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Study Says Farm Subsidies Distort Planting Decisions

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In my last column, I provided a summary of the Heritage Foundation’s report on how to change the upcoming farm bill. This week I am addressing Heritage’s view on subsidies. It claims “Government intervention creates numerous problems and makes the status quo of agricultural subsidies an untenable situation. Subsidies distort planting decisions of farmers so that instead of responding to the market, they make decisions based on the incentives provided by the subsidies.” 

Heritage goes on to claim that agricultural subsidies lead to “moral hazard” because risk is shifted to taxpayers and not farmers. Heritage claims the Federal crop insurance program costs approximately $15 billion a year which comes from the taxpayer. Further, it claims “…only 25% of agricultural producers received payments…”. Furthermore it claims from 2005-2014 corn, cotton, wheat, rice, and soybeans received approximately 90% of farm payments.

Two other charges
Heritage claims from 1995-2012 only 10% of farmers received 77% of the commodity payments. The second charge is only 20% of the farmers received 73% of crop insurance subsidies. Heritage claims “Crop insurance has been a failure.” It also asserts “The costs of crop insurance programs are about six times greater than the disaster payment program adjusted for inflation.”

Heritage says USDA and Congress should not help farmers manage risk. It believes faulty assumptions are used by Congress and USDA and they are “Agricultural producers do not have the financial means to manage agricultural risk; agricultural risk cannot be effectively managed and requires government intervention.” 

Heritage then sets forth a number of data about the sizes of farms and farm sales. These numbers I included in last week’s blog. The piece of data attracting my attention was that half of all farm sales are less than $10,000 and that number represents 1% of all sales.
Heritage sets forth several reasons why farm subsidies need to be eliminated. It claims for the last 10 years between 2005/2014 median farm household income was 35% to 19% greater than all other U.S. households. Heritage claims in 2013 the net worth of farm households in the United States was a whopping $801,980 and the average U.S. household net worth was $81,200. With these numbers Heritage makes the point government subsidies are not needed for farm households.

Heritage claims in 2011, 65% of all farms received no payments; 75% of all farms received no commodity payments and 85% of all farms participated in no crop insurance program.

The argument against subsidies
Then, the stunner number Heritage uses to argue against farm subsidies is that from 2005-2014 “…the average annual percentage of income for farm households that came from off-farm income (unrelated to farming or subsidies) was 84% of total income.” Heritage is making the point that risk management in farming is not a big deal. In fact, Heritage claims that most farms are hobby farms.

As stated earlier Heritage says most farms – approximately 51% – have sales less than $10,000 a year. 

Finally the Heritage report claims farmers are well equipped to handle the loss of a crop. It believes that family farms have an average 3-4 commodities in production and that most farmers hedge their market risk if they are totally dependent on farming.

The argument agriculture will face in Congress over the next year and a half from Heritage is that farmers can handle significant risk and that “Farmers are more than capable of managing risk, and while the risks they face can often be significant, not unlike many other businesses, it is by no means a justification for government intervention.”

Heritage will argue that the status quo is untenable and that we in agriculture are presenting a “moral hazard” to the American taxpayer and to the country.

(This column first ran in Farm Futures on May 26, 2017)
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