Agricultural Crop Subsidies, Are There Too Many?
Written by: Izzy Yuskis
When thinking of agricultural subsidies, it is tempting to think of small Mom and Pop farms. You may be imagining subsidies are for when not enough rain comes for mom and pop to grow their strawberries, so the nice government representative pats them on the back and hands them over just enough cash to supplement what they normally would have made selling strawberries.
Although that was a cute little story, I’m afraid it’s terribly wrong. Here's what actually happens:
Mom and Pop haven’t been able to grow as many strawberries as they hoped for during the drought, they applied for insurance subsidies, but they didn’t get much other than Disaster Aid. This is because, according to the USDA, only ⅓ of farms with revenues of less than $100,000 received federal subsidies. But don’t worry, their wheat farming neighbor who owns a mega farm, received abundant subsidies like the ¾ of farmers similar to him that make over $100,000. He is part of the 10% of rich farmers that enjoy 60% of the subsidies that come from insurance, Agricultural Risk Coverage, and Price Loss Coverage. Essentially this redistributes the wealth upward, favouring the wealthy and not helping those who need it.
Not only are agricultural subsidies ineffective with distribution, they also subsidize farmers too much. First of all, the USDA spends over $8 billion per year, subsidizing farming insurance. Now, this doesn’t sound at all too bad until you look at the breakdown. $1.5 billion actually subsidizes 16 private insurance companies that offer insurance to farmers. So the government doesn’t just subsidize farmers, it subsidizes the private insurance companies. Additionally, $.3 billion are given out to companies to subsidize underwriting losses, which are losses to the insurance company. Although some economists may argue that it’s important to help insurance companies so they can in turn help farmers, I disagree. The whole point of insurance is that the company is taking a risk, so they are apt to choose carefully who they give insurance to. However, if the insurance company knows that they can still make some money back if they have underwriting losses, they don’t care as much who they hand out money to. This leads to some farmers getting more insurance and planting risky crops or planting normal crops in a wasteful and not innovative fashion.
Not only are farmers more likely to get insurance, but the USDA pays for 62% of farmers’ premiums, allowing farmers to actually gain money if something goes wrong and they file a claim. The Congressional Budget Office calculated that farmers have, “received $65 billion more in claims than they have paid in premiums since 2000.” Once again, the rich benefit from insurance as well, since there are no income limits on insurance subsidies, deep pocket farm businesses can still apply for subsidies. All things considered, the insurance system doles out cash to farmers who take unnecessary risks and private insurance companies who give out policies to every other person who walks in their door.
Now at this point you may be thinking, okay yes the insurance subsidies are a little generous, but I suppose we need food to survive so maybe the extra cushion is acceptable. That makes perfect sense in theory, however, the subsidies don’t end with just insurance. Farmers are able to sprinkle in financial aid from Agricultural Risk Coverage or Price Loss Coverage in addition to insurance subsidies. ARC subsidizes farmers if revenue per acre is below the expected benchmark and PLC gives money to farmers if the national price of a crop lowers.
Speaking of selling at a higher price, Marketing Loans and Subsidies that began during the New Deal are still valid today! Marketing Loans give farmers cash during the harvest so farmers can hold onto their crops until the price for their crops increases, at which point they sell them at higher prices. Additionally, Conservation Programs cost taxpayers $5 billion a year to subsidize farmers as an incentive to use minimal land more efficiently. This sounds ideal, but unnecessary and expensive. Without Conservation Programs I believe we could have the same or better results. If we lower the payout of subsidies to cushion farming failures, farmers will be more motivated to use their land more carefully, develop better technology, plant safe crops, and use every inch of their land rather than wastefully expanding.
Although some say farming is a huge gamble, it’s no more of a gamble than any of business and if farmers lose their bets, there is still Disaster Aid and insurance to support them. Overall, I believe we should lower agricultural subsidies considering the best market is generally a free market with little government interference. Cutting back some subsidies isn’t to harm the farmers or to over work them, instead it is to distribute the wealth evenly and protect the consumer.
What do you think?
Works Cited
Amadeo, Kimberly. “How Farm Subsidies Affect You.” The Balance, www.thebalance.com/farm-subsidies-4173885.
Edwards, Chris. “Agricultural Subsidies.” Downsizing the Federal Government, Downsizing the Federal Government, 16 Apr. 2018, www.downsizinggovernment.org/agriculture/subsidies.
Sumner, Daniel A., et al. “Agricultural Subsidy Programs.” Econlib, www.econlib.org/library/Enc/AgriculturalSubsidyPrograms.html.
I wouldn't say that I agree or disagree with your argument here. I think it's a little bit of both. While yes the governemnt should care about the Mom and Pop farmers and protect them in hard times it is also important to realize that the larger corporations amount for a much larger percent of the crop yield. The subsidies the government gives out tries to help those corporations because they are so important in society. Despite humans farming for 1000's of years it is still a very fragile system and the government is needed to somewhat protect that food chain through whatever means it finds necessary at the time. I'm curious as to why you didn't talk about the chart in this post as there are some key takeaways from it that are important to understand.
ReplyDeleteHow much do you think the supply of food would be decreased if subsidies were taken away, and what would happen if farmers went on strike because of this? The information you presented makes it clear that subsidies to farmers have gotten out of hand, and that subsidies are allowing farmers to not be innovative with their crops, and pursue higher risk crops than they would without incentives, not helping the consumer. However, ARC program government website says that ARC commodities are given out on historical based areas, not production, so the fact that ARC’s apply to all farmers as well was slightly misleading. Overall, I agree with your points on why rolling back subsidies would be beneficial.
ReplyDeleteI agree that the government may be giving farmers too much money in subsidies and that they should probably spread out the money to more organizations that haven't had the chance to become big organizations yet (give all farmers a chance). I do wonder though what would happen if they took away the subsidies, would there be a decrease in supply of a good that Americans need? While some money should be put aside for other uses, I believe that if you take away too much that it would ruin the balance of the economy and cause shortages of certain goods.
ReplyDeleteThis does bring up a good question: how much is too much? The farm industry is vital, but how much is the right amount of government (taxes) money is the right amount to give the farmers? Should it be a constant amount? should it change more frequently? I feel that there are too many variables to give one simple answer, but the fact that there is a discussion is a good start.
ReplyDeleteI think that there are some benefits to both sides of this issue. As you mentioned, the subsidies can be bad at times, for example the fact that farmers can actually make more money off of the subsidies than actual farming. And I agree with that, I think farmers are becoming less motivated because of it. However, farming is probably one of the most important jobs in our society and the government needs to do what it can to protect the farmers.
ReplyDeleteThis is interesting to think about it, and I'm not sure exactly which way to think about it because I feel like I don't know how farmers would react to getting less subsidies. Like would giving all farmers a chance to become big organizations lessen the amount we produce, because it would be easier for specialization if people worked together.
ReplyDeleteYou bring up a very good argument! The current situation with subsidies has definitely led to inefficiency and unfair distribution. The subsidies cause way too much food to be produced, creating a surplus, which signifies an inefficient use of resources. Furthermore, the richest farmers are gaining the most subsidies, which they can use to reinvest and become even larger. This really is Thomas Jefferson’s worst nightmare come true! He had envisioned America as an Agrarian society full of small homesteads with few large plantations, and feared that the large plantation monopolies that existed in the South would set a precedent for the future of the United States. The subsidies in place today encourage large farms and threaten smaller farms, going against what Jefferson believed.
ReplyDeleteOn one hand, having large farming megacorporations threatens consumers by risking price manipulations. A monopoly of food could be devastating, since everyone needs to eat. The subsidies encourage monopolistic practices, benefiting the largest companies the most, so the trend these subsidies set is dangerous. On the other hand, it makes sense for farms to be as large as possible so that they can take advantage of economies of scale. Farming benefits greatly from this effect because the variable costs such as the cost of seeds and labor are fairly low, while the fixed costs, such as good farming equipment like tractors are fairly high. If farms were combined into large mega corporations, the owners could invest in the most efficient technology, driving the average costs down.
Is there a way to take advantage of economies of scale while also avoiding the dangers monopolies bring? Maybe there is a way for the government to encourage large farms while protecting the livelihood of farmers and consumers. While government intervention usually creates inefficiency, the increase in efficiency that would result from economies of scale might counteract the inefficiency. If the government would provide heavy subsidies to large farms that followed a strict protocol and fair treatment of farms while also using price controls to keep the price near its equilibrium point, we may be able to see greater efficiency. However, this treds dangerously close to the disastrous collectivization of farms seen under Stalin and Mao, in which farmers had no incentive to work because they were paid the same amount no matter how much they produced. If the US pursues a similar route, it would have to be carefully planned. We would have to learn from the mistakes of the past and progress slowly to evade disaster. Perhaps a safer route might be to cut subsidies and revert to Jefferson’s dream of small, independently owned farms.
While it is clear that there are probably much more efficient ways to encourage effective farming discipline, I don’t think the current policy has any chance of changing in the near future. The primary goal of most politicians is to get elected or re-elected, and that means securing the support of rural supporters throughout the country. If a politician were to have a platform that includes cutting the inefficient subsidies to farms, the voters who benefit from this practice would be furious. There would be little chance for that politician to win an election. In conclusion, while it is interesting to theorize more efficient practices, we are probably stuck with the current situation for a while!
I don't know why this came out as "Unknown." I am Ian Franda by the way
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ReplyDeleteThis is quite unbelievable to think. Before reading this, I would have never thought about what goes on behind the scenes in terms of subsidizing the agricultural industry, which surprisingly consists of uneven distribution and overfinancing. We clearly need a change in the composition and implementation of these particular subsidies, not to mention the other industries that these kinds of practices are most likely apparent in as well. While lowering the overall funding of subsidies may be a reasonable option, I feel as if some kind of rework or restructuring of subsidy policies should be in order. Not only would this allow for government officials to realize all of the harm being done, but it would also allow for these lower profile farmers to speak up and get their point across. Doing so would equalize the benefits for all farmers, and keep the agricultural industry on good terms with both other markets and the government. All in all, subsidies are an interesting topic that goes far beyond just the superficial level of government support given to certain producers. Learning more about them, through articles like this, is key to understanding both the macro and micro aspects of economics, and particular the US economy as a whole.
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ReplyDeleteOne connection that can be made here is to the endangerment of small family farms in east asian economies such as japan and china. So in Asia the agricultural market is mostly small individual farmers there are very few super companies that dominate the agriculture market and the competition is mostly pure. However the economy has become endangered in recent years because of progressions in the transportation industry with american super companies beginning to do large trade deals with these Asian countries and the small family farms can't keep up. In many ways this is similar in effect to job outsourcing even though it's not companies who are leaving it's technology providing new ways to connect with producers from around the world and generating cheaper inputs for japanese business. Which is why it ties into the issue with small farms. Just like in your mom and pop farm description as Ian stated previously there's just a much greater incentive to subsidise and purchase from these behemoth industries. I believe that all across the world in an economy of optimised technology that the agricultural industry will be an oligopoly.