Who really benefits from agricultural subsidies?

I've mentioned this paper by Barrett Kirwan before on this blog.  Here's the title and abstract:

The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates

Who benefits from agricultural subsidies is an open question. Economic theory predicts that the entire subsidy incidence should be on the farmland owners. Using a complementary set of policy quasi experiments, I find that farmers who rent the land they cultivate capture 75 percent of the subsidy, leaving just 25 percent for landowners. This finding contradicts the prediction from neoclassical models. The standard prediction may not hold because of less than perfect competition in the farmland rental market; the share captured by landowners increases with local measures of competitiveness in the farmland rental market.
This paper is one of very few in recent history on the topic of US agricultural policy published in a first-tier economics journal.  I like this paper a lot, but I'm less than fully objective. Barrett is a colleague and good friend. And I worked with Barrett during the incipient stages of this work (a much earlier and less thorough version that I was involved with is published here).

We are working on a joint follow piece now that I'll present at the AAEA meetings in Denver this summer.

Some senior economists in the field of agricultural economics who are far more experienced than Barrett or I, do not agree with these results.  They are convinced that payments are fully capitalized into land values and that land owners are the main beneficiaries.  I am trying hard to understand what they think they see in the data that I don't see.

On one level, I don't see how the incidence question matters all that much.  It looks like about 60 percent of subsidized cropland acres are owned by non-operating landlords, so the incidence question does matter, to an extent, for discerning who gains most from subsidies.  But whether we're talking about landowners or farmers, both are relatively wealthy these days, so the idea of transferring wealth to either of these groups seems like a hard thing to justify.  Neither are farmers or landlords, as a group, absurdly wealthy--this doesn't seem at all like CEO corporate welfare.  My point is that no side of this playing implicit advocate here--my impression is that this debate is purely an intellectual one.

In other ways I think less than full incidence of subsidies on land rents could have much broader implications.

One aspect of this that matters for policy is the fact that strong incidence of payments on land rents and values might engender an argument for subsidies as an established entitlement.  Agricultural subsidies have been around a long time, so if today's landowners bought the land with the idea that it embodied future subsidies, then taking the subsidies away only punishes those who invested with the mistaken idea that subsidies would endure.  This argument, of course, makes it more difficult (or costly) to end subsidies.  So, the lower the incidence of subsidies on land rents and land values, the less politically difficult it may be to reduce subsidies going forward.  No doubt it would be hard to end subsidies even if incidence were zero.

Other aspects of this that are even more interesting have to do with (a) what less than full incidence implies about the functioning of agricultural land rental markets and (b) what it may imply about the broader effects of subsidies.

With regard to (a), it seems agricultural rental markets are far from perfectly competitive.  It's not entirely clear why that might be the case.  But it appears most rented cropland is rented by large farms from multiple relatively small landowners.  The landowners class is fairly diverse, ranging from retired farmers, extended families of former farmers that often live far from the land, and investors.  For information and transactions-costs reasons, it seems to make sense that farmers would often hold more bargaining power than landlords in these arrangements, which may explain the incidence issue.  Barrett has done some work in this vein.  It needs a lot more study.

With regard to (b), it seems that imperfect competition in the rental market might lead to indirect effects subsidies that heretofore have not really been explored.  If farmers can extract 75 cents on the dollar of subsidies attached to land rented then, all else the same, it is going to pay to make your farm bigger.  And that's what we see, bigger and faster growing crop farms in places with higher subsidies--  I've shown this in earlier research with Nigel Key. Presumably this process  would drive up rents toward full incidence.  But if that's not happening for some reason, we get fewer bigger farms.  I think the same incidence issue could explain our research showing that subsidies keep farmers farming longer.  If retiring means giving up 75 cents of every subsidy dollar on rented land, plus 75 cents of every dollar on land owned that the owner may then rent out, then maybe it's worthwhile to farm for a few more years.

I've said before that, excepting ethanol and perhaps some cotton subsidies, it's hard to see how subsidies might have large-scale effects on agricultural production in the U.S.  (You may be skeptical about this if you don't know a lot about the way subsidies work or historical land use in the U.S. The general point is that the nature and size of most subsidies are unlikely to keep the Midwestern corn belt from growing corn and beans.  After all, if they weren't growing corn and beans, what would they do with the land?)  But I do think it's highly plausible that subsidies help to make farm sizes bigger faster.

Bigger farms also tend to be more efficient farms, so it's really not clear whether all this is a good or bad thing in terms of production efficiency.  We still have a lot more work to do to connect the dots.  Then maybe we can say something confident about the bigger picture.

Comments

  1. Great post. Very thoughtful. Surely a big issue is whether the land is cash rented versus 50/50 crop share, versus owner operated. If it's owner operated, the incidence question is an easy one. If it's 50/50 share, then the incidence also seems to be straightforward.

    It's only when there is a cash lease agreement that things get complicated, right? What % of farming gets done by this method vs. the others?

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  2. Jeff: I think for share leases it is actually much more complicated. The problem is that incidence is more difficult to measure since the rent actually paid may be far from what was expected. The nice thing about focusing on cash leases as opposed to land values or share leases is that it obviates all of the very challenging expectation issues.

    That said, I see no good reason why incidence should be different for share leases than cash leases, especially if less than full incidence is due to tenant farmers having market power.

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  3. My impression of the share arrangement is that the tenant/operator gets to make all decisions about what to plant, what seed to use, how much to fertilize, etc.

    After harvest, the operator/tenant sends a bill for half of all expenses to the landowner. In return, the landowner receives half of whatever grain was harvested. The landowner sells their grain on their own (e.g., to the local elevator).

    Therefore, the tenant and landlord would have equal opportunity to benefit from one of the floor price programs (e.g., loan deficiency), when they sell their grain.

    The tenant and landowner essentially have the same incentives and constraints.

    It is for these reasons that I thought that with a 50/50 share, the incidence question is pretty easy. But I don't know all the details and could easily be getting this story wrong.

    Jeff Reimer

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  4. Jeff:

    No. You seem to be assuming the contract would be the same if there were not government payments. And that's not the case at all. Even then, it's harder to measure the *expected* return for the landlord with a share contract.

    The landlord and tenant need to decide what the share will be. That share depends on lots of things (costs of production, who pays what costs, and expected return). It also depends on expected government payments.

    To know what the incidence is, we need to know (a) what the contract would look like if there were no government payments and (b) the difference in expected returns to the landlord under (a) in comparison to what it is in reality.

    That's not simple at all.

    It's hard enough with a cash lease. But then we at least of a clear measure of what the landlord is getting.

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