02-1023-0004Deanna Adjustment Act (AAA) was passed in

02-1023-0004Deanna WuEconomic Research Department29 December 2017In the aftermath of World War I, American farmers were producing record amounts of crops for a declining number of mouths. Food prices began to fall in the 1920s and reached record lows in the following decade. The surplus of crops could not be bought by consumers and farmers could not profit despite producing more crops. As a result, as part of Franklin Roosevelt’s New Deal, the Agricultural Adjustment Act (AAA) was passed in 1933. Under the AAA, farmers were paid by the government to leave parts of their land untouched, thus discouraging excess production. Since this introduction of agricultural subsidies, many other payments have been developed and incorporated, such as direct payments and insurance. While subsidies provide steady income to individual farmers and promote agribusiness, they are often unevenly distributed and negatively impact the economy. Agricultural subsidies allow farmers to retain a steady income, regardless of the way their commodities are priced at market. As part of governmental subsidy programs, farmers are compensated for market drops with counter-cyclical payments, which are triggered whenever prices fall below a certain baseline. The Agricultural Act of 2014 ensures that farmers are compensated whenever there is a decrease in average price of a certain commodity. In the United States, prices for most agricultural commodities have been falling since around 2011. For example, according to the U.S. Department of Agriculture (USDA), the average market price of corn, dropped from $6.22 in 2011 to $3.36 in 2016. Similarly, the average price per bushel of soybeans has dropped from $14.40 in 2012 to $9.47 in 2016. Even though market prices have dropped drastically in the past decade, the average annual income of farmers in the United States has, surprisingly, risen, from roughly $75,000 in 2011 to almost $120,000 in 2015, according to the U.S. Bureau of Labor Statistics. This increase can be mostly attributed to agricultural subsidy programs run by the U.S. government, which ensure the longevity of commercial farms and support individual farmers.In addition to supporting individual farmers in the agricultural business, agricultural subsidies also support agribusiness as a whole. One form of agribusiness support is marketing promotion. As reported by the Agricultural Marketing Service, approximately $1.2 billion is spent annually on promotion activities. Promotion also occurs internationally as well. The Foreign Agriculture Service spends about $1.4 billion a year to promote products in foreign offices. Not only are agricultural subsidies used in promotion, but also encompass funds for agricultural research. The USDA spends around $3 billion a year on research, as well as providing statistics and economic studies for the agricultural industry. This combination of promotion and research, provided by the government, ensures that agribusiness will continue to persevere in future years.    While subsidies are valuable to those that receive them, the tendency for subsidies to be unequally distributed detracts from their benefits. Large commercial farms usually plant five main crops – wheat, soy, rice, beans and corn. These are the target crops for agricultural subsidies. However, this means that other products, like poultry, fruits, vegetables and livestock, are scarcely funded, despite comprising around two-thirds of all farm production. Another factor behind unequal distributions is farm size. Since subsidies are apportioned by the acre, larger farms receive more subsidies, while the poorer and smaller farms receive little to none. As reported by the USDA, the bulk of subsidies are currently dealt to large commercial farms, most of which already receive a steady income. From 1995 to 2009, the top ten percent of farms received seventy-four percent of all farm subsidies according to the EWG. Each recipient collected $445,127 over 15 years. In comparison, the bottom eighty percent was only granted a mere $8.682 per recipient. This is the main issue with agricultural subsidies, since the smaller farms that would reap the greatest benefits from subsidies aren’t the main recipients. As such, agricultural subsidies damage the economy by causing overproduction, distorted choice of crops, and inflated land prices. Farmers choose to excessively plant crops for which they are eligible to receive subsidies. Without agricultural subsidies, a wider variety of crops would be planted, land usage would change and become more efficient. The resulting industry would become stronger and be more resilient to market fluctuations like in other industries, where market prices would balance supply and demand and promote innovation to improve productivity and reduce costs. Furthermore, USDA data from 2016 shows that farm households earn about three-quarters of their income from off-farm sources. Thus, farm households today are well equipped to deal with market fluctuations. Although agricultural subsidies have certain benefits, the unequal distribution in favor of large commercial farms and the five staple crops essentially eliminates these benefits. The main purpose of subsidies is to provide a steady income to all farmers, yet a majority of subsidy programs are targeted towards large commercial farms. Since large farms are already receiving a steady income from the staple crops they produce, they have no need for the subsidies provided by the government, and the individual farmers that need subsidies to maintain a steady income are not receiving them. Similarly, although subsidies are partially used to promote agriculture, most subsidies are targeted towards the five staple crops. The remaining sectors of the agricultural industry that actually require additional funds do not receive them, thus rendering subsidy programs as a whole obsolete. Therefore, since the unequal distribution of subsidies focuses the benefits to those that do not require them, agricultural subsidies should be discontinued.


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