For decades the United States government has regulated, and supposedly, stabilized the prices of agricultural products for the benefit of American farmers and agricultural industry. Modern agricultural subsidy programs in the US began with the New Deal and the Agricultural Adjustment Act of 1933 (Sumner). There are many forms of support and regulation of the prices of agricultural products, both fiscally and physically. Most forms of support come in the form of government subsidies. The types of subsidies vary greatly from country to country and even by product. The most common types are: (1) direct payments to farmers and landlords; (2) price supports by government purchase; and (3) import barriers such as quotas or tariffs (Sumner). Other forms of regulation include land idling and livestock destruction (Sumner).
Only recently have the critics of farm price support and its negative ramifications upon the economy really been heard, and the policy has slowly gained more recognition in today’s political arenas (though it is still not a major voting point for most voters). While price support and regulation are beneficial to an economy in the short term, the long term ramifications of agricultural price support are detrimental to the national and international economies. Opponents of farm price support have a large number of reasons as to why the U.S. government would be remiss in continuing to provide agricultural support, but we will only be discussing the most significant of those reasons. The first point discussed is the decrease in international competition that price supports take away from the agricultural market. The second discussion point will be the impact of agricultural price supports on the US farmers. The final point will discuss how the absence of price support will positively affect the US and world economy.
Many believe that farm price supports are justified because of low income farm families and the volatile nature of the agricultural market, which is largely dependent upon factors out of farmer’s control (Thompson). However, most of the benefits of the US farm programs are proportional to the volume a farmer can produce or the amount of acreage they own (Thompson). For example, in 1989, 71 percent of farmers in the US sold less than $40,000 worth of products and “received only 16 percent of government price support payments”(Thompson). In contrast, 15 percent of US farmers sold over $100,000 of product, and received 62 percent of government payments (Thompson). We can then conclude that farm program benefits show little correlation with need.
Not only do farm price supports offer little benefit to farmers, they actually work against the interest of many farmers. Since over two-thirds of US farmers do not even receive federal price support they pay a heavy price in lost opportunities to export because of high trade barriers abroad (Griswold, Slivinski, and Preble 1-10). “Agricultural exporters face average foreign tariffs that are several times higher than the average tariffs of manufactured products” (Griswold, Slivinski, and Preble 1-10). This may be applied to products that are imported to the US, which once again reduces the diversification of the market and decrease competition in the market.
A reduction of farm price supports would also benefit American consumers as well, because it would reduce the average cost of products across the board. By blocking the markets from global competition government farm programs raise the cost of food. These costs are increased by the high tariffs and trading barriers imposed upon imported products (Griswold, Slivinski, and Preble 1-10). If farm price supports were removed, consumers would be able to enjoy a more comfortable cost of food.
Proponents of agricultural price supports argue that price support creates more stability in the market and offset farm subsidies of other countries. However, economists who have tried to substantiate these arguments have been unable to do so (Sumner). The main reason they have not been able to fully support these arguments is because government farm price supports eliminate a large amount of competition in the industry. Experience has shown that the agricultural markets can thrive in a “free and open market” (Griswold, Slivinski, and Preble 1-10). American farmers successfully produce many crops such as, celery, potatoes, almonds, and pears without guaranteed prices or protected markets (Griswold, Slivinski, and Preble 1-10). One of the more controversial aspects of farm price support is the impacts it has on international trade (Sumner). The high import barriers (quotas and high tariffs) greatly suppress international trade, and therefore reduce diversity and competition within the market.
But the US market is not the only market affected by farm price supports. Price supports have become a fairly high-profile issue for many “less-developed” nations participating in trade negotiations, because the price-depressing effects of farm subsidies disadvantage their farmers (Sumner). For example, in 2001 and 2002, many countries in West Africa that produce cotton received only thirty-five to forty-five cents per pound; while at the same time US cotton growers received seventy-five cents or more per pound from the subsidies plus market price (Sumner). Economists believe that the US exports of cotton would have been significantly lower and the world price of cotton about 10 to 15 percent higher if US subsidies had been unavailable at the time (Sumner). The reduction of agricultural price supports in the US and other rich countries would greatly help poorer countries, in that it would essentially even the playing-field which would ultimately stabilize product prices across the board. It would also begin the process of “relying more on trade rather than aid for economic growth” (Sumner).
While proponents of agricultural price supports claim many benefits to US farmers and the economy, there has been little to substantiate those claims. In actuality, the arguments opposing are a lot more substantive and far-reaching. The positive impacts on the US and world markets not only beneficial in the short-term, but work toward making a stronger, more stable economy that relies upon trade and less upon government intervention. Experience has shown that the US agricultural market can operate productively in an open and unprotected market. So one may conclude that the removal of some, if not all, farm price supports would benefit the US economy and farmers, as well as the world economy as a whole.
Daniel A. Sumner, "Agricultural Subsidy Programs." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 25 October 2011. .
Griswold, Daniel, Stephen Slivinski, and Christopher Preble. "Six reasons to kill farm subsidies and trade barriers." Reason.com. February 2006: 1-10. Web. 25 Oct. 2011. . Robert L. Thompson, "Agricultural Price Supports." The Concise Encyclopedia of Economics. 1993. Library of Economics and Liberty. 25 October 2011. .