Will the end of U.S. crop subsidies leave farmers elsewhere better off?
A number of international organizations concerned with overcoming hunger and malnutrition in the world have come out against the current commodity programs, attacking the subsidies U.S. farmers receive.
These groups have garnered a considerable amount of sympathy arguing that U.S. subsidies stimulate overproduction of subsidized crops by U.S. farmers, thus driving world prices into the basement and harming farmers around the world.
Furthermore they assert that the U.S. is dumping cotton, corn, soybeans, wheat, and rice on the market at prices below the cost of production. Their solution is to end U.S. crop subsidies with the expectation that the absence of subsidies will cause US farmers to plant fewer acres, resulting in higher prices.
This analysis raises several issues that are important for U.S. farmers, farm organizations and ultimately policy makers to understand. Let us work our way through these issues one at a time.
First, as we have argued numerous times before, the amount of extra production that results from the presence of subsidies is relatively miniscule. It is true that subsidies and the price farmers expect at harvest time have some impact of the MIX of crops that U.S. farmers plant each year. That being said, one needs to remember that the total area dedicated to crop production each year remains fairly stable over a wide range of prices and weather has more of an effect on planted acres than subsidies.
Second, there is no question that the present farm program policy elements are structured to enable the dumping of US agricultural products on the world marketplace at prices below the cost of production. In particular the Loan Deficiency Payments/Marketing Loan Gains (LDP/MLG) portion of the current farm program, by its design, recognizes that crop sales at prices below the loan rate are below the total cost of production. Counter-Cyclical Payments (CCP) are no different, just at a higher level.
When one looks at farm receipts for 1999 and 2000, it becomes clear that even the decoupled/direct payments allow farmers to sell their crops into domestic as well as international markets at prices well below the cost of production. There is no other conclusion that one can come to when one sees government payments -- including decoupled/direct payments -- for major crop producing states well above net farm income. Farmers in those states used some of the subsidies just to cover operating costs.
Third, in the absence of subsidies, we would expect U.S. land prices and land rents to take a tumble. Undoubtedly some cotton acreage would be shifted to other crops. But overall, nearly all crop acres presently in production would remain planted in the short- to medium-run. Some prices would increase by a small percentage, but overall the price impact of ending subsides would be miniscule as would be the benefits enjoyed by farmers elsewhere in the world.
If subsidies are the cause of low prices for cotton, corn, soybeans, wheat, and rice, then how does one explain the price and income problems faced by the growers of coffee, tea, cacao, and other tropical crops? The U.S. has no subsidies for these crops. It does not even grow them.