- Agricultural subsidies are a fiercely argued topic, especially when the farm bill is in the news.
- For the vast majority of U.S. farmers who grow corn, soybeans, and wheat, farm subsidies provide little to no income assistance.
- The Organization for Economic Co-operation and Development (OECD) estimated in 2013 that farm subsidies make up 7.1% of income for American farmers, this in contrast to the EU 19%, Russia.
- For an industry that is susceptible to many different and unpredictable variables, the need for affordable insurance is important.
- The average age of a farmer has risen to 58.3 years old with a third of farmers being older than 65.
Agricultural subsidies are a fiercely argued topic, especially when the farm bill is in the news. Though their overall cost is greatly outweighed by other parts of the farm bill, specifically nutrition assistance programs, their supposed lack of impact on the majority of this country provides an atmosphere for undue criticism.
Domestically, farm subsidies face criticism because they are perceived as too expensive and are too generous to farmers. This may be true for some farmers who produce specialty crops, but for the vast majority of U.S. farmers who grow corn, soybeans, and wheat, the subsidies provide little to no income assistance.
Their reception on the global market is similarly as cold because the amount of money poured into the American agricultural industry. Other countries complain the subsidies artificially suppress U.S. corn prices making them more attractive on the global market. Though the overall amount of subsidies is arguably high, the amount of subsidies as a percentage of gross farm receipts is significantly lower than Asian and European countries. The Organization for Economic Co-operation and Development (OECD) estimated in 2013 that farm subsidies make up 7.1% of income for American farmers, this in contrast to the EU 19%, Russia 13.5%, and China 16.8%.
Country Subsidy Estimates as Percentage of Gross Farm Receipts
OECD - Total
Source: OECD Agriculture Statistics
After the passage of the Agricultural Act of 2014, farm subsidies made their most dramatic change in nearly 20 years. The new farm bill shifted away from direct payments, which were removed after inception in 1996, to a more crop insurance focused model. The removal of direct payments was in effort to cut down on the cost of the bill, but also to shift more of the burden of risk to farmers for their farming practices and planting decisions.
Implemented in the Agricultural Adjustment Act of 1938, crop insurance has been a tool for the federal government to protect our nation's farmers from catastrophic loss and lessen their burden of risk. For a reduced premium, farmers are able to purchase catastrophic, yield, and/or revenue protection from private insurers. The government in turn provides the private insurers with reinsurance for those products. In the event that an insurance provider pays out more in crop insurance claims than they collect in premiums for the year, the government will pay the insurance company for the loss.
The overall cost of the federal crop insurance program was calculated by the National Crop Insurance Service as two cents per meal eaten by an American. The cost is a minimal tradeoff for the assurance that there will be a consistent and plentiful supply of food.
For an industry that is susceptible to many different and unpredictable variables, the need for affordable insurance is important. The far-reaching impact the U.S. agriculture industry has on both the domestic and global population makes that need even more critical. By removing some of the risk from farming, the government ensures participation in a vital industry to our nation and the world.
Subsidized Farm Lending
The USDA Farm Service Agency (FSA) provides preferred lending to farmers who qualify. There are two FSA lending programs that provide farmers lending assistance. The first, is the guaranteed lending program; it provides new farmers with access to credit which will help them overcome the high entry barriers of the farming industry.
This is important because as Tom Vilsack, Secretary of Agriculture, pointed out, since 2007 the number of farmers in the U.S. has fallen 4%. He also has pointed out that the average age of a farmer has risen to 58.3 years old with a third of farmers being older than 65. By providing new young farmers with assistance, the government is ensuring there will be farmers to replace the rapidly aging workforce.
The second FSA lending product is the direct lending program; it provides small levels of assistance to support current farming operations in the event of natural disaster or financial hardship. The majority of the loans are capped at $300,000. Farmers may tap into this resource, but the lending is highly regulated, requiring strict documentation of what the loan will be used for as well as being subject to onsite review and observation by local FSA agents. By providing more safety nets for the agricultural industry, the government is providing support to a very important piece of America.
The most important reason for subsidized lending is to ensure the flow of new farmers into the industry and to ensure the continuity of the farmers currently engaged in farming. As fewer young people are remaining in their rural community to take over the family farm, the need for farmers is at an all-time high, and as the world's population grows, the role U.S. farmers will play in feeding the world becomes larger.
The importance of the U.S. agricultural industry on the economy and populous of not only America, but the world, cannot be overstated. Ensuring a continuous and plentiful source of food is one of the greatest struggles our world faces. The pressure on the U.S. farmer will grow as our global population increases and the need to ensure that there will be a workforce to meet the demand will become that much more important.
As the largest producer and exporter of grain in the world, the U.S. agriculture industry is not only vital to America's growth and success, but to the prosperity of many countries around the world. Farm subsidies are the key risk management tool to ensure U.S. farmers are able to feed the world.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.