Subsidies prevent farmers from reaching their full potential

Subsidies prevent farmers from reaching their full potential
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American farmers and low-income families are understandably uneasy with the recent expiration of the farm bill, although the eventual passage of another iteration is all but assured.

Regardless, we should take a moment to ask what would happen if we repealed farm bill agricultural subsidies instead. 

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The idea may sound fanciful. We’ve had farm subsidies for over 80 years; it’s hard to conceive of an agriculture industry without extensive government intervention. But we already have a good test case for what America’s farmland would look like without the farm bill: New Zealand.

In the 1950s, New Zealand’s per-capita income ranked just behind America’s, but less than 30 years later it had languished to 27th in the world, comparable to Portugal and Turkey.

Excessive government micromanagement of its economy — price controls, trade restrictions and subsidies to prop up failing industries — led to stagnation and a bloated, inefficient bureaucracy. 

This developed into a government budget crisis that saw New Zealand diplomats paying official expenses on personal credit cards. A reform-focused, left-leaning government elected in 1984 implemented previously inconceivable reforms, including ending most agricultural support programs.

The shift wasn’t without controversy or pain — subsidies accounted for around 45 percent of the gross income of sheep and beef farmers, the nation’s primary agricultural industry.

My Mercatus Center colleague Maurice McTigue, a farmer who later became a key member of New Zealand’s parliament, said: “It was a very difficult experience ... I’ve still got the bruises and bumps to show from it.” 

Despite the short-term difficulty, ending farm subsidies and trade restrictions has been a good decision in the long run. New Zealand’s agriculture industry has since become something of a Cinderella story around the world.

According to McTigue, in 1984 New Zealand sheep farmers’ major product — lamb — was selling internationally for $12.50 apiece. When the farmers accepted that subsidies weren’t coming back, they assembled a team to figure out how to improve the selling price to $30.

Innovations in producing better quality meat, improved processing and a renewed market focus allowed them to achieve this goal by 1989. And they weren’t done yet. Five years after that, the market price for New Zealand lamb had increased to $115.

After the government removed trade barriers to Australian wines, which had previously protected New Zealand wineries from competition, domestic winemakers improved their products, too.

This allowed them to compete in foreign markets, and today, New Zealand wines are a familiar sight in American grocery stores. Thirty years ago, there were fewer than 100 New Zealand wineries. Now there are over 670.

In 1985, New Zealand dairy farmers only produced about 35 products from milk. Over the following 10 years, that number increased to 2,200 distinct products targeted to niche markets.

New Zealand fruit farmers also increased their production value by focusing on customers who desire high-quality produce. A customer-focused mantra, “Consumers buy with their eyes,” led to new apple varieties and a reputation for producing some of the best-tasting apples and pears in the world. 

These changes were far from painless, but they were worth it — the farmers themselves say so.

New Zealand created an agricultural renaissance simply by removing the insulation from competition that subsidies, trade barriers, price controls and other protections created.

These policies may seem like good ideas to risk-averse farmers in the short term, but they encourage producers to maintain the status quo rather than focus on the ultimate source of their prosperity: customers. 

Real competition — as opposed to collecting subsidies or a share of a highly regulated market —means identifying and developing the next thing customers want. New Zealand farmers did this, differentiating their products and commanding higher prices as a result.

The farm bill is not some strange combination of agricultural and social safety net programs. American farmers might be loath to admit this, but it’s a welfare bill through and through, with food stamps for needy households and subsidies for farmers.

The difference is that the primary beneficiaries of agricultural subsidies are big farms who, unlike food stamp recipients, don’t need handouts.

Conservatives who worry that welfare programs foster dependency and trap poor people in a vicious cycle of poverty should apply that same level of logic and scrutiny to the farm bill, which does exactly that to farmers.

Government-granted protection from failure leads farmers to be less focused on what their customers really want, and in the end the farmers are the ones hurt by the policy.

Passing another farm bill would just perpetuate the agricultural dysfunction that we’ve struggled against for over 80 years.

Given how productive American farmers have been in the face of economic headwinds, imagine what they could do if their full ingenuity and entrepreneurship were unleashed. 

Michael Farren is a research fellow with the Mercatus Center at George Mason University.