Who Benefits from Agricultural Subsidies?

Check out my post on my department’s blog about some of the research I have been doing lately: Who Benefits from Agricultural Subsidies?

Posted in Agricultural Policy, economics, farm policy, farm subsidies | Tagged , , | Leave a comment

The Effect of U.S. Agricultural Subsidies on Equality

Perhaps the most fundamental question about U.S. agricultural subsidies is how have they affected the structure of U.S. agriculture. Recently the question has become more germane as food policy has become intertwined with public health policy (obesity), with energy policy (biofuels), and with third-world economic development and population growth (food demand and sustainability). As with all important questions, this one is very difficult to answer. Agricultural subsidies have been a part of agriculture for so long and through so many policy and economic changes, it is difficult to isolate causal relationships.

Distribution of Agricultural Subsidy Payments by Sales Class (2010)

Distribution of Agricultural Subsidy Payments by Sales Class (2010)

By subsidizing agricultural production, large farms inevitably receive large subsidies. The table above reports the distribution of subsidy payments by sales class in 2010. From the table, the consequences of subsidizing agricultural production and farmland are clear; only about 2 percent of farms receive $1 million or more in sales revenue, but they receive over 20 percent of all farm subsidies. About 55 percent of all farms had sales less than $10,000 in 2010, and only 18 percent of these farms received agricultural subsidies. These low-sales farms received only 6 percent of the subsidies paid out.

The concentration of subsidies among the largest farms has long been the case. James Bonnen made this point in 1969, pointing out that just 20 percent of farms received a majority of 1964 agricultural subsidies, and the top 5 percent of farms, by sales, received about 30 percent of subsidies.  Schultze further demonstrated that the farms receiving the lion’s share of the subsidies had the highest revenue.  The 2006 Economic Report of the President (EROP) revealed little change in the intervening 37 years when it reported, “The largest of the commercial family farms received 27 percent of payments even though they account for 5.5 percent of farms receiving payments.”

Lorenz curves illustrating the concentration of agricultural subsidies in 1968 and 2007

Lorenz curves illustrating the concentration of agricultural subsidies in 1968 and 2007

The stability of the concentration of subsidies can be seen in two Lorenz curves, illustrated above, which illustrate cumulative subsidy payments from the poorest to the richest farms. The dashed curve is from Paulsen, illustrating the concentration of producer payments in 1968. The solid blue line is constructed from the 2007 Census of Agriculture. Visual inspection reveals very little change over the 39-year period. Despite increasing concern by voters about the distribution of farm subsidies, the distribution remains stable; agricultural subsidies are neither increasing nor decreasing equality. (See this post for insight into why agriculture is not become less equal despite the concentration of subsidy payments.)

(Excerpted from Barrett Kirwan. 2014. “Economic Support for Agriculture,” in Public Economics: The Government’s Role in American Economics, edited by Steven Payson. Oxford UP: New York.)

Posted in Agricultural Policy, economics, farm subsidies | Tagged , , , ,

The Effect of U.S. Agricultural Subsidies on Farm Efficiency

Large farms receive large subsidy payments. This relationship is largely mechanical. Since the policy subsidizes production and land, farms with greater production and land will, consequently, receive more government payments. But the question arises whether subsidies enhance efficiency in agriculture.

An important way that subsidies enhance efficiency in agriculture is by providing farmers with greater access to capital. Numerous studies have concluded that U.S. farmers behave as though they have limited access to credit. Several empirical papers demonstrate a relationship between farm investment and the availability of internal funds. The findings all indicate credit constrained behavior among U.S. farmers. In other words, farmers face capital market imperfections. By solving such a market failure, government plays a key role in substantially increasing efficiency in the agricultural sector.

Researchers at the Department of Agriculture have closely investigated the impact of government payments on the structure of agriculture in the U.S. Their findings indicate that “government payments are strongly associated with subsequent concentration growth.” In other words, farms that receive large subsidies per acre grow faster. In similar work, Roberts and Key use quasi-experimental methods to examine the effect of government payments on farm concentration growth. Using farm-level data from the 1987-2002 quinquennial Census of Agriculture, they explore the relationship between per-acre subsidies and the growth in the size of the median farm in each zip code in the U.S. They find that per-acre government payments explain about half of the growth in farmland concentration. A plausible explanation of their findings is that government payments help farmers overcome liquidity constraints to exploit increasing returns to scale. In other words, government payments address capital market imperfections and in doing so they allow farmers to become increasingly efficient.

One way to measure the efficiency of U.S. agriculture is by the returns to investing in agriculture. Economists at the USDA’s Economic Research Service have shown that as farm-size increases, so does the return on equity. White and Hoppe show that, in 2009, farms with more than $1 million in sales achieved a 4.6 percent return on equity. In contrast, the average return on Treasury Inflation-Protected Securities was about 2.3 percent in 2009. The long-run average return on equity for the largest farms is about 6.5, which is comparable to the long-run return to the stock market.

When considering the justification for economic support for agriculture, one must carefully consider the economic benefits. Evidence suggests that farmers face capital market imperfections, which could lead to under investment in agriculture. Government payments overcome capital-market failings, and the economic returns appear to be quite high.

(Excerpted from Barrett Kirwan. 2014. “Economic Support for Agriculture,” in Public Economics: The Government’s Role in American Economics, edited by Steven Payson. Oxford UP: New York.)

Posted in economics, farm policy, ideas | Tagged , , ,

Do Agricultural Subsidies Contribute to Productivity Growth?

How does government-provided economic support affect U.S. agriculture? Agricultural economists have for decades deemed farm programs as wasteful and inequitable. In his 1995 book Plowing Ground in Washington, Delworth Gardner asks, “Given that farm price support programs are both wasteful and inequitable, why do these policies exist and, perhaps even more of a puzzle, why do they persist?”  At the same time, agriculture is the sixth most productive industry in the U.S., behind computer manufacturing and ahead of both telecommunications and software publishing.

Bar graph ranking industries by contribution to productivity growth.

Farm-sector contribution to U.S. productivity growth is among the highest.

U.S. agriculture accounted for fifteen percent of U.S. productivity growth between 1960-2007. How do we reconcile such productivity growth with “wasteful” farm programs? Could it be possible that farm programs somehow have contributed to the productivity growth and are not as “wasteful and inequitable” as supposed?

Posted in food policy, Productivity | Tagged , , ,

The Clean Water Act

A color-coded map of major waterways in Illinois. Red rivers are impaired, and blue ones meet their water quality standard.

Red rivers are impaired, and blue ones meet their water quality standard.

I’ve been thinking a little about the Clean Water Act lately. Jonathan Coppess and I have written a few things about it on the ACE Policy Matters blog. We introduced the topic back in July.And a last week we looked at the weather as the great unknown that hampers effective regulation.

Posted in Agricultural Policy, Environment | Tagged , , ,

I’m on the web

Check out my new site on the world-wide web: barrettkirwan.com

Posted in economics, Miscellania

Will Ethylene Displace Corn-based Ethanol?

When we think about ethanol, most of us in the U.S. think about corn. If we were in Brazil we would think about sugar cane. Essentially we think about ethanol produced from a fermentation process. But ethanol can also be made from hydrocarbons found in fossil fuels. In particular ethanol can be made from ethane. Ethane is the second-most common compound in natural gas–after methane. Ethane can be converted to ethylene by steam cracking. And ethylene can be catalyzed to become ethanol.

This is (potentially) relevant because a few weeks ago the U.S. Energy Information Administration reported that “Proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded since the U.S. Energy Information Administration (EIA) began publishing proved reserves estimates in 1977.” The following graphic illustrates the dramatic change in U.S. natural gas reserves.

U.S. natural gas reserves expanded dramatically in 2009 and 2010.

Consider the following scenario: 1) A drought in the Midwest causes corn prices to rise to unprecedented levels. 2) Technological advances (horizontal drilling and hydraulic fracturing) lead to a surging supply of natural gas. Event 1) reduces the profitability of corn-based ethanol production while event 2) increases the profitability of fossil fuel-based ethanol. Considering the wide-ranging cries to suspend the RFS ethanol mandate, one could imagine Big Oil supporting a looser biofuel mandate in order to take advantage of the changing economic picture.

I think a dramatic policy change is unlikely, but the surging natural gas supply adds an interesting wrinkle in the whole ‘food vs. fuel’ debate.

Posted in economics, food policy

Thinking about Ethanol Policy

Lately, a couple of my friends have posted their reactions to the Carter & Miller op ed in the NY Times. (You can see my take on it here.) I think Marc agrees too readily, and Michael brings up a good point, but misses the big picture. The most salient, thoughtful analysis of the current ethanol vis-a-vis feed debate was done by my colleagues at the University of Illinois. Scott Irwin and Darrel Good really understand the ethanol market. I’ve had countless conversations about it with Scott. On Scott’s recommendation, I even read Petroleum Refining to understand the structure of the ethanol and gasoline markets. (Fascinating book by the way, I highly recommend it.) Scott and Darrel point out that ethanol production is driven by demand from the oil companies (and blenders) not by the Renewable Fuels Standard. So easing the RFS won’t have any effect. Check out Scott and Darrel blog post for the details; it boils down to octane requirements and the high octane of ethanol. That’s also why we see a smooth, steady increase in ethanol production long before the 2007 RFS (or the 2005 RFS). Ethanol production began picking up in the late 1990s, when oil companies discovered the toxicity of MTBE, their main oxygenate and switched to ethanol as a replacement. Check out the picture:

Ethanol production started ramping up long before the Renewable Fuel Standard mandated ethanol production.

There certainly was dramatic expansion in 2007 and 2008, but the buildup had been coming for a decade before that.

I think the RFS was a bid by oil companies to get cheaper oxygenate. In other words, the RFS is a result of oil companies’ demand for ethanol, not a cause of ethanol demand. Consequently, relaxing the mandate probably won’t have much of an effect.

Posted in economics, food policy | 1 Comment

Ethanol Policy Undoes the Ravages of Nature

A couple days ago, Collin Carter and Henry Miller opined in the New York Times that, “a stroke of a pen can quickly undo the ravages of nature.” The “ravages of nature” in question is the current drought, which is “ravaging” corn in the Midwest. And the pen stroke? That’s a little more complicated, but the bottom line is: they are wrong.

Carter and Miller are concerned that under current law ‘corn for ethanol’ takes precedence over ‘corn for people.’ That’s because the Renewable Fuel Standard (RFS) mandates the production and blending of 13.6 billion gallons of ethanol this year, which is roughly equivalent to 4.9 billion bushels of corn. Considering that some folks think the drought has caused farmers to lose 2 billion bushels of corn, Carter and Miller suggest that simply loosening the mandate by 20%–that’s the ‘pen stroke’–will undo half of the damage caused by the drought. But their suggestion is totally superfluous.

To understand ethanol policy, one has to delve deeper than the pages of the New York Times. Those who really understand ethanol policy (like my colleague Nick Paulson) know that currently there is a built-in safety valve that accomplishes what Carter and Miller propose, without stroking any pens. The current law gives blenders ‘credits’ (called Renewable Information Numbers (RINs)) when they exceed the mandate. These credits can be carried forward and cashed in during years when they don’t meet their quota. Because the ethanol industry has been producing like gangbusters the past couple years, blenders currently have about a billion gallons-worth of RINs–roughly equivalent to the 20% easing Carter and Miller call for.

So, their op-ed should have said, “thankfully, since we produced so much ethanol the past few years, we won’t have to worry about ethanol competing with food for corn this year.” Or more to the point, “thankfully, our ethanol policy undoes the ravages of nature.” But I guess that doesn’t sell newspapers.

Posted in economics, food policy | 1 Comment

Aggies vs. Conservatives

A few days ago I blogged about the traditional ‘aggies vs. liberals‘ division on farm bill-related matters. I cited the difference in the farm bill debate between the concerns of the senators from farm states (the aggies) and the concerns of the more liberal general body of the Senate.

Well, it looks like the House is sticking to its dysfunctional ways, but there the contention is between the aggies and conservatives. According to the Boston Globe, “the [Republican] party remains stymied by internal divisions between conservatives and farm-state lawmakers on how to proceed with a broader renewal of farm subsidies and the food stamp program.”

These guys need to get their act together. Now is not the time to hold the American food supply hostage.

Posted in economics, food policy | 1 Comment