U.S. Agricultural Policy Reform in 2007 and Beyond

On May 17, AEI held a conference featuring a number of agricultural economists' work on subsidies, regulation, land use, spending, and more. Their recommendations were published in a series of twenty-one working papers and summarized for policymakers in a handbook entitled The 2007 Farm Bill & Beyond (AEI Press, May 2007). The full text of the essay by AEI Agricultural Policy Studies project directors Bruce L. Gardner and Daniel A. Sumner, from which this excerpt has been taken, and the working papers presented at the conference are available at www.aei.org/farmbill/.

As U.S. agricultural policy is revisited in the 2007 Farm Bill debate, the occasion is ripe to reconsider whether our commodity programs and related legislation best serve farmers and the economy, and what policies might do better.

We recommend a much-reduced government role in agricultural markets, along with an end to the substantial transfers to producers and other resource owners associated with the supported commodities. This reform is less radical than it may appear. A large fraction of U.S. agriculture already operates in an approximately free-market environment. The programs now in place have costs far in excess of the benefits they can reasonably be argued to provide, and U.S. agriculture would prosper no less than at present--and with better long-term prospects for both farmers and the public generally--in the absence of these programs.

Agricultural policy can serve two broad objectives: the efficiency and prosperity of agriculture as an industry and the well-being of farmers and rural residents. These purposes are closely related but distinct, in that agriculture as an industry is important to the nation as a whole: to consumers of food, to earners of income from industries related to agriculture, and to taxpayers, in addition to farmers themselves. The well-being of farm households is related to agriculture as an industry, but it is broader in that farm households receive a large fraction of their incomes from sources other than agriculture, and farming is even less important to rural welfare more broadly.

Rationales for agricultural policy include food security, food affordability, nutrition, competitiveness in international trade, and agriculture as a contributor to prosperity and income growth in rural areas. For American agriculture to contribute to these purposes, farms must be economically viable, farmland must generate returns sufficient to keep it from conversion to other uses, returns to investment must be sufficient to keep the capital stock in agriculture at the technological frontiers, and investment in new technologies and the skills to implement them must be maintained. At the same time, with relatively open borders and competing uses for rural land and other resources, these broader purposes are not served by maintaining farms in particular commodity markets or in particular regions when market forces would otherwise signal a shift.

Federal commodity programs fit into these purposes through their contribution to the economic viability of farms balanced against their costs to consumers, taxpayers, the broader agricultural and non-farm economies, and other national objectives, such as rural environmental quality. The threats to farm viability that have made such commodity programs attractive are the low market prices of farm products and variable farm incomes resulting from weather shocks and market fluctuations. But if these prices and returns reflect market realities, what is the justification for commodity programs sending different signals to producers?

Program supporters point to market failures in the form of imperfect competition among the corporate buyers of farm products and sellers of inputs to them, as well as the actions of foreign governments that restrict the market access of U.S. products or subsidize their own production of competing products. Other market failures, which lie behind excessive soil degradation and environmental damages associated with unregulated agricultural production, are also seen as defects that can be remedied with commodity or conservation programs.

Poverty in rural America was a major force behind the original establishment of commodity programs in the 1930s. Farm policies must therefore be considered in light of their effects on farm and rural incomes--especially their effectiveness at dealing with rural poverty.

***

The results of growing agricultural productivity, a competitive farm industry, and openness to imports have been continuously low food prices and a declining share of consumers' income spent on food. Thus, the success of agriculture as an industry has provided benefits to producers and consumers alike.

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Daniel A.
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