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Executive Summary #2043 on Agriculture

June 20, 2007

June 20, 2007 | Executive Summary on Agriculture

Executive Summary: How Farm Subsidies Harm Taxpayers, Consumers,and Farmers, Too

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This year's expiration of federal agriculture poli­cies gives Congress an important opportunity to take a fresh look at the $25 billion spent annually on farm subsidies. Current farm policies are so poorly designed that they actually worsen the con­ditions they claim to solve. For example:

Farm subsidies are intended to alleviate farmer poverty, but the majority of subsidies go to com­mercial farms with average incomes of $200,000 and net worths of nearly $2 million.

  • Farm subsidies are intended to raise farmer incomes by remedying low crop prices. Instead, they promote overproduction and therefore lower prices further.

  • Farm subsidies are intended to help struggling family farmers. Instead, they harm them by excluding them from most subsidies, financing the consolidation of family farms, and raising land values to levels that prevent young people from entering farming.

  • Farm subsidies are intended to be consumer-friendly and taxpayer-friendly, but they cost Americans billions of dollars each year in higher taxes and higher food costs.

Counterproductive Agricultural Policies. As the following problems illustrate, farm subsidies are both economically counterproductive and ill-advised.

Corporate Welfare. It is a myth that farmers' incomes are low and that they therefore need federal subsidies. The average farm household earns $81,420 annually (29 percent above the national average); has a net worth of $838,875 (more than eight times the national average); and is located in a rural area with a low cost of living. The farm indus­try's current 11.4 percent debt-to-asset ratio is the lowest ever measured and helps to explain why farms fail at only one-sixth the rate of non-farm businesses. Overall, net farm income totaled $279 billion between 2003 and 2006-the highest four-year total ever. The farm economy is thriving, and farmer incomes are soaring.

Furthermore, farm subsidy formulas are designed to benefit large agribusinesses rather than family farmers. Most farm subsidies are distributed to commercial farmers, who have an average income of $199,975 and an average net worth of just under $2 million. If farm subsidies were really about alleviating farmer poverty, then lawmakers could guarantee every full-time farmer an income of 185 percent of the federal level ($38,203 for a fam­ily of four) for just over $4 billion annually-one-sixth the current cost of farm subsidies.

Eligibility Restricted to a Few Crops. Only one-third of the $240 billion in annual farm produc­tion is eligible for farm subsidies. Five crops- wheat, cotton, corn, soybeans, and rice-receive more than 90 percent of all farm subsidies. Fruits, vegetables, livestock, and poultry, which com­prise two-thirds of all farm production, are gener­ally not subsidized at all. Those who assert that farm subsidies prevent massive poverty, rapid price fluctuations, and the eventual demise of the agricultural industry have not been able to explain why the two-thirds of the industry that operates without subsidies has experienced none of these problems.

Remedying Low Prices with Lower Prices. Farm policy is supposed to help farmers recover lost income from low crop prices. However, farmers can increase their subsidies by planting additional acres, which increases production and drives prices down further, thereby spurring demands for even greater subsidies. In other words, subsidies merely lower prices further. This is the policy equivalent of trying to use gasoline to extinguish a fire.

After handing out commodity subsidies that pay farmers to plant more crops, Washington then turns around and pays other farmers not to farm 40 mil­lion acres of cropland each year-the equivalent of idling every farm in Wisconsin, Michigan, Indiana, and Ohio. Paying some farmers to plant more crops and others to plant fewer crops exemplifies the eco­nomic incoherence of U.S. farm policy.

Driving Small Farmers out of Business. Small family farmers are generally not eligible for signifi­cant levels of farm subsidies. Furthermore, subsi­dies to large commercial farms actually harm small farmers by:

  • Reducing crop prices and, therefore, farmer incomes;

  • Raising the prices of farm land, thereby prevent­ing family farmers from expanding; and

  • Subsidizing agribusiness buyouts of family farms.

Small farmers receive virtually none of the subsi­dies but endure the market distortions and financial pain caused by these policies.

Subsidizing Both Crop Insurance and Disaster Aid. In 2000, Washington tripled crop insurance subsidies in an effort to eliminate the need for farm disaster payments. The budget-busting 2002 farm bill was also promoted as large enough to reduce the need for disaster payments.

Even with generous farm programs and subsi­dized crop insurance, Congress has passed a disas­ter aid bill every year since 2000 at a total cost of $40 billion. Congress has even drafted legislation offering disaster aid to farmers who refuse to pur­chase crop insurance at taxpayer-financed dis­counts. With Congress continuing to pass large disaster aid packages each year, what crop insur­ance subsidies are really funding is unclear.

Conclusion. Lawmakers would be hard-pressed to enact a set of policies more destructive to farmers, taxpayers, and consumers than the current farm policies. For these and other reasons, organizations representing taxpayers, consumers, environmental­ists, international trade, Third World countries, and even farmers themselves have united around the shared conclusion that the current farm subsidy system is failing and in dire need of reform during this year's reauthorization.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Ian Hinsdale, a former Heritage Foundation intern, contributed to this paper.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies