Farm Subsidies: Overview

Introduction

Since the 1920s, the United States government has tried to stabilize the income of farmers through a series of programs described broadly as “farm subsidies.” These programs work in several ways. Some are designed to ensure that farmers will receive at least an established minimum price for their crops, even when supply is greater than demand. In these programs, the government pays the minimum price for crops, helping prop up the market price. Other programs pay farmers to leave their fields fallow in an effort to avoid overproduction of designated crops. Governments use farm subsidies to actively manage the farm production of rice, wheat, oats, barley, soybeans, cotton, milk, peanuts, sugar, tobacco, beef, pork, and corn.

Farm subsidies have come under heavy criticism on two fronts. First, as agribusinesses have replaced family farmers, the bulk of government payments now go to large companies, including some Fortune 500 corporations. Second, government subsidies make it possible for American farmers to export some crops at prices below what native farmers need to make a living. In 2022, the United States was the world’s largest exporter of agricultural goods in terms of monetary value, followed by the Netherlands and Germany.

Most recent efforts to reduce or even eliminate farm-subsidy programs have been unsuccessful, partly for political reasons. Farm interests are highly influential in Midwestern states, many of which tend to send Republicans to Congress.

Understanding the Discussion

Agricultural Adjustment Act (AAA): Legislation passed in 1933 as part of the New Deal that allowed the federal agriculture secretary to set limits on production of farm products to reduce surplus and prop up prices. The Supreme Court later declared the law unconstitutional.

Commodity Credit Corporation (CCC): A federal program that made loans to farmers who agreed to government limits on the production of designated crops.

Price Supports: Government programs to buy crops at a designated price at times when production exceeds market demand, causing the market price of some crops to fall.

History

Farming has always been a risky business. In some years, crops fail, resulting in little or no income for the farmer. In years when crops prosper, prices can fall in response to surplus production. Demand for farm products can also shift rapidly. In the twentieth century, World Wars I and II and the Korean War created strong demand for American farm products, resulting in both higher prices and extra production.

In the 1920s, the federal government made its first efforts to stabilize farmers’ incomes—that is, to protect farmers from the annual ups and downs of their income due to fluctuating market demand and farm production. These efforts achieved little success at the time. In the early 1930s, however, the situation of farmers seemed much more desperate, as prolonged drought caused some crops to wither entirely, while a surplus of other crops resulted in plunging prices. As part of President Franklin D. Roosevelt’s New Deal program to cope with the impact of the Great Depression, Congress passed the Agricultural Adjustment Act (AAA) in 1933 and created the Commodity Credit Corporation (CCC). The AAA gave the federal agriculture secretary the authority to set quotas on production of some crops in order to avoid driving down prices in cases of overproduction, while the CCC made loans to farmers who agreed to limit production under the terms of the AAA.

After the Supreme Court declared the AAA unconstitutional, a modified version was passed in 1938. Among other provisions, the Agricultural Adjustment Act of 1938 established the Federal Crop Insurance Corporation (FCIC) to facilitate, support, and subsidize transactions between farmers and private insurers. The Federal Crop Insurance Act of 1980 expanded the crop-insurance program to many more crops and regions of the country. Protected crops include wheat, corn, oats, soybeans, cotton, sugar, peanuts, tobacco, rice, and milk, among other goods.

These programs set a pattern that persists today. Corn, wheat, and cotton have long accounted for the bulk of federal price supports. Periodic alterations in the details of these laws have been passed when events such as World War II and the Korean War threatened to destabilize prices and/or farm incomes. In some cases, such as during World War II, federal programs encouraged greater production in order to avoid shortages that might drive up the price of key crops; after the war, the aim was to reduce production in order to avoid falling prices. During the peaceful years of the 1950s, the government began paying farmers not to plant crops that threatened to come into surplus.

Although these programs are often described in terms of stabilizing the income of farmers, their intent is to stabilize the prices of crops. Thus, a farmer (or a corporation that owns a farm) who produces large amounts of designated crops stands to reap large benefits from government programs, whereas a farmer who owns a much smaller plot of land, and therefore produces less, will reap a much smaller benefit.

The United States is not the only country that employs government subsidies for farmers. The European Union (EU), to which the Netherlands and Germany both belong, operates a common agricultural policy (CAP) that subsidizes farmers via direct payments, farm-development assistance, and market support. Seventy-two percent of the CAP budget is allocated for direct payments to farmers in exchange for strict adherence to food-safety, environmental-protection, and animal-welfare standards.

Critics of farm-subsidy programs point out that American and European farmers in particular have incentives to produce large quantities of crops. If market prices fall, these farmers will be protected, unlike their potential competitors in poorer countries, such as Mexico, that cannot afford to subsidize their farmers. One result has been that American farmers can sell their crops in Mexico for prices below what Mexican farmers can afford to charge. In this way, American subsidies to American farmers, seemingly a domestic issue, have serious ramifications outside the country, including providing additional incentive for Mexicans to look for work in the United States.

Farm Subsidies Today

Total US government spending on farm-subsidy and price-support programs is estimated at more than $20 billion per year. In many cases, this represents payments that go to large agribusinesses, including some corporations on Fortune magazine’s list of the five hundred largest corporations in the United States.

Between 2005 and 2014, about 90 percent of federal agricultural-subsidy payments went to growers of just five crops: corn, wheat, cotton, soybeans, and rice. In 2010, approximately 74 percent of all farm subsidies went to just 10 percent of US farms, all of which had annual sales of $250,000 or more. According to some estimates, Americans pay for farm subsidies twice: once in the form of tax dollars going to large farming organizations, and again in the form of higher prices for food.

Efforts to change farm subsidy programs have consistently foundered, largely for political reasons. For instance, the 2008 US Farm Bill, supported by large farmers and agricultural interests, increased farm-subsidy rates and expanded government control over farm programs. Although the number of people engaged in farming in the United States is much smaller today than it was when such programs were launched in the 1930s, farm interests remain highly influential in the Midwest, South, and Great Plains regions. Politicians have been reluctant to alienate key constituencies in these regions by supporting agricultural reform.

In February 2014, Congress passed the Agricultural Act of 2014, also known as the 2014 US Farm Bill, which authorized federal nutrition and agriculture programs for the next four years. The act, which received significant bipartisan support, made several important steps toward farm-subsidy reform, including instituting an income cap for farm subsidies. Perhaps most notably, the act ended direct-payment subsidies to farmers, which had previously accounted for an estimated $5 billion in government spending per year. However, the bill also increased the government’s share of federal crop-insurance premiums, which some critics claimed represented a more generous subsidy than the one that had been cut. Although the Senate estimated a savings of $23.3 billion between 2014 and 2024, the Congressional Budget Office predicted in 2016 that the expenditure would grow to $23.9 billion in 2017.

Much of the debate centers on government support of prosperous farmers and agribusiness. For instance, conservative critics dislike farm subsidies because they interfere with the free market. Others have concerns about attendant ecological impacts, such as monoculture cropping, water pollution, health effects, and poor land management, that they argue the subsidies incentivize.

In 2017, the administration of President Donald Trump proposed income caps, eliminating the subsidy for the harvest price option, and changes to conservation and livestock payments. In all, the cuts were estimated at $4.8 billion. The American Farm Bureau argued the move would harm family farms and increase insurance costs. Around the same time, Congress was working toward passage of the 2018 Farm Bill.

In the spring of 2018, Trump began imposing tariffs on certain foreign goods, such as steel, prompting other countries to impose retaliatory tariffs. In response, Trump offered affected farmers additional aid up to $12 billion through the CCC, bypassing the congressional budget allocation process. Critics such as Senator Rand Paul contended that the correct solution was not further subsidies but rather eliminating the tariffs, while economist Mark Zandi maintained the farmers would face bureaucratic hurdles for little benefit.

Congress passed a bipartisan farm bill in December 2018 worth $867 billion, which includes billions of dollars in subsidies for US farmers. The bill was signed into law by Trump on December 20, 2019. The final version of the bill was notable for rejecting bipartisan reforms that would have limited subsidies for large US agricultural interests, which are often not only able to face bureaucratic hurdles such as payment caps but find ways to bypass them. For example, according to the Associated Press in July 2019, Deline Farms Partnership, a soybean farm in Missouri, found a way to collect $2.8 million in aid payments in 2019 by registering multiple partnerships at the same address. The 2018 farm bill was given a one-year extension in 2023.

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