The Best Farm Policy is the Free Market

As Congress haggles over the farm bill, it is time again to consider updating the legislation. The Agriculture Adjustment Act, passed “to relieve the … national economic emergency” of the Great Depression has been the basis for most major agricultural legislation since the 1930s. The basic emphasis of each farm bill has been to raise the prices of crops and livestock in order to help farmers. Recently, President Bush has proposed changes in farm policy that are projected to reduce spending by $10 billion over the next five years. This is a step in the right direction, but it still leaves the government spending billions of dollars every year to help farmers.

What is accomplished by all the money spent on agricultural policy? Ever since the Great Depression, the government has used a variety of strategies that are supposedly intended to help poor farmers and save the family farm. These include paying farmers to plant fewer acres, buying surplus production to maintain price floors, subsidizing crop production, and subsidizing exports. The public has been led to believe that without government farm programs there might be shortages or higher prices of food. There is also concern that if agriculture were left to the free market, corporations would take over and family farms would disappear.

Many of the popular beliefs about the benefits of farm policy are myths. It is competition in the free market that has resulted in declining costs and the resulting abundant supply of low-cost food and fiber that we enjoy today. Farm policy distorts production decisions so that farmers plant too much of subsidized crops and not enough of alternatives. The resulting mix of crops and livestock produced is no longer consistent with consumer preferences. Taxpayers pay for artificially low prices of some crops, while supply and import restrictions result in high prices for other products, such as sugar and milk. The combined effect of subsidies and import restrictions holds down prices for farmers in developing countries, keeping them in poverty.

Government policy does not prevent growth in the share of agricultural output produced by corporate farms instead of family farms. Along with family farms, corporate farms receive millions of dollars in subsidies and other government payments. This has led to calls for reform that would limit government payments to farmers with incomes below a certain threshold level. Previous attempts to exclude large farmers from the benefits of farm programs have always failed as owners of large farms find ways to circumvent the rules. Congress has never been willing to enact direct payments that are limited to those few farmers who are truly needy. If they did, they would lose the political support of the majority of farmers and farm land owners who benefit from government handouts.

In the long run, farm programs not only raise the revenue farmers earn from their land, but also raise the cost of farming by raising the cost of renting farm land. Owners of farm land benefit from the resulting higher land values. While many farmers rent some or all of the land they farm, a substantial percentage of farm land is owned by investors who do not actually farm the land.

The best agricultural policy is to eliminate all government farm programs and let prices be determined by supply and demand in a free market. The transition could be painful for farm land owners who bought land that was inflated in value due to the effect of government programs. It might also lead to lower incomes for some farmers in the short run. It is doubtful, however, that such a change would hasten the demise of the family farm. Government policy has not prevented corporations from gaining a dominant role in the production of some crops and livestock. For other crops, such as wheat, corn and soybeans, family owned farms can compete successfully against corporate farms without help from the government.

There is no good reason for the government to regulate farm prices, even if market competition results in a growing role for corporations in farming. Why should family farms be treated differently than mom and pop grocery stores, which have largely disappeared due to competition from supermarket chains?