The Farm Problem and Government Farm Programs; E.C. Pasour, Jr.

C urrent U.S. farm programs were insti tuted during the Great Depression of the 1930s. Despite dramatic changes in economic conditions over time in the farm sector, the Food and Security Act of 1985 is remarkably similar to farm programs of the past fifty years. Government programs have not solved the farm problem. Indeed, the level of financial stress on U. S. farms is the highest since the Great Depression of the 1930s even though Federal outlays on farm programs in 1986 were at record high levels. Moreover, there is a growing awareness that our domestic farm programs are more and more anachro nistic in a world in which agricultural produc tion is increasingly competitive.! This paper defines the farm problem, discusses the effects of farm programs, and demonstrates that a fun damental change in direction of U.S. farm pro grams is long overdue. The Farm Problem The farm problem in the United States his torically has been considered to be one of rela tively low farm incomes. This problem can be traced in large measure to the destabilizing ef fects of economic growth.2 Economic growth leads to a shift of labor and other resources from agriculture to other sectors of the economy as agriculture decreases in relative Dr. Pasour is a professor of economics at North Carolina State University at Raleigh.

importance. For example, the U.S. farm popu lation decreased from 25 per cent of the total population in 1929 to little more than 2 per cent in 1985. During this period, however, output per hour of farm work increased more than 15 times.3 For labor resources to be bid away from agriculture, it is necessary that incomes be higher in nonagricultural occupations. Since in comes of farm workers historically were fre quently lower than those of nonfarm workers, on average, it is not surprising that agricultural interests perceived this difference as a "farm problem." Current farm programs, including price sup ports, conservation and credit subsidies, subsi dized crop insurance, and food assistance pro grams, were initiated during the Roosevelt New Deal to raise farm product prices and farm in comes. Programs to raise (or even to maintain) farm product prices, however, as shown below, are increasingly at odds with falling worldwide prices of farm products brought about by ad vances in technology.

Falling prices of farm products is not a new phenomenon. Through the years, mechaniza tion, improved seeds, the development of new pesticides and herbicides, and other increases in technology have resulted in the substitution of capital for labor, thereby dramatically in creasing the supply of farm products. The de mand for farm products, influenced mainly by gradual increases in population and consumer 304 THE FREEMAN. AUGUST 1987 incomes, on the other hand, has increased much more slowly than supply. The downward trend in farm product prices has implications for government expenditures on price support programs. The more product prices decrease, the higher the taxpayer cost of supporting agricultural product prices at any given level. Incomes: Farmers, Nonfarmers, and Commercial Farmers4 Average income per U.S. farm in 1984 was $28,600. This is somewhat higher than the me dian income of $22,400 for all households. 5 There are a number of problems, however, in making farm versus nonfarm income compar isons of this kind.

First, the concept of "average income" has little meaning since income per farm operator varies widely, depending on farm size. Almost half of all farms, as measured by sales of farm products, have annual sales of less than $10,000, and these farms account for only about 6 per cent of gross farm income. On the other hand, the largest 5 per cent of the farms (annual sales of more than $250,000) account for almost half of gross farm income. The average U.S. farm family earns roughly 40 per cent of its income from farming and the other 60 per cent off the farm. However, the importance of off-farm work varies widely with farm size-with off-farm income decreasing in relative importance as farm size increases. On small farms with sales of less than $40,000 per year, most income is now derived from non farm sources. Thus, discussions of "average" farm income generally are highly misleading because the farm is not the primary source of income for many farmers, including most small farmers.

Second, any meaningful comparison of farm and nonfarm incomes must consider differences in worker productivity. Indeed, much of the observed inequality in income is due to differ ences in education, training, and experience.6 Third, in making comparisons of living levels for farmers and nonfarmers it is impor tant to make adjustments for differences in costs of living and taxes. For example, the buying power of a given level of money income is somewhat higher for farmers because of in come tax advantages and lower costs of living in rural areas. In addition, the individual satis faction gained from working in the outdoors and of being one's own boss are high enough for some farmers to. substitute for a substantial amount of money income. When all of these factors are taken into account, it is questionable whether incomes are now lower in agriculture. As suggested above, attempts have been made since the 1930s to increase farm incomes - mainly through government programs that raise farm product prices. The effect of these programs is to make incomes within agriculture more unequal, since the benefits of farm pro grams are tied to the volume of farm sales and vary with farm size. Farmers with sales of less than $40,000 per year, for example, constituted 70 per cent of the farms but received only about one-tenth of the total direct government pay ments.

On the other hand, the one per cent of the farmers having sales of more than $500,000 per year received more than 1°per cent of the sub sidies (which averaged $33,000 per farm on these large farms in 1984). Farm program pay ments go primarily to farmers whose incomes are far above the median household income for the country as a whole. However, the largest farms do not always re ceive benefits from farm programs. Many large farms produce commodities, such as livestock, poultry, nursery products, and fruits and vege tables, that are not covered by price-support programs. Also, there is a $50,000 per pro ducer payment limitation that limits to some extent the benefits of government programs to large farmers. However, exceptions frequently limit the effectiveness of the payment restric tion and subsidies to individual producers sometimes exceed $1 millio~. There is a growing awareness that the in come transfers of farm commodity programs cannot be justified. Even Willard Cochrane, long-time proponent of farm commodity pro grams and former farm adviser to President Kennedy, now agrees that there is no defen sible reason why the nonfarm sector should be called upon to pay higher taxes and food prices to finance these programs that redistribute in come to higher income farmers.7 Financial Stress and Government Payments8 The "stabilization" of the farm sector is an other commonly stated reason for government price support programs. During the 1980s the debt/asset ratio of U.S. farms, a widely used measure of financial stress, has risen to levels unseen since the Great Depression. The rapid decline of agricultural land and machinery values has been a major reason. Land values nationwide decreased an average of 19 per cent from 1981 to 1985 and the decrease was much larger in regions with the largest land value de clines-the Com Belt, the Lake States, and the Northern Plains.

About 12.5 per cent of all farms are "finan cially distressed," but financial stress is higher on commercial farms. Despite the fact that commercial farmers receive the lion's share of government payments, most farm subsidies are not targeted toward those farms in financial distress. Indeed, only 17 per cent of the pay ments in 1984 went to farmers in financial dis tress who relied primarily on farming for their livelihood.9 Other Commodity Programs Direct payments are not the only means through which commodity programs affect farm income. Some commodity programs raise prices to producers through production or im port controls. The sugar program, for example, which holds domestic sugar prices well above the world market level, yields huge benefits to the 12,000 to 13,000 domestic sugar producers. The producer benefits, averaging $120,000 to $145,000 per farm, are achieved through a system of sugar import quotas.10 Similarly, the tobacco program raises prices to producers with a system of producer acreage allotments and marketing quotas. In this case, the farmer does not receive a direct government payment as in wheat, cotton, rice, and feed grains programs. Instead, product prices are in creased through government-sanctioned and -enforced producer restrictions on production GOVERNMENT FARM PROGRAMS 305 and marketing. The tobacco program is viewed by some agricultural cartel advocates as a model for other farm commodities because the budget outlay is small.

In a still different manner, the dairy program raises milk prices received by dairy producers through government purchases of butter, cheese, and nonfat dry milk. The government purchases enough of these milk products to raise the price of milk to the price-supported level set by Congress. Outlays on dairy and other price support pro grams in fiscal 1986 were at record high levels -some $26 billion. However, an analysis of recent trends in net farm income and USDA outlays demonstrates that farm commodity pro grams do not ensure farm prosperity. Farm Income and Outlays for Farm Programs!! The income derived from farming operations is quite variable from year to year depending upon weather, product prices, and so on. How ever, net farm income, adjusted for inflation, is considerably lower in the 1980s than it was in the 1960s and 1970s. For example, inflation adjusted net farm income in 1985 was less than two-thirds the level in 1975. The decrease in farm income has been accompanied by calls for government to "do more." The extent to which Congress has responded is not fully ap preciated.

In a recent paper, the author calculated USDA expenditures separately for (1) price support programs, (2) food stamp and other food assistance programs, and (3) "other"pro grams that include outlays for conservation, subsidized credit, crop insurance, research, and extension. 12 There has been relatively little increase in real terms in USDA outlays for the latter two categories, i. e., for food assistance or for "other programs" during the past decade. The dramatic increase in USDA outlays since 1980 has been in price support programs. Outlays in current dollars for price supports (including foreign assistance programs) increased more than four times from 1980 to 1985 (from $4 billion to $19.4 billion). And the end is not in sight. Outlays for price support programs in 306 THE FREEMAN. AUGUST 1987 fiscal 1986 were $26 billion, and there is growing concern that expenditures will estab lish new records under the 1985 farm bill.