US Farm Subsidies and the Farm Economy: Myths, Realities, Alternatives

Karl Beitel | 08.01.2005

Food First Backgrounder, Summer 2005, Vol. 11, No. 3

Over the last five years, groups spanning the ideological spectrum have come out in opposition to US and EU farm support payments, or subsidies. Critics of US and EU farm policy claim that subsidies are a major cause of overproduction. Overproduction depresses global prices, leading to a loss of economic viability and the destruction of small-scale agriculture, both in the US and globally. While US farm policy is highly discriminatory against smaller farmers, the excessive focus on subsidies has served to obscure the deeper forces underlying the long-term decline in global farm commodity prices. This Backgrounder will argue that declining agricultural commodity prices are rooted in the market’s lack of self-correcting mechanisms. Even in the absence of subsidies, commodity markets do not tend to equilibrium or operate to ensure fair returns on farm labor. Recognizing this reality is essential to any sound reform of US commodity policy.

On the surface, the argument against subsidies is quite compelling. Reforms in US farm policy instituted after 1996 established subsidy programs in which payments to farmers are triggered once prices fall below a floor price (the loan rate), which is set by Congress. While these subsidies shelter US farms from risk, critics argue that the floor prices encourage overproduction, generating surpluses that are then dumped on the international market at prices well below the cost of production. In fact, critics claim, the main beneficiaries of subsidy payments are not farmers, but large agribusiness firms, whose access to a steady supply of cheap farm commodities reduces their costs and boosts their profits (as they don’t pass through full cost savings to consumers). This line of reasoning leads to the assumption that reducing subsidies would curb overproduction and boost prices. Critics further note, correctly, that US agricultural tariffs are higher than those levied by developing countries, and call for their reduction.

The only way to stabilize farmers’ incomes and preserve a viable, diverse agricultural system is through some combination of price supports and supply management.

Without question, the current US subsidy system discriminates systematically against small farmers in the US and globally. But two linked misconceptions pervade the present subsidy debate: that subsidies are a principal—even the principal—cause of overproduction and falling prices; and, hence, that removing subsidies (and cutting tariffs) will significantly boost incomes for poor farmers in the developing world. Both these claims are inaccurate, and serve to obscure our understanding of the types of reforms that are required to restore real equity and long-term sustainability to the US and global farm economy.