Friday, July 28, 2006

Effects of Ending Farm Subsidies

What would be the effect of ending U.S. farm subsidies? I'm no expert, but when does that stop a blogger?

Economists seem to say that landowners capture farm payments. Their reasoning: if I can profit from growing cotton (for example), then I'm willing to pay more to rent land to grow cotton. If I own the land, then when I sell I can expect a higher price because buyers know they can make money growing cotton. So over time land rental rates and land values adjust to the flow of subsidy payments. That's what economists say anyhow.

The Economic Research Service of USDA studies the costs of production for various crops. As you'd expect, there's a distribution curve (bell curve) from low cost to high cost, with the bigger operators usually being more efficient. My impression is that for every crop, perhaps excluding sugar, low-cost operations can make money at current world market prices.

If that's true, then ending payments should cause U.S. land values and rental rates to fall. Only those (large, efficient) operators who can make a profit without subsidies would be willing to buy or rent land. So in the absence of subsidies we'd still have farms and the acreage of land being farmed might be much the same. But we'd have fewer farms.

No comments: