The classic depiction of the American farm — an aging red barn on a plot of land tilled
by a struggling mom and pop — is fiction.
It’s time for Congress to rethink farm subsidies.
For decades farm interest groups on Capitol
Hill have argued that farmers are struggling and need substantial government assistance.
The first pro-subsidy argument is that farmers are facing a financial crisis.
In 2017 the House Agriculture Committee Chairman pointed out that farmers have seen a 45% drop
in their incomes between 2014 and 2016, the largest drop since the Great Depression.
This statement is in fact true, however farm income may not be the correct measure to use.
Farm income measures the value produced by a farm in a given year, regardless of whether
the products are sold or not.
This is very important for annual GDP calculations, but farmers will often store their products
and sell them when they can get a better price.
To understand how farmers are doing financially, it is better to look at farm net cash income which
takes into account when farmers actually sell their products.
Both net farm income and net cash income had their highest values since the 1970s around
2013 due to almost record commodity prices.
So, a steep decline is not necessarily a sign of impending financial ruin.
In fact, Net Cash income in 2016, 2017, and 2018 is right at the 1960-2018 inflation adjusted
average.
The farm sector is doing just as well as would be expected in normal economic conditions.
The second argument is that farms face business risks associated with weather and diseases
that other businesses do not face.
This is also true, but nothing new for agriculture.
Moreover, subsidy programs that farmers want like crop insurance incentivize farmers to
take on more risk by not diversifying their operations, only planting crops, and planting
those crops on lower quality land.
From a business perspective, since the 1960s farm assets have grown while farm debt has
stayed relatively flat.
Looking at the ratio of debt over assets, it is clear that the farm sector has become
steadily less leveraged since its peak in the 1980s.
A debt-to-asset ratio of around 13 percent actually implies farm businesses have much
less exposure to debt than small and medium sized business owners in other sectors of
the economy.
The third argument is that farmers are unable to manage fluctuations in their incomes without
government support and insurance subsidies.
However, families that own farms are actually quite good at smoothing out their incomes
and managing production risk in agriculture.
Households that own farms do face substantial fluctuations in the incomes they get from
farming, but their total incomes from all sources, including farming, are much more
stable.
In fact, the average year-to-year percentage change in their farm incomes is eight times
the change in the total incomes for those families.
Most families that own farms get the vast majority of their income from other off-farm
sources.
Finally, it’s very unlikely that farmers will fall into poverty.
Since the mid-1990s, median farm household incomes have been above the median household
income for the entire country.
In 2018, median farm household incomes were around $15K higher than the typical US household.
Average farm household incomes have exceeded average US household incomes by over 35 percent
in recent years.
In conclusion, it is hard to make the argument that farmers are desperately in need of help
and facing a “crisis”.
When the evidence is considered in context, it is clear that farmers aren’t facing a
crisis, and are more than capable of managing risk on their own.
Moreover, many farm policies actually raise prices for consumers and encourage risky farming
practices.
Instead of spending money on wasteful farm subsidies, Congress should direct money to
programs that have a net social benefit. And do no harm.
To learn more about our take on agricultural policy, check out
the link to our new book, "Agricultural Policy in Disarray", in the description below.
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