simultaneously for grains, oilseeds, and cotton. First, farmers receive “direct payments,” which are independent of current market prices and are based primarily on a farm’s history of production of a specific supported crop. There are a number of restrictions on the use of the land that receives these payments, but farmers receive the payments even if they plant crops other than the payment crop or leave the land idle. Second, farmers receive “countercyclical payments,” which are tied, inversely, to the market price of the payment crop, but which also allow planting flexibility. These two forms of payment do not require a farmer to plant a specific crop currently. However, because the continuation or increase of payments may depend on current production of that crop, they do provide an incentive to overproduce (Sumner 2003). The third form of subsidy payments, “marketing loan benefits,” are inversely proportional to current market prices and are tied directly to current production of a specific crop. It is difficult to measure the degree of production inducement tied to this complex array of payments; nonetheless, economists agree that without them the production of subsidized crops would decline.
Among the most controversial aspects of farm subsidy programs in recent decades have been their impacts on international trade. D. Gale Johnson (1950) raised the issue more than fifty years ago. As globalization has increased, farm trade barriers and subsidies that block pursuit of agricultural comparative advantage have become more disruptive to normal trade relations and trade negotiations.
Farm subsidy programs, which are used by most wealthy countries, have made multilateral trade negotiations more complex and have threatened broad-based market opening. In the early years of the General Agreement on Tariffs and Trade (GATT) (the 1940s and early 1950s), the U.S. government placed its farm subsidy programs out of reach of trade negotiations and thereby thwarted liberalization in agriculture for three decades. In the 1980s, the U.S. government began to reduce the production stimulus of its own farm programs. In trade negotiations, it advocated freer trade in agriculture and stated its willingness to eliminate its own import barriers and trade-distorting farm subsidies if other nations would do the same. European nations, Japan, and Korea resisted. Nevertheless, the GATT agreement of 1994, which created the World Trade Organization (WTO), began modest progress toward liberalization. U.S. farm subsidy legislation in 1996 was consistent with gradual reform of farm subsidies. With the passage of new and more distorting farm subsidy programs in 2002, however, the United States has been a less credible bargainer in WTO negotiations, and reductions in subsidies and trade barriers have been delayed.
After the 2002 Farm Bill in the United States and initiation of the Doha round of WTO negotiations, farm subsidies became a high-profile issue for many less-developed-country participants in trade negotiations. They pointed out that the price-depressing effects of wealthy countries’ farm subsidies disadvantaged their farmers. U.S. cotton subsidies are a clear example. Some of the poorest countries in West Africa have traditionally been cotton exporters. In 2001 and 2002, they faced a world price of cotton ranging from thirty-five cents to forty-five cents per pound. Meanwhile, cotton growers in the United States, the world’s largest exporter, received seventy cents or more per pound from the subsidies plus the market price. Economists have estimated that U.S. exports of cotton would have been substantially lower, and the world price of cotton 10 to 15 percent higher, if U.S. cotton subsidies had been unavailable during this period. Reducing farm subsidies in the United States and other rich countries would help poor cotton growers and other farmers in poor countries, and, moreover, would begin a process of relying more on trade rather than aid for economic growth. Taxpayers in rich countries would gain in two ways: by paying lower subsidies to their farmers and by paying lower subsidies to people in poor countries. The WTO is the key forum for nations to pursue reforms of global agricultural policies, but this forum may not be sufficient.
In wealthy nations such as the United States, farm subsidies, though large in total, are relatively minor political issues for most voters. The reason is that the cost per voter, in higher taxes and higher food prices, is small. For farmers, though, the gain per person is large. Hence, the domestic political stage is set for continued transfers from a broad constituency of voters, who pay little attention to the issue, to a much smaller group, for whom farm subsidies are vital to their short-run economic well-being. This dilemma is not unique to farm subsidies, and in fact is a central concern of political economy (see political behavior). Nonetheless, with widespread attention currently being drawn to the issue, more people are open to understanding the damaging effects of farm subsidies.