U.S. FARM PROGRAMS COSTS - A Part of Our Grocery Bill?

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Congress is currently putting final touches on a new 10-year farm bill. Spending proposals for this bill are in contrast to the sentiments when the 1996 farm bill was passed - which was written to gradually get the government out of farm legislation. The '96 bill contained a relatively small amount funds for "transition payments" while we moved toward a free market for the basic farm commodities.

But these thoughts did not materialize. Farm program payments have increased since 1996, hitting a historical high of $32 billion in FY 2000 (figure 1). Farm lenders tell us many of their borrowers have repaid operating loans with these payments. Farm market income would not have paid the all the bills.

Payment levels over trim have varied with the economic health of the farm economy. We vividly recall the payments necessary to keep farmers from going out of business in the mid-80's - although many were forced to relinquish their reins on the farmstead.

Output Determines Payments

Much of the press has dwelled on these outlays - showing that operators have received payments amounts larger that many of us can fathom. Payments are based on farm output. A farm with 1,000 acres of cotton would receive payments twice as larg than a farm with 500 acres (all things being equal). Many of these larger farming operations have expenses of hundreds-of-thousands-of-dollars -- and many into the million of dollars. They have more to risk, consequently, they receive more payments. We sensed an attitude around 1996 that as we moved toward a world economy - and purchased items from whomever could produce them the cheapest -- the same could be done with our farm commodities. But in recent months, we seem to have sensed that maybe some type of program is needed to insure our infrastructure of food production. Maybe we had better not move too much toward buying more food from someone else. (Some may disagree with this observation).

But given this, we can say that farm program payments have helped keep many of our farms in business, and the capacity to feed and clothe ourselves is still in place. If we look at farm program spending as a percent of our aggregate spending for food, it has been equal to less than 4% of monies spent for food since 1988 (figure 1). And it has been 2% or less for 10 of the years since 1980.

How much did this cost you and me? Per capita expenditures for farm program payments since 1980 have been less than $80 annually for 17 of the 21-years and less than $40 annually in 11-years (figure 2). This is a small amount to help insure the ability to produce our farm commodities.

*Off-farm labor (39-cents), *Packaging (8.5-cents), *Transportation (4-cents) *Advertising, Rent and Profits (4-cents each), *Energy, Depreciation and Business Taxes (3.5-cents each).

The low cost farm inputs and value added sector lets U.S. consumers spend a very low percentage of their disposable income for food (10.2%). Consumer food expenditures (% total expenditures) of other selected nations are: United Kingdom-11.2%, France-14.8%, New Zealand-15.4%, Germany-17.3%, Japan-17.6%, Israel- 20.5%, South Africa-27.5% India- 51.3%.

The benefits of our food production and processing industries are shown in figure 3. U.S. expenditures for food have increased from about $300 billion in 1980 to near $800 billion in 2000. But spending for non-food items has increased at a faster pace. Our percentage of disposable income spent on food in 1980 was 13.2%. In 2000 it was 10.2%.

Information on farm subsidies in other countries is best available from the European Union (EU). This union was begun by six nations in 1957 to encourage economic recovery and development of Western Europe. Currently there are 15 member nations.

The EU is the world's largest importer of agricultural commodities and in 1998 became the largest exporter of agricultural goods.

EU Support and Export Subsidies: EU agricultural spending was as an estimated $40 billion (U.S. dollars) in 2000. This has declined from: $50 bil. in 1999; $48 bil. in 1998; $50 bil. in 1997; and $54 bil. in 1996. Agricultural has thrived under this level of support. These high subsidies have led EU farmers to overproduce , building up surpluses of grains and other commodities.

In the EU, control of most economic policy except for agriculture is formally retained by the national governments. The economies of the EU member nations became more closely linked with the enactment of the single market reforms in 1993, and with the adoption of a single currency in 1999 by 11 members, the EU countries formed an economic and monetary union of export subsidies. The EU is still a major spender for export subsidies ($6 billion in 1998). This amount is less than earlier, but still dwarfs the subsidies of other countries. U.S. export subsidies were $121 million in 1997, down from a high of more than $1 billion in 1994.

Trade Agreements: The union committed to limit its ability to support its agricultural sector and to lower barriers to imports under the Uruguay Round Agreement on Agriculture. Approximately 40% of its farm revenue in 1997 was in the form of subsidies.

Much of the farm support in these countries results from the desire to insure a domestic food supply. But payments are subject to WTO limitations which limit program payments that can distort supply. In the future we'll likely hear more about these concepts - which also affect the U.S..