Protecting the Environment Through the Ownership Society — Part I

Policy Reports | Energy and Natural Resources

No. 282
Wednesday, January 25, 2006
by H. Sterling Burnett, Ph.D.

Farm Subsidies: A Harvest of Environmental Sorrows

Figure I - USDA Subsidies%2C 1995-2004

"Subsidies give farmers incentives to overproduce."

Agriculture has driven America 's economic development since the country's founding, and has a profound impact on the ecology. Farmers cleared the forests, drained the swamps and plowed under the native sod in much of the eastern United States. Although some traditional agricultural practices were environmentally destructive and ecologically unsustainable, for millennia farmers have known to rotate crops to maintain yields, fallow land to prevent soil erosion and move livestock to sustain grazing.

However, when given incentives to do so, farmers and ranchers acting in their economic self-interest will undertake practices that may have negative environmental impacts — abroad as well as in America. Today, government policies create perverse incentives to overproduce crops, convert wetlands and wildlands to agriculture, and intensively use fertilizers and pesticides.

"Farm subsidies totaled $144 billion over the last decade."

Types of Subsidies and Their Impact. Many of these perverse incentives stem from a myriad of farm subsidy programs that involve direct payments for crop production, subsidized crop and disaster insurance, conservation programs, and so forth. According to the Environmental Working Group, U.S. Department of Agriculture (USDA) farm subsidies totaled more than $143.8 billion from 1995 to 2004. [See Figure I.] 11 Commodity subsidies alone accounted for almost $113.6 billion of the total. 12

Let's look at some of these programs in detail.

Subsidy Payments and Loans for Crop Production. The federal government subsidizes the production of specific crops through several programs. These include:

  • Fixed Direct Payments to producers that do not vary with market prices or current plantings, but rather are based on historical crop yields and acreage. In 2004, farmers received $5.3 billion in direct payments. 13
  • Counter-cyclical Payments to producers when the average price of the crop plus the direct payment is less than the targeted price. From 2002 to 2004, farmers received $3.6 billion in counter-cyclical payments. 14
  • Marketing Assistance Loans to producers using crops as collateral. If the value of the crop falls below the loan repayment cost, the farmer can simply forfeit the crop as payment. Marketing assistance loans totaled $9.1 billion in 2004. 15

"Farmers responded by increasing production."

Farmers respond to subsidies by increasing production. They use existing land more intensely, increase inputs of fertilizers and pesticides and/or put more acreage into production. The increased production can severely depress farm commodity prices; but farmers shielded from the effects of low prices by subsidies and tariffs maintain higher production levels.

Thus, for instance, in the five crop years beginning with 1996, worldwide production of grains and seeds exceeded demand by more than 87 million metric tons, according to Daryll E. Ray with the Agricultural Policy Analysis Center at the University of Tennessee-Knoxville. Much of this grain was stored, often at government expense. As a result, he explains, the amount of grain stored from previous years, or carryover stock, increased despite the fact that the prices of most crops dropped by nearly 40 percent! 16

In addition, while soybean prices are their lowest in 10 to 15 years, according to Environmental Media Services (EMS), the U.S. acreage devoted to soybean cultivation increased a million acres or more every year from 1997 to 2001. 17

Similarly, the use of land to produce sugar has expanded. While direct sugar subsidies are relatively small, only about $300 million since 2000, the industry enjoys substantial trade barriers against foreign competitors. The USDA requires sugar importers to pay a 16 percent tariff. 18 As a result, although there was no growth in demand for sugar between 1981 and 1991, U.S. sugarcane production surged by approximately 26 percent. 19 This led to an increase in the land devoted to sugar cane and sugar beet production. The acreage devoted to sugar production in Florida , for example, has grown from 50,000 acres in 1960 to about 500,000 acres today. 20

"The federal government insures farmers against low crop prices."

Subsidized Crop and Disaster Insurance. The federal government also subsidizes crop insurance and disaster insurance. The Federal Crop Insurance Corporation (FCIC) insures farmers against financial losses due to droughts, floods, hail or other natural disasters and against the risk of crop price fluctuations. The FCIC pays private insurers to administer the program, including paying a portion of the premium for the crops insured.

  • In 2003, the FCIC insured over $40 billion worth of crops grown on more than 200 million acres of farmland. 21
  • In 2004, crop insurance premiums totaled more than $4 billion, of which the government paid almost 60 percent or $2.5 billion. 22

Despite the availability of crop insurance, not all crops are covered and farmers often do not carry enough insurance to cover their entire potential losses. In addition, more than half of all U.S. farms are livestock operations, but the government has only recently begun to offer pilot programs for livestock insurance (current enrollment is small). As a result, and because Congress has been loath to leave the uninsured in the lurch, Congress has passed four ad hoc disaster assistance measures since 2000, covering six crop years and paying out more than $10 billion in addition to losses covered by FCIC. 23

Irrigation Subsidies. In some parts of the United States , the government sells water "wholesale" from its extensive system of reservoirs to farmers. The water is delivered via pipelines and aqueducts constructed and operated with federal subsidies through the U.S. Department of the Interior's Bureau of Reclamation (BOR). From 1902 through 1994, BOR constructed 133 irrigation projects, costing $21.8 billion. 24

Federal water authorities sell water for far less than it costs — sometimes for as little as 10 percent of its full cost. Farmers have little incentive to conserve water because they are often charged a flat rate based on the amount of acreage served rather than the amount of water delivered. For example, in 2001, many California farmers were still paying the government $2 to $20 per acre-foot for irrigation water, 25 whereas the national average cost was $32 per acre for groundwater and $41 per acre for off-farm surface water. 26 From 1902 to 1986, irrigation subsidies totaled around $70 billion. 27

Paying Farmers Not to Produce. While some federal subsidies have encouraged overproduction, federal land conservation programs simultaneously attempt to reduce overproduction. Indeed, the USDA oversees at least 17 conservation provisions. Aside from encouraging less production in order to maintain commodity crop prices and prevent supply gluts, a main objective of these programs is to address the environmental impact of farming and ranching. These include soil erosion, conversion of wetlands and other wildlife habitats, and water pollution.

"Farmers are also paid not to plant crops."

The Conservation Reserve Program (CRP), for instance, provides financial incentives to farmers to remove land from production. This voluntary program involves 10- and 15-year contracts under which farmers receive rental payments and cost-share assistance in exchange for idling eligible cropland and planting long-term, resource-conserving covers on their CRP enrolled acreage. From 1986 to 2004, the federal government paid more than $28 billion to farmers to idle land. 28 In 2004 alone, more than 34.7 million acres were enrolled in the CRP and cost more than $1.8 billion that year. 29

The Wetlands Reserve Program (WRP) was established in the 1990 Farm Bill to encourage farmers to stop cultivating and instead restore some wetlands to their natural state. As of 2004, 8,396 projects, totaling more than 1.6 million acres were enrolled in the WRP, at a cost of approximately $1,470 per acre. 30 In 2005 alone, the federal government allocated $239,723,633 to the states for the WRP. 31

While these programs have removed some acreage from agricultural production, there is evidence that many farmers put previously undeveloped lands into production to replace acreage set aside under the CRP and the WRP. In fact, a University of Minnesota geographer studying the effects of CRP on the Great Plains discovered that although regional farmers received payments to remove 17 million acres from production, total cultivated land fell by only 2 million acres. He concluded that "for every eroding acre a farmer idles, another farmer — or sometimes the same one — simply plows up nearly as much additional erosion-prone land." 32

Further evidence that federal programs to limit farmland usage have been ineffective comes from the USDA, which found that despite idling 36 million acres of farmland, the $28 billion CRP has not abated crop production. 33

Environmental Costs. These subsidy programs entail environmental costs by encouraging actions that harm the environment.

Pesticide and Fertilizer Runoff. Subsidies not only lead to the destruction of habitats as wildlands are converted to agriculture, but also encourage greater use of pesticides and fertilizers, which run off into lakes, rivers and streams.

In 1999, the U.S. Geological Survey reported that more than 90 percent of water and fish sampled from streams and about 50 percent of all sampled wells contained one or more pesticides. 34 In 1999, the EPA estimated that physicians diagnose 10,000 to 20,000 pesticide-related illnesses and injuries every year on farms nationwide. 35 And in 2002, according to the Heinz Center , an environmental research institute, at least 83 percent of the streams sampled in farm areas contain at least one pesticide at concentrations exceeding federal guidelines for protecting wildlife. 36

"Farm subsidies encourage intensive fertilizer and pesticide use."

High concentrations of chemicals found in fertilizers, such as phosphorus and nitrogen, arguably affect wildlife and ecosystems. Nitrogen and phosphorous fertilizers have been cited as contributing factors in destructive algal blooms in lakes, estuaries and oceans. The process, also known as eutrophication, occurs when algae, boosted by excess nutrients, grows excessively, lowering the oxygen content in water and creating dead zones where few organisms can survive. According to scientists, fertilizer runoff from the Mississippi River contributes to the 7,000-square-mile dead zone that appears every summer in the Gulf of Mexico off the coasts of Louisiana and Texas . 37 And researchers at the Heinz Center found that some 10 percent of tested streams and 20 percent of groundwater wells in rural areas exceed federal drinking water standards for nitrate. 38

Eliminating farm subsidies would greatly reduce this impact. For example: 39

  • Cutting agricultural subsidies in half would result in a 17 percent reduction in pesticide use and a 14 percent decrease in fertilizer use, according to estimates by Jonathan Tolman of the Competitive Enterprise Institute based on data from six farming states.
  • Removing all subsidies would result in a 35 percent reduction in total chemical use, including insecticides and herbicides, per acre and a 29 percent reduction in fertilizer use per acre, says Tolman.

Environmental damage from agriculture often means added costs for taxpayers. For instance, contaminated waterways in the Everglades, largely attributed to fertilizer use stemming from sugar farming, led to a massive restoration effort that will cost taxpayers an estimated $7.8 billion over 30 years.

Wetlands Lost. As previously discussed, subsidies encourage farmers to cultivate as many acres as possible, often at the expense of wetlands. From 1986 to 1997, the conterminous United States experienced a net loss of 644,000 acres of wetlands, according to a report by the U.S. Fish and Wildlife Service (USFWS). 40 While wetland losses have slowed in recent years and there are other causes of wetland depletion, the draining of wetlands for agricultural use continues to be the leading cause of wetland loss.

According to the U.S. Department of the Interior and the USFWS, wetland conversion for agricultural use is responsible for 87 percent of all wetland losses from the 1950s to the 1970s, 54 percent of wetland loss from the 1970s through the 1980s, and 49 percent of wetlands lost from 1986 to 1997. 41

"Water use is subsidized."

Damage to Rivers and Streams. Subsidized irrigation has had dramatic effects on California 's coastal environment. California 's Trinity River has experienced a 60 percent to 80 percent decline in fish populations because over half of its water is diverted for agricultural irrigation. The construction of the Friant Dam has dried out 40 miles of the San Joaquin River , which once had a productive salmon fishery. The San Francisco Bay-Delta has also suffered from excessive water diversion for agriculture in California . The populations of many species in the San Francisco Bay-Delta ecosystem have reached record low numbers — including the endangered Delta smelt, young striped bass, threadfin shad and copepods. 42 The CALFED Bay-Delta Program has spent almost $3 billion since 1995 to restore the ecological health of the Bay and Delta, to improve water supply reliability and water quality and to stabilize the levee system. 43

Cost to Consumers . Government subsidies for agricultural production also raise retail prices. Sugar is a prominent example. Sugar subsidies include price supports to producers and import-tariff quotas to limit the importation of foreign sugar. U.S. consumers pay up to three times the price of sugar sold on the world market. As of October 2002, Americans paid 22 cents a pound for sugar when the world price was 7 cents. 44 The GAO estimates that every year consumers spend $2 billion more on sugary-foods than they would have without government intervention in the sugar industry. 45

Industries using sugar are also affected. Over the last 35 years, U.S. candy manufacturers have moved to Canada , Mexico and elsewhere.

  • Since 1970, sugar industry employment in Chicago — America 's "candy capital" — has nearly been cut in half. 46
  • In 2003, Brach's announced the closure of one of its Chicago plants, laying off some 1,000 workers; 47 that same year, Kraft Foods Inc. moved its Life Savers plant from Michigan to Canada , costing another 600 jobs. 48

"Subsidies raise food prices."

Consumers also pay dearly for dairy subsidies. For example, the USDA's Economic Research Service estimates that this subsidy program increases the cost of fluid milk by 14 percent — equaling $2.7 billion paid in higher prices every year. 49 Jerry Kozak, CEO of the National Milk Producers Federation, says current milk policy raises milk prices as much as 20 cents per gallon. 50

Subsidies have an especially pernicious effect on the poor, who spend a relatively greater proportion of their income on food.

Effects on Family Farmers. Ostensibly, farm subsidies are meant to help the family farm, but in practice, they are funneled to the wealthiest and largest producers. For example:

  • The top 10 percent of recipients received 72 percent of all farm subsidies — most of these producers make more than $250,000 annually.
  • By contrast, smaller farms received little help — the bottom 80 percent of farmers received only $64 a month.

The federal government admits that agricultural programs often lack sufficient oversight to prevent fraud and abuse. For instance, the Government Accountability Office (GAO) determined that 30 percent of the recipients it sampled did not qualify for subsidies they received. 51

"Farmers in developing countries can't compete with subsidized exports."

Effect of U.S. Agriculture Subsidies on Developing Countries. Agricultural trade barriers in the form of import tariffs and quotas on imports are a form of subsidy because they artificially raise domestic prices. Subsidies and trade barriers also affect developing nations. Intensive production in developed countries has led to falling world prices for agricultural commodities. Farmers in developing countries are particularly devastated and are often driven out of their local markets, unable to compete with the cheaper, subsidized goods. According to the Global Policy Forum, the value of African food exports would double if the United States and Europe removed farm subsidies. 52

Using the most recently available USDA and Organization for Economic Cooperation and Development (OECD) data, the Institute for Agriculture and Trade Policy calculated the price of U.S. agriculture exports in 2003, compared to average costs for their production. 53 The Institute found that:

  • Soybean and corn export prices are 10 percent below the cost of production.
  • Rice is exported at an average price 26 percent below cost.
  • Wheat is exported at a price 28 percent below cost.
  • Cotton is exported at a price 47 percent below cost.

Developing countries have trouble coping with the effect of farm subsidies. For many African nations, for instance, U.S. subsidies are many times greater than their national income. 54

Even though developing nations have a comparative advantage in many agricultural products, American subsidies depress these industries. According to the World Bank, if the United States ended its cotton subsidies, West and Central African farmers would gain $250 million a year in revenue. 55 In addition, removing U.S. sugar price supports and quotas would increase world prices 17 percent, boosting developing nations' export revenue by $1.5 billion annually, 56 but causing "negligible increases in U.S. prices for corn, wheat and soybeans." 57

Of course, removing farm subsidies and liberalizing trade would not just benefit developing nations — helping our trade partners helps America too. The International Monetary Fund (IMF) estimates that by eliminating all of these programs, rich countries would raise global welfare $100 billion — 92 percent of the benefit of which they would receive. 58

"The Freedom to Farm Act capped subsidies — temporarily."

Reforming Farm Programs . In 1996, Congress undertook an ultimately failed attempt to wean (some) farmers off of government assistance by passing the Freedom to Farm Act. Under the Act, federal crop price support payments were temporarily capped and federal authority to withhold land from production ended. Farmers planting select subsidized crops received fixed but declining payments for their crops, regardless of the amount produced, over the course of seven years.

Unfortunately, Freedom to Farm did not cut subsidies for a number of crops or for dairy products. In addition, before the ink on the bill was barely dry, Congress approved supplemental farm payments to make up for low farm prices. In 1998, demand for U.S. farm exports dropped rapidly and Congress responded by passing several bailout laws to temporarily boost farm subsidies; the same ones the 1996 act tried to phase out. And, in typical Washington fashion, Congress and the administration left the hard choices to future legislators since, absent congressional action — which did not occur — the old farm policies, including subsidy payments and land set-asides — reemerged in 2002 when the program lapsed.

The most recent farm bill, the Farm Security and Rural Investment Act of 2002, was expected to cost taxpayers $180 billion over 10 years. 59 So far, according to the Office of Management and Budget (OMB), the 2002 Farm Bill has provided $176 billion in farm-related assistance, which is a 74 percent increase over what the previous Farm Bill would have provided in the absence of any additional emergency assistance. 60

Bringing Ownership to the Farm. Under the present system, agricultural producers bear only a portion of the economic and environmental costs of their decisions. As detailed above, subsidies encourage the overuse of water, pesticides and fertilizer, and the conversion of wetlands to crop production. Yet it is the public that suffers from higher food prices, fouled water, and fewer wetlands and wildlands. A different policy could benefit both farmers and the public. If farmers bore the full costs of their choices with regard to the amount of acreage farmed, the crops planted and the intensity of chemical and water use, they would likely reduce their use agricultural inputs, and some might even go into other lines of work where incomes are higher. Higher crop prices and increased agricultural trade would likely result. Bringing the ownership society concept to farm policy could reduce environmental harms, the economic misallocation of resources and improve the fortunes of the poorest of the poor in developing countries. The reasons for such a change are obvious; the question is how to get from here to there.

Freedom to Farm was a good starting point, but Congress and the administration need to go farther to bring the full individual and social benefits of ownership to agricultural policy — and this time they need to stick to their guns with no halfway measures. They need to implement comprehensive reform with no crops or areas of policy left out of the mix.

"Subsidies should be phased out."

Freedom to Farm II. In order to ease the transition from the current state of political dependency in the agricultural community, any reform plan would have to be undertaken over a period of time. The more comprehensive the reform, arguably, the longer the time period — keeping in mind that the longer the phase-out period for market distorting protectionist measures, the longer the problematic results fostered by current farm programs will remain.

Over perhaps a 10-year period, an ownership-focused agricultural policy could simultaneously: end all direct and indirect agricultural payments, end subsidized water delivery, remove tariffs and end federal mandates or limits on the amount of acreage that can be used and types and amount of crops that can be grown. Under this proposal, each farmer currently receiving crop payments would receive a flat but declining grant of money each year, with the initial payment equaling the amount of subsidy received on average over the previous five years. The subsidy payment would decline 10 percent each year. Over the same 10-year period, water prices would be increased and import tariffs and export subsidies reduced so that at the end of the 10 years, U.S. borders would be completely open to foreign agricultural products and the price paid for water would equal the market rate — farmers would be competing on an equal basis with industrial and residential water users.

Fixed but declining payments may result in higher payments in some years — those with higher than average crop prices — than the producer would have received under the current system. It also provides a certainty of payment which would allow farmers to plan financially — they will know in advance for 10 years how much they can expect to receive from the federal government. In order to garner political buy-in from the agricultural community, the subsidies should be paid regardless of whether those receiving payments continue to produce the crops for which the subsidies are being paid, or switch to other crops with higher market prices or plant crops at all. Some producers may choose to plant nothing at all, which may offend some who, rightly, object to paying something for nothing — an agricultural windfall, so to speak. However, farmers are likely to plant nothing only if they reasonably expected crop prices in a particular year to fall below their cost of production — otherwise, they can make a profit on the crops and take the federal payment. If a number of farmers expect their costs to be higher than their revenues in a particular year and decide not to plant, the lower production should increase the prices received for those who deliver products to the market. In any case, the environment would benefit from the land being left fallow, and taxpayers should be no worse since, in such years, they would likely have paid more in subsidies. And in the long run, the benefits to consumers, the environment and the federal budget from ending farm subsidies would far exceed any short-term windfall gain to agricultural producers.

Overtime, this policy should encourage the implementation of more efficient, less wasteful irrigation systems on farms and a more focused application of pesticides and fertilizers. At the same time, it should reduce the amount of acres devoted to farming since, as prices decline, less efficient farmers will devote their resources to other pursuits.

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