The Remaining Agriculture Subsidies
March 29, 2011
Last year Congress enacted a revolutionary overhaul of agricultural subsidies known as the Freedom to Farm law. This statute phases out the subsidy payments for wheat, feed grains, cotton and rice, and at the same time eliminates production limits imposed on farmers. This is a good trade-off not only for the public in general but also for farmers. The $12 billion in annual crop subsidy payments paled in comparison to the $25 billion to $45 billion in forgone income that acreage ``set-asides'' cost farmers annually. But in order to generate enough political support to pass the Freedom to Farm bill, supporters had to leave three major support programs unchanged--those for peanuts, tobacco and sugar. The Senate can now correct that oversight through its agricultural appropriations bill coming up for a vote this month; the House already passed its version and left these programs intact. Supporters of these programs rightly assert that they're not budget busters. Tobacco farmers even argue, and rightly so, that there is no federal tobacco subsidy per se. The fine print reveals, however, that the government indeed does spend tax dollars to administer what amounts to a government-sponsored cartel. In fact, all three programs--peanuts, tobacco and sugar--rely more heavily on tight controls of both domestic production and imports than on direct federal subsidy payments. So, like an iceberg, most of the real costs of these programs are hidden below the surface. The peanut and tobacco programs--mainly benefiting Southern farmers--require growers to obtain a permit or ``quota'' in order to grow and market their crops. But the quota system raises the price of peanuts and drives farmers out of business. In fact 15 of the 16 states that had at least one farm producing peanuts under quota actually saw the number of peanut farms go down between 1985 and 1993. Many farmers under the program apparently either went bankrupt or switched crops. With the major crop programs now being phased out, this attrition rate may increase. Consider a North Carolina farmer who under Freedom to Farm has lost his federal subsidy for corn. With an average yield in the Tar Heel State of 95 bushels per acre, that Carolina farmer can't really compete with Indiana, Illinois and Iowa farms that have yields reaching 200 bushels per acre. Yet without getting a quota, the Carolina farmer cannot switch to the two commodities for which his climate and soil type give him the biggest advantage--tobacco and peanuts. This means farmers must forgo valuable commercial opportunities. The export market for tobacco, for example, is now booming due to rapidly rising incomes in places like China and Malaysia; the Chinese have tripled their cigarette consumption to 1.7 billion per year. U.S. tobacco varieties, considered the premium blend in the world, would be capable of capturing the lion's share of this new market if quotas did not cap production. Alas, tobacco farmers don't seem to know where their self-interest lies. They lobby to keep the quotas, which offer them a guaranteed market. All the deal does is keep U.S. tobacco uncompetitive in the world market. For U.S. peanuts, the government's helping hand has been similarly destructive. The General Accounting Office estimates that the peanut program costs American consumers between $300 million and $500 million per year, mainly in increased food prices. By raising the cost of peanuts, this program discourages food manufacturers from producing items that contain peanuts. Total use of peanuts in processed foods is down 10% since 1990. U.S. peanut exports have dropped as well--by 27% overall since 1989. Last year China displaced the U.S. as the world's largest peanut exporter, at a time when China became an importer of most other commodities. Yet the world demand for peanuts and peanut products should continue to grow. Peanut butter, for instance, is a shelf-stable, easily exportable, relatively inexpensive source of protein. It is perfect for a market like India. Hindus don't eat beef, yet India has some 250 million people with incomes comparable to the U.S. average, who are demanding more protein in their diets. They won't get that protein from U.S. peanut butter unless the support program is terminated. Like the peanut growers, the sugar beet industry is collapsing under the weight of its own program. Acreage for sugar beets is less than it was 20 years ago, and high-fructose corn syrup has replaced sugar in virtually all soft drinks and many other processed foods. Corn growers and refiners are about to perfect a dry corn sweetener that can be used for cake mixes and other dry food products, taking even more market share from sugar. Corn farmers already have about half the market for sweeteners in food manufacturing--and all the growth. So Congress should save tobacco, sugar and peanut farmers from themselves by terminating their shortsighted support programs. This will not only help the U.S. comply with free trade agreements like GATT, but it will also give American growers a big boost in the world market. Mr. Cantu is a businessman who exports U.S. agricultural products. He also serves as an adjunct fellow of the Hudson Institute's Center for Global Food Issues.
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