Food for Thought: Why are Agricultural Subsidies Controversial?
Updated: Oct 21, 2018
On June 28, the Senate passed their version of the US Farm Bill 2018, which has some stark differences to the more controversial House bill that was passed the week beforehand. While the House bill’s proposed changes to food stamps and the Clean Water Act angered many, subsidies to agricultural producers went seemingly unnoticed, as these types of payouts have become baked into each budget. While it’s true that subsidies have become more controversial over the years, it wasn’t always this way.
Farm subsidies largely came into effect as part of the New Deal, when the Great Depression was in full swing. The wheat and cotton industries were huge beneficiaries of government payouts during this time, eventually leading to surpluses and very low prices. While the ways in which the subsidies were structured evolved over time, consistent aid to the industry remains unchanged. Starting in 1996, farmers’ payments were dispensed in fixed amounts, but pretty soon, that payment structure became fiscally unsustainable, since the direct payments-which were based on historical production-could end up being a lot higher or lower than the actual market prices at that time. In 2014, in order to shift to a more market-oriented system, direct payments were eliminated and replaced with 2 different commodity programs- Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC). Within this structure, the amount that is paid out supplements farmers only in proportion to how well their commodity prices or yields are. For example, if their yield did poorly, the supplement will be higher. In addition, farmers can benefit from crop insurance coverage, which the government has helped sustain for approximately 80 years with increasingly higher subsidies. According to an Ohio State University research report, the average share of crop insurance premiums paid by farmers has declined from 74% in the early 1990s to 38% in recent years.
Farm and commodity programs comprise roughly 20% of the USDA’s total budget, and they have come under attack more recently over the years, largely because subsidies seem not to assist small farm owners, but instead corporate operations, especially those that produce corn, wheat, soybeans, cotton and rice. According to a report by the conservative-leaning think tank American Enterprise Institute, “Farms in the top 10% of the crop sales distribution received approximately 68% of all crop insurance premium subsidies in 2014 and that farms in the top 2% receive approximately $50 per acre in crop insurance subsidies, more than four times higher than the average per-acre subsidy of $12.28.” It doesn’t just apply to crop insurance either. “Farms in the bottom 80% of crop sales received approximately the same total amount of ARC, PLC and insurance subsidy payments as farms in the top 2%,” according to the report. According to a Congressional Budget Office analysis, between 2017-2027, over 70% of ARC, PLC and insurance payments will go to corn, soybean and wheat producers.
It shouldn’t be surprising these producers are the big winners. The left-leaning Environmental Working Group’s (EWG) annual database on farm subsidies shows that in 2016, corn received the most in federal subsidies ($6.4 billion), followed by soybean ($2.27 billion), wheat ($2 billion) and cotton ($1.1 billion). Much of this is sold to livestock producers as animal feed.
So why exactly are subsidy payments so controversial? Well, for domestic purposes, giving huge subsidies to agricultural behemoths allows them to keep their costs low, therefore eliminating small farms’ ability to match their competitors’ low prices. Since they’re not growing on mass scales, these smaller operations are oftentimes local producers who may use less pesticides, antibiotics or other unknown additives. But even if not, they don’t receive the same government payouts as the larger companies, making it much harder to stay in business. If you’ve wondered why it is cheaper to buy WonderBread than it is to buy gluten-free bread, it’s because wheat growers can sell their products for a fraction of the price since they’re getting lots of help from the government to cover their costs. As consumers, we’re more inclined to pick up the $1 loaf of bread rather than the $6 loaf.
Local American growers aren’t the only ones affected either. In fact, the issue has increasingly become the focus of international debate. Just take Brazil’s World Trade Organization (WTO) case against the US cotton industry as a prime example. In the early 2000s, the US used several “export credit guarantee” programs, which are incentives that are essentially aimed at boosting agricultural exports. While the WTO Agreement on Agriculture (AA) allows countries to provide some advantages to their domestic industries, Brazil’s government claimed that the United States’ level of support for their American cotton growers went beyond the established rules and gave them an unfair advantage in the world market, thus diminishing world prices and subsequently affecting other cotton exporters such as Brazil. The WTO panel sided with Brazil, and gave the US until July 2005 to eliminate certain subsidies and elements of its export credit guarantee programs. After much back and forth (over a decade to be exact- the US appealed, the decision was upheld and Brazil threatened retaliatory measures such as tariffs, since the US was not complying as ordered), the US and Brazil officially settled their dispute. The WTO ruling was also a driving force behind some of the 2014 Farm Bill changes, such as the elimination of the direct payments. It also introduced the Stacked Income Protection Plan (STAX) specific to the cotton industry, which introduces a supplemental insurance plan, for which the government would pick up 80% of the premium.
Brazil far from the only country that has been affected by enormous domestic subsidies for commodities. According to a University of Pennsylvania report “From the 1990s to the 2000s, [the United States’] share in world cotton trade grew from 25% to an average 37%.” If your country competes on the world cotton stage, you probably don’t like the US’ increased market share, especially if you’re a less-developed country (LDC) that doesn’t have as much cushion as an economic superpower. Cotton-producing LDCs, such as Benin, Burkina Faso, Chad and Mali-known as the C4- have spent years trying to address this, as the livelihood of their many citizens depends on it. WTO members have held numerous discussions for over a decade on how to best resolve the issue. After all, it’s not just the US that foots a hefty bill for agricultural subsidies. Between 2014-2020, 38% of the entire EU budget is earmarked for agricultural policy, roughly 75% of which will be spent on subsidies in the form of direct payments.
For context, the first WTO Agreement on Agriculture passed during the 1995 Uruguay Round created the framework for agricultural trade rules for developed, developing nations and LDCs. The rules fall into 3 pillars: domestic support, market access and exports. The WTO’s 2015 Nairobi Conference addressed the 3rd pillar, and it resulted in the passing of a historic resolution to prohibit export subsidies altogether. With some product exceptions, developed countries would have to get rid of these subsidies immediately and developing countries had until 2018. In addition, according to a WTO report, stricter rules were imposed on other export programs that may be used as loopholes to the new rule. “The Nairobi decision contains rules to minimize the possible distorting impact of [export finance, international food aid and operations of agricultural exporting state trading enterprises] on international trade. These include maximum repayment terms for export financing programmes for agriculture exporters supported by the government, provisions on state trading enterprises engaging in agriculture trade, and disciplines to ensure that food aid does not displace trade and does not cause adverse effects on domestic production,” the briefing note stated.
However, there is still lots of work to be done. The C4 claim that while the Nairobi conference addressed export subsidies, developed nations still need to shrink their domestic supports. Some make the argument that the US spends millions of dollars in foreign aid to Africa, only to keep a significant sector of its economy suppressed via domestic cotton subsidies.
Developed countries face increasing pressure from both the international community and domestic constituents to reduce their payments. While agriculture subsidies are embedded into national budget-after all, keeping food prices affordable is something everyone is on board with- there is a constant tug-of-war between governments, producers and foreign counterparts to protect their agriculture sector while staying open to the tenets of free trade and globalization.
Sources (in order of appearance)
"The 20th Century Transformation of U.S. Agriculture and Farm Policy". Economic Research Service, US Department of Agriculture. June 2005. https://ageconsearch.umn.edu/bitstream/59390/2/eib3.pdf
"The End of the Direct Payment Era in U.S. Farm Policy". Department of Agricultural Economics, Purdue University. December 2013.
"Farm Commodity Programs: An Overview". National Agricultural Law Center.
"History of the Crop Insurance Program". Risk Management Agency, US Department of Agriculture.
"6 things to watch in the House farm bill, from food-stamp work requirements to school lunch". Washington Post. May 18, 2018.
Summary- H.R.2 - Agriculture Improvement Act of 2018. US Congress.
FY 2018 Budget Summary. US Department of Agriculture. https://www.usda.gov/sites/default/files/documents/USDA-Budget-Summary-2018.pdf
"Where the Money Goes: The Distribution of Crop Insurance and Other Farm Subsidy Payments". American Enterprise Institute.
"The United States Farm Subsidy Information-Top Programs in the United States 2016". Environmental Working Group.
"The Impact of United States Agricultural Subsidies on World Trade in Context of the Brazil Cotton Dispute". University of Pennsylvania-Wharton Public Policy Initiative. September 8, 2015.
"United States - Subsidies on Upland Cotton". World Trade Organization, Dispute Settlement.
"United States and Brazil Reach Agreement to End WTO Cotton Dispute". Office of the United States Trade Representative, press release 2014.
"Unraveling Reforms? Cotton in the 2018 Farm Bill". American Enterprise Institute, American Boondoggle. January 28, 2018.
"How The EU Budget Is Spent: Common Agricultural Policy". European Parliamentary Research Service Blog. July 20, 2016.
"Domestic support in agriculture: The boxes". World Trade Organization, Domestic support in Agriculture.
"Briefing note: Agriculture issues. World Trade Organization, Tenth WTO Ministerial Conference, Nairobi, 2015.
"WTO members urged to step up efforts to secure farm trade deal in Buenos Aires". World Trade Organization, Agriculture Negotiations: Informal Meeting.