At the outset of the next Administration, the President should bring attention to the overly expansive role the government plays in agriculture. The farm bill, which is reauthorized approximately every five years, is the centerpiece of agricultural policy. Instead of waiting until 2018, when the next farm bill legislation will likely be introduced, it is critical to get ahead of the process and develop a vision for the proper role of government in agriculture.
This paper gives a general framework and a starting point for discussing agricultural policies. Furthermore, it provides a proactive and positive approach that can help move the nation away from the status quo of government intervention in agriculture toward reforms that empower farmers and ranchers to best provide the food and fiber that meet market needs.
The Problems of the So-Called Safety Net
Farmers receive a seemingly endless array of direct and indirect federal subsidies. Existing policies are not really about protecting struggling farmers from serious and unforeseen losses that are beyond their control and they have little to do with the so-called safety net; rather, they are really about providing handouts to large agribusinesses to help ensure they do well financially. In general, agricultural policies have little to do with helping struggling farmers. The large majority of farm households are not struggling and have much higher income and wealth compared to all U.S. households. The median income for farm households was 19 percent higher than all U.S. households from 2005–2014, and a staggering 50 percent greater in 2014. Farm households had 10 times the net worth of all U.S. households in 2013. Only two percent of farm households are in the bottom half of all households in terms of both income and wealth, based on 2011 data.
Agricultural subsidies tend, in general, to benefit large agribusinesses. According to the Environmental Working Group, the top 20 percent of crop insurance policyholders in 2011 were the beneficiaries of 73 percent of the total premium subsidies. For commodity payments, the top 20 percent of recipients accounted for 78 percent of payments in 2012. According to the 2012 Census of Agriculture, and in regard to government payments in 2012, farms with $250,000 or more in sales constituted only 23 percent of the farms receiving such subsidies but they received 60 percent of the payments.
Further, these large agribusinesses, which are well positioned to manage risk, generally receive subsidies at a higher rate than smaller farms. Data regarding government payments (conservation and commodity payments) from the U.S. Department of Agriculture’s (USDA) “Family Farm Report 2014 Edition” show that 31 percent of small family farms (family farms with less than $350,000 in gross cash farm income) received payments whereas 80 percent of midsize and large-scale family farms (family farms with $350,000 or more in gross cash farm income) received payments.
This is not to say, however, that subsidies would be appropriate if the farms were small. The fact that a farm is small does not justify subsidizing it (especially given that any subsidy is almost certainly unjustified). In fact, more than half of all farms had sales less than $10,000, making them more like hobby farms than working agricultural operations. Taxpayers should not be forced to subsidize hobby farms any more than they should shoulder financial burdens for large agribusinesses.
Most farms do not participate in the safety net. The safety net refers to the federal crop insurance program, in which taxpayers subsidize 62 percent of the premiums for participating farmers, as well as the commodity price and income support programs. However, most farms do not receive these subsidies. Only 25.2 percent of all farms received commodity payments in 2011. Based on 2010 data, only about 15 percent of all farms participated in the crop insurance program. These participation numbers may seem low, but likely are due to most farms being extremely small and having little production, not all commodities being eligible, and some farmers simply choosing not to participate.
Moreover, the safety net protects against almost all risk. The safety net for farmers not only offers protection against major losses, but also covers minor dips in expected revenue; further, in some cases, producers can even receive payments in excess of losses sustained. In other words, it is not a safety net at all, but instead more like a trampoline. Taxpayers should not be expected to cover what often is just the risk of doing business.
The heavily subsidized federal crop insurance program does not require a disaster, any catastrophic loss, or for that matter even a yield loss for participating farmers to receive indemnity payments. The program offers revenue-based policies that insure farmers in the event that they receive less revenue than expected (the dip in revenue can be small). Further, there are no payment limits on the total amount of farmers’ premium subsidies or total indemnities that farmers can receive in the crop insurance program.
Why Agricultural Subsidies Are Harmful
The cost to taxpayers for all of the “agriculture-related” parts of the farm bill is significant, reaching approximately $20 billion per year. The cost is far from the only reason why the status quo of farm bill and other agricultural subsidies is unacceptable and needs to be addressed. Subsidies can lead to the problem of moral hazard, in which farmers will take actions they would otherwise not take because the costs of the risks are being passed on to taxpayers. For example, farmers may decide to plant crops on marginal lands that have high rates of losses because they do not bear the risk. They also may not seek to innovate because there is less reason to do so.
When the government intervenes through agricultural subsidies, farmers are acting, not in response to the market, but in response to the subsidies. The numerous subsidies that form the foundation of existing agricultural policy lead to many problems, including:
- Subsidies crowd out private solutions. Through the use of subsidies, the federal government is crowding out private competition. For example, farmers benefit from the crop insurance program, but they are also hurt as well. They do not have access to private insurance products that very well could be available absent government intervention. The federal crop insurance program is effectively a government-run cartel in which the government controls the private crop insurance market in collaboration with its approved companies (17 companies in 2016). In this scheme, if a company has a great idea for a new product, it must first get the approval of the government.
- Subsidies undermine private risk management. There are numerous ways that farmers can manage risk without government intervention, from off-farm income, crop diversification, commodities markets participation, and other solutions and innovations that would be developed if agriculture were allowed to operate without these subsidies. As it is, subsidies can discourage farmers from using these private tools.
- Subsidies hurt free trade. Other countries might retaliate in response to the United States’ trade-distorting subsidies. This retaliation can be directed at completely different industries other than agricultural producers. Taxpayers can be forced to pay the penalty for the inappropriate subsidies, as seen by taxpayers being forced to pay Brazil $300 million to settle a dispute regarding domestic cotton subsidies.
- Subsidies will create more government control at the expense of farmers. As the federal government continues to subsidize farmers, especially at significant cost, policymakers will use that as justification to influence or control farming activities. In many respects, accountability is a reasonable expectation of policymakers seeking to ensure proper use of taxpayer dollars. However, this accountability will likely be a pretext for government interference in farming. Agricultural producers should know all too well that there is increasing pressure for policymakers to extensively regulate genetic engineering, industrial farming, and animal practices that may be humane (but not to some activists). Subsidies might benefit some farmers today, but there are individuals and organizations that want to inappropriately create new subsidies—not to maintain the status quo but to pursue their own objectives that very well may come at the expense of farmers.
Developing a New, Proactive Free Enterprise Agenda
There is a need for a strong, proactive agricultural agenda that is based on principles of free enterprise and economic freedom, rather than on government intervention. As seen in the 2016 Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal, economic freedom is positively related to a wide variety of critically important social and economic goals.
The federal government should be aggressive in promoting free trade and eliminating policies, specifically regulations, which hamper private risk management and create unnecessary obstacles for farmers and ranchers to meet consumer demand.
Critical considerations include the following:
- Agriculture needs free enterprise, not government intervention. The U.S. economy has flourished because of free markets, and so, too, will agriculture. When it comes to agricultural policies, free enterprise has too often been ignored. Government is seen as the solution with the assumption that farmers and ranchers need handouts to succeed, not unlike the thinking that existed when the first farm bill was passed in 1933.
- If agriculture is “special,” that is an argument for freer agricultural markets. For some, agriculture is seen as more important than other sectors of the economy, in large part because it helps provide food (a necessity) for the country. This is often used as the justification for needing government intervention, such as subsidies. Yet, ironically, if agriculture is so important, it is vital to avoid the stifling of innovation and the distortion of planting decisions that make agricultural producers less responsive to the market, which are some of the typical results of government involvement.
- Questions regarding government intervention should focus on how to get rid of the intervention. The question of government intervention usually focuses on how the government can intervene to help farmers. This is not the right question. The proper question is: In what ways does the government currently intervene that make it more difficult for agricultural producers to manage risk and effectively engage in farming and ranching activities? There are many regulatory obstacles that need to be eliminated.
Some policy recommendations, beyond getting rid of most, if not all subsidies, include:
Separate food stamps from agricultural programs. Food stamps account for about 80 percent of the costs of the farm bill, thus really making it a food stamp bill. In 2013, the U.S. House of Representatives did the right thing when it tried to separate food stamps from agricultural programs by passing an agriculture-only bill and a nutrition-only bill. These distinct programs are combined for political purposes so that these programs can get passed. Legislators who would otherwise seek reform of agricultural programs (or vice versa) stay quiet in order to maintain the status quo of their favored program.
It is illuminating when status quo proponents acknowledge that separation would make it difficult to get agricultural programs and food stamps passed. This strange and amusing argument is a tacit admission that the programs would never get support if they were considered on their own merits. What does that say about the programs? The entire purpose of reauthorizing programs is for Congress to review existing policy and, if necessary, change or eliminate ineffective policies (or expand effective ones). By combining the programs, the value of reauthorization is reduced because an open and thoughtful process to reassess existing policy (and the chance to make important changes) is mostly nonexistent.
Aggressively promote free trade in agriculture. Both agricultural producers and consumers benefit from free trade. According to the USDA’s Economic Research Service, the $144.38 billion in agriculture exports in 2013 created an additional $176.0 billion in economic activity, and over 1 million full-time jobs, of which 27 percent were outside farming. Imports provide consumers better access to products they demand and can lower food costs through greater competition. Regrettably, however, agriculture across the globe is heavily subsidized, including in the U.S. In order to have credibility in trade negotiations, the U.S. needs to eliminate its own subsidies. Further, the federal government can play a critical role in challenging trade barriers imposed by other countries; this includes being far more aggressive using the World Trade Organization dispute settlement process where the U.S. has been very successful.
Eliminate policies that unnecessarily inhibit risk-management methods like the commodities markets. Title VII of the Dodd–Frank Wall Street Reform and Consumer Protection Act is a prime example of policy that hurts agricultural risk management. This part of the statute, which covers commodities markets, should not apply to farmers. In 2010, Dodd–Frank was enacted to address the 2008 financial crisis. Yet this law is being interpreted broadly by the Commodities Futures Trading Commission to cover businesses that had nothing to do with the 2008 crisis, including agricultural producers. Farmers need to be able to effectively use commodity markets to manage risk. The application of Title VII of Dodd–Frank will make it more difficult to do so.
Devolve power regarding water policy from the federal government to states and local communities, and stop federal overreach. Water policy is critical to farmers and ranchers. Federal policy should not try to establish one-size-fits-all policies that fail to address the unique ecological features of local water bodies. States and local communities should be allowed to develop solutions to their unique problems. The means to achieving measurable outcomes should not be dictated by the federal government.
Further, federal overreach like the recent Environmental Protection Agency (EPA) and U.S. Army Corps of Engineers “Waters of the United States” rule, which allows the federal government to regulate almost any type of water, should be repealed. Congress needs to define clearly in the Clean Water Act that the waters covered under the statute should be generally limited to traditional navigable waters.
Treat farmers and ranchers as partners in protecting wildlife under the Endangered Species Act (ESA), by respecting property rights. In order to best protect wildlife, and particularly species that are deemed endangered under the ESA, farmers and ranchers should be partners in the protection process. This will happen only if their property rights are respected. The protection of property rights entails providing compensation to property owners for restrictions imposed upon them for the use and enjoyment of their property. Society has made the choice to protect endangered species; the cost therefore should be borne by society as a whole, not individual property owners who are merely using their property without interfering with the enjoyment of property by others.
The next President should take a step back and ask whether, if current agricultural policies did not exist, what kind of policies would truly be necessary? Before the next farm bill, the new President and Members of Congress should consider this question and develop appropriate and thorough responses. Agricultural policies should not be the work product of a small group of individuals, as they generally are now, given the importance of agriculture. Everyone is affected by agriculture because everyone eats.—Daren Bakst is Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.