What Farm Subsidies Will Do To The Value Of Farmland
* By Pushing New Subsidies, Is Congress Setting Farmers Up For Another Collapse In Land Values?
March 8, 2001
by Dennis T. Avery
THE BridgeNews FORUM: Viewpoints on farming, farm policy and related agricultural issues
February 26, 2001
CHURCHVILLE, Va.--Is the U.S. Congress setting up American farmers for the next land-value collapse?
In 1996, the government faced a big budget deficit. American farmers reluctantly accepted the Freedom to Farm concept, along with a hefty set of transition payments.
At the same time, Congress implicitly agreed to pursue liberalized farm trade, so that American farmers could help meet the rising food demand in densely populated Asia. (Grain prices in India have recently been double the world market price.)
Unfortunately, the Asian economies stumbled in 1997 and their farm imports stopped rising. Worse, when the World Trade Organization met in Seattle two years ago to start liberalizing farm trade rules, American unions and eco-zealots took to the streets of Seattle in protest.
Congress immediately lost its enthusiasm for exports and Freedom to Farm. Never mind that exports to the currently barred markets in Asia are the only long-term new income available to farmers in Europe and North America.
The solons can't wait to offer American farmers a new set of subsidies instead of trade, so they won't have to confront the eco-zealots who apparently want Asia to clear tropical forests for low-yield crops.
House Agriculture Committee Chairman Larry Combest is hosting hearings designed to regularize the "emergency" payments that Congress has been making for the past three years.
The newly received report of the commission on 21st century production agriculture calls for the recent "transition" payments to become a permanent entitlement--along with new set of payments to be called "Supplemental Income Support."
The SIS payments would be paid "when aggregate program crop gross income falls below some percentage of the historical income level calculated over a fixed-base reference period." Unfortunately, Congress can't raise farm subsidies without farm land values rising in conjunction.
In theory, every farmer should sell out immediately on receipt of a new subsidy. Otherwise, he's got to earn more from the land to reflect the higher subsidy value built into it.
During the last farming boom, between 1974 and 1981, farm land values doubled as exports to the old Soviet Union boosted farm income. When the U.S.S.R. went bankrupt, U.S. farm land values crashed.
Corn Belt cropland values leaped upward by 68 percent between 1990 and 1998, belying the claims of low farm income. Land values rose 30 percent just between 1995 and 1998. Europe's cropland costs six times as much as American cropland due mainly to its high subsidies. But that just means Europe's farmers have to earn far more to pay off their farms.
The only beneficiary of a new subsidy is the farmer who owns the land when the subsidy is installed. That's why the commission on 19th century-- excuse me, 21st century agriculture--recommends a new subsidy on top of the existing one.
Simply extending the current transition payments wouldn't give today's voting farmers any additional cash or land equity. But a new subsidy would jack the land values up another notch. Farmers could sell their land for more, or borrow more against it from the local bank. Hooray, it's 1976 again. The rude awakening would come either when Congress runs out of money or the World Trade Organization decides the new SIS payments are a production subsidy and violate America's international commitments. Both could happen quite soon. America is close to its farm subsidy limit under the World Trade Organization.
The commission says its new SIS payments would be exempt from sanctions under the WTO rules. However, it has no reason to believe this is true. They asked one of the USDA lawyers whether they'd be exempt, and the lawyer said he'd be glad to argue that case.
But lawyers exist to make their clients' arguments. Half of them lose every day. Just imagine how America would react if the EU was planning to install a new set of production-related farm subsidies, and you can see what a hollow shell the Commission's new payment scheme really is.
Worse, Congress is coming up against the day when it has to start paying Social Security to baby boomers. The moment Congress addresses the $12 trillion unfounded obligation that Social Security represents, everything else in the U.S. budget has to shrink. How will farmers fare when the new subsidy disappears and land values shrink to match?
If we keep running the same anti-trade farm policies we've run for 70 years, why would we expect a different outcome than the continued shrinkage of the farm sector and the further decline of rural communities.
Dennis T. Avery is based in Churchville, VA, and is director of the Hudson Institute's Center for Global Food Issues.