Agricultural Policy, Farm Subsidy, Subsidies

Thomas Dobbs

English

Research Papers in Economics

 
 
            E C O N O M I C S 
  C O M M E N T A T O R 
South Dakota State University        No. 484                                   March 21, 2007 
 
Time for Change in U.S. Farm 
Policy: Fundamental Reform 
Emphasizing Institutions Based 
on Agriculture’s 
‘Multifunctionality’? 
 
              by 
              Thomas L. Dobbs 
Professor of Economics and  
 Food & Society Policy Fellow 
 
“By settled belief I mean the arrival at a point in time in the 
consideration of possible action that individuals or groups can 
finally and honestly declare, “this seems the better thing to do 
at this time.” When we can say to ourselves (or to our 
colleagues in the parliaments, the legislature, administrative 
agencies, or the court chambers) that we have reached a 
decision, it means that our settled deliberations have given us 
a new coherent belief. And, again, a belief is that upon which 
we are prepared to act. In effect, we have now found sufficient 
reason(s) to alter specific institutional arrangements in the 
interest of—for the purpose of—modifying particular 
economic outcomes in the future.” (Daniel W. Bromley, 
Sufficient Reason: Volitional Pragmatism and the Meaning of 
Economic Institutions, Princeton University Press, 2006, p. 
27) 
 
The previous issue (No. 483) in this Commentator series 
was focused on Federal farm policy reform proposals 
coming out of two competing visions for U.S. 
agriculture. Organizations representing a global 
competitiveness vision have recommended that major 
policy changes be incorporated in the 2007 farm bill, as 
have organizations representing a sustainable 
agriculture vision. Organizations representing both 
visions have emphasized the need for reforms in the 
commodity payment programs. The current commodity 
payment programs have their origins in President 
Franklin Roosevelt’s ‘New Deal’, a collection of 1930s-
era economic and social programs designed to alleviate 
suffering and induce economic recovery from the Great 
Depression. The New Deal programs for agriculture and 
other sectors of the economy represented a fundamental 
shift in beliefs—away from nearly complete reliance on 
markets and toward an activist role of government in  
establishing institutions to stabilize and improve 
economic conditions. British economist John Maynard 
Keynes pioneered the change in thinking within the 
economics profession, culminating with publication of 
his famous book The General Theory of Employment, 
Interest, and Money in 1936. At least as important, 
however, was a shift in the belief system of the body-
politic about the roles of government institutions. This 
shift in beliefs had already occurred among many 
farmers, since agriculture had been in an economically 
depressed state throughout much of the 1920s following 
the decline of commodity prices after World War I. As 
Daniel Bromley emphasizes in his recent book, 
Sufficient Reason, a shift in thinking within an academic 
discipline such as economics is not sufficient by itself to 
bring about major institutional change in democratic 
societies. There must also be a change in the beliefs of a 
sufficient number of citizens and policy makers. 
 
The belief system that formed the basis of Roosevelt’s 
New Deal economic programs largely prevailed into the 
1960s. However, beginning in the 1970s, the global 
competitiveness vision for U.S. agriculture began to take 
root, and the belief that farm policies should be based on 
this vision has gained strength in the decades since. 
However, the competing sustainable agriculture 
vision—with roots in the New Deal government activist 
philosophy, but with a broader ecological perspective—
began to take shape in the 1980s, and the belief that 
policies should be based on this vision also has gained 
strength over time. As I noted in the previous 
Commentator article, the sustainable agriculture vision 
increasingly resembles the multifunctionality view of 
agriculture that has dominated thinking behind recent 
reforms in the European Union’s Common Agricultural 
Policy (CAP).  
 
It is too soon to declare that a major portion of the 
American body-politic now has a “settled belief” that 
farm and food policy should be based on the European-
style multifunctionality perspective on agriculture. 
However, there is a growing sense that the current U.S. 
farm policy structure is “broken” and some totally new 
direction is needed, which I discuss in the first part of 
this article. Then I discuss how the 2007 farm bill could  
 
embody fundamental changes to reflect a 
multifunctionality perspective. Finally, I suggest a path 
that could help ease the economic transition from 70 
years of Federal farm programs dominated by 
commodity payments to a food and farm program based 
on multifunctionality.  
 
The preconditions for a change in our settled beliefs 
Data on the distribution of Federal farm program 
payments released since the mid-1990s by the nonprofit 
Environmental Working Group (EWG) have had an 
enormous impact on dialogue and perceptions about 
U.S. farm policy. According to the EWG’s most recent 
data compilation and summary (www.ewg.org), nearly 
$165 billion was spent on USDA commodity, disaster, 
and conservation payments from 1995 through 2005. Of 
that, approximately $120 billion (73 percent) went to 
just 10 percent of those receiving farm subsidies during 
that period. The EWG’s on-line data base has allowed 
citizens, news media, and policy analysts, for the first 
time, to see how much money has been received by each 
individual farm or business entity. Staggering payments 
have been revealed for some recipients at the high end of 
the distribution. One farm corporation is listed as having 
received $541 million in payments during the 11-year 
period ending in 2005. The EWG’s periodic data 
releases have provided a continuous stream of insights 
that have fueled farm bill debates.  
 
At the international level, there has been a rising chorus 
of criticism of U.S. and European Union (EU) 
agricultural policies in the context of World Trade 
Organization (WTO) negotiations. A few economists 
have called attention for quite some time to the uneven 
playing field developing country farmers face in world 
markets flooded with commodities that are highly 
subsidized in numerous ways by the U.S. and the EU. 
Policy spokespersons for developing countries, as well 
as many non-governmental organizations (NGOs), have 
also voiced this concern in recent years. The issue was 
brought to a head at WTO meetings in Cancun, Mexico 
in the summer of 2003, when a number of developing 
countries and some developed countries that have 
eliminated most of their commodity-type subsidies 
blocked efforts by the U.S. to force developing countries 
to reduce their tariffs and other restrictions on imported 
agricultural goods. The WTO talks effectively collapsed 
at that time, before being resurrected in 2004 and then 
collapsing again in the summer of 2006—in part because 
of continued concerns about the impacts of U.S. and EU 
farm policies on developing countries. 
 
Major U.S. news media entities have publicized the 
dysfunctional features of U.S. farm policies from time to 
time over the years. However, concerns seemed to come 
to a head in 2006 with articles and critical columns on 
U.S. farm policies appearing in newspapers across the 
U.S. (including in-depth series’ in the Washington Post 
and the Atlanta Journal-Constitution). These articles and 
columns drew attention to the kind of farm payment 
distribution data that the EWG has released over the 
years and to the international impacts of U.S. commodity 
payment programs. They reflected a growing sense of 
outrage in circles outside the agricultural establishment. 
If there is continued reporting and editorializing of this 
sort, we could see a settled belief in the body-politic 
calling for quite different policies—possibly ones based 
on agriculture’s multifunctionality.  
 
Food and farm policies based on agriculture’s 
multifunctionality 
Three major interrelated sets of reforms are needed in 
order to reshape the institutions of U.S. food and farm 
policy to emphasize agriculture’s multifunctionality: (1) 
over time, phase out the existing commodity payment 
structure consisting of direct payments, marketing 
assistance benefits, and counter-cyclical payments; (2) 
provide risk protection to farmers only through some 
combination of revenue insurance and farmer savings 
accounts, with the government-subsidized element 
limited to the equivalent of ‘moderate-sized’ family 
farms; and (3) shift savings from the phasing out of 
commodity payment programs to agri-environmental 
and rural development programs. Groups representing 
both the global competitiveness vision and the 
sustainable agriculture vision have offered various 
proposals that can be drawn upon to provide detailed 
structure and process in each of these three sets of 
reforms. In addition, the USDA should reestablish some 
type of grain reserve program—possibly one patterned at 
least in part after earlier ‘farmer-owned reserve’ 
programs—that would provide a modest degree of price 
stability and contribution to world food security. 
However, it is crucial that such a reserve not be viewed 
or managed as a ‘price support’ program. In other words, 
it must not be managed with the intent of trying to 
maintain grain prices above average market levels. 
Farmers would be expected to avail themselves of 
revenue insurance and farmer savings accounts for their 
government-assisted risk protection. There are various 
futures market and contracting mechanisms in the 
private sector that farmers can use for additional risk 
protection. Moreover, if revenue insurance and farmer 
savings account institutions are to have any credibility 
and chance of success, Congress must resist the 
recurring political urge to appropriate farm disaster 
funds.   
  
 
For these reforms to truly transform U.S. policy into a 
set of institutions that provides desired balance among 
agriculture’s environmental, social, and food, fiber, and 
energy functions, it is crucial that most of the funds that 
would otherwise have been spent on commodity 
programs be moved into agri-environmental programs, 
including agri-environmental programs with rural 
development dimensions. The agri-environmental 
program best able to effectively absorb major new 
infusions of money is the Conservation Security 
Program (CSP). However, the program must be operated 
very differently than it was in the first three years (2004-
2006) of its operation. It is quite clear that the original 
Congressional intent when the CSP was included in the 
2002 Federal farm bill was that all farmers in the U.S. 
would be ‘entitled’ to be eligible to participate. Contrary 
to that Congressional intent, only farmers in designated 
watersheds across the country have been eligible to 
participate in the first three signups; different watersheds 
have been designated each time, and the USDA plan has 
been to continue to rotate to new watersheds each signup 
period. Moreover, and also contrary to Congressional 
intent, there has been a quasi-competitive bid process 
(through the use of ‘enrollment categories and 
subcategories’) for farmers within the designated 
watersheds to obtain CSP contracts. These and other 
limitations on participation have been largely budget 
driven. Although $6 billion was authorized for the CSP 
for the time period 2002-2011, only about $500 million 
was actually made available for the enrollments through 
2006. Administrative capacity limitations within the 
USDA’s Natural Resources Conservation Service 
(NRCS), which administers the CSP, have probably also 
influenced the decision to rotate signups by watershed. 
As a consequence of these constraints, after three years 
of signups, there are fewer than 20,000 CSP contracts in 
a nation of 2.1 million farms. Those long-term contracts 
obligate over $2 billion of CSP funds. 
 
A recent Congressional Budget Office (CBO) estimate 
indicates that if current funding caps were removed from 
the CSP the program would cost about $3.6 billion per 
year. This is equivalent to less than one-third the average 
annual spending ($11.7 billion) on commodity programs 
during 2002-2005. If the CSP were broadened to more 
explicitly include the kind of rural development 
functions that are included in some agri-environmental 
programs in the EU, the program could effectively 
utilize considerably more than the CBO estimate. Many 
rural development programs, particularly ones oriented 
primarily to physical infrastructure such as rural water 
and transportation structures, are best left outside the 
CSP. Enhancement of rural landscape, however, often 
serves both environmental and rural development 
objectives by making rural areas more attractive for new 
residents and for rural agro-based tourism. The CSP 
could be a more truly multifunctional agri-environmental 
program if a rural component were added to the 
components that presently emphasize environmental 
objectives. Also, it is extremely important that CSP 
incentives place high priority on ecological biodiversity, 
including diversity of crop and livestock systems. 
 
Shifting funds from commodity programs to agri-
environmental programs makes sense if the body-
politic’s belief system rests on a multifunctionality 
perspective, but would that resolve outstanding WTO 
issues concerning the international impacts of U.S. farm 
payments? There are a number of complex economic 
and legal arguments about the conditions necessary for 
agri-environmental payments to properly fit in the 
WTO’s ‘green box’, the category of supports considered 
to be nondistorting or only minimally distorting of trade. 
(For brief discussions, see the sources listed at the end of 
this article by Dobbs and by Dobbs and Pretty.) Some 
policy analysts challenge the underlying assumptions of 
the ‘green box’ itself, however. French economist 
Jacques Berthelot has argued in his writing for several 
years that nearly everything that U.S. and EU negotiators 
want to put in the ‘green box’, including agri-
environmental payments, impact production and, 
therefore, world prices. The U.S.’s direct payments and 
the EU’s new single farm payments (both types of fixed 
payments that supposedly are ‘decoupled’ from current 
production), as well as agri-environmental payments and 
government sponsored agricultural research, all 
influence countries’ agricultural production capacities, in 
Berthelot’s view. These are all types of payments that 
countries such as the U.S. can better afford than can 
most developing countries. Simply moving most 
payments from ‘coupled’ commodity payments to fixed 
and agri-environmental payments will not necessarily 
satisfy charges of ‘dumping’ by developing countries. 
The arguments along these lines by Berthelot and others 
suggest that very fundamental issues about food security 
and environmental protection must be rethought in the 
WTO framework. For example, the U.S. openly 
subsidizes corn-based ethanol production and places a 
heavy tariff on imported ethanol, all in the name of 
‘energy security’. How is that different from developing 
countries using tariffs to protect their food production 
capacities or the EU wanting to provide sufficient import 
protection to maintain agricultural landscapes? 
 
A policy reform path  
The kinds of policy reform outlined in this article would 
need to be phased in. This is necessary from the 
perspectives of both political acceptance and economic  
 
stability. The shift of funds from commodity programs 
to agri-environmental programs could be phased in over 
a 5 to 10-year period. However, if this is going to 
happen starting with the 2007 farm bill, the transition 
path must be clearly spelled out in the legislation and 
implemented accordingly by the USDA. Vague 
references to this or that happening after some date 
several years down the road, or after some future WTO 
settlement, will simply imply more stalling and 
continuing to leave reform to future elected officials.  
 
The U.S. might borrow and build on one transition 
approach being used in the EU. Under the 2003 CAP 
reforms, many of the formerly ‘coupled’ commodity 
payments were folded into more ‘decoupled’ single farm 
payments in 2005 and 2006 (though individual EU 
member countries have some latitude in how much 
decoupling they do). At the same time, funds available 
for rural development and agri-environmental programs 
in the EU are being increased by reducing single farm 
and other direct payments in phases. (In CAP 
terminology, ‘agri-environmental’ programs are under 
the broader ‘rural development’ umbrella.) Individual 
member countries are allowed to retain at least 80 
percent of these ‘modulation’ funds to allocate to rural 
development and agri-environmental programs within 
their own borders. The analogy in the U.S. would be for 
a portion of the funds shifted each year from 
‘commodity program’ payments that would otherwise 
have gone to farmers in individual States being 
reallocated to Federal agri-environmental programs in 
those same States. For example, suppose farmers in a 
particular State normally receive 6 percent of the 
nation’s commodity payments. In each year that a given 
amount of commodity program dollars are shifted to 
agri-environmental programs, a fixed proportion—say 
half of that 6 percent, or 3 percent—could be used to 
augment CSP-funding within that State. This would not 
leave individual farmers unaffected, but it would help 
cushion the overall economic impacts within the various 
States. In fact, to make the transition even more 
politically acceptable in States where farmers are 
especially dependent on commodity payments, the entire 
proportion (6 percent, in this example) could be directed 
back to each respective State during the transition 
period. This kind of provision violates many economists’ 
definition of economic efficiency, but institutional 
change is almost never solely about economic efficiency 
anyway. 
 
For additional information, see: 
Berthelot, Jacques. 2006 (November). “EU and US Cheatings 
on Agriculture Can Kill Doha Round and Impose Food 
Sovereignty.” Introductory keynote to the roundtable, 
Indian Social Forum: WTO-End of the Road? New 
Delhi, India. [For this and other papers by Berthelot, go 
to: http://solidarite.asso.fr/home/Agriculture06.php .]   
 
Dobbs, Thomas L. 2006 (September). “Working Lands Agri-
environmental Policy Options and Issues for the Next 
United States Farm Bill.” Economics Staff Paper 2006-3, 
South Dakota State University. Brookings, SD. 
[http://econ.sdstate.edu/Research/Dobbs-StaffPaper2006-
3.pdf] 
 
Dobbs, Thomas L., and Jules N. Pretty. 2004. “Agri-
environmental Stewardship Schemes and 
Multifunctionality.” Review of Agricultural Economics 
26(2):220-237. 
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Time for Change in U.S. Farm Policy: Fundamental Reform Emphasizing Institutions Based on Agriculture’s ‘Multifunctionality’?

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Time for Change in U.S. Farm Policy: Fundamental Reform Emphasizing Institutions Based on Agriculture’s ‘Multifunctionality’?

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