Farm subsidies are a solution in search of a problem | reTHINK TANK

Farm subsidies are a solution in search of a problem | reTHINK TANK

The classic depiction of the American farm
— an aging red barn on a plot of land tilled by a struggling mom and pop — is fiction. It’s time for Congress to rethink farm subsidies. For decades farm interest groups on Capitol Hill have argued that farmers are struggling
and need substantial government assistance. The first pro-subsidy argument is that farmers
are facing a financial crisis. In 2017 the House Agriculture Committee Chairman
pointed out that farmers have seen a 45% drop in their incomes between 2014 and 2016, the
largest drop since the Great Depression. This statement is in fact true, however farm
income may not be the correct measure to use. Farm income measures the value produced by
a farm in a given year, regardless of whether the products are sold or not. This is very important for annual GDP calculations,
but farmers will often store their products and sell them when they can get a better price. To understand how farmers are doing financially,
it is better to look at farm net cash income which takes into account when farmers actually sell
their products. Both net farm income and net cash income had
their highest values since the 1970s around 2013 due to almost record commodity prices. So, a steep decline is not necessarily a sign
of impending financial ruin. In fact, Net Cash income in 2016, 2017, and
2018 is right at the 1960-2018 inflation adjusted average. The farm sector is doing just as well as would
be expected in normal economic conditions. The second argument is that farms face business
risks associated with weather and diseases that other businesses do not face. This is also true, but nothing new for agriculture. Moreover, subsidy programs that farmers want
like crop insurance incentivize farmers to take on more risk by not diversifying their
operations, only planting crops, and planting those crops on lower quality land. From a business perspective, since the 1960s
farm assets have grown while farm debt has stayed relatively flat. Looking at the ratio of debt over assets,
it is clear that the farm sector has become steadily less leveraged since its peak in
the 1980s. A debt-to-asset ratio of around 13 percent
actually implies farm businesses have much less exposure to debt than small and medium
sized business owners in other sectors of the economy. The third argument is that farmers are unable
to manage fluctuations in their incomes without government support and insurance subsidies. However, families that own farms are actually
quite good at smoothing out their incomes and managing production risk in agriculture. Households that own farms do face substantial
fluctuations in the incomes they get from farming, but their total incomes from all
sources, including farming, are much more stable. In fact, the average year-to-year percentage
change in their farm incomes is eight times the change in the total incomes for those families. Most families that own farms get the vast
majority of their income from other off-farm sources. Finally, it’s very unlikely that farmers
will fall into poverty. Since the mid-1990s, median farm household
incomes have been above the median household income for the entire country. In 2018, median farm household incomes were
around $15K higher than the typical US household. Average farm household incomes have exceeded
average US household incomes by over 35 percent in recent years. In conclusion, it is hard to make the argument
that farmers are desperately in need of help and facing a “crisis”. When the evidence is considered in context,
it is clear that farmers aren’t facing a crisis, and are more than capable of managing
risk on their own. Moreover, many farm policies actually raise
prices for consumers and encourage risky farming practices. Instead of spending money on wasteful farm
subsidies, Congress should direct money to programs that have a net social benefit. And do no harm. To learn more about our take on agricultural policy, check out the link to our new book, “Agricultural Policy in Disarray”, in the description below. Also let us know what other topics you would like AEI scholars to cover on reTHINK TANK. And be sure to subscribe for more videos and research from AEI.

9 thoughts on “Farm subsidies are a solution in search of a problem | reTHINK TANK

  1. I'm from farming stock and I'm convinced that we need to phase out farming subsidies world-wide. And therein lies a problem – in many (all?) western countries agriculture is heavily subsidized and protected through subsides. If any country were to unilaterally drop subsidies and tariffs then the farmers would feel it quite heavily. The trick, I think, is to reduce both subsides and tariffs slowly over, say, a 20 year period and do it vocally so that the farmers can plan properly and increase their productivity accordingly.

  2. On March 29, 2019 (this year) Britain is leaving the European Union. This means that subsidies paid through the Common Agricultural Policy stop. Farm subsidies are unpopular with British tax payers. This is a good opportunity to rethink the financial basis of the UK's farming sector.

  3. ALL government subsidies need to be permanently stopped and Congress return money to the tax payers via 90% tax elimination and 95% spending cut permanently

  4. Instead of shifting subsidies from one industry to another, like you suggest, why not just let the tax payer keep their money?

  5. World wide AG is not a free market and can never be a free market. Even if they were, free markets can't change the weather.

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