Comments to the USDA’s Farm Service Agency, On the Proposed Five-Year Strategic Plan for the FSA
Dennis Avery and Dr. Thomas Elam
Submitted February 10, 2004, in connection with the meeting of the agency’s external stakeholders at the Wyndham Hotel, 1400 M. St., NW, Washington, D.C.
The U.S. has recently returned to a policy emphasizing high subsidies for its farms. These subsidies are paid primarily through the Farm Service Agency. That makes the mission of the FSA critically important, and its mission goal one of the critical factors governing the future of American farms.
The one proven impact of higher farm subsidies is to raise land values on the subsidized farms. This raises the subsidized farmers’ costs. There is no consistent evidence that the subsidies work to retain more small farms; in fact, the evidence seems to indicate that the subsidies give larger farmers a more secure base from which to finance buy-outs of small farmers who can earn more income by shifting to off-farm jobs. Thus, the subsidies may actually hasten rural population decline.
There is no good evidence that farm subsidies help farmers to achieve higher standards of living; their rising productivity, their rising family off-farm incomes and the declining real cost of non-farm goods and services seem to account for most of the obvious increase in farmers’ living standards.
It is also certainly true that U.S. farm subsidies over the past 80 years have generally prevented U.S, commodities from competing effectively in world markets. The world’s consumption of grain has increased by more than one billion tons per year since 1933, but the world still cannot find room for the last increment of U.S. grain production. Other subsidizing countries, and internal production from countries like China and India expanding behind trade barriers, have supplied most of the rapid total growth in demand.
But rising subsidies do mean higher land values, and make American farmers less competitive in world markets. The U.S. demand for farm commodities is already oversaturated (even our pets are obese) and growing very slowly. The surge of growth in world farm demand is occurring primarily in densely populated Asian countries which are short of land and water, which should make such countries eager customers for American farm exports. However, the U.S. farm subsidies have made our farm exports anathema to most of the should-be importing governments (along with their own farmers’ natural antipathy to competing farm products).
Farmers have a curious reaction to higher land values. If their tractor prices doubled, they would be appalled because this would imply higher base production costs, making their industry less competitive. This reaction would occur even though their existing tractors would become more valuable. They’d be more worried about future tractor costs.
When land prices increase, however, farmers rejoice. They cheerfully point out that their existing stock of land has increased in value-even though the higher land values imply that they must now earn higher returns from the land they own to justify holding it-or sell out. They also know that over time they will probably have to buy more of this high-priced land to stay in the competition with their neighbors for places in a shrinking industry, and to stay competitive with the rising returns from off-farm jobs and investments.
So U.S. politicians continue to offer the farm subsidies as budget pressures permit and political exigencies demand. As a result, U.S. land values are significantly higher than land costs in Brazil, even after allowing for America’s better transportation infrastructure. Farm land costs in Western Europe, which are even more heavily subsidized than America’s (at least to date) are several times higher than in the U.S. There is no easy or comfortable way to climb down from this insupportable perch.
Now, the European Union is now adding 10 new countries to its existing 15 members. The Germans, who have largely funded the EU’s Common Agricultural Policy, are about “tapped out,” so the high level of current EU farm subsidies cannot be extended to the millions of Polish, Hungarian and Romanian farmers. The EU claims it will maintain a two-tier farm subsidy system, but this is unlike to survive once the 10 new member countries reach full voting status. The EU is likely to be forced into a demonstration of declining per-farmer and per-hectare farm subsidies in the next decade.
Nor is America likely to be able to avoid another drop in farm land prices. It would take further increases in farm subsidies in coming decades just to maintain the optimistic farm land values now driven by the current farm law. But that law was passed during a period of high apparent federal budget surpluses. These surpluses have turned to large deficits under the pressures of slower economic growth and the War on Terror. We are also moving rapidly closer to the “moment of truth” on reforming the Social Security and Medicare systems that are facing at least a $25 trillion unfounded obligation in the years of heavy baby-boomer retirement after 2011. It is highly probable that U.S. government farm subsidies will have to be reduced, not increased.
Now, to this volatile mix has been added the collapse of the World Trade Organization farm subsidy reform talks last fall at Cancun. Angered by the recent increase in U.S. farm subsidies Third World leaders refused to even discuss partial farm subsidy reform. In essence, they said that they were now doing well enough economically that they would prefer to keep their farm trade barriers and let the U.S. and EU boil in their own farm subsidy oil.
For 20 years, I have spoken of the Asian export opportunity as the U.S. farmer’s “escape hatch.” I hoped that American farmers could transfer from high farm subsidies to higher farm export earnings without a collapse in farm and farmland prices. World demand for farm products, and especially for meat and feed, is likely to more than double in the next few decades. However, a major expansion in U.S. and EU farm exports does not currently look possible, given the collapse of reform talks and the absence of any momentum in toward new ones.
It is now very likely that whatever claims of current generosity the agency can make to the farming community will soon be largely offset by cutbacks in FSA funds.
It is hard to say how the Farm Service Agency could ease the newly massive problem of subsidy-inflated land values given the provisions of the current U.S. farm law. At the very least, however, the FSA should remain aware of the problems-and do its best (along with other USDA agencies) to warn American farmers about them and the dangers they represent to future farm investment returns.
As further expansion of the Center for Global Food Issues comment on the FSA strategic plan, we incorporate a presentation we recently wrote for a hog industry meeting in Denmark. We believe the cautionary approach we used for the Danish pork industry applies equally strongly to U.S. agriculture.
