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Land Commodities was established on the premise that the world is in the early stages of a secular bull market in agricultural commodities. The agricultural investment environment will be characterised by fundamentally constrained supply set against a backdrop of step changes in demand from a... More
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  • US Agricultural Subsidies Will Continue Rising Under The New Farm Bill 0 comments
    May 29, 2013 11:44 AM

    Notwithstanding a tokenistic proposed reduction (primarily due to minor cuts to the food stamp program, 'Supplemental Nutrition Assistance Program') the total combined value of subsidies and food aid under the new Farm Bill is set to remain the same at roughly US$100 billion annually.

    One of the more controversial subsidies, government support for crop insurance, is actually set to increase under the new bill. According to Fox News:

    The bill would cut about $2.4 billion annually from overall farm spending. But it would still expand federally subsidized crop insurance and raise some subsidies for rice and peanut farmers.

    The government spent an estimated $15.8 billion on the [subsidized insurance] program for the 2012 crop year after a drought destroyed many crops, up from $9.4 billion in 2011.

    The reality is that if past form is anything to go by talk of fiscal belt tightening is unlikely to deliver any real savings, with the Senate Farm Bill's current cost projection of just under $1 trillion over the next 10 years falling well short of the actual cost. According to the National Taxpayer's Union:

    The 2002 Farm Bill exceeded its post-passage cost by 42 percent, while the 2008 legislation is expected to run at least 50 percent over budget. Thus, relying on the Farm Bill to avoid the fiscal cliff is akin to tying a toy balloon around an anvil, hoping it will somehow fly.

    A producer support program, which according to the OECD has accounted for an average of 12.1% of US agricultural sector revenues over the last 10 years, clearly has a substantial impact on US agribusiness profits and has contributed to the recent run in farmland prices. By comparison, in Australia where there is no talk of a farmland price bubble, average Australian agricultural subsidies accounted for only 3.8% of sector revenues over the same period

    The irony is that subsidies benefit wealthy farmers to a greater extent than the smallholder farmers they are supposed to assist. With over three quarters of all direct subsidies to agriculture (totalling $277 billion since 1995) going to the largest 10% of farms, this will be a bitter pill to swallow for many cash strapped tax payers.

    What's more, US farm subsidies hurt producers in other countries, particularly those in the developing world, by flooding the global markets with agricultural commodities at artificially deflated prices.

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