Agriculture and Farm Policy Notes

Agriculture

The Politics of Agricultural Policy

Every five or so years, the federal government reviews the food and farm landscape and renews the Farm Bill.
The beneficiaries of the bill and the methods of benefit are subjects of ongoing debate.
2018 Farm Bill:
- The 2018 farm bill, totaling 867 billion, reauthorized many expenditures from the 2014 Farm Bill.
- In 2020, farmers received almost 40 percent of their income directly from the U.S. government.
- A question arises whether the U.S. government should subsidize agriculture to this extent.
- Senator Charles E. Grassley (R-Iowa) voted against the 2018 Farm Bill due to its expansion of federal subsidies to more-distant relatives of farmers.
- Grassley joined eight other Republicans in opposing the measure, which was supported by every Senate Democrat.
Millions in farm aid go to "city slickers".
- Some Philadelphia residents with even minor rural ties legally get subsidies.
- At the same time, the USDA considers cuts in food aid to the poor.
- Nearly 900 Philadelphians have collected federal farm subsidies totaling 3.2 million in the last 25 years.

Characteristics of Agriculture

Inelastic demand for farm products in the short run.
Extensive technological change in the past half-century.
Immobile resources.

Inelastic Demand

Demand in which buyers are relatively unresponsive to changes in price.
Steep demand curve.
The effect of inelasticity on price and farm incomes in the corn market:
- Because the demand for farm products is inelastic, an increase in supply from S to S' will cause a sharp decrease in price, as well as a decrease in farmers’ incomes.
- Price falls from 3 to 2, while incomes decrease from 15 million to 12 million.
- Conversely, a decrease in supply to S'' will increase price to 4 and increase total farm incomes to 16 million.

Extensive Technological Change

Technological change increases supply and lowers cost per unit.
New techniques.
New, efficient machinery.
New high-yield crop varieties.
Intensive use of fertilizers and pesticides.
Artificial insemination leads to a more reliable growth in cattle and pig herds.
Center-pivot irrigation systems.
Biotechnology.
Might result in bumper production - An unexpectedly large crop resulting from good growing conditions.
The large increase in supply, coupled with a relatively small increase in demand (not shown), has caused the real prices of agricultural commodities to fall in the past 80 years.

Government Policy Toward Agriculture

Objectives of farm policy (1930s):
- Stabilize conditions in farming.
- Increase real farm incomes.
Agricultural subsidies: government programs to assist agriculture.
Instruments:
- Price supports (various methods).
  - Restrict supply.
  - Increase demand.
Major subsidies to five crops: corn, soybeans, wheat, cotton, and rice.
- There are smaller subsidies for peanuts, sorghum, and mohair.
- Producers of meat, fruits, and vegetables benefit only from crop insurance and disaster relief.
Price supports:
- Example of price floors.
- Legally imposed minimum price of good/service.
- To have an effect on the market, it must be above market equilibrium.
- Rationing function of prices not performed.
  - The ability of a flexible market price to clear the market of shortages and surpluses.
Agricultural price floors create a surplus because prices are artificially high.
- Government buys the surplus.
- Income is redistributed to the farm sector (gainers), mostly large-scale farmers and big agribusinesses (Cargill, Monsanto, etc.), from taxpayers (losers).
Policies to decrease the amount produced and offered for sale
- e.g., farmers paid for not farming.
- Reduced supply results in a higher price.
If the supply of wheat can be decreased from S to S' by a government program, the market price will increase from 3.50 to 4.
However, the supply continued to increase, lowering prices.
- Farmers set aside the worst land and farmed on the best.
- Technological change.
  - New machines, seeds, and fertilizers.
Efforts to increase demand—domestically:
- Distribute surplus.
  - To public schools (lunches).
  - Food stamps.
  - Directly to the poor.
- Objectives:
  - Humanitarian - Feed the poor, subsidize school lunches.
  - Pragmatic - Increase the demand, eliminate surpluses.
Efforts to increase demand—internationally:
- Foreign food assistance programs.
  - Means of disposing of surplus commodities abroad.
  - Have done more harm than good to Third World countries.
- Export subsidies.
  - Government financial assistance to U.S. agricultural exporters results in lower prices and an increase in foreign consumption of U.S. agricultural products.
  - Accused of dumping, selling our farm products abroad at prices well below cost, harming third-world farmers and blocking global trade agreements.

An Evaluation of U.S. Farm Policy

Treating a symptom (low prices) of the problem, as the US produces too many farm products.
Distribution of Benefits.
- Farm subsidies act like regressive taxes.
- Between 1995 and 2019, the top 10% of recipients received 78% of the 223.5 billion given out.
- The top 1% received 26% of the payments.
- Fifty people on the Forbes 400 list of wealthiest Americans received farm subsidies.
- On the other hand, 62% of U.S. farms did not receive any subsidies.
Diversity and Agriculture:
- African-American farmers.
  - 1920, 1 in 7 farms; 1992, 1 in 100 farms.
- Environmental Working Group: USDA discriminated against African-American farmers by denying access to crop loans.
- 1997, civil rights class action suit against USDA resulted in a 2.3 billion settlement.
- Difficult implementation – nearly 9 out of 10 who sought restitution were originally denied.

Global Agriculture and World Hunger

Food Production and Hunger—causes:
- Hunger—a problem of distribution and poverty, not production.
- Exacerbated by civil war, political unrest, bad weather, poor transportation and distribution systems.
- US subsidized crops flood world markets.
  - Causes low world agricultural prices.
- Most developing country people are in the rural sector.
  - Poor farmers cannot compete with cheap, subsidized crops.
  - No incentive to produce food.
  - Farmers swarm to urban sectors, in poverty.
- Trade restrictions by wealthy countries prevent developing country crops (rice, sugar, cotton) from entering wealthy countries.
- Patents owned by U.S. Corporations prevent outsiders from growing GMO food, as seeds work only if used with expensive fertilizer sold by seed companies.

The Politics of Agricultural Policy

Most farm payments go to the wealthiest farmers and agribusinesses.
U.S. farm lobby—well financed by the large commercial farmers.
- Almost all members of the U.S. House of Representatives have at least one crop in their states and support agribusiness interests.
Senators—overrepresented by rural populations and support agribusiness interests.
Legislators are uninformed or uninterested in the effect of agricultural subsidies and trade policies on poor farmers in developing countries.
Strong lobbying activity favors government programs that benefit farmers in their state.
Unequal distribution of the benefits of farm programs, with large agribusinesses having more political power than smaller farmers.
In 1900, 11 million were employed in farming with 2,900 USDA employees; today, 2 million are employed in farming with 93,000 USDA employees.
Reforming farm policy by cutting subsidy programs and agricultural trade barriers would save U.S. taxpayers and consumers tens of billions of dollars over the next decade, reduce prices to food processing industries and consumers, and help create more space for global trade liberalization.
Successful transitions have occurred in Australia and New Zealand.
The political clout of the farm lobby remains strong, and the Federal Government is not out of the farm-subsidy business.