Toward a Free-Market Farm Policy

December 13, 2013

Jayson Lusk

OCPA executive vice president Brian Bush recently sat down with economist Jayson Lusk, OCPA’s Samuel Roberts Noble Distinguished Fellow, to discuss agricultural subsidies, crop and livestock insurance, and more.

BUSH: There’s been a lot of discussion lately about the farm bill and about the future of farm policy in this country. Opinions on this topic are numerous and widely varying. Can you start by explaining the difference of opinions?

LUSK: For more than a half-century, the federal government has played a major role in affecting what farmers plant and what they get paid. Economists are more unanimous on effects of this intervention than they are on almost any other issue—surveys suggest that more than 80 percent of professional economists believe that the United States should eliminate agricultural subsidies. Interestingly, however, only 34 percent of the general public agrees, according to a nationwide survey I conducted three years ago. When I asked more than 1,100 U.S. citizens “are you in favor of the U.S. government subsidizing farmers?” a full 66 percent said “yes.”

What explains the wide gulf between professional economists and the general public?

One explanation may rest with a general lack of understanding of the true effects of farm subsidies and the facts on the ground. According to the U.S. Department of Agriculture (USDA), there are 85,500 farms in Oklahoma, but most of those farms (58.8 percent of them) are very small, selling less than $10,000 per year. The biggest beneficiaries of farm payments, in terms of total dollar payouts, tend to be the largest farms. According to the Environmental Working Group and USDA data, only 31 percent of farms in Oklahoma receive subsidy payments, and 10 percent of the farms in the state collect 74 percent of all the subsidies. In 2010, the top 10 percent of recipients received an average of $49,207 each.

That phenomenon would seem to make sense, given that a farm producing less than $10,000 would likely only be a small portion of that person’s income for the year, whereas the larger farms are the majority of that farmer’s income, making it more likely they would rely on insurance to replace that lost income. Does that explain the discrepancy?

The relationship between on/off-farm income and payments has not been widely studied, but to your point, if you calculate the payout in terms of the percent of production, smaller farmers receive more per bushel produced than larger farmers (larger farmers produce more bushels, so their total payouts are higher). Generally, off-farm income accounts for a large share of farm household income, even for many “large” farms. Farm incomes today are much more diversified than they once were, and off-farm income accounts for a high share of farm household income.

How do those subsidy programs typically play out in Oklahoma? What does it look like on the ground?

The Environmental Working Group estimates that last year the U.S. government paid Oklahoma farmers and land owners more than $382 million in various forms of farm subsidies, mostly direct payments and payments of insurance premiums for wheat farmers. In 2011, Oklahoma wheat farmers received $0.26 from the federal government for every $1 worth of wheat they produced.

Those numbers are staggering at first glance, but was 2011 an unusually bad year, making those numbers look worse than usual? For example, I recall a High Plains Journal report from October 2011 which showed winter wheat production was down 42 percent from the previous year, with average yield being roughly 22 bushels per acre—one-third less than the state average of 33 bushels per acre.

Actually, the figures for 2008, 2009, 2010, and 2011 are $0.13, $0.42, $0.20, and $0.26, making the average federal payment per $1 of wheat produced in those years roughly $0.25. These also do not include ad-hoc disaster payments or other forms of assistance administered in those years, so the “true” figure is probably higher.

That is certainly a lot of money, especially in light of our national debt and spending problems. But some might argue that it’s a small price to pay for struggling farmers.

I certainly understand the fear of turning our backs on struggling farmers, but this line of thinking ignores several key facts. First, by and large, farmers aren’t struggling relative to the rest of the U.S. population. The median income of farmers in the U.S. has outpaced that of non-farm households for more than a decade, and has been near record levels in recent years. And, when it comes to the value of assets owned, farmers tend to be far wealthier than the average U.S. household.

I have to admit that is hard to believe. I am the proud son of an Oklahoma wheat producer, and our family has been farming in southwest Oklahoma since before statehood. Although I would not trade that upbringing and the values I learned there for anything, I don’t remember ever feeling wealthy by monetary standards. Gross income from farming can sometimes surprise people, but the cost of production takes a huge bite out of that. Likewise, the assets a farmer owns are naturally going to be more than the average citizen because farming involves large amounts of land and expensive machinery not owned by the average citizen. Do the numbers you cited account for that?

Great question. And believe me, I value agriculture as much as anyone, so much so that I have dedicated my career to working for an agricultural college. But let me walk you through how I reached this viewpoint. I’m talking about assets here. The value of those assets may “naturally” be higher—but they are higher nonetheless. If the average farm and average non-farm household had to liquidate, the average farm household would be far wealthier. In fact, a great publication on farm household income says, “less than 4 percent of all farm households … had wealth less than the median household level.” That means 96 percent of farms are wealthier than the median U.S. household. Everyone would like to make more money than they actually do, and that includes farmers. But, the data are pretty clear: the average farmer has higher income and much more wealth than the average non-farmer.

What other concerns do you have with farm payments as they are currently administered?

Well, farmers aren’t necessarily the prime beneficiaries of farm payments. Rather, the research suggests that many of the subsidy dollars flow to land owners (who typically aren’t farmers themselves) in the form of higher land rents. Also, benefits tend to flow to larger farmers. According to a recent Heritage Foundation report, “Nearly 80 percent of farms with gross cash farm income of $250,000–$999,999 receive government payments, compared to 24 percent of farms with gross cash farm income of $10,000–$249,999.” Finally, research shows that one of the effects of farm subsidies is to prevent resources from being allocated from less efficient to more efficient farms, which is hardly good news for those who support farm subsidies on the premise that they secure a steady supply of food for U.S. citizens.

Well, you’ve ruffled my “farm boy” feathers again. I am not an economist, so using gross income numbers may be throwing me a bit. For example, I definitely recall the cost of production eating up much of the gross income. For example, in 2009, the Noble Foundation estimated total expenses for wheat farmers were between $224.50 and $217 per acre, depending on tillage system, against a potential gross income of $254 per acre if the price was at $8/bushel and the yield matched the 10-year state wheat yield average for Oklahoma (about 33 bushels per acre). That means a 1,000 acre what farm, a large farm by the Heritage Foundation report standards, would gross $254,000, also large by their standards, but in reality more than $217,000 of that would have been spent on producing the crop, netting only $37,000 in annual income to support a family. Could that make those numbers slightly misleading?

I agree that “gross” can be misleading. However, this is the way the USDA reports these figures—by gross income categories. While gross isn’t a good measure of net, I think we can safely say that farms with $900,000 gross are larger than farms with $10,000 gross, which is the point of the comparison being made here.

I see. Changing gears a bit, you and I have also spoken before about some important groups that get left out of these discussions. Can you elaborate on that a bit?

Absolutely. I think it is important that we also consider struggling consumers in this equation. More than 600,000 Oklahomans are on food stamps, and farm subsidies affect what they pay. One recent study in the American Journal of Agricultural Economics argues that the grain subsidies and trade barriers have the equivalent effect on consumers of an 8.4 percent tax on food grains, and a 2.85 percent tax on beef and pork, and a 4.75 percent tax on poultry and eggs (it bears mentioning that cattle, hogs, and poultry are Oklahoma’s most valuable agricultural commodities, accounting for more than 75 percent of the total value of agricultural production in the state in 2011). Not only do agricultural subsidies force consumers to pay more for certain types of foods, and distort farmers’ incentives to provide those things consumers truly demand, they also drive up our taxes. According to one Heritage Foundation report, “If the existing farm bill programs continue as is, it would likely cost about $1 trillion from 2014 to 2023.”

It looks like there are significant efforts under way to reform the farm bill. Do those show any promise?

Existing efforts to overhaul the farm bill include efforts to shift farm subsidies toward crop and livestock insurance. Insurance sounds more free-market-oriented, until one realizes that in 2012 a full 14 billion taxpayer dollars were spent paying 60 percent of farmers’ insurance premiums. Farming is a risky business. But so too is drilling for oil, running a restaurant, writing books, or operating a body shop. There is no uniquely compelling reason why other people’s dollars should be spent insuring against risks in agriculture but not in those industries. I know many great and wonderful people who are farmers, and I admire the hard work they do. But I suspect they’d raise an eyebrow if I sent them a bill for my car insurance premium.

I definitely see your point here, but couldn’t we take the intermediate step of eliminating direct payments and leaving crop insurance programs in place for now? It seems like a phase-out would be preferable, if only because my bias is showing.

In short, yes, I think there are some things the government can and should do to help facilitate the emergence of crop insurance markets, but simply paying almost all of farmer’s premiums and paying off insurance companies isn’t, in my mind, an intermediate step of eliminating direct payments. If I want to be cynical, it is relabeling a subsidy program to fool the public about what is really going on. That doesn’t mean we shouldn’t have a farm bill. We ought to think about ways that the government can assist producers that are also consistent with free-market principles. A few ideas that come to mind:

  1. Make sure there are no barriers to development of self-funded private crop insurance, and ensure accurate data are available to price and deliver insurance (one interesting idea here is insurance savings accounts);
  2. Make sure American farmers have access to customers all over the world by opening borders and promoting free trade;
  3. Ensure American farmers are the most competitive in the world by ensuring they have access to the best technology and science available; and
  4. Develop creative ways to pursue environmental and health objectives. The Conservation Reserve Program is a useful program if focused on the most environmentally sensitive lands in a cost-effective manner.

I think we agree that an honest and open discussion is what it will take to move us forward on this issue. I appreciate your time and candor. Oklahoma knows agriculture, and we can be a leader in the fight for these critical policy reforms. There is a better way—the free market—and I’m proud to be working alongside you as we search for a system that allows Oklahoma’s ag producers to thrive.

Jayson Lusk (Ph.D., Kansas State University) is the Samuel Roberts Noble Distinguished Fellow at OCPA and Regents Professor and Willard Sparks Endowed Chair at Oklahoma State University. His new book is The Food Police: A Well-Fed Manifesto about the Politics of Your Plate (Crown Forum, 2013).

Brian Bush (J.D., University of Oklahoma) is OCPA’s executive vice president. He formerly served as director of government relations at Oklahoma Christian University, and also served as an assistant district attorney in Oklahoma County.