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
Why?

Sugar in New Farm Bill
• Traditionally sugar program cost nothing
• NAFTA changes that Mexican sugar comes in w/o tariff or quota since Jan 2008
• Buy Mexican sugar for 21 cts/lb and sell it to ethanol producers for 6 cts/lb
• $140 million per year cost to taxpayer, plus much more to consumer ($1.5 bil.)

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
• Don’t work in long run
• Don’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 – creates surplus that must be purchased and sold at loss – usually exported - expensive
• Quotas – limits production – makes 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

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?

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
• Poorest farmers still lose money

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

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)

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

2008
Dem
Rep
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 are very high
• Vegetable oil prices very high
• 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

Main Milk Producing States
Bill. lbs.
0 to 5
5 to 10
10 to 15
20 to 25
35 to 40

Non-controversial Parts
• Can’t fight over everything
• Rest is non-controversial
– Research
– Extension
– Trade
– Environment
• No change unless everyone agrees
• Inertia

Policy and GATT
• Small countries walked out in Cancun.
Why?

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