Skip to main content
Menu

Main navigation

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact
    LOADING...
  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit
    LOADING...
  • Publications
    • Studies
    • Commentary
    • Books
    • Reviews and Journals
    • Public Filings
    LOADING...
  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving

Issues

  • Constitution and Law
    • Constitutional Law
    • Criminal Justice
    • Free Speech and Civil Liberties
  • Economics
    • Banking and Finance
    • Monetary Policy
    • Regulation
    • Tax and Budget Policy
  • Politics and Society
    • Education
    • Government and Politics
    • Health Care
    • Poverty and Social Welfare
    • Technology and Privacy
  • International
    • Defense and Foreign Policy
    • Global Freedom
    • Immigration
    • Trade Policy
Live Now

Cato at Liberty


  • Blog Home
  • RSS

Email Signup

Sign up to have blog posts delivered straight to your inbox!

Topics
  • Banking and Finance
  • Constitutional Law
  • Criminal Justice
  • Defense and Foreign Policy
  • Education
  • Free Speech and Civil Liberties
  • Global Freedom
  • Government and Politics
  • Health Care
  • Immigration
  • Monetary Policy
  • Poverty and Social Welfare
  • Regulation
  • Tax and Budget Policy
  • Technology and Privacy
  • Trade Policy
Archives
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • November 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009
  • January 2009
  • December 2008
  • November 2008
  • October 2008
  • September 2008
  • August 2008
  • July 2008
  • June 2008
  • May 2008
  • April 2008
  • March 2008
  • February 2008
  • January 2008
  • December 2007
  • November 2007
  • October 2007
  • September 2007
  • August 2007
  • July 2007
  • June 2007
  • May 2007
  • April 2007
  • March 2007
  • February 2007
  • January 2007
  • December 2006
  • November 2006
  • October 2006
  • September 2006
  • August 2006
  • July 2006
  • June 2006
  • May 2006
  • April 2006
  • Show More
November 9, 2011 2:35PM

Farm Subsidies and ‘Risk Management’

By Daniel A. Sumner

SHARE

There has been much written recently about the so‐​called shallow loss proposals to provide subsidies for farms in cases when farm revenues fall slightly below the record high levels of the past few years. The proposals come from a bi‐​partisan collection of influential farm state legislators, such as Rep. Collin Peterson (D., MN) and Senator Richard Lugar (R, IN) et al., and commodity groups such as the National Cotton Council. (The Congressional Research Service has prepared a helpful summary of the proposals). All suggest that new and expanded subsidy programs are needed to help farmers manage untoward risks of farming. These ideas have even gotten support from some long time advocates for farm policy reform such as the distinguished former Agriculture Secretary and U.S. Trade Representative Clayton Yeutter.


Let us take a step back and put these proposed programs in context. First, since the middle of the last decade farm prices for the major grains, oil seeds and cotton have doubled or more than doubled and are expected to remain elevated. This has meant that the long‐​standing support programs with their fixed congressionally mandated support prices no longer trigger payments. Projections for the next decade suggest that prices are unlikely to drop back to below the established support prices. Since there is no support for simply raising the government set minimum prices, and simply paying farmers and farmland owners based on their history of having political clout (as was established in 1996) now seems infeasible, commodity groups needed another formulation to continue to receive significant government payments.


One way to ratchet up supports and lock in high revenues is to tie payments not to price per se, but to revenue. Hence the new proposals each include variants of the idea that when revenue declines by 5 or ten percent below what farmers of a particular commodity have come to expect, the taxpayer would make payments to fill the gap. Thus, this year, with harvest time price of soybeans about 10 percent below the futures price established last winter, government payments would kick in under some proposals. Even now under subsidized crop insurance programs, farms or county yields as little as 5 percent below average would be enough to trigger crop insurance payments in some cases. Notice this would happen with a price of soybeans of more than $12 per bushel when the average farm price from 2004 to 2006 (not a particularly low‐​price period) was below $6.00 per bushel. In other words, historically high prices have become the new “benchmark” for support. Talk about a ratchet effect.


We can use insurance information to get a sense of how much the proposed programs are designed to satisfy farmers latent demand for “risk management.” Under the current crop insurance program with more than 50% premium subsidies, additional subsidies for program delivery, and subsidies to cover losses of insurance companies, relatively few farmers buy insurance to cover losses above 20 percent. And, as premium subsidies decline farmers abandon insurance altogether. Farmers employ many risk management strategies from diversification and crop rotation to storage and use of forward contracts. Given these options, they do not choose to buy more risk management when asked to pay a major share of the costs. The opportunity to lock in high revenues with expected payoffs likely to be in the billions of dollars is not about risk but about higher returns, and no operation can afford to turn down higher returns with little or no risk.


Finally, there are two further problems with the argument that farming is especially risky and therefore taxpayers must continue to provide payments whenever revenue targets are not met.


First, notice that this idea only seems to apply to that subset of farm commodities that have received the traditional farm subsidies since the 1930s. There are no proposals for massive “shallow loss” subsidies for industries such as fruits, vegetables, tree nuts, broilers, hay, hogs, beef cattle, greenhouse and nursery products, eggs or seeds. These industries are at least as risky as corn and soybeans, but they have not traditionally been subsidized to the degree to which some crops have become accustomed. (As an aside, there is no evidence that the long term prosperity or productivity of the heavily subsidized industries is higher than the less subsidized farm commodity industries.)


Second, the debt to equity ratio of the subsidized farm sectors does not make them particularly vulnerable. In fact farm debt is well below 15 percent of equity. Moreover, most farms have substantial non‐​farm income and most farmers work off the farm or get retirement income from non‐​farm occupations. The farmers that are least likely to work off the farm operate the largest farms and practice a number of risk management strategies. Thus, relatively few farms are in danger going under. Farming is a risky business, but, given how they are organized, there is nothing particularly risky about farming compared to other businesses.


Under the new “risk management” proposals, any individual farm would gain from access to government payments when market revenue falls below some recent average or pre‐​set target. That said, there is simply no evidence or consistent reasoning for subsidies whether rationalized by “risk management” or one of the other dozen or so common claims (see page 12 of this book by Stanford University’s Woods Institute). Furthermore, there is no evidence that the long term prosperity of agriculture is enhanced by government subsidies or that U.S. farming is more productive or that Americans eat better because we have spent trillions of dollars on farm subsidies over the past seven decades. The best argument for farm subsidies is that we have always had them and change is hard. But, that argument has been stretched a bit thin and this period of record farm profits and record government budget deficits is an ideal time to finally cut the cord.


(Other papers critical of recent “risk management” proposals and well worth your time are a piece written by Bruce Babcock for the Environmental Working Group and one by Barry Goodwin and Vince Smith for AEI. For a recent broader evaluation of farm subsidies visit my paper written jointly with Barry and Vince and published by AEI).

Related Tags
Tax and Budget Policy, Trade Policy, Herbert A. Stiefel Center for Trade Policy Studies

Stay Connected to Cato

Sign up for the newsletter to receive periodic updates on Cato research, events, and publications.

View All Newsletters

1000 Massachusetts Ave. NW
Washington, DC 20001-5403
202-842-0200
Contact Us
Privacy

Footer 1

  • About
    • Annual Reports
    • Leadership
    • Jobs
    • Student Programs
    • Media Information
    • Store
    • Contact
  • Podcasts

Footer 2

  • Experts
    • Policy Scholars
    • Adjunct Scholars
    • Fellows
  • Events
    • Upcoming
    • Past
    • Event FAQs
    • Sphere Summit

Footer 3

  • Publications
    • Books
    • Cato Journal
    • Regulation
    • Cato Policy Report
    • Cato Supreme Court Review
    • Cato’s Letter
    • Human Freedom Index
    • Economic Freedom of the World
    • Cato Handbook for Policymakers

Footer 4

  • Blog
  • Donate
    • Sponsorship Benefits
    • Ways to Give
    • Planned Giving
Also from Cato Institute:
Libertarianism.org
|
Humanprogress.org
|
Downsizinggovernment.org