Academic Research on USDA Programs

Continuing my discussion from the paper I recently published with the Mercatus Center, I'll share a few thoughts about the academic research on USDA programs.  This is a huge area of research and there is no way I can cover it all, but I'll try to touch the high points.  Underlying citations for all these comments are in the paper.

Farm Payments

Standard economic theory suggests that subsidies, whether subsidies in the form of price supports on crops or subsidies on the premiums for crop insurance, distort production decisions and result in so-called deadweight loss. Subsidies—even supposedly “decoupled” farm payments that aren’t tied to production— can sometimes encourage greater production.

Moreover, economic theory suggests that farmers are not the ultimate beneficiaries of farm subsidies. That seems a bit counter-intuitive.  How can the recipient of a subsidy not benefit from the subsidy?  Well, given an additional subsidy, farmers will compete with one another and bid up the price of fixed assets, such as land or high-quality seed, implying that the owners of fixed assets, such as landowners or holders of patents on seed technology, capture a portion of the subsidy.  There is substantial debate in the academic literature (here is the most recent paper on the topic) regarding the share of farm subsidies captured by nonfarmers, but economists almost universally agree that for every $1 in farm subsidies, farmers benefit by less than $1.

Despite popular claims to the contrary, research suggests that farm subsidies have likely had little to no effect on obesity rates.48 First, although such policies may have had some effect on farm commodity prices, these inputs account for only a small share of the overall retail cost of food.  Second, agricultural policies are mixed, and some policies (such as those for sugar, ethanol promotion, and the Conservation Reserve Program, or CRP) push the prices of agricultural commodities up rather than down. Third, despite the widely varying agricultural policies across countries and over time (see the previous post), those policies do not correlate well with differences in food prices and obesity rates across countries or with changes in obesity rates over time.

Research suggests that the Conservation Reserve Program (CRP) program has achieved some goals related to erosion, wildlife, and soil and water quality, but some unintended consequences have occurred.  Taking some cropland out of production can drive up commodity prices, which in turn incentivizes producers to plant more farmland. This is called a “slippage effect.”  There is also some evidence that CRP payments contribute to higher land prices and thus benefit land owners.

Finally, agricultural policies create distributional effects across producers, locations, and commodities. That is, farm subsidies benefit some farmers more than others and actually harm other farmers and consumers.

Food Assistance Programs

While the original food stamp program had dual goals of farm support (or reducing government surpluses) and reducing food insecurity.  However, little evidence verifies that the modern-day incarnation, SNAP, has any substantive effect on farm prices. For example, I calculate that for every $1 taxpayers spend on SNAP, farmers benefit by only a penny. Likewise, several years ago Martinez and Dixit calculate that food assistance programs increase farm prices by less than 1 percent.  

Since at least the work of the economist Herman Southworth in the 1940s, debate has continued about whether food stamps (now SNAP) have effects that differ from unconditional cash transfers. Southworth noted that people who spend more on food than they receive in food stamp benefits (the so-called inframarginal consumers, who represent the vast majority of SNAP recipients) should, in theory, treat the benefits the same as an unrestricted cash transfer.  The consumer can get around the restriction that SNAP payments be spent only on food by rearranging which items are purchased with SNAP benefits and which are bought with cash. Despite this theoretical result, some empirical evidence indicates that SNAP benefits tend to increase food purchases by a slightly greater amount than would be expected by an equivalent rise in income, though the evidence is debated.

For similar reasons as discussed above, more recent calls to restrict SNAP purchases to only healthy foods or to outlaw purchases of soda or junk food with SNAP benefits are unlikely to be successful; inframarginal consumers can reallocate which items are paid for by SNAP benefits and achieve the same consumption bundle at the same cost, irrespective of the soda or junk food restrictions.

Reasonably good evidence shows that food assistance programs accomplish their primary objective—reducing hunger among low-income Americans. In addition, the best academic research does not support the view that SNAP benefits result in higher rates of obesity (SNAP participation is correlated with obesity, but it probably doesn't cause it).

Agricultural Research

A large body of research has investigated the returns to agricultural research funding disseminating from USDA programs like National Institute of Food and Agriculture. The research tends to show large, positive benefits from public investments in agricultural research.  One review of 35 studies finds that the average estimated rate of return on US public agricultural research is 53 percent, which is quite high compared with other investment alternatives.  In fact, one paper by Julian Alston suggests spending on agricultural research is more beneficial to farmers than farm subsidies.  Despite this, the rate of growth in public spending on agricultural research has slowed over time (though private spending has increased for some crops), a phenomenon some researchers argue is partly to blame for declining rates of productivity growth.  

Farm Subsidies - Magnitudes and Comparisons

Continuing the discussion of the paper I wrote entitled "The Evolving Role of the USDA in
the Food and Agricultural Economy", today I'll discuss some USDA farm support programs (in another post, I'll discuss the academic research on effects of these and other USDA programs). 

In 2012 (the last date of the Census of Ag), the average government payment per farm receiving payments was $9,925. However, a large percentage of farms receive no government payments . In particular, farms that sell less than $50,000 worth of products tend not to receive payments, while the opposite is true for farms with sales greater than $50,000. For the 3.9 percent of farms with sales of $1 million or more, 71.2 percent receive payments averaging $40,559. Whereas the smallest farms receive the smallest average payments in total dollars, they receive the largest payments when expressed relative to value of production. Farms with sales of less than $1,000 that receive payments tend to get 9.36 cents for every dollar of output produced, but farms with sales of more than $1 million that receive payments tend to get only about 2 cents for every dollar of output produced.

Although government payments represent a small fraction of the value of output (i.e., gross revenue), they are certain to represent a much higher fraction of farmers’ net income. In fact, USDA Census of Agriculture data show that in 2012, the average net cash income for each category of farm with sales of less than $24,999 was negative. Those farms operate at a loss; because of this, whatever government payment they receive is infinitely greater than what they
make from farming. The average payment as a percentage of net income (for those receiving payments) is 31 percent, 18 percent, 13 percent, and 7 percent for farms with total sales in the categories $100,000 to $249,999, $250,000 to $499,999, $500,000 to $999,999, and $1 million or more, respectively.

It is interesting to compare all this with SNAP payments.  As indicated, of the farms receiving payments in 2012, the average payment was $9,925. By contrast, USDA data indicate that the average payment per individual receiving SNAP in 2012 was $133 per month, which amounts to $1,596 annually. SNAP payments increase at a decreasing rate with the size of the household. For a four-person household receiving SNAP benefits, the average payment was $440 per month, or $5,280 per year, in 2012. Food assistance programs represent a larger share of the USDA budget than do farm support programs because SNAP recipients far outnumber the recipients of farm program payments, not because each SNAP recipient receives a higher payout than does each recipient of farm supports.

It is also useful to compare US farm support payments with those in other countries.  For this, we can turn to data from a World Bank project led by the Kym Anderson and colleagues. 

The nominal rate of assistance (NRA) is defined as the percentage increase or decrease in gross returns to farmers caused by government policies. A positive number means a country’s
policies are pushing up agricultural prices and returns, and a negative number implies the opposite. The gross rate of assistance (GRA) is the NRA expressed in absolute dollar terms (in the year 2000) instead of in percentage terms. The GRA is the NRA multiplied by the value of agricultural production in a country divided by the number of farmers.

Figure 14 shows the average NRA, and figure 15 shows the average GRA of 53 different countries from 2000 to 2010. The figures contain a selection of developed and developing countries to provide insight into the diversity of agricultural policies around the world. The United States had an average NRA of 11.2 percent and a GRA of $3,576 per farmer over this period. That means that the gross returns of US farmers are 11.2 percent (or $3,576 per farmer) higher than would have been the case were it not for various government policies. Some countries, such as Norway, Iceland, Switzerland, and the Republic of Korea, have NRAs higher than 100 percent. Thus, US agricultural policies push farmer prices and returns higher than would be the case in the absence of such policies, but by an amount far less than is the case in some other countries and far more than in others.

Whereas figure 15 shows a snapshot of the GRA at a point in time, figure 16 shows changes in the GRA per farmer over time in eight selected locations (all in 2000 dollars). The GRA per farmer in the United States increased sharply from the 1970s to the 1980s and has subsequently stayed around $3,000 per farmer per year. The GRA per farmer in Japan has risen over the entire period considered from only $536 per farmer per year in the 1960s to $8,653 per farmer per year from 2000 to 2009. New Zealand dramatically lowered the GRA per farmer from the 1980s to the 1990s. Brazil and China have policies that are relatively neutral with regard to farmer gross returns. Until recently, countries in the European Union had highly distorting policies equivalent to taxes in excess of 100 percent.

In most locations (except eastern Europe and central Asia), agricultural policies have distorted the overall economy less since the 1980s. From 2000 to 2010, the United States had a welfare reduction index (WRI) of 17; the only locations that had less distorting policies were Australia and New Zealand, which had an average index of only 3.8 over this period (figure 17).

The welfare reduction index (WRI)  accounts not only for transfers but also for trade policies that affect the food and agricultural economy. According to Anderson, Rausser, and Swinnen, the WRI is calculated as “the percentage uniform trade tax which, if applied equally to all agricultural tradables, would generate the same reduction in national economic welfare as the actual intrasectoral structure of distortions to domestic prices of these tradable goods.”

The previous graphs aggregate the effects of agricultural and trade policies across all commodities. Figure 18 shows the average NRA for 11 different commodities in the United States from 2000 to 2010. During that period, sugar, cotton, and milk producers benefited most, with NRAs of 75 percent, 56 percent, and 39 percent, respectively. Barley and wheat had relatively low NRAs. Other commodities like beef and pork (not shown in the graph) had NRAs near zero.

To put these figures in perspective, it is useful to compare them with other distortions in the economy. In a remarkable statement, Anderson, Rausser, and Swinnen write,

“In 2004, existing agricultural and trade policies accounted for an estimated 70 percent of the global welfare cost of all merchandise trade distortions, even though the agricultural sector contributes only 6 percent of global trade and 3 percent of global GDP.”

In short, despite the small contribution of agriculture to global GDP, agricultural policies are responsible for the lion’s share of welfare losses that result from trade distorting policies.

In the paper I also talked about the fact that USDA impacts on the economy likely extend beyond those caused by explicit farm-commodity policies. To get a sense of such impacts, I utilized the RegData database.  You can read the paper for more details on that data set, or look at some of the work by Levi Russel who blogs at FarmerHayek.com.

Assorted Links

The Food Rush Magazine reviewed Unnaturally Delicious

Study of dietary trends from 1999-2012 in the US reveals generally positive improvements

Trends in obesity rates essentially flat for the past decade

Jane Kolodinsky and I are interviewed in a NPR Marketplace story about Vermont's impending GMO labels

The Restaurant Performance Index falls again - something I predicted last month (well, my little model got the direction right if not the magnitude)

Cool article about the various ways robots are starting to affect our kitchens

The USDA by the Numbers

I previously posted on a paper I wrote entitled "The Evolving Role of the USDA in the Food and Agricultural Economy."  Today I'll cover some of the figures and tables that describe the USDA and how it has changed.   

Today, the USDA engages in numerous activities. The department has 17 different agencies, 18 different offices, and the agencies are organized under seven politically appointed under-secretaries (see here for a description the agencies and offices and here for an organizational chart).  Many (but not all) USDA activities are authorized by the farm bill, the most recent of which is the Agricultural Act of 2014. The 2014 Farm Bill has 12 major sections (or titles). 

Since the 1960s there has been a sharp increase in USDA spending. Most of that increase has been driven by spending on food and nutrition assistance (primarily "food stamps"). Of total USDA outlays in 2014, over 70 percent went toward food and nutrition assistance. Real spending on agricultural research slowly increased from the 1960s and experienced a sharp jump in the first few years of the 21st century. Since that time, research funding has declined in real terms and fell back in 2014 to the pre-2000 levels (full disclosure, some of my research and salary is funded by these USDA research expenditures). Spending on farm income stabilization varies from year to year, but it has hovered around $20 billion in recent years.

Below is the same data expressed as a percent of the total federal budget (note that the copy editors got the scale of the axis wrong - there is an extra "0" where there shouldn't be; the scale should range from 0% to 7%).

From 1980 until 2009, total federal spending increased at a faster rate than did USDA spending, leading to a fall in the share of spending attributable to the USDA. Since that time, USDA spending has outpaced total federal spending because of increases in food and nutrition assistance. In 2014, the USDA was responsible for about 4% of total federal spending.

Figure 10 shows a breakdown of the USDA budgetary authority for 2014. The department was authorized to spend $161 billion, with 66.6 percent allocated to the Food and Nutrition Service, which is responsible for administering the Supplemental Nutrition Assistance Program. The next-largest spending categories in 2014 were the Risk Management Agency (i.e., crop insurance) and the Commodity Credit Corporation.  The Commodity Credit Corporation is the mechanism through which the USDA pays out farm subsidies associated with price and income support programs, Conservation Reserve Program payments, and payments for export promotion programs. The Agricultural Marketing Service Section 32 funds (representing customs receipts allocated to support the farm sector; in recent years, most of those funds have been transferred to the childhood nutrition account) and the Forest Service account for 5.5 percent and 3.3 percent of the USDA budget, respectively. All other agencies individually account for 2 percent or less of total USDA spending.

As a basis for comparison, and to illustrate how the USDA has changed over time, figure 11 shows a breakdown of the USDA budgetary authority in 2006, when the department was authorized to spend only $100 billion (that's in 2006 dollars despite what the title says; covered to 2014 dollars its about $117 billion). The Food and Nutrition Service accounted for only 53.7 percent in 2006 compared with 66.6 percent in 2014. The Commodity Credit Corporation played a much larger role in the USDA budget in 2006 than in 2014, with the opposite being true of the Risk Management Agency.

In 2010, the USDA had 106,867 employees. If one disregards employment by the Defense Department (and Veterans Affairs) and the US Postal Service, USDA employees account for just under 10 percent of all federal employees.

In 1955, there were about 85,500 USDA employees and 4.78 million farms, implying about 1.8 USDA employees for every 100 farms in the United States. The number of USDA employees per farm grew sharply until the 1980s, when there were 6.4 employees per 100 farms. Since that time, the number of USDA employees has fallen slightly, with an uptick in 2010, the last year for which data are available. In 2010, there were 5 USDA employees for every 100 farms in the United States (of course not all USDA employees work on farm issues).

The evolution of American agriculture

The Mercatus center just released a paper I wrote entitled "The Evolving Role of the USDA in
the Food and Agricultural Economy."  I decided to write the paper after having a number of conversations with folks who held a variety of beliefs (some correct, some incorrect) about how agriculture has changed and were curious about the role of the USDA and how it has evolved over time.  In the next few posts, I'll share some of the data and figures I pulled together for the paper (most of which comes perhaps ironically from the USDA).  

Here is a bit on the evolution of American agriculture.  Future posts will cover changes in the USDA.

In 1900, just under 40 percent of the total US population lived on farms, and 60 percent lived in rural areas. Today, the respective figures are only about 1 percent and 20 percent. 

The United States had between six and seven million farms from 1910 to 1940 (figure 1). A sharp decline in the number of farms occurred from the 1940s to the 1980s. At the same time, the average farm size more than doubled, from about 150 acres to around 450 acres. 

Whereas farm households earned lower incomes than other households before the 1970s, since the mid- 1990s, farm households have consistently earned more than other US households.  In addition to earning higher incomes, farm households today tend to have substantially higher net worth than the average US household. Census data indicate that the mean (median) net worth of all US households in 2012 was $338,950 ($68,800). By contrast, the mean (median) net worth of farm households in 2014 was $915,210 ($802,000). In 2012 (the last ag census date), 98 percent of farm households had a net worth that exceeded the net worth of the median US household. (The average income for farm households in 2015-2016 is likely to come down somewhat given the fall in commodity prices.)

Farm household incomes have become more diversified over time in the sense that the percentage of household income from farming has steadily declined (aside from the increase in 2011–2012 from higher commodity prices). So while farms have become more specialized (growing fewer commodities than they did in the past), the household income of farmers has become more diversified and less reliant on farm income

Small farms account for only a small share of the value of agricultural output. In fact, farms with total sales of less than $25,000 (more than half of all farms) account for less than 1 percent of the value of agricultural output while farming 20.7 percent of the acreage. By contrast, 7.5 percent of the larger farms (those with more than $500,000 in sales) account for 80 percent of the value of agricultural output while farming only 38.4 percent of the land. These data suggest that much of the information the USDA reports on farms fails to correspond with businesses that have any substantive level of output.

The changes in the number and composition of farms over time are partly attributable to changes in technology and market conditions. The figure above shows an index of yields for corn, wheat, and cotton. Corn yields in 1900 were only 18 percent of what they were in 2014. In 1900, wheat yields were only about 30 percent of what they were in 2014. With the adoption of tractors, synthetic fertilizers, and improved seeds, yields began climbing after World War II. Yield growth has continued until today, although the rate of growth has slowed somewhat in recent decades.

It is possible to achieve higher output by increasing the volume of the inputs used. However, total agricultural output has more than doubled since 1948, while key agricultural inputs have fallen. More output with fewer inputs implies increased productivity. According to USDA-ERS data, in 1948, the amount of labor used in agriculture was four times what it is today. As the above figure shows, the United States produces more agricultural output today, despite using less land and substantially less labor.

Increasing productivity leads to falling prices. The figure above shows an index of real prices from 1910 to 2014 for corn, wheat, and cotton. Before the 1950s, prices for those commodities were routinely three to six times higher than they are today.  The beneficiaries of falling agricultural prices have been food and fiber consumers. Farmers face lower prices today than in the past, but as the preceding figures reveal, they have more output to sell, resulting in higher net incomes. 

In short, today there are fewer but larger farms than there were in the past.  The farms that remain tend to earn higher incomes and have higher net worth than average US households.  Farm production is today heavily concentrated among a small share of about 160,000 producers.