My plan for this month was to write on Agricultural subsidies. To my pleasant surprise, one of my more gifted students, Leeza Itkin, in my Economics of Contemporary Issues class, did a paper on that very topic. This months blog is solely Leeza's work from her term paper and is printed with her permission. (the pictures were supplied by me).
The Agriculture sector has changed monumentally over the past century in response to vast economic change and technological advancements. Farm subsidies are various forms of payments from the federal government put in place in an effort to stabilize prices, keep farmers in business, and ensure quality of crops. The federal government currently pays $20 billion in cash each year to US farmers and spent an estimated $250 billion between 1995-2005. Presently, a new farm bill is passed every five years with the most recent being in 2013 . The Commodity Credit Corporation (CCC) finances subsidies and buys surplus food to regulate and steady farm income. There are presently eights various subsidies: Direct Payments, Countercyclical Payments, Export Subsidies, Conservation Subsidies, Marketing Loans, Agricultural Research and Assistance, Disaster Aid, and Insurance
Prior to the Great Depression the federal government largely abided by Article 1, Section 8 of the Constitution, which has no mention of granting intervention in the agricultural sector. The economic crisis left Herbert Hoover, a strong proponent of agricultural intervention, no choice but to take action. Hoover’s policy allowed farmers to receive a decent return on their crops and encouraged them to continue producing. His policy created The Federal Farm Board and vested it with a 500 million dollar budget. The board bought wheat and cotton from farmers, stored it and resold it in hopes of creating a price floor. This was largely successful in raising US prices but ruined foreign trade, giving other countries price advantage.
In 1934, Roosevelt implemented the Agricultural Adjustment Act where growers signed acreage reduction contract which regulated the amount of land they could use to harvest certain crops. Additionally government took initiative to limit food supply by buying up livestock and crop surplus. Farmers were compensated for reducing their harvest of cash crops and given the freedom to diversify their crops with the newly found land surplus. This was the first emergence of farm subsidies .
In 1934, Roosevelt implemented the Agricultural Adjustment Act where growers signed acreage reduction contract which regulated the amount of land they could use to harvest certain crops. Additionally government took initiative to limit food supply by buying up livestock and crop surplus. Farmers were compensated for reducing their harvest of cash crops and given the freedom to diversify their crops with the newly found land surplus. This was the first emergence of farm subsidies .
Besides boost farming profits the second purpose of the act was to use the purchased goods to feed the impoverished. Roosevelt did not account for one crucial fact: the attitudes and opinions of those affected by this drastic change. Farmers did not like the manipulation but continued to take the payments nevertheless. Bernard Devito wrote: “Farmers throughout the West were always demanding further government help and then furiously denouncing the government for paternalism, and trying to avoid regulation.” Receiving government aid was a radical concept that was not immediately accepted by those in need; causing a large portion of the purchased food to be wasted.
Roosevelt called the aid “A temporary solution to deal with an emergency.” Presently, this ‘temporary solution’ has become interpreted as an entitlement to farmers. Each time the Farm Bill is called to the stand it is often called to stop subsidizing wheat but politicians fear that the loss of support from those in the agribusiness would be far too incriminating. As Milton Friedman put it “There is nothing more permanent than a temporary government aid program”
Roosevelt called the aid “A temporary solution to deal with an emergency.” Presently, this ‘temporary solution’ has become interpreted as an entitlement to farmers. Each time the Farm Bill is called to the stand it is often called to stop subsidizing wheat but politicians fear that the loss of support from those in the agribusiness would be far too incriminating. As Milton Friedman put it “There is nothing more permanent than a temporary government aid program”
The harsh truth is that the recipients of subsidies are not the small family-owned farms who justify the need for these programs. The top 20% of farmers get 83% of all government payments. The average payment for the top 20% is $35,000 annually while the bottom 80% receives an average of just $700. Furthermore, those earning over $2 million are supposed to be ineligible for aid. This would be valid but this has not taken into account the ease in manipulating income a decent accountant could do.
The USDA’s limits on production limits supply and drives up food prices. By setting a price minimum for crops the cost is passed onto the consumer. Over 16 billion dollars were taken from taxes in 2004 and transferred to large agricultural producers. According to the Organization for Economic Cooperation and Development, American households pay an extra premium of about $150 on top of federal budget money when food shopping.
High food prices go against one of the most important goals of the USDA: To provide welfare to impoverished households. The extra money spent at the grocery store could be enough to change the eligibility of government aid for poor households by raising their real income. The USDA counteracts itself when it pays out money to raise prices as well as implementing aid programs such as food stamps to accommodate the consumer to them. Consumers in the US pay 30% more for necessities like eggs, milk and butter. Heightened raw food prices force consumers on a budget to substitute healthy foods with cheap sugary drinks, processed meats and candy.
Farmers who receive the majority of government aid are often not in need of it. On average a successful farm is family owned for generations upon generations.
(Companies such as Dole and Chiquita receive thousands of dollars annually ) Consequently, the barrier to entry is high and anyone who wants to begin farming or expand their current farm is unable to gather enough capital to do so.
The cost creates a domino effect impacting producers, consumers, businesses and the economy as a whole. Potential trade opportunities are diminished because of the tariffs and high costs associated with purchase of raw material. Domestic and international companies are encouraged look elsewhere for cost efficient materials to use as inputs. The opportunity cost for businesses could be more employees and expansion but unfortunately production costs remain too high.
High food prices go against one of the most important goals of the USDA: To provide welfare to impoverished households. The extra money spent at the grocery store could be enough to change the eligibility of government aid for poor households by raising their real income. The USDA counteracts itself when it pays out money to raise prices as well as implementing aid programs such as food stamps to accommodate the consumer to them. Consumers in the US pay 30% more for necessities like eggs, milk and butter. Heightened raw food prices force consumers on a budget to substitute healthy foods with cheap sugary drinks, processed meats and candy.
Farmers who receive the majority of government aid are often not in need of it. On average a successful farm is family owned for generations upon generations.
(Companies such as Dole and Chiquita receive thousands of dollars annually ) Consequently, the barrier to entry is high and anyone who wants to begin farming or expand their current farm is unable to gather enough capital to do so.
The cost creates a domino effect impacting producers, consumers, businesses and the economy as a whole. Potential trade opportunities are diminished because of the tariffs and high costs associated with purchase of raw material. Domestic and international companies are encouraged look elsewhere for cost efficient materials to use as inputs. The opportunity cost for businesses could be more employees and expansion but unfortunately production costs remain too high.
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