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.

Thus, the record suggests that price support programs are no panacea for the problems pla guing the farm economy. Why Farm Programs Do Not Ensure Farm Prosperity In one sense it is ironic that farm financial stress and farm program expenditures are si multaneously at record levels. A closer anal ysis, however, shows why huge outlays on government farm programs do not provide a long-run solution to problems confronting com mercial agriculture. Income assistance from agricultural price support programs designed to boost farm in come is transitory. Benefits from these pro grams are quickly incorporated into higher prices of land, production and marketing rights, production facilities, and other specialized farm resources that do not show up in farm income. Moreover, the short-run gains from price sup port programs go mainly to owners of these specialized farm resources and not to farm op erators. 13 Furthermore, it is the first generation of owners of farm resources, not farm pro ducers as such, who receive the benefits. After price support programs are initiated or benefit levels increased, benefits of higher producer prices are largely offset by higher production costs. And, once farm commodity programs are begun and the benefits are incorporated into higher input prices, there is no way to terminate or reduce benefit levels for dairy, wheat, rice, cotton, feed grain, and other commodity pro grams without imposing losses on all affected owners of land and other farm assets, regard less of whether they received the original gain.

Moreover, as in the case of price support payments, when increases from farm programs are capitalized into higher prices of land and other inputs, those who own more farm re sources receive more benefits. Here again, it is likely to be the higher income commercial farmers who benefit most from increases in prices of land and other farm assets. In the inflationary environment of the late 1970s, government-subsidized and -sponsored credit programs operated by the Farmers Home Administration and the Farm Credit System created an incentive to expand the size of farm operations through borrowing. The easy gov ernment credit policies of the late 1970s was a contributing factor to the farm bankruptcies of the 1980s. As inflationary expectations and farm product prices decreased in the 1980s, farm land prices plummeted and owners of land, capital facilities, and other farm inputs incurred huge losses in real wealth.

Farm price support programs have also been detrimental to exports of farm products. Agri culture traditionally has relied heavily on ex port markets. The export value of U.S. farm products in fiscal 1986 was about $26.5 billion - some $17 billion below the 1981 record level.l 4 And in mid 1986, the U.S. imported more agricultural products than were exported. For the year as a whole, the net farm trade bal ance (exports less imports) of $6 billion in 1986 was the lowest in 13 years. Rising Agricultural Productivity U.S. exports of farm products have been ad versely affected by increasing agricultural pro ductivity in other countries. Farm productivity is increasing rapidly throughout much of the world, not only in the United States and Western Europe, but also in the developing countries. 15 It is ironic that U.S. farm programs have contributed to increased farm output in other countries. The price support loan rates in U.S.

commodity programs that effectively set price floors frequently have provided artificial pro duction incentives to farmers in other countries who could produce at less than the U.S. loan rate. As U. S. farm programs tried to reduce farm output after 1981, the rest of the world significantly increased output of wheat, soy beans, cotton, and other products so that U.S. farm exports plummeted. Most of the government subsidies are re ceived by large farmers whose incomes, on average, already exceed those in the nonfarm sector. In addition to direct payments, farm programs also provide short-term gains to owners of farm land and other specialized resources. However, there is little long-run ben efit because the short-term gains are quickly re flected in higher production costs. For farmers renting or buying land after the programs are initiated, benefits are largely offset by higher production costs. On the other hand, when product prices decrease as during the 1980s owners of farm assets incur losses in real wealth-with large farmers losing more.

Increasingly expensive farm programs will not solve the farm problem. Farm programs have little effect on the long-run returns to farm labor. Since farm labor readily responds to changes in wage rates, increases in product prices mainly affect farm employment rather than wages. 16 Thus, the return to labor in the rest of the economy is far more important in influencing farm wage rates than are farm pro grams. Government price support programs for farm products are protectionistic and incompatible with free trade. 17 It is hypocritical for the United States to criticize other countries for using import controls, export subsidies, and other trade restrictions that this nation is also using. As agricultural productivity rises throughout much of the world and product prices decrease, greater budget outlays will be required to sup port product prices at any given level. The in creased competition for farm products and Fed eral budget pressures may force U.S. policy makers to do what they have heretofore been unable to do-modify U.S. domestic farm pro grams to make them compatible with the goal of liberalized trade.

There is no acceptable alternative for U.S. agriculture but to remove price supports and impediments to trade. Deregulation is no pain less panacea for current farm woes, but market forces are superior to other means of achieving resource adjustments in agriculture-domesti cally and internationally. A dismantling of price supports and trade restrictions would en able the United States to use its strongest force in world agriculture markets-the comparative advantage of V.S. farmers based on soils, cli mate, technology, managerial skills, and effi cient marketing and transport systems. GOVERNMENT FARM PROGRAMS 307 Even if the United States alone were to de control its agriculture, the nation and its farmers would be better off than with either of the alternatives-a subsidy contest between nations or strict production controls with the necessary protectionist international trade poli cies.

Policies that ignore or attempt to isolate U.S. farmers from world market trends cannot be successful in the long run. Protectionism pre vents farmers, other workers, and consumers throughout the world from reaping the benefits that occur when individuals are permitted to engage in those activities in which they are most productive. Consequently, policy actions of the United States and other countries have profound implications for farmers in the V nited States and other countries and for consumers of farm products throughout the world. 0 1. The points in this paper are discussed in more detail in the au thor's paper "The Farm Problem, Government Farm Programs, and Commercial Agriculture" forthcoming in The Journal of Produc tion Agriculture. 2. Hendrick S. Houthakker, Economic Policyfor the Farm Sector (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1967).

3. Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 1986), p. 361. 4. Farm income data in this section are from the Economic Report of the President, 1986, pp. 132-134. 5. U.S. Bureau of the Census. Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office, 1985), p. 445. 6. Mark Lilla, "Why the 'Income Distribution' Is So Mis leading," The Public Interest 77 (Fall 1984): 62-76. 7. W. W. Cochrane, "A New Sheet of Music: How Kennedy's Farm Adviser Has Changed His Tune About Commodity Policy and Why," Choices (Premier Edition): 23-33. 8. Data on farm financial stress are from the Economic Report of the President, 1986, pp. 132-134. 9. Dave Lyons and K. Collins, "Government Payments and Farm Finance." Update: The 1985 Farm Bill (Washington, D.C.: The U.S. Department of Agriculture, 1985). 10. Economic Report of the President, op. cit. p. 138.

11. Data in this section are presented in E. C. Pasour, Jr., op. cit. 12. E. C. Pasour, Jr., op. cit. 13. E. C. Pasour, Jr., "Inconsistencies in U.S. Farm Policies: Im plications for Change," Forum for Applied Research and Public Policy. (Summer 1986): 57-68. 14. Farm Credit Administration, Agricultural Situation Report, May 23, 1986 and August 29, 1986. 15. E. C. Pasour, Jr., "Protectionism and Agricultural Price Sup ports," The Freeman (October 1986): 381-383. 16. D. G. Johnson, "The Performance of Past Policies: A Cri tique," pp. 11-36 in Alternative Agricultural and Food Policies and the 1985 Farm Bill. G. C. Rausser and K. R. Farrell eds. (Berkeley, California: Giannini Foundation, 1985), p. 27. 17. E. C. Pasour, Jr., "Protectionism and Agricultural Price Sup ports," The Freeman (October 1986): 381-383.