The Economics and Politics of U.S. Agricultural Policy

James Dunn

Pennsylvania State University

Since 1990, 17% of political contributions from agriculture

have come from sugar growers. Sugar is less than 1% of

agricultural output

Impact of technological change in agriculture

History

• Started in 1930s as temporary measure

• Political support remained after depression

• Farm problems recur regularly

• Lots of programs – I’ll talk about price and income programs

Economics of Agricultural Policy

• Idea- raise farm incomes, end farm failures• Give one time boost• Doesn’t work in long run• Doesn’t stop farm exit• Subsidize large farms more• Subsidize rich at expense of others -average farm

family has higher income and much higher wealth than the average US household

Types of Policies

• Simple price supports – create surplus that must be purchased and sold at loss – usually exported - expensive

• Quotas – limit production – make it difficult to expand – quota gains value if sold

Price support

Government purchases

Purchases

• What do you do with the surplus you buy?

• If you give it away what about the farmers trying to compete with free food?

Quota

Capitalization of Programs

• Farmers learn program will continue

• Price of land and cows and other specialized assets reflects value to best farmers

• Artificially high milk prices drive up prices of cows

• worst farmers still lose money

Dairy Cows

• If milk price is high, what happens to price of cows?

• Who will pay the most?

• Do higher cost farmers make any money?

Rentable Quota

• Who will pay the most to rent the quota?

• How much will they pay?

• Who will pay the least rent?

• How much will they pay?

• Who makes money?

• Quota in Canada is $20,000/cow

Cash Farm Income and Government Payments

Agricultural Subsidies

Loss of markets

• Price supports reduce competitiveness in international markets, e.g., loss of soybean exports to Brazilian producers

• Higher prices stimulate substitution by other commodities in consumption, e.g., high fructose corn syrup (sugar)

Some important points

• Very few farmers• House of Representatives based on population –

disproportionately urban• Senate – two members per state – more rural

interests represented• Often control of Congress very close

– in 2008

– Senate 49-49-2 (independents caucus w/ Dems)

– House 232 -200 (3 vacant)

Congress Now• Senate –

– 54 Democrats– 4– 6 Republicans

• House of Representatives– 232 Republicans– 200 Democrats– 3 vacant

Other Points

• Farmers vote together

• In a close election farm vote can be very important

• No one wants to tell farmers no

The Coalition

• Farmers

• Consumers

• Environmentalists

• Other food sector participants, e.g., fertilizer companies, other agribusiness

DemRepBoth

Senate Ag Committee2008

2013 Senate Ag Committeewhite Democrat, blue Republican, red both

Program Commodities

• Feed grains – mostly corn

• Oil seeds – mostly soybeans

• Wheat

• Cotton, rice, sugar, peanuts

• Dairy products

• Wool, mohair, honey, dry peas

• 13% of Farm Bill spending

Bio-Fuels

• Subsidies for corn from ethanol

• Loans for bio-refineries

• Corn and soybean prices were very high for several years

• Vegetable oil prices were very high as well

• Very little savings in petroleum use

Ratio of government paymentsto farm gross cash income

0.1 - 0.20.2 - 0.250.25 - 0.30.3 - 0.350.35 - 0.40.4 - 0.450.45 or higher

Geographic dependence on direct government payments, 2002Geographic dependence on direct government payments, 2002

Geographic distribution of government payments as a proportion of gross cash income from farming

Source: USDA

Source:USDA

<= 55 - 7.57.5 - 1010 - 1515 - 2525 - 50

US Dairy States2008 Production (bil. lbs.)

Policy and GATT

• Small countries walked out in Cancun.

Policy and freer trade• Free trade agreement with Australia (January 1,

2005)• Duties on most industrial goods eliminated• Special treatment for agriculture, especially

sugar and dairy products• Central American Free Trade Agreement was

held up over agriculture (sugar) but passed in 2005

• NAFTA disputes - many over agriculture (tomatoes, sugar)

Concluding Comments

• Not a big success

• Very costly

• Extremely important politically – domestically and internationally

• With close elections – won’t go away –very important in government shutdown