Agricultural subsidies are government subsidies that are paid to agricultural businesses of any size to supplement their income. Anyone from single-family farmers to large agribusinesses are usually eligible to apply for these subsidies. Virtually every government in the developed world offers some type of agricultural subsidies to qualifying applicants.
In 2005, the U.S. government paid about $20 billion to farmers in subsidies that were labeled as farm income stabilization. That figure has remained relatively steady since. In 2017, when farmers earned about $400 billion from the sale of crops and products, an additional $23 billion was granted in agricultural subsidies.
The goal of these subsidies, from an American perspective, is to prevent farmers from falling into poverty. In 2017, however, just 2% of farming households earned an income that placed them into such a classification.
When agricultural subsidies were first introduced in the 1930s, they were called a “temporary solution” to deal with the emergencies of the Great Depression. Back then, 1 in 4 people lived or worked on a farm. Today, just 1% of the population is actively involved in farming in some way.
Here are the top pros and cons of agricultural subsidies to consider, especially as countries around the world begin to consider cuts to their subsidy programs.
List of the Top Pros of Agricultural Subsidies
1. Agricultural subsidies help to manage domestic food supplies.
Subsidies help to make agricultural products affordable for the average person. We often think of subsidies as payments that are made to farmers, though it can take on many forms. The government may pay a portion of the cost of certain agricultural products as well, making them more affordable for domestic households. If corn is $5 per bushel, but the government pays a 50% subsidy on it, then the final cost to the consumer is $2.50 per bushel at the counter.
2. They can help to provide emergency income support.
Farming can be a dangerous occupation. One bad weather season could devastate the crops a farmer is growing, leaving them with virtually no income for that season. Farmers have diversified their crops to prevent this from happening over the past generations, but emergencies, accidents, or natural disasters still happen. Offering subsidies to those who need them most can keep farmers farming instead of being driven out of business.
3. It helps to build domestic agricultural infrastructure.
Agricultural subsidies help in the purchase of farming assets as well. For large-scale farming, specific equipment is necessary to get the job done in a timely fashion. The cost of a new John Deere combine can be as high as $500,000. Add-on features could push the price above $600,000 for some farmers. The only way for small farmers to afford this equipment is through joint purchases with neighboring farms and subsidies to support the financing or final cost of the item.
4. Subsidies help to reduce agricultural imports.
In the United States, 44% of agricultural imports involve fruits, vegetables, wine, hops, and other specialty products. Because of the presence of agricultural subsidies on the four primary feed grains, domestic supplies help to fulfill a majority of the domestic demand for these items. That means the import market can focus on tropical items that may not grow on US croplands. The presence of subsidies helps to keep specific agricultural products affordable, allowing items grown in a country to stay in that country.
5. Farmers can take their land out of production to help it recover.
Some agricultural subsidies involve farmers growing nothing. Although this might seem counterintuitive, the purpose of such a subsidy is to help the soil recover from previous growing seasons. By offering a farmer a specific amount of income that year, they can support the needs of their household and farm while preparing for a future growing season. This practice helps to ensure that a consistent food chain is available for production within domestic croplands.
6. Agricultural subsidies help farmers remain competitive.
Because of lower labor costs in certain geographic locations, the price for food products can be highly variable. To counter this issue, subsidies may be used to offset higher domestic costs to allow local products to be competitive with import products. Timed subsidies can also be used to encourage product import for off-season demand, allowing domestic products to take a precedence for in-season demand.
This creates two distinct advantages: a domestic supply is assured, creating local economic benefits through indirect employment; and a year-round supply of agricultural products can be obtained.
7. It helps to reduce the effects of sudden loss within the market.
In 2012, orange juice futures reached a 34-year high because food safety authorities in the U.S. announced they would block imports of any fruit that contained carbendazim, which is a fungicide. It is used to combat mold that grows on oranges, particularly in Brazil. If agricultural subsidies were placed on domestic oranges, then pricing spikes in the futures market would have been minimal. Instead, the commodity rose by nearly 10% before returning to what would be considered a normal level.
List of the Top Cons of Agricultural Subsidies
1. There can be environmental consequences because of agricultural subsidies.
Subsidies must be structured in a way that supports the environment. Unfortunately, subsides tend to encourage farmers to grow specific crops or perform specific activities to gain a promised monetary environment. This can lessen agricultural best practices, such as crop rotation, which reduces the effectiveness of the croplands for future years. Subsidies may also encourage the specific use of certain fertilizers, pesticides, or herbicides, which may negatively impact local habitats.
2. They do not always apply to every farmer.
Many subsidies require an application to determine if a farmer or agribusiness qualifies for the program. From 1995-2016, a majority of the agricultural subsidies paid out went to large businesses instead of small farms. Three agencies received more than $100 million in agricultural subsidies between 1995-2006: Riceland Foods, Producers Rice Mill, and Farmers Rice Coop. Riceland Foods received over $554 million in subsidies. When big companies get a lot and small farms get little, if anything, then it transitions how the agricultural industry operates.
According to the conservative-leaning Heritage Foundation, just 15% of farmers in the United States receive 50% of the direct benefits of agricultural subsidies.
3. It can create a lack of food diversity.
In the United States, a majority of corn that is grown on croplands is destined for ethanol production instead of the food supply. Proponents argue that the corn grow is not a food-suitable corn in the first place. Critics argue that the croplands could be used to grow crops that would enter the food chain if subsidies for fuel-based corn were not in place. If a farmer needs a little help with their budget, the offer of a subsidy will influence what they choose to produce on their property. Over time, if subsidies remain static, then there is less diversity within the domestic food chain.
4. Agriculture subsidies require government involvement.
The inclusion of agricultural subsidies can provide emergency income and pricing support. It will also create interference within a free market economy. Subsidies directly affect the supply and price of targeted commodities. This manipulates the market, instead of allowing natural supply and demand principles to take place. In New Zealand, before 1984 reforms virtually eliminated all subsidies, 40% of the average sheep or beef farmer’s gross income was the result of provided government aid.
5. Subsidies tend to benefit the landowner, which may not be the farmer.
In the United States, 45% of the subsidized farm land that is being used today is rented to farmers. That means the agricultural subsidies are not going to the people who work the land. They are going to the people who own the land. Less than 10% of the farmland in the U.S. is owned by farmers and rented to other farmers. That means about 40% of the agricultural subsidies offered domestically in the U.S. get passed through to the landlords who are not farming.
6. It can become a form of corporate welfare.
Virtually all agricultural subsidies in the United States are awarded to commercial farms with a net worth of at least $2 million. The average income of these commercial farms, without subsidies, is already above $200,000 annually. That means American taxpayers are paying billions of dollars each year to support corporations while being forced to purchase agricultural products from those same businesses.
7. The expenses of agricultural subsidies are highly inflated.
Agricultural subsidies do not take into account other products and services that are available to farmers in the modern marketplace. Some subsidies are awarded without regard to the status of the crop. That means some farms can produce crops, sell them at market rates, then be given a subsidy on top of that. Crop insurance can be awarded, then a subsidy awarded on top of that. There are numerous ways that balance can be achieved in the agricultural market without using subsidies to do it.
8. Agricultural subsidies have a minimal effect on food pricing.
Two-thirds of food production in the United States is not subsidized. According to the Heritage Foundation, the food products covered by subsidies are balanced by conservation programs which raise priced. Agricultural subsidies do not account for processing, transportation, or marketing costs either. That means a complete elimination of subsidies, from a consumer perspective, would have little, or no, impact on actual food pricing.
9. Many nations do not require domestic protections for food supplies.
In the U.S., more food is grown than can be consumed. About 25% of the total production is exported each year. A lack of subsidies in certain agricultural areas has not prevented production or profit levels in unsubsidized crops. It would not likely drive production away from crops that are subsidized either.
10. It reduces comparative advantages.
There are large farm subsidies in Europe and Japan that provide cheap food supplies to U.S. consumers. The response has been to increase tariffs or enact trade barriers to prevent these cheap imports. That way, U.S. farmers can remain competitive. This action reduces a comparative advantage in the global market, however, because it reduces the number of farms that can focus on producing profitable crops in their own right. Subsidies might reduce pricing schemes in specific circumstances. For the most part, however, they tend to increase prices instead.
The top pros and cons of agricultural subsidies show us that this practice can have a positive effect on an economy when appropriately managed. Although subsidies are supported through taxpayer support, households can benefit from lower prices. Farmers get the chance to keep farming, even though a difficult season would wipe them out in a free market system.
On the other end of the spectrum, agricultural subsidies also manipulate the markets. That can dramatically alter how people access food products by limiting choices. For that reason, some nations are looking at the complete elimination of subsidies as a way to support a more open market.