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The USDA distributes between $10 billion and $30 billion in cash subsidies to farmers and owners of farmland each year.¹ The particular amount depends on market prices for crops, the level of disaster payments, and other factors. More than 90 percent of agriculture subsidies go to farmers of five crops—wheat, corn, soybeans, rice, and cotton.² Roughly a million farmers and landowners receive subsidies, but the payments are heavily tilted toward the largest producers.

In addition to routine cash subsidies, the USDA provides subsidized crop insurance, marketing support, and other services for farm businesses. The USDA also performs extensive agricultural research and generates statistical data for the industry. These indirect subsidies and services cost taxpayers about $5 billion each year, putting total farm support at between $15 billion and $35 billion annually.

Agriculture has long attracted federal government support. The first subsidy program for agriculture was the Morrill Act of 1862, which established the land-grant colleges. That was followed by the Hatch Act of 1887, which funded agricultural research, and by the Smith-Lever Act of 1914, which funded agriculture education. Still, the subsidies remained small, and until the 1930s the USDA’s agriculture efforts were mainly focused on producing statistics, funding research, and responding to problems such as pest infestations.

A large array of farm subsidy programs was enacted during the 1930s, beginning with the Agriculture Adjustment Act of 1933. New Deal programs included commodity price supports and production controls, marketing orders to limit competition, import barriers, and crop insurance. The particular structures of farm programs have changed over time, but the central planning philosophies behind them have changed little in seven decades. Dozens of other industries have been deregulated and opened to domestic and global competition in recent decades. But agricultural policies remain stuck in the 1930s, despite the failures of those policies.

Between the 1940s and the 1980s, Congress occasionally considered farm reforms, usually when commodity prices were high, but then it reverted to subsidy increases when market conditions were less favorable.³ The Reagan administration proposed serious cuts to farm subsidies, but farm finances were in bad shape in the 1980s, which prompted Congress to increase farm support. Sometimes Congress has changed course when its policies have created obvious disasters, such as the massive crop stockpiles built up in 1960 as a result of overproduction in the 1950s.

Agriculture subsidies have never made economic sense, but since the 1930s farmers have resisted changes to subsidy programs, and they have generally held sway in Congress. While farmers are a smaller share of the population today than in the 1930s, the farm lobby is perhaps as strong as ever. One reason is that farm-state legislators have co-opted the support of urban legislators, who seek increased subsidies in agriculture bills for programs such as food stamps. Legislators interesting in rural environmental subsidies have also been co-opted as supporters of farm bills. Thus many legislators have an interest in increasing the USDA’s budget, but there are few opposing them on behalf of the taxpayer.

In 1996 Congress did enact some pro-market agriculture reforms under the “Freedom to Farm” law. The law allowed farmers greater flexibility in their planting decisions and moved toward greater reliance on market supply and demand. But the law did not cut farm subsidies, and Congress expanded subsidies in a series of large supplemental farm bills in the late 1990s. When the 1996 law was passed, subsidies were expected to cost $47 billion in total from 1996 to 2002, but subsidies ended up costing $121 billion.⁴ Republican farm policies have been a disaster from the taxpayers’ point of view.

That was reaffirmed in 2002 when Congress, with the support of the Bush administration, passed farm legislation that partly reversed the few reforms of 1996. The 2002 law increased projected subsidy payments by 74 percent over 10 years.⁵ It added new crops to the subsidy rolls and created a new price guarantee scheme called the “countercyclical” program. Congress is scheduled to reauthorize farm subsidy programs in 2007.

The extensive federal welfare system for farm businesses is costly to taxpayers and creates distortions in markets. Subsidies induce farmers to overproduce, which pushes down prices and creates demands for further subsidies. Subsidies inflate land prices in rural America. And the flow of subsidies and regulations from Washington hinders farmers from innovating, cutting costs, diversifying their land use, and taking the actions needed to prosper in a competitive global economy.

The distortions caused by federal farm policies have long been recognized. In 1932 a member of Congress noted that the Agriculture Department spent “hundreds of millions a year to stimulate the production of farm products by every method, from irrigating waste lands to loaning and even giving money to the farmers, and simultaneously advising them that there is no adequate market for their crops, and that they should restrict production.”⁶ The folly is the same seven decades later, except that the subsidies have increased from “hundreds of millions” to tens of billions of dollars.

1. Direct Payments. “Direct” payments are federal cash subsidies for producers of 10 crops: wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. The last three were added in the 2002 farm law. Direct payments are based on a historical measure of a farm’s acres used for production and are not related to current production or prices.

Established in 1996, direct payments were intended to be transitional, a way to wean farmers from old-fashioned price guarantee programs. Unfortunately, direct payments have not been phased down over time as planned. In most years, direct payments are the largest source of subsidies to farmers at more than $5 billion annually.

The fact that direct payments are decoupled from current production reduces economic distortions. However, it is creating a growing scandal because large subsidies are being paid to owners of land that is no longer used for farming. The Washington Post estimated that between 2000 and 2006 the USDA handed out $1.3 billion in direct payments to people who don’t farm.⁷ The newspaper points to thousands of acres of land formerly used for growing rice in Texas. The land is now used for nonfarming purposes, such as suburban housing, but the landowners continue to receive federal farm subsidies.

2. Marketing Loans. The marketing loan program is a price support program that has been a key part of the farm subsidy system since the New Deal. Originally just a short-term loan program, today it provides large subsidies by paying guaranteed minimum prices for crops. The marketing loan program encourages overproduction both by setting a price floor for crops and by reducing the price variability that would otherwise face producers in normal open markets.

The marketing loan program covers the same crops as the direct subsidy program—wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. But, in addition, the 2002 farm law expanded eligibility for marketing loans to producers of wool, mohair, honey, dry peas, lentils, and chickpeas. In recent years, payments under this program ranged from about $1 billion to $7 billion annually.

Under the program, farmers take “nonrecourse” loans from the USDA using their crops as collateral, which allows farmers to default on the loans without penalty.⁸ In the past, if market prices fell below target levels, farmers kept their loans and forfeited their low-value crop to the government. Taxpayers were stuck paying the loan costs and the costs of storing government crop stockpiles. But today, most marketing loan subsidies are in the form of “loan deficiency payments,” which allow farmers to bypass the loan process and simply receive a subsidy payment. Alternatively, farmers can receive “marketing loan gains,” under which farmers can repay their USDA loans at preferential rates.

Farmers don’t receive subsidies from the marketing loan program just when crop prices are low. They have become expert at gaming the system to maximize their subsidies every year. Farmers can lock in high government benefits when seasonal prices are low and wait until market prices are higher to sell their crops. The Washington Post reports that “growers reap benefits even in the good years,” noting that the program “has become so ingrained in farmland finances that farmers sometimes wish for market prices to drop so they can capture a larger subsidy.”⁹

3. Countercyclical Payments. While the 1996 farm law moved away from traditional price guarantee subsidies, the 2002 farm bill embraced them with the addition of the countercyclical program. This program covers the same commodities as the direct payments program—wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. In recent years, countercyclical payments have ranged from about $1 billion to $4 billion annually.

The countercyclical program provides larger subsidies when market prices are lower. It also stimulates excess farm production, as does the marketing loan program. However, countercyclical payments are tied to a measure of historical production, whereas marketing loan subsidies are tied to current production. For that reason, countercyclical payments are thought to be less distortionary than marketing loan payments.

4. Conservation Subsidies. USDA conservation programs dispense about $3 billion annually to the nation’s farmers. The largest conservation subsidy program is the Conservation Reserve Program, which was created in 1985 to idle millions of acres of farmland. Under CRP, farmers are paid on a per acre basis, not to grow crops, but to cultivate ground cover, such as grass or trees, on retired acres. About one-third of land idled under the CRP is owned by retired farmers, thus one does not even have to be a working farmer to get these subsidies.¹⁰

The USDA provides a range of other conservation subsidy programs, including the Conservation Security Program, which was added in 2002. These programs respond to the problem that farm subsidies cause overproduction on marginal farmland. But an easier and cheaper way to reduce overproduction would be to simply eliminate all farm subsidies.

5. Insurance. The Risk Management Agency runs the USDA’s farm insurance programs. Both “yield” and “revenue” insurance are available to farmers to protect against adverse weather, pests, and low market prices. The RMA describes its mission as helping farmers “manage their business risks through effective, market-based risk management solutions.”¹¹ The RMA has annual outlays of about $3.4 billion and employs about 550 people, and its activities are far from “market-based.”

Federal crop insurance policies are sold and serviced by 16 private insurance companies, which receive federal subsidies for their administrative costs and insurance risks. The firms operate like a cartel, earning excess profits from the high premiums they charge.¹² They get away with that because the government provides large subsidies for insurance premiums, such that farmers pay only about one-third the full cost of their policies. The cartel-like structure of the current system was made clear in 2005, when, under lobbying pressure from insurance companies, Congress derailed an attempt by a company to offer discount insurance policies to farmers.¹³

In 2007, USDA crop insurance programs were heavily criticized at a rare oversight hearing on an agriculture program by a non-agriculture committee of Congress. The chairman of the House Oversight and Government Reform Committee, Henry Waxman (D-CA), called USDA insurance “a textbook example of waste, fraud, and abuse in federal spending …over $8 billion in taxpayer funds have been squandered in excess payments to insurers and other middlemen.”¹⁴ Time will tell whether the agriculture committees in Congress will heed Waxman’s calls for reform.

6. Disaster Aid. Federal crop insurance is not available for all commodities. For products that are not covered by federal insurance, such as aquaculture, mushrooms, Christmas trees, ginseng, and turf grasses, the government pays for losses through the Noninsured Crop Disaster Assistance Program. This program was enacted in 1984 and expanded in 2000.

Whether or not farmers are covered by insurance, they can be sure that Congress will rush to pass an “emergency” relief bill after even the slightest adverse event. Congress frequently passes farm disaster bills, and these are substantial sources of subsidies for farmers. A Washington Post analysis found that “farmers often get paid twice by the government, once in subsidized insurance and then again in disaster assistance.”¹⁵

Over the decades, Congress has repeatedly expanded crop insurance programs to supposedly reduce farmers’ dependence on emergency bailouts. But both insurance subsidies and disaster aid keep growing. After just about any damage to any crop, Congress jumps in to declare a “disaster” and distribute millions of dollars to farmers, regardless of whether farmers are insured, and often regardless of whether farmers sustained substantial damage.¹⁶

7. Export Subsidies. The USDA operates a range of programs to aid farmers and food companies in their foreign sales. The Market Access Program hands out about $140 million annually to producers in support of activities such as advertising campaigns. Recipients include the Distilled Spirits Council, the Pet Food Institute, the Association of Brewers, the Popcorn Board, the Wine Institute, and Welch’s Food.¹⁷ Another program, the Foreign Market Development program, hands out $35 million annually to groups such as the American Peanut Council, the Cotton Council International, and the Mohair Council of America.¹⁸ The 2002 farm law substantially increased funding for export subsidy programs.

8. Agricultural Research and Statistics. Most American industries fund their own research and development programs. The agriculture industry is a notable exception. The USDA spends about $3 billion annually on agricultural research, statistical information services, and economic studies. The USDA carries out research in 108 different locations and provides subsidies to the 50 states for research and education.

1. Farm Subsidies Redistribute Wealth. Farm subsidies transfer the earnings of taxpayers to a small group of fairly well-off farm businesses and landowners. USDA figures show that the average income of farm households has been consistently higher than the average of all U.S. households. In 2005 the average income of farm households was $79,965, or 26 percent higher than the $63,344 average for all households.¹⁹ When large-scale federal farm subsidies began in the 1930s, farm incomes were only half the national average.

Although policymakers love to discuss the plight of the small farmer, the bulk of federal farm subsidies goes to the largest farms.²⁰ For example, the largest 10 percent of recipients have received 72 percent of all subsidy payments in recent years.²¹ Numerous large corporations and even some wealthy celebrities receive farm subsidies because they are the owners of farmland. It is landowners, not tenant farmers or farm workers, who benefit from subsidies. And one does not even have to be the owner of farmland to receive subsidies: Since 2000 the USDA has paid $1.3 billion in farm subsidies to people who own land that is no longer used for farming.²²

2. Farm Subsidies Damage the Economy. The extent of federal micromanagement of the agriculture sector is probably unique in America industry. In most industries, market prices balance supply and demand, profit levels signal investment opportunities, market downturns lead to cost cutting, and entrepreneurs innovate to provide better products at lower prices. All of those market mechanisms are blunted or nonexistent in government-controlled agriculture markets. As a result, federal agriculture policies produce substantial “deadweight losses” and reduced American incomes.

Farm programs result in overproduction, overuse of marginal farmland, and land price inflation, which results from subsidies being capitalized in land values. Subsidy programs create less efficient planting, induce excess borrowing by farmers, cause insufficient attention to cost control, and result in less market innovation. And policies often work against the claimed goals of Congress. As an example, while members of Congress say that they support small farms, owners of large farms receive the largest subsidies, and that has given them the financing they need to merge with and acquire smaller farms.²³

In 2006 the Congressional Budget Office reviewed major studies that examined repeal of U.S. and foreign agriculture subsidies and trade barriers.²⁴ The CBO found that all the studies they reviewed showed that both the U.S. and global economies would gain from the repeal of subsidies and trade barriers.

3. Farm Programs Are Prone to Scandal. Like most federal subsidy programs, farm programs are subject to bureaucratic inefficiencies, recipient fraud, and congressional pork-barrel politics. The Government Accountability Office found that as much as half a billion dollars in farm subsidies is paid improperly or fraudulently each year.²⁵ Farmers create complex legal structures to get around legal subsidy limits.²⁶ And many farmers decide not to pay back their USDA loans: in 2001 the GAO found that more than $2 billion in farm loans were delinquent.²⁷

Congress and the USDA distribute payments for farm emergencies carelessly. Disaster payments often go to farmers who have no need for them, and in many cases have not even asked for them.²⁸ To receive benefits, many farmers claim to have experienced damage even when they haven’t.

A powered milk scandal in 2003 illustrates the USDA’s bureaucratic ineptitude. That year, the government decided to give some of its massive stockpile of powdered milk to cattle ranchers for feed after a drought. But much of the milk ended up being illegally diverted to other uses, which allowed speculators to earn large profits at taxpayers’ expense.²⁹

Perhaps the biggest scandal with regard to farm subsidies is that congressional agriculture committees are loaded with members who are active farmers and farmland owners. Those members have a direct financial interest whenever Congress votes to increase subsidies, and they have fought tooth and nail over the years to prevent nearly all farm reforms.

4. Farm Subsidies Damage U.S. Trade Relations. Global stability and U.S. security are enhanced when less developed countries achieve stronger economic growth. America can further that end while helping itself by encouraging the lowering of trade barriers and the expansion of trade by poor nations. However, U.S. and European farm subsidies and agriculture import barriers are a serious hurdle to making progress in global trade agreements. U.S. sugar protections, for example, benefit only a very small group of U.S. growers but are blocking broader free trade within the Americas.

The World Trade Organization estimates that even a one-third drop in all tariffs around the world would boost global output by $686 billion, including $164 billion for the United States.³⁰ Trade liberalization would boost the exports of U.S. goods that are competitive on world markets, including many agricultural products, but U.S. farm subsidies and protections stand in the way of that goal.

5. Farm Programs Damage the Environment. Federal farm policies are thought to damage the natural environmental in numerous ways.³¹ Subsidy programs, particularly price guarantee programs, cause overproduction, which draws marginal farmland into active production. Similarly, trade barriers induce agriculture production on land that is less naturally productive. As a result, marginal lands that might otherwise be used for parks or forests are locked into farm use because farm subsidy payments get capitalized into higher prices for land.

Subsidies are also thought to induce excessive use of fertilizers and pesticides. Producers in regions that have more optimal soils and climates tend to use less fertilizers and pesticides than do producers who are induced by subsidies to farm in less favorable locations. An excessive use of chemicals can contaminate lakes, rivers, and other water systems.

Florida sugar provides a good example. Large areas of wetlands have been converted to cane sugar production because of artificially high domestic sugar prices. Unfortunately, the phosphorous in fertilizers used by sugar farmers has caused substantial damage to the Everglades. Farming, like any industry, can cause negative environmental impacts, but it is misguided for federal policy to exacerbate those problems.

Federal subsidies for irrigation have also been a cause of environmental concern. The federal Bureau of Reclamation runs a vast water empire in the western United States that sells water to farmers at a fraction of the market cost. The resulting overuse could lead to a water crisis as the West’s population keeps rising.³² The solution is to move water into the free market and allow prices to rise to efficient and environmentally sound levels.

6. Agriculture Would Thrive without Subsidies. It is normal for people to fear economic change, but many industries have been radically reformed in recent decades with positive results, including the airline, trucking, telecommunications, and energy industries. If U.S. farm subsidies were ended, and agriculture markets decontrolled and open to entrepreneurs, farming would change—different crops would be planted, land usage would change, and some farms would go bankrupt. But it is very likely that a stronger and more innovative industry would emerge that had greater resilience to shocks and downturns.

Interestingly, producers of most U.S. agricultural commodities do not receive regular subsidies from the federal government. In fact, commodities that are eligible for federal subsidies account for 36 percent of U.S. farm production, while commodities that generally survive without subsidies, including meats, poultry, fruits, and vegetables, account for 64 percent of production.³³ And, of course, nearly all other U.S. industries prosper without the government coddling that many farmers receive, and many are subject to wide swings in market conditions as is agriculture.

Another point to consider is that farm households are much more diversified today and better able to deal with market fluctuations. Many farm households these days earn the bulk of their income from nonfarm sources, which creates financial stability. USDA figures show that only 38 percent of farm households consider farming their primary occupation, and even a majority of income for those households comes from nonfarm sources.³⁴

Some USDA programs provide useful commercial services such as insurance. The USDA says that its insurance services are “market-based,” but if that were true, there would be no need for subsidies and the services ought to be privatized. After all, most U.S. industries pay for their own commercial services. Wall Street offers a huge array of financial tools, such as hedging and forward contracting, that can help farmers weather cycles in market prices without government subsidies.

An interesting example of farmers prospering without subsidies is New Zealand.³⁵ In 1984 New Zealand ended its farm subsidies, which was a bold stroke because the country is four times more dependent on farming than is the United States. The changes were initially met with fierce resistance, but New Zealand farm productivity, profitability, and output have soared since the reforms.³⁶ New Zealand farmers have cut costs, diversified land use, sought nonfarm income, and developed niche markets such as kiwi fruit.

Today, data from the Organization for Economic Cooperation and Development show that farm subsidies in New Zealand represent just 3 percent of farm income, which compares to 18 percent in the United States.³⁷ New Zealand’s main farm organization argues that the nation’s experience “thoroughly debunked the myth that the farming sector cannot prosper without government subsidies.”³⁸ That myth needs to be debunked in the United States as well.