Abstract: The main U.S. farm subsidy programs transfer between $10 billion and $25 billion per year to farms that produce wheat, rice, oilseeds, feed grains and cotton. These programs have evolved since the 1930s, but the basics remain. Subsidies stimulate additional production of the supported crops and thereby suppress market prices for those crops. Estimated production and price impacts range from just a few percent (for soybeans in recent years) to 10 to 15 percent or more (for cotton and corn in years when market prices are expected to be low). These impacts depend on the expected share of revenue from subsidy, the share of the U.S. crop in relevant markets and the price elasticities of supply and demand. These price impacts have been the basis for WTO complaints by trading partners. Although there are “conservation compliance” rules designed to reduce negative environmental consequences of commodity programs, subsidies continue to encourage use of additional resources and purchased inputs for these crops (i.e. more land, water, fertilizer, pesticides, etc.). Farm subsidies distribute most benefits roughly in proportion to production or land base in the program crops. That means that bigger farms get more, but there is no solid evidence that programs are biased towards larger farms or that they stimulate larger farm size. Payments benefit owners of farmland and suppliers of inputs and resources, whether they are farm operators or not. These benefits come at the expense of taxpayers and economic efficiency. In addition to commodity subsidies, farm programs include long-term land retirement (such as the Conservation Reserve Program) and so-called “working lands” programs (such as the Environmental Quality Incentive Program and the Conservation Security Program). Complex technical and economic issues surround effective targeting of such programs. One challenge is tying measured environmental outcomes to on-farm practices; another is designing schemes to maximize environmental benefits given limited funds. Some current programs allow farmers to bid for the lowest payment they would accept for undertaking certain practices (including land idling) on their farms. These bids are ranked by an estimate of environmental benefit per dollar and bids are accepted to achieve the most cost-effective outcome. It is challenging to design programs that facilitate more accurate measurement of environmental impacts and pay farms not for practices but directly for environmental or ecological services, either in the form of positive benefits from farmland use (such as carbon sequestration or wildlife habitat) or reduced negative environmental consequences of farming. Farm programs are scheduled for renewal, reformulation or removal with the 2007 Farm Bill that is now being developed in Congress. New legislation provides an opportunity to reconsider how farm programs contribute to national objectives and gauge if alternative roles for government might be better tuned to current realities and goals.
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