Farm Subsidy Program Research Articles

The Impact of Input and Output Farm Subsidies on Farmer Welfare, Income Disparity, and Consumer Surplus

Because of a growing population and shrinking arable land, the world is facing a global food crisis. One important solution could be to subsidize farmers to sustain their production so that they can produce more food for consumers and earn more money for themselves. An efficient subsidy program should also aim to reduce income inequality among farmers, as measured by the Gini coefficient of farmers’ income. In this paper, we examine and compare the effects of input and output farm subsidy programs. The input subsidy reduces the farmers’ input purchasing costs, whereas the output subsidy reduces the farmers’ output processing costs. By considering a continuum of infinitesimal price-taking farmers who are heterogeneous in their average yield rates, our equilibrium analysis of a game-theoretical model yields three results. First, both subsidy schemes reduce the aggregate income inequality measured by the Gini coefficient. However, they create the following “opposite” effects: the input subsidy decreases the income gap among farmers (under mild conditions), whereas the output subsidy increases it. Second, farmers with low yield rates prefer the input subsidy, whereas farmers with high yield rates prefer the output subsidy. Third, the output subsidy scheme is more effective in improving the total farmer income than the input subsidy scheme, whereas the input subsidy scheme is more effective in reducing income disparities and improving consumer surplus than the output subsidy scheme. Our results provide new insights for policymakers who are crafting subsidy schemes. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71971184, 71972025, and 72032001], the Departmental General Research Fund of the Hong Kong Polytechnic University [Grant P0008761], and the Research Grants Council of Hong Kong [Grants 15504615 and 15500820]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4850 .

Impact of Farm Households’ Adaptations to Climate Change on Food Security: Evidence from Different Agro-ecologies of Pakistan

The study used data from 3298 food crop growers in Pakistan. Potential outcome treatment effects model was applied to evaluate the impact of adaptations on household food security. A household Food Security Index (FSI) was constructed applying Principle Component Analysis (PCA). Adaptation strategies employed by the farmers in response to climate change were categorised into four groups namely: changes in sowing time (C1); input intensification (C2); water and soil conservation (C3); and changes in varieties (C4). Out of 15 mutually exclusive combinations constructed for evaluation, only 7 combinations were considered for estimating the treatment effects models because of limited number of observations in other cases. Results of only two of the 7 are discussed in the paper, as the other 5 had very small number of adapters and the impact measures shown either insignificant results or had opposite signs. The first (C1234) combined all the four, while the second (C234) combined the last three strategies. The results suggest that the households which adapted to climate changes were statistically significantly more food secure as compared to those who did not adapt. The results further show that education of the male and female heads, livestock ownership, the structure of house—both bricked and having electricity facility, crops diversification, and non-farm income are among the factors, which raise the food security of farm households and their impacts are statistically significant. The variables which are significantly negatively associated with the food security levels include age of the head of household, food expenditure management, households having less than 12.5 acres of land— defined as marginal (cultivate 6.25 to 12.5 acres). Farmers of cotton-wheat, rice-wheat, and rain-fed cropping systems are found to be more food secure as compared to the farmers working in the mixed cropping systems where farm holdings are relatively small and high use of tube-well water adding to salinity of soils. It is crucial to invest in the development of agricultural technological packages, addressing issues of climate change relevant to different ecologies and farming systems; improve research-extension-farmer linkages; enhance farmers‘ access to new technologies; improve rural infrastructure; development of weather information system linking meteorological department, extension and farmers; and establishment of targeted food safety nets as well as farm subsidy programs for marginal farm households.

The Effects of Farm Subsidies on Farm Exports in the United States

AbstractWe estimate the elasticity of U.S. farm exports to U.S. farm subsidies using a gravity model of state‐level farm exports to 100 major trading destinations for the period 1999 to 2011. Our identification strategy exploits the within‐state variation that is free of endogeneity bias in the levels and trends of farm subsidies and farm exports. We find that a 1% decrease in farm subsidies would reduce U.S. farm exports by 0.40% per annum. This equivalently means that the complete abolishment of the farm subsidy program would reduce U.S. farm exports by approximately $15.3 billion per year. Importantly, we document robust evidence that amber box subsidy programs such as counter‐cyclical payments and marketing loan gains have the strongest effect on farm exports, while green box subsidy payments, such as direct payments have negligible effects. Finally, subsidy payments affect exports only in agricultural commodities, not in livestock. Our subsidy elasticity estimates are statistically significant, stable, and economically meaningful, and are vitally needed by U.S. and global policymakers in the face of critical domestic and international developments.

Gorbachev’s Agriculture Agenda: Decollectivization and the Politics of Perestroika

Gorbachev’s Agriculture AgendaDecollectivization and the Politics of Perestroika Chris Miller (bio) “Whenever I talk to Sovietologists,” wrote the economist Abel Aganbegian in 1989, “they always return to the same question: why did we not do as in previous reforms and start out perestroika with agriculture?”1 When Mikhail Gorbachev came to power in 1985 and launched his program of perestroika, it was widely recognized that the Soviet Union’s agricultural system needed to be made more efficient. Since Iosif Stalin collectivized farmland in the 1920s and 1930s, the Soviet Union had suffered repeated crop failures and persistently low agricultural productivity. Grain had been one of Russia’s main exports under the tsars, but during the 1970s and 1980s the Soviet Union had to import food to feed its population. Such grain as was produced domestically required increasingly large capital inlays. Fixed capital investment in agriculture increased by 4.7 times from 1965 to 1981, even though output less than doubled. That meant capital investments were becoming much less productive.2 Despite declining returns to investment, Moscow’s central planners plowed tremendous resources into the agricultural sector during the postwar period. Soviet farms used tractors, fertilizer, and labor at far higher rates than comparable countries.3 During Leonid Brezhnev’s premiership, fertilizer usage [End Page 95] doubled and tractor deliveries tripled, even as productivity stagnated.4 This nearly limitless supply of funds supplied to the Soviet countryside constituted the largest farm subsidy program in history.5 But because Soviet farms were so wasteful, new investment did relatively little to boost farm output. If perestroika was to succeed in lifting the Soviet Union out of stagnation, the country’s farms would have to be made more efficient. It is often argued, as Aganbegian noted, that Gorbachev did little to address the USSR’s agricultural problems. Many scholars have suggested that, had Gorbachev focused on farms rather than industry, perestroika might have succeeded.6 In fact, this article suggests that Gorbachev had a clear policy toward agriculture, dating from the early years of perestroika, which was far more radical than many realized. Historians of the perestroika era have long relied on published sources—newspapers, public statements, and memoirs—to understand Gorbachev’s policies.7 But Gorbachev was a wily political operator, and he knew better than to show his cards to the public before assembling the coalition needed to operationalize his ideas. That was particularly true in agriculture, where Gorbachev’s vision diverged sharply from the long-standing Soviet consensus, which backed collective farms and permitted individual farming only in limited circumstances. Thousands of pages of documents from the perestroika era are now available to historians, but scholars studying the economic policies of perestroika have barely begun to make use of them. That is particularly true of documents from Gorbachev’s personal archive—above all, notes from perestroika-era Politburo meetings, some of which have even been published.8 [End Page 96] Historians who study Soviet foreign policy have long treated the Gorbachev Politburo notes as a central source for understanding the 1980s, but few scholars of Soviet economic policy have yet made use of them. Given how rarely they are cited in the literature, many historians appear to be unaware that they exist. Yet the Politburo papers are a goldmine for scholars seeking to understand the politics and policies of perestroika—far more useful than the often unreliable memoir literature and contemporary journalism upon which existing accounts of perestroika are based. The papers of Gorbachev and his advisers show a general secretary striving toward a market economy in the face of tenacious political opposition, not the indecisive ditherer that most accounts of Gorbachev’s tenure suggest.9 Agriculture is a prime example. The Politburo notes and other archival sources demonstrate that Gorbachev long wanted to decollectivize agriculture and to provide farms with market incentives. As early as 1986, during the initial days of perestroika, Gorbachev set forth to his Politburo colleagues an agenda of far-reaching agricultural transformation. Many other top officials, however, disagreed with Gorbachev’s agricultural ambitions for reasons of ideology and bureaucratic politics. Gorbachev’s proposals to empower individual farmers against the collective-farm leadership not only...

The twisted path from farm subsidies to health care expenditures

Overweight and obese individuals are at increased risk for many diseases and health conditions, including but not limited to the following: hypertension; osteoarthritis; dyslipidemia; type 2 diabetes; coronary heart disease and stroke. Consequently, individuals who are obese are more likely to use health services and are more likely to use costly health services than non-obese individuals. Between 1987 and 2001, growth in obesity related health expenditures accounted for 27 percent of the growth in inflation-adjusted per capita health care spending. Researchers, popular press and the television news media have paid considerable attention to the effect that farm subsidies have on dietary habits and obesity. Prominent researchers in the field have concluded that US farm subsidies have had a negligible impact on obesity. However, even small increases in obesity rates are associated with higher health care expenditures. The primary intent of this study is to break down the linkages from farm subsidy to health expenditure and shed light on the unintended implications of the farm subsidy program. We find that agricultural subsidies have the potential to influence health care expenditures.

Ex Ante Evaluation of Alternative Agricultural Policies in Laboratory Posted Bid Markets

Decoupled payments to producers are among reforms in U.S. farm subsidy programs that have been advanced by policy analysts (Orden 2007). These reforms follow an interest in in creasing market orientation in the agricultural sector and minimizing the distorting effects as sociated with tying production decisions and government payments. Decoupled payments are fixed-income transfers independent of the farmer's production choices, output levels, or market conditions. These income transfers do not change per unit returns, so theoretically, they have no direct effect on production deci sions (Beard and Swinbank 2001). One decou pled policy tool receiving attention is a bond. Producers in receipt of a bond would garner a guaranteed stream of income during a transition period of fifteen to twenty five years in exchange for giving up all fu ture government program subsidies. This bond would have financial value and could be sold over its life, allowing producers to receive in come annually or in a lump sum (Orden and Diaz-Bonilla 2005). As policymakers search for options that pro vide nontrade distorting income transfers to agricultural producers, ex ante analyses must be conducted to avoid policy trial and error. There is little empirical evidence regarding how such policies might impact production decisions and what the potential market im pacts might be, given producer's behavior. Our research objective is to assess the potential direct market impacts of a decoupled pol icy alternative called a buyout bond, using experimental economics methods, specifically laboratory markets, to investigate the issue.

The Law of Unintended Consequences: How the U.S. Biofuel Tax Credit with a Mandate Subsidizes Oil Consumption and Has No Impact on Ethanol Consumption

With a mandate, U.S. policy of ethanol tax credits designed to reduce oil consumption does the exact opposite. A tax credit is a direct gasoline consumption subsidy with no effect on the ethanol price and therefore does not help either corn or ethanol producers. To understand this, consider first the effects of each policy alone (a mandate and a tax credit). Although market prices for ethanol increase under each policy, consumer fuel prices always decline with a tax credit and increase with a mandate except when gasoline supply is less elastic than ethanol supply. To achieve a given ethanol price, the gasoline price is always higher with a mandate compared to a tax credit. A tax credit alone is an ethanol consumption subsidy but most of the benefits go to ethanol producers because ethanol is typically a small share of total fuel consumption. Fuel consumers benefit indirectly to the extent gasoline prices decline with increased ethanol production. With a tax credit or mandate, gasoline consumption declines but more so with a mandate (for a given ethanol price and production level). However, a tax credit with a binding mandate always generates an increase in gasoline consumption, the extent to which depends on the type of mandate. If it is a blend mandate (as in most countries outside the United States), the tax credit acts as a fuel consumption subsidy. Ethanol producers only gain indirectly with the increased ethanol demand resulting from the increase in total fuel consumption. Most of the market effects are due to the mandate with the tax credit only exacerbating the ethanol price increase and causing an increase in the gasoline price but a decrease in the consumer fuel price. For a consumption mandate (as in the United States), the tax credit is even worse as it acts as a gasoline consumption subsidy. Market prices of ethanol do not change, even as the price paid by consumers for gasoline declines (while gasoline market prices rise). A tax credit is therefore a pure waste as it involves huge taxpayer costs while increasing greenhouse gas emissions, local pollution and traffic congestion, while at the same time providing no benefit to either corn or ethanol producers (or in promoting rural development) and fails to reduce the tax costs of farm subsidy programs but generates an increase in the oil price and hence wealth in Middle East countries. These social costs are huge because the new mandate calls for 36 bil. gallons by 2022, to cost over $28 bil. a year in taxpayer monies alone. Even if the mandate is not binding initially, the elimination of the tax credit will cause the mandate to bind or the mandate can be increased so our results still hold.

'Water' in the U.S. Ethanol Tax Credit and Mandate: Implications for Rectangular Deadweight Costs and the Corn-Oil Price Relationship

The relationship between ethanol, corn and oil prices are analyzed under two alternative situations, depending on whether or not consumers purchase ethanol on the basis of its contribution to mileage. In all cases, market prices of ethanol can be above or below the consumer price paid for ethanol. With a tax credit, we determine several key parameters affecting the price relationships between corn, ethanol and gasoline, including the relative value of the fuel tax and tax credit, and the value of corn returned to the market in the form of by-products. The outcome is further complicated if the mandates are binding or if price contingent corn production subsidies like deficiency payments are available. Empirical analysis of historical U.S. price relationships assesses the validity of the alternative models and the extent to which each policy impacted the market. The implicit subsidy of the tax credit and mandates is often higher than the observed corn price itself. We discuss several reasons for this including how corn production subsidies cause the corn price to fall below that which would occur if there was no ethanol policy. Therefore, without corn production subsidies in the past, no ethanol production would have occurred, even with a tax credit or a mandate. Furthermore, corn producers do not benefit at all from ethanol policies when the deficiency payment program is operational and very little from the tax credit when the mandate is binding. We extend de Gorter and Just's concept of water in the tax credit to include the premium due to a binding mandate. The resulting rectangular deadweight costs are estimated for the past 25 years and are found to dwarf standard triangular deadweight cost measures of traditional farm subsidies. Those who emphasize the benefits of ethanol policy in reducing tax costs of farm programs ignore new deadweight costs created by ethanol policy including an increase in the deadweight costs of the farm subsidy program. Furthermore, farm subsidies increase both the tax costs of the tax credit and the deadweight costs due to ethanol policy. Our theoretical framework provides a foundation for future research on biofuel policies while the empirical analysis gives a perspective on the relative importance of several key parameters determining the effects of past U.S. ethanol policy.

“Water” in the U.S. Ethanol Tax Credit and Mandate: Implications for Rectangular Deadweight Costs and the Corn-Oil Price Relationship*

Abstract The relationship between ethanol, corn and oil prices are analyzed under two alternative situations, depending on whether or not consumers purchase ethanol on the basis of its contribution to mileage. In all cases, market prices of ethanol can be above or below the consumer price paid for ethanol. With a tax credit, we determine several key parameters affecting the price relationships between corn, ethanol and gasoline, including the relative value of the fuel tax and tax credit, and the value of corn returned to the market in the form of by-products. The outcome is further complicated if the mandates are binding or if price contingent corn production subsidies like deficiency payments are available. Empirical analysis of historical U.S. price relationships assesses the validity of the alternative models and the extent to which each policy impacted the market. The implicit subsidy of the tax credit and mandates is often higher than the observed corn price itself. We discuss several reasons for this including how corn production subsidies cause the corn price to fall below that which would occur if there was no ethanol policy. Therefore, without corn production subsidies in the past, no ethanol production would have occurred, even with a tax credit or a mandate. Furthermore, corn producers do not benefit at all from ethanol policies when the deficiency payment program is operational and very little from the tax credit when the mandate is binding. We extend de Gorter and Just’s concept of “water” in the tax credit to include the premium due to a binding mandate. The resulting rectangular deadweight costs are estimated for the past 25 years and are found to dwarf standard triangular deadweight cost measures of traditional farm subsidies. Those who emphasize the benefits of ethanol policy in reducing tax costs of farm programs ignore new deadweight costs created by ethanol policy including an increase in the deadweight costs of the farm subsidy program. Furthermore, farm subsidies increase both the tax costs of the tax credit and the deadweight costs due to ethanol policy. Our theoretical framework provides a foundation for future research on biofuel policies while the empirical analysis gives a perspective on the relative importance of several key parameters determining the effects of past U.S. ethanol policy.

The Welfare Economics of an Excise-Tax Exemption for Biofuels and the Interaction Effects with Farm Subsidies

A general theory is developed to analyze the efficiency and income distribution effects of a biofuel consumer tax exemption and the interaction effects with a price contingent farm subsidy. Using U.S. policy as an example, ethanol prices rise above the gasoline price by the amount of the tax credit. Corn farmers therefore gain directly while gasoline consumers only gain from any reduction in world oil prices due to the extra ethanol production. Domestic oil producers lose. Because increased ethanol production improves the terms of trade in both the export of corn and the import of oil, we determine the optimal tax credit and the conditions affecting it. Historically, the intercept of the ethanol supply curve is above the gasoline price. Hence, part of the tax credit is redundant and represents `rectangular' deadweight costs that dwarf standard triangular deadweight cost measures of traditional farm subsidies. We show under what conditions corn subsidies can eliminate, create, have no effect or have an ambiguous effect on rectangular deadweight costs. There are situations where corn subsidies have been the sole cause of ethanol production (and therefore of rectangular deadweight costs), even with the tax credit. Corn producers do not benefit from a tax credit when the subsidy program is in effect. Proponents of ethanol argue that the tax credit reduces tax costs of farm subsidies. But this ignores rectangular deadweight costs. To assess this, we calibrate a stylized empirical model of the U.S. corn market and determine that total rectangular deadweight costs averaged $1,520 mil. from 2001-2006. Over 25 percent of this is due to the farm subsidy program which also increased the tax costs of the tax credit by 50 percent. Furthermore, the tax credit itself doubles the deadweight costs of the corn production subsidies. Ethanol policies can therefore not be justified on the grounds of mitigating the effects of farm subsidy programs.

Texas, Cotton, and the New Deal

In the early 1930s, cotton was produced in 223 of the 254 countries in Texas and was a central element in the state's economy. The Great Depression created a major distruption that threatened to destabilize the entire Lone Star State. Keith J. Volanto relates the story of the New Deal's efforts to aid Texas cotton farmers, specifically with the production-control policies introduced by the Agricultural Adjustment Administration (AAA). He explores the reasons the AAA cotton programs in Texas were instituted, the implementation problems the AAA encountered and how they were resolved, and the results of the programs. He draws conclusions concerning how well Texans benefited from the AAA cotton programs and about those who were actually harmed by them. In addition, Volanto also examines the role of Texas politicians and bureaucrats in formulating the policies in Washington and the importance of Texas to New Deal cotton policy broadly. Volanto's account of the AAA cotton programs in Texas is a study not only of agriculture policy but also of the New Deal itself. The experience of the AAA - the political, economic, and legal constraints it faced - provides new insight into the nature of New Deal commodity programs. Very little has previously been written on farm subsidy programs and their impact on Texas during the 1930s and the AAA's cotton programs that were implemented at the state level. Texas, Cotton, and the New Deal fills this void.