After World War II, the major agricultural problem was how to deal with the large farm surpluses created by farm price supports. To correct this problem, in 1949, Secretary of Agriculture C. F. Brannan announced the plan of “compensatory payments” to which the press and public quickly attached his name, although its central ideas had been developing for many years in academic writings. The Brannan plan would have allowed prices to seek their own level in the marketplace, with the difference between the market price and a “modernized” parity price to be paid to the farmer (up to a maximum amount) with a check from the Treasury. The potential benefits of the Brannan plan were obvious. Surpluses would be eliminated, saving storage costs; and the public, the poor in particular, would be able to buy food cheaply (see Economic Insight 27.1).
ECONOMICS OF THE BRANNAN PLAN
This figure illustrates the economics of the Brannan plan. In a free market, the price of an agricultural product would be P and output produced would be Q, determined as usual by the intersection of supply and demand. This price is considered, however, to be unfair to farmers.
Under the traditional support system, the government wishes to raise the price to P*, the “parity” price. At this price, consumers are willing to buy only Q*; but farmers produce Q**. To hold the price in the market at P*, the government must purchase the excess supply, Q** - Q*. This will cost the government (the taxpayer) P* X (Q** - Q*). The surplus, Q** - Q*, will have to be stored, so storage costs will be incurred in future years. The gain to farmers (compared with the free market equilibrium) will be the area P*BCP.
Under the Brannan plan, the government simply allows the surplus to be sold in the marketplace for whatever it will bring. The price falls to P**, the price at which Q** can be sold. The Treasury then writes a check to each farmer for the difference between the parity price P* and the new market price P**. In this case, the total cost to the government is given by the area Q** x (P* - P**).
Consumers clearly benefit from switching to the Brannan plan: They pay a lower price for farm products. No resources are wasted simply producing food and then storing it in government warehouses. Even under the Brannan plan, however, there is an efficiency loss given by the triangle CBE: Resources are employed in farming that could better satisfy consumer demands elsewhere in the economy.
The impact on the government budget depends on whether area Q** x (P* - P**), the costs under the Brannan plan, exceed or fall short of area P* x (Q** - Q*), the costs under the traditional purchase-for-storage system plus the storage costs. In general, this will depend on the elasticities of the supply and demand curves. The more elastic the supply and demand curves, the less costly will be the Brannan plan compared with the purchase-for-storage plan.
Financially, farmers fare the same under the two plans. They produce Q** output and receive P*Q** total income. Under the Brannan plan, however, farmers receive a part of the income in the form of a “welfare” check. Some farmers will find this demeaning. Direct payments also will be obvious to the public and make it more difficult for farmers to defend and increase their subsidies.
Price
Heated debate, during which the National Grange and the American Farm Bureau Federation opposed the plan, the House of Representatives refused to give the Brannan plan a trial run.
After the Brannan plan’s failure, reformers turned their attention to less radical measures. For example, with surpluses still at controversial levels, Congress turned again to a depression-era solution. The Soil Bank Act of 1956 was devised to reduce supplies of basic commodities by achieving a 10-17 percent reduction in plowland through payments to farmers who shifted land out of production into the “soil bank.” The diversion payments were based on the old formula of multiplying a base price for the commodity by normal yield per acre by the numbers of acres withdrawn. Although the soil bank idea had been linked at its creation in the 1930s with the dust bowl in the Plains states, the plan remained what it had always been: an attempt to raise farm prices thinly disguised as a conservation program.
The results were unexpected, but easy to understand in retrospect. Farmers placed their least productive land in the soil bank and cultivated the remainder more
Intensively. Surpluses went right on mounting, reaching astronomical heights in 1961 after nine consecutive years of increase.1 The Emergency Feed Grain Bill of 1961 encouraged drastic reductions in acreages devoted to corn and grain sorghums by offering substantial payments to farmers who reduced their acreage. On the whole, this plan worked because the reduction was large enough to offset attempts by farmers to minimize its effects. For the first time in a decade, feed grain carryover dropped.
As inflation and concern about government spending mounted in the 1970s, Congress found it more difficult to respond unilaterally to farm interests. The Democratic Congress and President Jimmy Carter, who was well versed in agricultural subsidies—he was a prosperous peanut farmer in Georgia before entering politics—made an effort to lower support prices in the Food and Agriculture Act of 1977. This monument to complication set support prices within specified ranges on wheat, cotton, feed grains, and many other commodities. Farmers, however, protested bitterly and crowded into Washington, D. C., to make known their opposition to lower prices. In the winter of 1978, they obtained higher support prices through the Emergency Act of 1978.
President Ronald Reagan’s Farm Bill, passed in late 1981, exceeded $22.6 billion in expenditures, with more than $10 billion allocated to the food stamp program; price supports were continued on peanuts, sugar, wheat, feed grains, rice, soybeans, cotton, and wool, although these supports were reduced from their levels during the Carter years. As expected, both Democratic and Republican farm interests claimed that the administration dictated the cutbacks, leaving no effective protection for farmers facing severely depressed incomes.
In subsequent years, the incentives offered to farmers improved somewhat. Under the deficiency payment system used for grains, which had elements of the Brannan plan, farmers received a subsidy based on the difference between a “target” price and the market price or support price, whichever of the latter two was higher. The quantity to which this deficiency payment was applied was based on historical yields and acreages under cultivation, so farmers could not increase their deficiency payment by cultivating their land more intensively. An important change also occurred in the acreage restriction system. In 1985, the Conservation Reserve Program was set up, allowing farmers to enter into long-term contracts with the Agriculture Department to retire land from production. This program was designed to combine the goal of protecting the environment by retiring environmentally sensitive land with the goal of restricting output.
It seemed in the early 1990s that farming would escape deregulation. Even agriculture, however, could not hold out against the free market tide. In 1996, Congress passed the Federal Agriculture Improvement and Reform Act, known colloquially as the “Freedom to Farm Bill.” This legislation swept away the government’s policy of setting a floor under agricultural prices in return for controls over production or acreage. As compensation, farmers were guaranteed annual payments through 2002 to aid the transition to free market agriculture. Although many farmers were opposed to the measure, others supported it. Prices for many agricultural products were at historical highs, and it seemed to some farmers that the stream of assured payments under the transition program would be higher than what might be forthcoming under traditional programs. Once the act was passed, however, agricultural prices began to fall. In 1998 and again in 1999, Congress provided emergency payments to help farmers cope with the sudden fall in their incomes. The system of price supports and direct subsidies was soon 112
Reinstated. The experiment with free market agriculture, in other words, did not last long. Under the Food, Conservation, and Energy Act of 2008, farmers benefitted from price supports for major crops and from direct payments based on historic crop acreage and yield. Thus, some farmers may receive payments based on the yield from land planted in cotton in the past, even though the land is now planted with another crop or no crop at all. The 2008 act also provided support for the development of bio-fuels intended to supplement gasoline for automobiles.
Why are farmers so heavily subsidized in the United States and other developed countries? The sympathy that most of us feel for people who attempt to maintain a cherished way of life in the face of hard economic realities is part of the explanation. The most important factor, however, is the political economy of farming. Farmers are a well-organized special interest group with considerable influence in the House of Representatives and especially in the Senate (where representation is independent of a state’s population). The subsidies farmers receive, moreover, while crucial to them, are only a minor irritant to the average taxpayer. It does not pay for consumers to take the time to fight hard against price-increasing policies and tax-raising subsidies that reduce their incomes by only a small amount.113
World History
