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
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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
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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
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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 –
– 44 Democrats
– 54 Republicans
– 2 Independents
• House of Representatives
– 247 Republicans
– 188 Democrats
Other Points
• Farmers vote together
• In a close election farm vote can be very
important
• No one wants to tell farmers no
The Coalition
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Farmers
Consumers
Environmentalists
Other food sector participants, e.g., fertilizer
companies, other agribusiness
Sen
2013 Senate Ag Committee
white Democrat, blue Republican, red both
Program Commodities
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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
Geographic distribution of government payments as a proportion of gross cash
income from farming
Ratio of government payments
to farm gross cash income
0.1 - 0.2
0.2 - 0.25
0.25 - 0.3
0.3 - 0.35
0.35 - 0.4
0.4 - 0.45
0.45 or higher
Source:USDA
Source: USDA
U
2
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