Subsidy cash payments made to farmers reduce the price of food and have the potential to increase its availability, since they give farmers a bigger incentive to grow subsidized crops. Agricultural payments to farmers also affect other factors, such as how competitive a country’s agricultural produce is in international markets.
Subsidy payments to farmers in the U.S. directly target wheat, rice, soybeans, oats, barley, sorghum, minor oil seeds, peanuts, corn and cotton. While not all of these goods are used as food by consumers, most are used as ingredients in food production. The lower costs of raw materials used in food production could translate into lower prices of food for consumers.
Farming is a volatile industry due to the effects that weather, pest infestations and financial speculation can have on crop yields and food prices. Government subsidy payments help reduce these risks and provide farmers with safety nets.
While agricultural subsidies can drive down food prices and benefit producers and consumers nationally, they also create a problem in international markets. Typically, developing countries have a competitive advantage in the agricultural sector. This is due to their larger rural populations and lower wages. However, when large economies like the U.S. or the EU subsidize their agricultural production, developing countries tend to become net importers of foreign food, which can stifle growth for countries which could otherwise be self-sufficient.
A reason why agricultural subsidy payments continue to be implemented in the U.S., EU, and many other developed economies around the world can be explained by a phenomenon called Public Choice Theory, introduced by Political economist James Buchanan. According to Buchanan, wealthy farmers have a bigger incentive to lobby for subsidies than consumers do to oppose them.