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Farm Subsidies & Federal Crop Insurance

Eamon Molloy


With the Agricultural Adjustment Act of 1933, Franklin Roosevelt signed into law what would become one of the largest and longest running safety net programs in America. The program began as a way to temporarily support struggling farmers and boost the economy during the Great Depression, but its central tenets - namely, paying farmers to not produce and guaranteed purchase by the government - were codified into law as part of the every 5 years Farm Bill in 1938[1].


In the years since, parts of the food system have circumvented the normal rules of supply and demand because they have been deemed too important to fail. The vast majority of farm subsidy dollars are directed towards just five crops: corn, soybeans, wheat, cotton, and rice[2]. When these so-called commodity crops are over-produced, the U.S. government steps in to purchase at a guaranteed price, and store the excess until it is needed. The program is designed to artificially limit supply and create a price floor so that farmers can continue production even in "lean" years. Essentially, the volatile swings inherent in an industry that is dependent on so many uncontrollable factors (i.e. weather, soil conditions, larger economic forces, etc.) are smoothed by the various programs in the subsidy system. Farmers are guaranteed an income, and consumers are guaranteed a product - stored product can be released and sold in times of  shortage.


But, the system that was designed to support family farmers hasn't worked as intended. Over the years, the major elements that make up the patchwork of the subsidy program have been adjusted and rearranged, but the problem remains that two-thirds of all subsidy payments are made to large-scale, wealthier-than-average producers of the five commodity crops. Small farmers, even those who do produce one or more of the commodity crops, are unlikely to reap the benefits. Fruits, vegetables, and meats are considered "specialty" products and do not qualify for the vast majority of subsidy programs. You would be hard-pressed to find a vendor at the Hillsdale Farmers' Market who is able to participate in federal subsidy programs outside of the crop insurance that they've bought into (and even that would be a stretch). The top 3% of farms receive 40% of all subsidy payments annually2.


Unfortunately, the Federal Crop Insurance Program hasn't proven to be much more equitable. Through this program, producers can purchase insurance policies that protect them in the event of a revenue loss due to crop loss or a drop in price[3]. Despite the fact that policies exist for over 100 crops, payments for producers of the commodity crops make up over two-thirds of all payouts3. Farmers pay just 40% of the premium (the other 60% is subsidized by taxpayers). In effect, the Federal Crop Insurance Program operates as a subsidy given that taxpayers foot the bill for over half of the premium, and are also responsible for a large portion of the payment to farmers in the event of revenue loss3. 


To be clear, we fully understand the importance of mitigating risk for farmers. We need producers to keep our country fed and our economy moving forward. There are so many uncontrollable factors in the farming industry that it makes perfect sense to provide a safety net for a sector that has such a large net impact on our society. A system in which 3% of farms receive 40% of payments doesn't make sense. Neither does a system in which five crops are kept (artificially) viable. Fruits and vegetables are widely regarded, even by the USDA, as the basis for a healthful diet. Yet these items are considered a specialty and their producers are given little, if any, financial support from the federal government.


So what is the impact of these policies on the cost of our food?


Truthfully, it's unclear. There is disagreement among economists, food scholars, and popular foodies over how much impact farm subsidies have on food prices. Many, Michael Pollan included, claim that these policies are directly responsible for the fact that unhealthier, processed foods are far cheaper than fresh fruits and vegetables. This argument does hold water, given that farm subsidies do encourage the production of commodity crops even when they're not truly "profitable". In contrast with the originally stated intent to control the supply and stabilize the market, decades of farm policy have led to a huge oversupply of the commodity crops[4]. Thus, these foods are incredibly cheap and wind up in all kinds of products at the grocery store.


But, others estimate that the impact is just a few cents on the dollar per calorie produced[5]. Tamar Haspel doesn't dispute the mechanism, but begs the question of scale when discussing the impact of subsidies on the cost of food. In an analysis based on the total cost to produce various food items, she argues that the value of subsidies for corn, soy, and wheat hovered around 10% of the crops' total value in 20165.


As with most things, the truth is likely somewhere in the middle. It is undeniable that commodity crops are much less costly to produce, and are therefore cheaper for consumers at the store. While subsidies surely have an impact, there are myriad other factors at play - the labor associated with production, yield per acre, cost of inputs during the growing cycle, transportation & refrigeration costs, and more. Keep that in mind because we'll explore some of these factors in next week's Grapevine.


Even if there is disagreement over the magnitude of the impact, there is widespread agreement that the current system is broken. Critics from a variety of backgrounds - including farmers, environmental advocates, nutritionists, policymakers, and economists - agree that too much taxpayer money is spent lining the pockets of wealthy farm operators[6]. This also means that too little is used to support the small and medium producers who bring us "specialty" crops.


There have been limits for the past 30 years on the amount of money operations could receive from subsidy payments. There are many loopholes that savvy producers have used to exceed the $125,000 limit each year, but in theory these limits do exist[7]. Whether or not they continue on after the 2018 Farm Bill is passed will be interesting to see. The version that passed the House would remove the cap and allow mega-farms to collect an unlimited amount of subsidy payments. It also seeks to eliminate funding for the education program that helps farmers to conduct risk assessments and reduce their own risk at the ground level7. At the same time, the Senate version provides hope: certain provisions seek to close existing loopholes and tighten eligibility requirements for subsidy and crop insurance payments.


The U.S. is far from creating policies that reduce the cost of fruits and vegetables for farmers and consumers, proposed changes to the federal subsidy and crop insurance programs do not include increasing payments for specialty crops, but reducing payments for wealthy commodity producers is a start.



[1] The Salt: https://www.npr.org/sections/thesalt/2011/09/26/140802243/the-farm-bill-from-charitable-start-to-prime-budget-target

[2] https://farm.ewg.org/subsidyprimer.php

[3] https://farm.ewg.org/crop_insurance_analysis.php

[4] https://michaelpollan.com/articles-archive/you-are-what-you-grow/

[5] https://www.washingtonpost.com/lifestyle/food/im-a-fan-of-michael-pollan-but-on-one-food-policy-argument-hes-wrong/2017/12/04/c71881ca-d6cd-11e7-b62d-d9345ced896d_story.html?utm_term=.9417904506c3

[6] https://www.washingtonpost.com/lifestyle/food/why-do-taxpayers-subsidize-rich-farmers/2018/03/15/50e89906-27b6-11e8-b79d-f3d931db7f68_story.html?noredirect=on&utm_term=.c65d951ecc26

[7] http://sustainableagriculture.net/blog/2018-farm-bill-commodities/