From Farm to Fork: Government Policies Distort Food and Agricultural Markets

June 1, 2015

Jayson Lusk

Last year Congress passed a new farm bill (officially called the Agricultural Act of 2014). Debate over the bill was particularly contentious, and two of the primary points of conflict had to do with the size of the food-stamp program (Supplemental Nutrition Assistance Program, or SNAP) and the move away from traditional direct payments and commodity programs toward subsidized crop insurance.

Adding to the controversy is the fact that, ironically, one set of government policies which has arguably most affected agricultural markets in recent years is not even contained in the farm bill but rather is administered by the Environmental Protection Agency: biofuels policies. While direct subsidies to ethanol producers ended at the beginning of 2012, the Renewable Fuel Standard (RFS) requires increasing amounts of transportation fuel (up to 36 billion gallons by 2022) to come from renewable sources, particularly corn-based ethanol.

While much has been written on the merits (and demerits) of “farm subsidies,” we don’t know much about the impacts of individual programs, such as SNAP or crop insurance or the RFS, on prices of retail foods and individual farm commodities. Moreover, given the differences in commodities grown in each U.S. state, and the differences in the flow of SNAP and crop insurance subsidies to different states, one might expect significant regional differences in the impact of these programs.

I took up these issues in a new research paper, “Distributional Effects of Selected Farm and Food Policies: The Effects of Crop Insurance, SNAP, and Ethanol Promotion,” published by the Mercatus Center at George Mason University. Using an economic model that links production of crops with retail food categories, the study traces the effect of crop insurance, SNAP, and ethanol promotion on producers and consumers “from farm to fork.”

It turns out that all three programs significantly distort food and agricultural markets and create winners and losers via government policy. The study explains the economic model in detail, outlining how and why each program interacts with food prices on a national and state-based level. Let’s consider each briefly.

Subsidized Crop Insurance
In 2013, 295 million acres (83 percent of insurable cropland) were insured under the federal crop insurance program, and 90 percent of enrolled land was for corn, soybeans, wheat, cotton, and pasture, rangeland, and forage. Policies are sold and serviced through private insurers, but the federal government insures company losses, reimburses administrative and operating costs, and establishes guidelines and premium rates. Producers only pay a portion of the premium while the government pays the rest.

The results of my research reveal a net economic benefit of $932 million per year would arise from the removal of subsidized crop insurance. Despite these potential benefits, the analysis reveals one reason why they persist: virtually every aggregate group benefits from the existence of crop insurance subsidies. Food consumers benefit from lower food prices and agricultural producers benefit from the subsidy. The costs of the policy are “hidden” in the form of a higher tax burden. Consumers would pay higher food prices if subsidized crop insurance were removed, but the benefit to taxpayers more than compensates for the higher food prices. Taxpayers have to pay about $1.80 for every $1 in benefit seen via lower prices for the food consumer.

Removal of subsidized crop insurance would have different effects across the United States. Consider, for example, California, which generated about $32.6 billion in annual food-related agricultural output from 2008 to 2012, and Oklahoma, which generated about $5 billion over the same time period. Despite the fact that California generates six times more agricultural output than Oklahoma, Oklahoma farmers received almost the same amount of crop insurance subsidies ($192 million vs. $233 million) in 2013. Moreover, the states are radically different in terms of the types of agricultural commodities grown. Just under 70 percent of the value of all food-related agricultural output in California comes from fruits, vegetables, and tree nuts; for Oklahoma, the figure is only 1 percent.

As a result, the removal of subsidized crop insurance is projected to benefit California producers by $142 million, while Oklahoma farmers lose $92 million. Removal of subsidies is projected to increase vegetable (a major California crop) prices by 1.4 percent and wheat (a major Oklahoma crop) prices by 7.9 percent. The implicit subsidy lost by California producers of vegetables is only 0.16 percent, whereas the implicit subsidy lost by Oklahoma wheat farmers is 18.5 percent.

Thus, California vegetable producers gain an effective price advantage of 1.4%-0.16% = 1.24%, whereas Oklahoma wheat producers experience an effective price loss of 7.9%-18.5%=10.6%. Even these results mask within-state heterogeneity.

For example, despite the fact that Oklahoma wheat farmers are net losers, Oklahoma cattle producers benefit by $5 million per year. Overall, Oklahoma taxpayers would gain $86 million per year, while the state, as a whole, would lose $33 million annually from the removal of subsidized crop insurance.

The 2014 farm bill allocated most of its funding to SNAP. Funding for SNAP has increased dramatically over the last decade, rising from $33 billion in 2007 to nearly $80 billion in 2013, while the number of participating households increased from 26 million to 47 million.

I find that, depending on how SNAP recipients allocate their SNAP dollars, the removal of SNAP is projected to generate net economic benefits ranging from $12.7 billion to $42.8 billion, with the benefits accruing to taxpayers and SNAP nonrecipient consumers, who will pay lower prices.

Debate has focused on whether SNAP is purely a cash transfer from wealthy to poor Americans, or instead alters how consumers allocate their budget toward food. This research shows that SNAP payments have an inflationary effect on food prices, which undercuts some of the benefit of the transfer and drives up food costs for nonrecipients. SNAP may be included in the farm bill in part to support agricultural commodity prices for producers, but the evidence in this study concludes that it is an inefficient form of support: for every dollar spent by taxpayers, farmers benefit only one cent. The net benefit to Oklahomans from the removal of SNAP is estimated to be around $440 million.

Promotion of Ethanol
A variety of government policies have served to increase demand for corn-based ethanol. One major concern for consumers is the effect of these policies on food prices. I find that reduced demand for corn-based ethanol would reduce food prices, especially meat prices. If demand for ethanol falls (perhaps as a relaxation of the RFS), consumers will benefit by paying lower food prices, but producers, particularly corn producers, are harmed. Reduced demand for corn-based ethanol would benefit wheat and cattle producers, two major Oklahoma commodities.

The Takeaway
Whatever the merits of farm subsidies and food stamps, these federal programs have economic consequences that distort food prices, create inefficiencies, drive up taxes, and create winners and losers. There may be other countervailing reasons why one might support such policies, but we ought to at least understand the economic consequences that food and farm create.