Now that we’ve discussed nutrition and conservation programs in the Farm Bill, the time has come to direct our attention to the elephant in the room: agricultural subsidies. The commodity programs represent 15% of Farm Bill spending, which is $42 billion, the second largest Farm Bill allocation (you’ll recall that nutrition spending is the largest). And it’s a controversial topic that requires some careful consideration.
Since the commodity support programs are such an important topic, we’ll spend a few weeks on them. This time, we’ll try to understand how the commodity programs came to be and how they work, and next time we’ll talk more about their implications.
What is the argument for agricultural subsidies? After all, the government doesn’t directly subsidize most industries. In order to understand this, a quick review of Econ 101 is in order (I think you’ll find it useful, but if you want to skip class you can meet me in a few paragraphs).
As my favorite professor always said, prices are a language. Recalling the laws of supply and demand, as the price of a good goes up, supply of that good increases and demand for it decreases. Let’s put it in terms of something interesting, like beets (local, organic ones of course). If the price of beets is high, people might opt to buy turnips instead, but as the price of beets falls, consumers will purchase more beets. On the other hand, if the price of beets is low, farmers won’t want to produce many because they won’t make much money, but as the price increases, farmers will grow more beets to sell. In a perfect economic system, the price of beets communicates to farmers how much to produce based on consumer demand at that price.
That’s how it’s supposed to work, but the case of agricultural production is actually more complicated than the example about beets above. Consumers don’t respond to changes in the price of food by buying proportionally larger or smaller amounts of it. If food prices soar, consumers will still need to buy food, while there is a limit to how much food people will purchase, even if it is cheap (extra credit if you recognized this as price inelasticity). Because there are constraints on land and other resources, farmers often can’t respond to price fluctuations by producing more or less. Add to this unpredictable weather and the lag between planting decisions and harvest during which conditions can change, and farming becomes risky business with volatile swings in income. The goal of the commodity programs is to stabilize farm income by shifting some of these risks to the government, allowing farmers to remain in the business of producing food and fiber for the nation and the world.
As a Midwesterner, when I think of crop subsidies, King Corn and Queen Bean come to mind. However, the production of many other crops, including rice, chickpeas, and sunflower seeds, is subsidized. In all, there are about two dozen commodity crops, but five – corn, soybeans, wheat, cotton, and rice – account for 90% of subsidy payments.
The Farm Bill provides for three types of payments to prop up farm income: direct payments, countercyclical payments, and marketing assistance loans/loan deficiency payments. Direct payments are issued to farmers who produce an eligible crop and are paid regardless of the current market price of the crop. They are based on how many acres have been planted in that crop in the past, and the historical yield. Corn farmers currently receive $0.28 in direct payments per bushel. The other two types of payments require the market price to fall below a specified level. To determine if farmers will receive these payments, a target price is set for each commodity crop. For example, the target price for corn for the 2011 production year is $2.63 per bushel. If the market price for corn dips low enough that the price the farmer receives plus the direct payment amount doesn’t add up to the target price, countercyclical payments (so called because they go up as prices fall) are triggered to make up the difference. For the 2009 crop year, countercyclical payments weren’t offered for corn because the market price was high enough.
If this post has left you with more questions than answers – are direct subsidies the best way to ensure farmers a reasonable income? Who benefits most from subsidies? How does the structure of the commodity programs influence what farmers grow, and, in turn, what we have to eat? – that’s okay. In fact, that’s a good thing. Over the next few weeks, we’ll delve into all of these questions and more.
- Lecture by Bea Rogers at Tufts University, February 4, 2010.
- Farm Commodity Programs in the 2008 Farm Bill, written by Jim Monke for the Congressional Research Service in 2008
- The Non-Wonk Guide to Understanding Federal Commodity Payments, written by Scott Marlow for the Rural Advancement Foundation International in 2005
- Farm and Commodity Policy (http://www.ers.usda.gov/Briefing/FarmPolicy/)
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Ann Butkowski is happy to be back in her native Minnesota after spending the last two years in Boston. She’s learning to bike the streets of Minneapolis and grow tomatoes in her backyard. Ann has a master’s degree in nutrition science, but doesn’t let that stop her from eating ice cream right out of the carton. Ann is Simple, Good, and Tasty's resident Farm Bill expert. Her most recent post for us was Understanding the Farm Bill: Good Soil and the Programs that Protect It.