How Farm Subsidies Affect the U.S. Economy

Farm subsidies are government financial benefits paid to the agriculture industry that help reduce the risk farmers endure from the weather, commodities brokers, and disruptions in demand. But they have evolved to become very complex. As a result, only large producers can take advantage of farm subsidies.

Out of all the crops that farmers grow, the government subsidizes only five of them. They are corn, soybeans, wheat, cotton, and rice.

The five states that have received the most farm subsidies between 1995 and 2020, are, in order, Iowa, Texas, Illinois, Nebraska, and Minnesota. These states have received 38.2% of the 240.5 billion distributed between 1995 and 2020. During this time period, the top 10 percent of commodity payment recipients were paid 78 percent of commodity payments.

There are also smaller subsidies for peanuts, sorghum, and mohair. Producers of meat, fruits, and vegetables can benefit only from crop insurance and disaster relief.

Summary of the US Farm Industry

In 2020, the combined agriculture and food industry made up 5% of the U.S. economy. It employed 19.7 million full-time and part-time workers, 10.3% of total U.S. employment. Farming itself contributed 0.6% of the gross domestic product and employed 1.4% of workers.

Corn is the nation’s biggest crop. More than 15.1 billion bushels were grown in 2021, the second-highest quantity on record. The corn belt is Indiana, Illinois, Iowa, Missouri, Nebraska, and Kansas. Farming and ag-related industries directly or indirectly employ one of every six Iowans.

There are 2.02 million U.S. farms, of which 98% are family owned. There is a competitive advantage in understanding local soil conditions and weather patterns. Families pass on this lore from generation to generation.

Large-scale family farms, defined as having an income of $1 million or more, accounted for just 3% of farms but 46% of the value of production. In fact, most U.S. vegetable and dairy sales come from these large farms. Most farms focus on one commodity. Almost one out of five were started in the past decade.

Pros of Fram Subsidies

America’s food supply must be protected from extreme weather like droughts, tornadoes, and hurricanes. The government has a role in ensuring food production during wars, recessions, and other economic crises. Food production is more important to the nation’s welfare than other business products.

Farms are susceptible to commodity price dips. Commodities traders determine the prices on an open exchange. They trade futures contracts that promise to buy or sell at an agreed-upon price on a specific date. Farmers can take their chances on what the price will be when it’s time to harvest. They can lock in a price with a futures contract. Either way, they are betting that their costs will be lower than their future revenue.

Crops and animals are vulnerable to pathogens, diseases, and weather. In 2012, droughts forced farmers to slaughter cattle that had become too expensive to feed. In 2015, egg prices skyrocketed 17.8% due to avian influenza. In 2018, hurricanes caused temporary price spikes as the production of pecans, chickens, and hogs were affected.

Farmers rely on loans. They borrow in the spring to plant seeds and pay the debt in the fall when they sell their harvest. This makes farming feel like a gamble. An emergency expense or several years of low prices can be catastrophic.

Farms can’t move. They can go out of business if a local processor cancels their contracts or goes bankrupt.

Cons of Farm Subsidies

U.S. farms are in one of the world’s most favorable geographic regions. It has rich soil, abundant rainfall, and access to rivers for irrigation when rainfall fails.

Today’s farms also have all the advantages of modern businesses. They have highly trained labor, computerized equipment, and cutting-edge chemical research in fertilizers and seeds.

Between 1995 and 2020, the top 10% of recipients received 78% of the $240.5 billion doled out, according to EWG. The top 1% received 26% of the payments. That averages out to $1.7 million per company.

Fifty people on the Forbes 400 list of the wealthiest Americans received farm subsidies. On the other hand, 62% of U.S. farms did not receive any subsidies.

U.S. farm subsidies block global trade. The Doha Round of trade talks and the Transatlantic Trade and Investment Partnership failed partly because of U.S. and European farm subsidies. Doha would have eliminated tariffs between every country in the World Trade Organization. The TTIP would have lowered trade barriers between the United States and the European Union.

History of Farm Subsidies

Agriculture has long attracted federal support. Most farm programs were set up during the Great Depression. Below is an abridged history of the programs and their purposes.

• 1862: The Homestead Act in 1862 granted land in the west to settlers willing to farm it. The Morrill Act of 1862 funded colleges of agriculture. The Federal Farm Loan Act made government loans available to farmers. It made sure there was enough food during World War I. It became the Farm Credit System.
• 1929: The Agricultural Marketing Act of 1929 created the Federal Farm Board. It tried to keep crop prices from crashing. It asked farmers to limit crops, which didn’t work. It bought and stockpiled crops to limit supplies. It became the Farm Credit Administration in 1933.
• President Franklin D. Roosevelt included farm subsidies in the New Deal. They were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929.
• 1933: Congress signed the Agricultural Adjustment Act. It paid farmers to reduce crop output. It doubled crop prices by 1937. It was overturned by the Supreme Court in 1936 because it taxed processors but gave funds to farmers. The Emergency Farm Mortgage Act provided loans to save farms from foreclosure.
• 1934: The Soil Conservation and Domestic Allotment Act paid farmers to plant soil-building crops, like beans and grasses, to counteract the drought. The Rural Electrification Act provided loans to farming cooperatives to generate electricity for their rural areas.
• 1935: The Resettlement Administration trained farmers and adjusted farm debt payments. It bought 10 million acres of submarginal farmland and paid farmers to convert it to pasture, preserves, or parks. It also resettled farmers onto better land and taught them modern conservation and farming techniques.
• 1937: The Farm Tenancy Act created the Farmers’ Home Corporation to provide loans for tenant farmers to buy their farms. The Farm Security Administration replaced the Resettlement Administration to provide loans and training for farmers.
• 1938: The New Agricultural Adjustment Act remedied the 1933 AAA. This price support system lasted until the 1990s. The federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure the supply did not exceed demand. The government subsidized farmers to keep croplands idle in order to prevent overproduction. It also bought excess crops. It then either stored them or gave them away to feed low-income people throughout the world.

How Farm Subsidies Affect the Economy

The federal crop insurance program may be encouraging farmers to plant crops that aren’t drought-resistant. The insurance program encourages them to plant the same crops year after year, regardless of crop yield. As a result, it keeps them from switching to drought-resistant crops. This worsens drought in the Midwest. Between 2006 and 2015, the Midwest was in an extended drought.

The drought is forcing farmers to drain the groundwater from the Ogallala Aquifer eight times faster than rain is putting it back. The aquifer stretches from South Dakota to Texas. It supplies 30% of the nation’s irrigation water. At the current rate of use, it will dry up within this century. Scientists say it would take 6,000 years for rain to refill the aquifer.

Corn for cattle feed is the most significant culprit, fattening 40% of the nation’s grain-fed beef. Other subsidies encourage farmers to grow corn for ethanol biofuel. The number of ethanol production facilities in the High Plains region has doubled. That drains an additional 120 billion gallons a year from the aquifer. 

Farm subsidies bills include food stamp funding. That ensures urban members of Congress will support the farm subsidy bills.

How Farm Subsidies Affect You

Grains are the most heavily subsidized crop, making them cheaper than vegetables and fruits. As a result, grains make up one-fourth of the average American diet. Oil made from corn, soybeans, and canola contributed another quarter. Fruits and vegetables are less than 10%.

More than 6% of farm subsidies go toward four “junk food” components: corn syrup, high-fructose corn syrup, corn starch, and soy oils. It seems the federal government subsidizes food that contributes to America’s obesity problem. 

Most developed countries have farm subsidies. They give farmers in those countries an unfair trade advantage. The World Trade Organization limits the number of subsidized grains that countries can add to global stockpiles to reduce this edge. But this also reduces the amount of food available in a shortage. That increases food price volatility.