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9/27/99
PLAIN ECONOMIC SENSE
For release Sept. 27, 1999
Column 382
What is the Farm Problem?
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
While preparing a for an ISU agricultural policy class lecture, I noted the textbook pointed out that problems faced by American agriculture have in fact changed over the years. The problems faced by American agriculture 70 years ago, when traditional farm programs were first implemented, are different than those faced by American agriculture today. Here are some indicators on how the farm problems have changed.
The Historic Farm Problem: Overcapacity, Low Prices and Low Farm Income. United States agricultural exports plummeted following World War I as Europe's food production capacity rebounded. U.S. farmers continued to overproduce during the Agricultural Depression which lasted throughout the 1920s. After the 1929 stock market crash, the Great Depression began. Peak unemployment was 25 percent--more than double the highest it has ever been since.
However, conditions in agriculture during the Great Depression were even worse. The Smoot-Hawley Act completely shut off trade. The average per capita income for the U.S. farmer in 1934 was 32.4 percent of the average per capita income for the non farm Americans. No wonder many farmers lost their land and no wonder federal farm programs were invented using a sector-wide strategy--all farmers were in trouble.
The textbook indicates that by the 1990s, the low farm income problem had been solved on average. Not withstanding the past two years, average household income for U.S. farmers during the 1990s has been about equal to the average U.S. households, at slightly over $40,000.
A Contemporary Farm Problem: Increased Diversity of Farms. The elimination of the farm-nonfarm income gap is somewhat misleading because nearly three-fourths of U.S. farms have agricultural sales below $50,000 and they rely on off-farm income as the predominant source of household income. Household incomes for medium and smaller commercial farms with annual sales between $50,000 and $250,000 also had about equal to the average U.S. household during 1993 and 1994.
However, the average household income for the mega-farms with sales over $500,000 in 1993 was $153,000 and $155,000 in 1994--about four times the average U.S. household. The household income for large commercial farms with sales between $250,000 and $500,000, was $66,000 in 1993 and $73,000 in 1994--about 1.6 times the average U.S. household.
The point is that current farm programs distribute payments--up to the payment limitations--based on a farmer's program acreage base that existed in the early 1990s. The point is that untargeted sector-wide assistance programs distribute farm payments based on volume of production. Therefore, larger farmers receive larger payments up to the payment limitations. So, much of the farm program assistance goes to the farmers with incomes that have averaged well above the average U.S. household because they produce most of the food.
Instability has been a Growing Farm Problem. Based on USDA numbers, the textbook shows that the variability of net farm income received from the market has increased dramatically over the past four decades. The annual variation in profit increased from 6.1 percent during 1955-63, to 11.5 percent for 1964-71, to 23 percent for 1972-79, and to 37.5 percent for 1980-95. The average profit margin excluding government payments as a percent of gross receipts declined from 32 percent for 1955-63, to 22.5 percent for 1964-71, to 24.1 percent for 1973-79, and to 17 percent for 1980-95.
Cost of Farm Programs. An offsetting concern to taxpayers has been the cost of farm programs. Accounting for inflation, real spending on farm programs never exceeded $13 billion per year for the period 1961-81. In 1982, farm program spending increased to $14 billion and peaked at $26 billion in 1986. By 1989, spending was below $10 billion. Except for 1993, farm program spending has stayed below $10 billion until the last two years.
Those who keep tally estimate that this year's spending will be in $22-$24 billion range provided that Congress passes and the President signs an $8 billion supplemental package. But even at this higher level of federal spending, farm programs represent less than 1.5 percent of 1998 federal spending.
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