Agricultural Subsidies: Meaning, Scope, Reasons

New legislation is introduced and passed through the U.S. Congress every five to six years to subsidize farmers and agricultural products. These bills provide benefits like cash, minimum prices, and crop insurance programs. Most academic economists and policy analysts oppose agricultural subsidies, but that seems to have little impact on the continuous transfer of taxpayer money to farmers.

Key Takeaways

• The farm bill is used to subsidize farmers and agricultural products.
• The bill is passed through Congress every five to six years.
• Some of the main farm subsidies include crop insurance, agricultural risk coverage, and disaster relief.
• Subsidies were deemed necessary as farmers were considered essential to the national economy.

The Farm Bill

As noted above, the farm bill allows lawmakers to make changes to agriculture and food programs every five to six years. The Agriculture Improvement Act of 2018, P.L. 115-334 was signed into law by President Donald Trump in December 2018 and was extended beyond the five-year term to include the 2024 crop year. The bill:

• Modified farm commodity support
• Expanded crop insurance coverage
• Made changes to conservation programs
• Reauthorized and revised nutrition assistance

When the bill was enacted in 2018, the farm bill’s mandatory programs were estimated to cost $428 billion for the full five-year period. That cost was estimated at $867 billion over a 10-year basis, with nutrition and crop insurance taking up the bulk of the outlays.

Important

The U.S. Department of Agriculture (USDA) is a federal agency that oversees the farming, ranching, and forestry industries. It is also responsible for food quality, food safety, and nutrition labeling.

Scope of Farm Subsidies

These bills tend to be massive. From 1962 to 2019, farm income stabilization programs averaged $13.2 billion. These subsidies target wheat, rice, soybeans, oats, barley, sorghum, minor oilseeds, peanuts, corn, and cotton.

Marketing loans set minimum prices for crops, encouraging overproduction beyond market demands for the aforementioned products as well as honey, chickpeas, wool, and mohair.

The table below highlights some of the major types of agricultural subsidies, including counter-cyclical payments for crops, conservation subsidies that pay farmers to not grow crops, USDA farm insurance programs, special crop disaster assistance programs, and taxpayer-funded agricultural research.

Reasons for Farm Subsidies

Before the Industrial Revolution, nearly all of the workforce was employed in farm labor. For example, 90% of all working Americans were farm owners or worked on farms in 1790. Understandably, farmers were seen as economically crucial. Politicians were elected by being friends of farmers.

Wealthy farmers have been successful in lobbying for government favors throughout history. Some subsidies existed in the U.S. before the Great Depression, but most modern programs date to the 1930s. It was thought that propping up farm prices would keep farmers from going bankrupt; the net result made food more expensive for people struggling to afford it.

Political economists note that subsidies tend to never go away through a phenomenon called public choice theory. This means that wealthy farmers essentially have more incentive to fight for subsidies than consumers do to fight against them.

What Is a Subsidy?

A subsidy is a sum of money or financial benefit provided to an individual, business, or other entity by the government. Subsidies are often provided for economic or social benefit and to remove a financial burden from the recipient. Examples of subsidies include welfare payments, unemployment benefits, and those paid to major industries that function within the economy, such as agriculture and energy companies.

What Is the Largest Agricultural Subsidy Program?

Insurance is the largest agricultural subsidy program. This program costs the government about $10 billion each year and provides farmers with 60% of their insurance premiums. Private sector insurance companies are also reimbursed for their administrative expenses and underwriting gains for writing insurance policies.

When Was the First Farm Bill Passed?

The farm bill was first signed into law in the United States in 1933 as part of the New Deal. It was called the Agricultural Adjustment Act of 1933. The bill aims to address areas of concern for the agricultural industry, including trade and support. The most recent bill was signed into law by Donald Trump in December 2018.

The Bottom Line

Subsidies are commonly paid by governments to different industries for a variety of reasons. This includes boosting production and consumption levels and helping keep key players in struggling sectors afloat. The farm bill, which was introduced in 1933 as part of the New Deal, offers government benefits to farmers and companies in the agricultural sector. It is updated every five to six years. Crop insurance, price loss coverage, and disaster aid are among the largest and most common subsidies offered by the U.S. government.