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Why farm subsidies hurt small farmers

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Have you ever listened to a classical symphony and thought the music needed more distortion? Or have you ever read a newspaper and believed it would have been improved if it had more disinformation? Most of us don’t appreciate distortion in our music or disinformation in our news. Yet far too many do favor distortion and disinformation when it comes to pricing.

Prices signal information in markets. A “market” is a summary term for a variety of voluntary exchange for tangible commodities or nontangible services. In fact, one of the most important functions of a market is to use pricing to serve as an information system (creating, collecting, filtering, processing, and distributing information). When we describe a market as a “free market” one of things meant is the prices are largely free of distortions and disinformation.

This is one of the main reasons free market advocates oppose government government intervention into markets: they inject distortions and disinformation into the pricing system. Almost always, the distortions result in an advantage of the strong over the weak, the big over the small, and the rich over the poor.

A prime example is government subsidies to farmers. During the Depression, the government began subsidizing crops to save family farms. As one of the cornerstones of FDR’s “New Deal,” the federal government created the the Commodity Credit Corporation. The program is now run by the USDA, but it’s description sounds like something devised by the Soviet Union:

The Commodity Credit Corporation (CCC) is a Government-owned and operated entity that was created to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution.

When the program was created in 1933, it still seemed plausible that central control over some markets—such as the markets for agriculture—could be effective. Decades of famine and starvation in communist countries, though, showed how foolish it was to believe that distortions could lead to prosperity.

Yet despite the evidence subsidies don’t work, some New Deal socialists still believe they are essential. After discovering his trade wars were inflicting harm on U.S. farmers, President Trump now wants to use the CCC to send them $12 billion.

U.S. Secretary of Agriculture Sonny Perdue recently announced that the USDA will use CCC and other authorities to “implement a Food Purchase and Distribution Program through the Agricultural Marketing Service to purchase unexpected surplus of affected commodities such as fruits, nuts, rice, legumes, beef, pork and milk for distribution to food banks and other nutrition programs.”

The USDA acts as if no one could have forseen the “unexpected surplus” caused by Trump’s intervention. But they are exactly what free market advocates warned would happen.

Unfortunately, this new round of subsidies (which will go toward increasing the federal debt) is in addition to the current farm subsidy programs. The billions in welfare benefits big agricultural companies, and can even harm family farms.
In an interview with Business Insider, farmer Kevin Smith, co-owner of upstate New York’s Sycamore Farms, explained how farming subsidies distorts information and destroys the market for his crops:

When the government subsidizes corn and grain in the Midwest, a farmer can afford to grow 10,000 acres of corn, no matter the demand. All of the corn is pre-contracted and supplemented on the back-end. It would make no sense for a small farmer to try to grow that much corn because you can’t sell that much at market. There is only a fixed amount of materials like seeds and fertilizer in the market. As subsidized farms buy and buy materials (which they can because of the subsidies), resources get scarce and prices go up. The scarcity drives up the cost of materials, but it doesn’t drive up market prices of produce.

Notice that the subsidies not only distort the pricing information for the crops, but also distort the information all the way down the production chain. Because the government is giving some farmers money to produce more corn than people want, the price of corn seed is artificially inflated for all farmers. The result is that it cost small farmers much more to produce the crop but they can’t charge more to make up for the additional cost. Over time, small farmers—even those who get subsidies themselves—are pushed out of the market altogether.

In 1985 musicians Willie Nelson, Neil Young, and John Mellencamp organized the first Farm Aid concert to “raise awareness about the loss of family farms and to raise funds to keep farm families on the land.” In a few weeks they’ll host the 33rd annual festival to once again try to raise money to save small farms. Maybe this will be the year the concert finally calls for the one change that can actually save the farm: tell the federal government to stop trying to control the market.

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Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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