An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities. Examples of such commodities include wheat, feed grains (grain used as fodder, such as maize, sorghum, barley, and oats), cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.
The beneficiaries of the subsidies have changed as agriculture in the United States has changed. In the 1930s, about 25% of the country's population resided on the nation's 6,000,000 small farms. By 1997, 157,000 large farms accounted for 72% of farm sales, with only 2% of the U.S. population residing on farms.
The subsidy programs give farmers extra money for their crops, as well as guarantee a price floor. For instance in the 2002 Farm Bill, for every bushel of wheat sold farmers were paid an extra 52 cents and guaranteed a price of 3.86 from 2002–03 and 3.92 from 2004–2007. That is, if the price of wheat in 2002 was 3.80 farmers would get an extra 58 cents per bushel (52 cents plus the $0.06 price difference).
The following is the subsidies by crop in 2004 in the United States.
|Commodity||US Dollars (in Millions)||Percentage of Total|
|Upland and ElS Cotton||1,420||17.7|
|Soybeans and products||610||7.6|
|Vegetable Oil products||11||0.1|
Some proponents of agricultural subsidies argue that they are necessary because of the fluctuating nature of agriculture. Domestic crop yield can fluctuate considerably depending on the local weather. International crop supply and prices also fluctuate considerably depending on weather (eg, drought in Australia), politics (eg farm seizures in Zimbabwe), war, and other factors affecting crop yields in foreign countries. As a result of these fluctuations in production levels and prices, there could be very large variations in farm revenues and food available for purchase on the global market. Price support and income guarantees can help to maintain a strong domestic farm sector and domestic food supply, by smoothing farmers' income over time and better ensure that farmers are not required to maintain a hefty float from year to year in order to maintain a consistent income.
Farm subsidies have the effect of transferring income from the general tax payers to farm owners. It is argued in some countries that without support from government, domestic farmers would not be able to compete with foreign imports. Removing subsidies would therefore drive domestic farmers out of business, leaving the country with a much smaller (or possibly non existent) agriculture industry. A country that is unable to domestically produce enough food to feed its people is at the mercy of the world market, and is more vulnerable to trade pressure and global food shortages and price shocks. The loss of the domestic farming industry is also often seen as undesirable on a variety of grounds, including increases in (short term) unemployment, and the loss of a traditional cultural way of life.
Depending on the nature of the subsidies, agricultural subsidies may have the effect of increasing agricultural production and/or driving down domestic food prices. This means domestic producers and consumers would pay less for their food. Compared with wealthier individuals, poor people generally pay a smaller proportion of their income in taxes, and they generally spend a larger proportion of their income on food. Thus lower food prices, financed through tax revenues, will provide larger benefits for the poor than for the wealthy. In this respect, agriculture subsidies could be considered an indirect means of transferring wealth to lower income individuals.
Agricultural subsidies, resulting in lower food prices, and domestic overproduction, can also provide benefits for the poor in other ways. In the 1960s, President Lyndon B. Johnson made food surpluses a weapon in the war on poverty. Since then, food has been donated to poor urban areas in the United States. Also, both critics and proponents of the WTO have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries.
One criticism of subsidy comes from proponents of free market economics, stating that subsidies are against the principles of free trade. Prices are the signals by which farmers, and other entrepreneurs, find out what people want. Since profit is the difference between the value of your inputs and the value of your outputs, attempting to maximize profits will cause you to do that work which produces the greatest benefit to consumers at the least cost. Without the signals of profit and loss, the market has no way of suggesting that a farmer who has made poor decisions should change his behavior, or to reward those farmers who have made good decisions. Thus subsidized farmers may well produce the same worthless product every year, and dump it in the ocean, while turning a profit due to subsidies. Unsubsidized farmers who produce a worthless product will eventually have to choose between going out of business, or producing something that consumers demand.
Another is the issue of fairness. Many manufacturers and retailers do not receive relief from the market and therefore neither should farmers.
Justification of subsidies from the uncertain nature of the weather can be countered by considering that many other areas of economy experience equivalent risks for which the free market does provide solutions, through insurance and the futures markets.
Critics of agricultural subsidies argue further that they promote poverty in developing countries by artificially driving down world crop prices. Agriculture is one of the few areas where developing countries have a comparative advantage, but low crop prices encourage developing countries to be dependent buyers of food from wealthy countries. So local farmers, instead of improving the agricultural and economic self-sufficiency of their home country, are instead forced out of the market and perhaps even off their land. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade negotiations stalled because the US refused to cut subsidies to a level where other countries' non-subsidized exports would have been competitive.
Economists strongly rebuke the benefits of reduced retail prices derived from subsidizing over-production. If the government were to subsidize car manufacturers to produce more cars then this would indeed lower the showroom price but it would be the consumer's own money collected through tax that would be used to fund the over-production. Even worse, subsidies are a deadweight loss to the welfare in the aggregate economy due to the misallocation of production spending caused by the price distortion in agricultural products. Also, in the hypothetical case that lower retail costs would outweigh the additional production costs, the manufacturers would simply lower their prices themselves until they are at a point of maximum profitability.
Others argue that the artificially low prices resulting from subsidies create incentives for mis-allocation of resources, such as replacing cane sugar with cheap corn syrup, and replacing grasses for grazing cattle with cheaper cattle corn. Critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl at the Heritage Foundation showed that nearly three quarters of subsidy money goes to the top 10% of recipients. Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. The discrepancy is only widening. Since 1990, payments to large farms have nearly tripled, while payments to small farms have remained constant. Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies—which they can use to buy even more small farms. Critics also note that, in America, over 90% of money goes to staple crops of corn, wheat, soybeans and rice while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy has provisions that encourage local varieties and pays out subsidies based upon total area and not production. Although, in fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms.
Subsidies are often given in conjunction with strict laws reducing their benefit to farmers. For example, UK farmers have difficulty competing with Argentinian farmers, not only with higher labor costs, but with enforced meat traceability overheads from the same government.
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