Six Stylized Facts About U.S. Agricultural Subsidies

Awhile back I promised I would try to summarize some of my own other others’ research on the effects of agricultural subsides. Well, it’s taken me a bit longer than anticipated…

And, well, I just cannot summarize all of this stuff in one post. Instead, for starters, I am going to summarize some of the stylized facts that are most prominent in my own mind when I think about U.S. Agriculture, agricultural subsidies and their consequences.

1) The dawn of the “green revolution,” which started crop yields on a remarkable and historically unprecedented upward trend that continues today, began around the same time agricultural subsidies began on a large scale. To add irony to irony, this trend began during the middle of the Great Depression.



I do not believe there is a causal link going from subsidies to subsequent yield growth. Rather, it seems that during the dust bowl farmers realized that hybrid corn was less susceptible to drought than traditional corn varieties. And this discovery inspired adoption of hybrid corn, and more importantly, adoption of the plant sciences as a method for increasing agricultural productivity. Richard Sutch has a fascinating article that revisits this history of hybrid corn adoption and Zvi Griliches' classic paper on the temporal and spatial spread of adoption of hybrid corn. Following these events, we also owe thanks to Norman Borlaug for helping to spread these technologies globally. Economic incentives, sadly, seem to have had a small role in this story.

2) While one cannot be sure, it appears as though most “supply response” of U.S. agricultural commodities to prices is the result of U.S. policy, not decisions of individual farmers. For evidence I present the following figure: it shows the amount of cropland used for crops and land in so-called “set asides” or conservation programs—land for which farmers are paid not to plant. For more detail you can see this USDA report on land use (USDA's oldest recurring publication). It is not perfectly clear because we don’t know what farmers would have done with the land had the government not paid them not to plant it. Perhaps they would not have planted anyway. (To me anyway, this seems unlikely.)

(Yes farmers do respond to changes in relative prices: when corn prices go up more than soybeans do, farmers plant more corn and less soybeans. But response is limited, probably due to the agronomic benefits of rotations, among other factors.)

3) Nearly half the nation's agricultural land, and more than half (I think) of the nation’s cropland (the difference between agricultural land and cropland is mainly pasture and range), is rented from non-operator landlords. These landlords would seem to represent a powerful interest group that reaps a large share of the benefits of agricultural subsidies. Agricultural economists have long held that land owners reap most benefits from agricultural subsidies. Surprisingly, and against all prognostications by agricultural economists for the last 75 years, land rents increase by about only 25 cents for every dollar of subsidies. Instead, it seems farmers get most of the benefits of subsidies.

The paper by Barrett Kirwan in the current issue of the Journal of Political Economy is a must read for anyone interested in this topic.

4) Over the last 20 years, the concentration of agricultural production on larger and larger farms is happening far more rapidly in areas with greater per-acre levels of agricultural subsidies. This is documented in my work with Nigel Key. While it is not perfectly clear whether or not this relationship is causal, obvious confounding factors have been accounted for.

5) Farmers are wealthy. They are not Titans-of-Wall-Street wealthy, but they are a solid notch wealthier than a typical American family. And in comparison to others living in rural parts of the United States, they are at least two notches wealthier. This is not the way things were before World War II. Big farms (with most production) are wealthy from farming and from subsidies. Small farms are wealthy from off-farm jobs, other businesses, and perhaps from farm-related tax deductions.

6) The nature of subsidies has changed a lot over time. They are no longer paying farmers a subsidy per unit of output. In fact, they haven’t been doing that for a very time. While significant production effects stemming from U.S. agricultural subsidies may possible, it is very hard to tell a story in which current subsidies are large enough to influence world prices. One possible story is given here. Ethanol subsidies and mandates are a huge exception--these have a big influence (see earlier post here).

I remain somewhat agnostic on the overall effects of agricultural subsidies. But these stylized facts suggest to me that while these subsidies have likely enriched farmers, they have done little to impede technological change or strongly influence world commodity prices over the last 30 years, except perhaps to mitigate price fluctuations via adjustments in set-aside and conservation programs. So while I sympathize with frustrations about size of payments to farmers, I have a hard time agreeing with the likes of Michael Pollan who argue that these subsidies are an important reason for cheap food and our corn and meat-rich diet.

Comments

  1. How is the mitigation of price fluctuation not to be considered a strong influence in commodity prices.

    It seems that, if for no other reason, the predictability and thus stability of commodity production in the US would suffice to continue subsidies.

    Over the last decade, as we have moved increasingly away from such supply controls, production and thus price variability has increased dramatically.

    Is the increased efficiency worth such volatile food prices?

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  2. outwardlyfoolish: Yes, you're right, I should have chosen my words more carefully. Conservation programs probably influence prices and so I’m contradicting myself.

    The point is that this is opposite usual story. The usual story is that subsidies cause farmers to produce more and thus drive down world prices. I don't know of any compelling evidence, or even anecdotal evidence, to support the standard view.

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  3. "I do not believe there is a causal link going from subsidies to subsequent yield growth. . . . Economic incentives, sadly, seem to have had a small role in this story."

    It's been a long time since I did Industrial Organization, but I will say that "insurance" is a big factor in the incentives for sunk cost investments in small, incremental improvements in organization and practice, generally. In the history of industry, securing market power to stabilize and regulate price is often the first step toward the steady building of organization and application of technological advance. It's a familiar story: Standard Oil was built on Rockefeller's mastery of price in the Ohio-Pennsylvania oil patch, which had gyrated madly -- what followed was a decades-long expansion and steady decline in the retail price of kerosene, which price was nevertheless carefully administered.

    It might not be apparent that the insurance of market power is a critical change in economic incentives, especially since, in industrial corporations, it tends to result in bureaucracies administered mostly by salaried managers, but it is.

    It's a signal and noise problem, if you like, in the feedback loop, between a system of management control and outcomes. Without the insurance against risk of the administered price, management cannot plan and execute the low npv investments in incremental improvements.

    I can well imagine the problem was acute in U.S. agriculture in the 1920s and 1930s. The feedback loop from planning a crop and planting -- to realizing a result in harvest and sale is marked by a long lag, as long or longer than what any industrial supply chain presents. An unexpected fluctuation in realized price would wipe out even a successful investment in increased output; the risk of such price fluctuations might swamp the value of investments in incremental expansion of output, and the cost of finance in such an environment overwhelm returns on investment.

    U.S. agriculture in the 1920's was experiencing increasing financial risk, and a lot of pressure to shed resources, even as the technological potential was rising. Stabilizing prices and finance at levels that allowed both investment and the continued shedding of resources (labor) was an important achievement of New Deal agricultural programs. The New Deal also greatly improved the effectiveness and resources of County extension agents, which might have had some effect on technological transmission.

    Anyway, I hope my purely hypothetical storytelling is at least suggestive of what the "causal" link in changed economic incentives from subsidies might have been.

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  4. Bruce Wilder:

    I understand and can appreciate your theoretical reasoning. But it just does not apply here. Or, at least it doesn't explain what happened to cause yields to take off.

    Yield growth is first and foremost a phenomenon associated with development of new seed development. The new seeds didn't come from farmers. They came from universities and USDA experiment stations.

    Second and third would be use of chemical fertilizers and pesticides. Your reasoning may apply to these factors, but most of it, I believe, just involves the spread of knowledge and development of markets to supply these inputs.

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  5. The link to the story explaining why subsidies could affect world prices doesn't work? Can you post it again?
    Thanks!

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