Dimensions: 5.5'' x 8.5'' 79 pages AEI Press  (Washington) Publication Date: July 1996 Paperback ISBN: 0-8447-3915-4 Price: $ 9.95 Add to Cart   Examination Copies

July 1996
Assessing the Environmental Impact of Farm Policies
Walter N. Thurman

This book is a study of the ways in which U.S. agriculture policies contribute to or help to ameliorate the adverse effects of farming on the environment. The author is a professor of economics and agricultural economics at North Carolina State University. A summary of the book follows.

Although the land base devoted to agriculture in the United States has remained roughly the same size over the past forty years and farm labor has fallen by a factor of three, the production of crops and livestock has increased dramatically. Constantly improving farm methods, the increased use of fertilizers and pesticides, and the intensification of cultivation on smaller acreage have made American agricultural productivity the envy of farmers worldwide.

At the same time, modern farm practices are also said to result in a number of environmental problems, including soil erosion, the eutrophication of waterways, the exposure of agricultural workers to dangerous substances, the contamination of drinking water, and the accidental poisoning of wildlife. Many critics assert that not just farming but also government farm programs have systematic and bad results for the environment.

The effects of agriculture on the environment are real, and they are significant. At the same time, those effects are often site specific and difficult to measure. And not every instance of environmental damage is an appropriate subject of public concern. When a landowner decides to farm in a way that erodes his own soil but the erosion has no harmful downstream external effects (or "externalities"), then both costs and benefits are focused on the decision maker. But when his fertilizer runoff pollutes public waterways or the property of others, government action may be appropriate and even necessary.

Of course, the downstream water users may be numerous and diverse and the relationship between their water quality and the farming practices upstream may be dimly understood. Farm workers may not understand the risks associated with exposure to pesticides. And the growth of residential suburbs into areas that were once primarily agricultural may lead to new conflicts over clean water sources and open space for recreation. Those thinking about government policy, however, need to be aware not only of the external effects of agriculture on the environment but also of the possibility that some problems are more properly handled by private transaction than by public coercion.

The Environmental Effects of Farm Commodity Programs

Commodity programs designed to effect or defeat specific market results are typically categorized by the instruments they use to support farm income, such as crop deficiency payments, marketing quotas, or import quotas. Although the environmental effects of commodity programs are unintended, the mixture of commodities receiving price support happens to include crops that are among the most soil erosive and chemically dependent of all agricultural land uses: cotton, soybeans, corn, and grain sorghum.

One way to assess the broad environmental effect of commodity programs is to determine their impact on production. If environmental externalities are generated by agricultural production, then removal of production subsidies should reduce the externalities along with production. The scale effect of program subsidies on production is tempered, however, by the fact that the major programs employ acreage set-asides that, without commodity programs, might well be farmed.

Commodity programs clearly increase equilibrium prices. The key question for policy makers, however, is: Does the government, by raising the price above its unsupported level, encourage the production of environmental externalities? An affirmative answer to this question lies behind much of the environmental concern over commodity programs.

The bulk of government payments to farmers is made under a system of nonrecourse loans and deficiency payments. In a typical nonrecourse loan program, the government sets a support price, which is a price floor guaranteed to growers of crops such as corn, other feed grains (sorghum, barley, and oats), wheat, cotton, and rice. If the market price should fall below the floor, then the government agrees to buy the production from program participants at the floor price.

If acreage eligible for payments is somehow fixed, and if yield is measured as the current year's actual yield on the farm in question, then the payment scheme does create yield-increasing incentives. On fixed acreage, such incentives will increase the use of nonland inputs per acre, primarily chemicals--fertilizers and pesticides. If, however, current yield does not affect payments (as has been the case since an important administrative change to the program in 1986), then the deficiency payments provide no incentive to increase yield.

Despite the fact that the environmental effects of agricultural production are variable and site specific, it is tempting to equate high per acre yields with environmental externalities. Not all increases in yields are correlated with chemical use, however. If soil quality varies across acres on a farm, land diversion programs may encourage farmers to retire their least productive acres, so that yield per acre will rise with no environmental harm.

The discussion to this point has described the deficiency payment schemes in the late 1980s. In the 1990 Omnibus Budget Reconciliation Act, the calculation of eligible acreage was further complicated by the introduction of "flex acres," which required farmers to divert planting of base acreage away from the program crop and reduced the incentive to participate in the program. Nonetheless, scholars who have studied the flex acres provisions agree that it is difficult to generalize about the environmental effects of such shifts.

No discussion of the environmental effects of commodity programs is complete without at least a brief mention of the specific programs that govern the production of the most important crops: tobacco, peanuts, sugar, and dairy products.

Tobacco and Peanuts: Tobacco and peanuts are the only two U.S. crops with mandatory restrictions on the total quantity marketed. The tobacco program limits by transferable quota the total amount that an individual farmer may produce and sell, while the peanut program limits by transferable quota a farmer's sales to the domestic edible market.

The aggregate effect of the tobacco program is to restrict the quantity grown and sold in the United States and to increase its price. A secondary effect comes from the program's fixing of the geographic distribution of production, which means that tobacco is grown now in approximately the same counties that grew it in the 1930s. To the extent that alternative crops are more or less erosive or more or less chemical intensive than tobacco, supply controls on tobacco may have external environmental effects. By contrast, although peanut farmers regularly produce well in excess of their domestic quotas for sales on the world market, the production of peanuts instead of a substitute crop generates no obvious environmental externality.

Sugar: Through the use of quotas allocated annually to specific producing countries, the sugar program limits the quantity of sugar imported into the United States. These quotas have increased the U.S. domestic price of sugar to about twice the world price, reduced its consumption, and increased its domestic production.

The most serious environmental effects of sugar production are associated with cane farming, especially in Florida, where one-half of U.S. cane acreage is found. The environmental problems of cane production are primarily the large quantities of water used and the nutrient loads added to water as it leaves sugar cane fields. One recent study estimated that if the sugar program were to disappear and the U.S. price were to fall to the world price, then the 450,000 acres in Florida planted in sugar cane would decline to less than 100,000.

Dairy Products: Dairying is one of the more environmentally costly agricultural activities. The discharge of animal waste into waterways or onto land often results in the overloading of natural waterways with nitrogen and phosphorous compounds, which encourage algae growth and degrade conditions for fish and other species. Two separate policies constitute the heart of the dairy program: a price floor on milk manufactured products and the system of federal milk marketing orders pertaining to sales of fluid milk. Both increase aggregate dairy runoff and its associated environmental problems, particularly in the South and Northeast where the industry is concentrated.

Promotion of Environmentally Friendly Production

A number of attempts have been made in recent years to integrate environmental concerns into agricultural policy. The most significant of these is the Conservation Reserve Program (CRP), which was created by the Food Security Act of 1985 and which paid farmers approximately $1.8 billion in fiscal year 1994 to withhold land from cultivation.

The CRP revived the 1950s-era idea of the soil bank to deal with surpluses of price-supported commodities and with perceived problems of soil erosion. CRP administrators in the U.S. Department of Agriculture solicit bids from farmers to retire their land from production for ten years in return for annual rental payments and reimbursement for one-half of their conservation expenses. Between 1986 and 1989, 34 million acres were enrolled in the CRP. Since 1990, however, only 2.5 million acres have been enrolled, due to a change in the bidding process that led to a geographic shift toward areas where the primary environmental problem was water, not wind, erosion. One cogent criticism of CRP, at least in the 1985-1990 version, is that retiring land is a rather blunt instrument to use to reduce erosion. In principle, targeted subsidies could better address particular externality problems in particular locales. One might also ask if the goal of CRP--reducing soil erosion--is a good thing in itself. If wind erosion blows topsoil off some exposed acres and relocates it elsewhere within the same farm, for example, there is no externality. The problem of externality occurs when downwind or downstream deposition of soil has harmful effects. If it does, and if the upwind and downwind parties are prevented by transaction costs from contracting over erosion's effects, then a prima facie case can be made for public action. One important provision of the 1985 Food Security Act encouraged farmers to draw up and carry out approved conservation plans by withholding farm program benefits if they did not comply. The provision specifically targeted lands identified as highly erodible and gave their owners financial incentives to redirect them to other uses, primarily the growing of cover crops such as grasses. Not everyone is convinced, however, that conservation compliance has resulted in large environmental benefits. A recent study from the Center for Resource Economics considered the minuscule amounts of farm program payments denied under the provision as evidence that local Soil Conservation Service officials are colluding with farmers to circumvent the law. One could also make an even more generic criticism of using the denial of farm program payments to enforce environmentally friendly production: the loss of program benefits may be costly at some times and not at others, depending on market conditions that are only partially related to the costs and benefits of erosion control.

Nonetheless, those who advocate the marrying of current commodity programs to environmental objectives see the possibility of simultaneous progress on at least two social projects: supporting the income of farm operators and improving environmental quality. The Campaign for Sustainable Agriculture, an umbrella group of more than 200 organizations, is committed to a farm and food system that combines economic viability with environmental soundness and social justice. Taken at face value, the coalition's literature suggests that its policy recommendations will promote small, wise, and profitable farms at the same time that they will prevent environmental damage. The realities of the environmental externalities generated by agriculture suggest otherwise. A "green support program" that maximized environmental quality would most likely be concentrated in the heavily populated Northeast and Chicago lake plain, the southern Piedmont, the Mississippi delta, and parts of southern California and Arizona. Conspicuously absent from this list are the major payment-receiving regions in the Great Plains. In fact, it is hard to imagine green support programs that can meet both income and environmental objectives without breaking the federal budget, or that can successfully redistribute income away from current members of a politically powerful coalition.

Conclusions

We have good reasons to believe that major crop farm programs in the past, through their effects on yield-increasing chemical inputs and through their discouragement of crop rotation, raised the external costs of agriculture. Most of the yield-increasing incentives are gone from current versions of farm programs. Deficiency payment programs no longer base payments on realized yield and no longer provide the incentive to apply yield-increasing chemicals. Further, through the recent flex provisions, they now allow some rotation of crops within a farmer's acreage base.

The reforms in the deficiency payment and supply control programs, we should note, were adopted primarily for budgetary reasons. The yield-increasing effects of both sets of programs were bad for the Treasury at the same time that they were bad for the environment. Just as the environmental effects were unintended consequences of agricultural policy, their partial alleviation was an unintended consequence of agricultural policy reform.

Of course, not all is environmentally well with current farm programs. It is still true that a program that encourages domestic production of a commodity that generates negative environmental externalities can properly be blamed for making environmental problems worse. The U.S. dairy and sugar programs (before the 1996 farm act) are two such examples. One successful environmental reform appears to be the post-1990 version of the Conservation Reserve Program discussed above, which, through a greater focus on water runoff, has resulted in reducing the externalities from water erosion.

Agricultural commodity programs can be and have been made more environmentally friendly, and there is room for further improvement. This conclusion does not imply an answer to the question whether farm programs should be used as tools to address environmental externalities. In fact, there are several reasons for thinking that farm programs should not be so used. There are no programs for the growing beef, pork, and poultry industries, for example, whose concentrated animal waste causes locally important surface water, groundwater, and odor problems. Externalities generated by these industries cannot be addressed by farm programs unless we are willing to widen the ring of government subsidy to include them.

The final and, perhaps, most important issue is that of truth in labeling. If farm programs are sold to the public on the grounds that they are buying environmental quality, the public is bound to be disappointed. Making payments to the traditional coalitions supporting farm programs is a different task from making payments to promote environmentally friendly production or from penalizing environmentally unfriendly production. In a phrase that arises frequently in discussion of these issues, commodity programs are "blunt instruments" for dealing surgically with the adverse effects of farming on the environment.