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Government, the Family Farm and Payment Limits

by 5m Editor
31 July 2001, at 12:00am

By Andrew Swenson, Farm and Family Economics Specialist, NDSU Extension Service - The political reason often given for annually funneling billions of dollars to producers and landlords is to support family farms. Yet the number of family farms declines each year. Given this trend, advocates of family farms may conclude that different policies are needed while others may claim that concentration in agriculture is inevitable.

The political reason often given for annually funneling billions of dollars to producers and landlords is to support family farms. Yet the number of family farms declines each year. Given this trend, advocates of family farms may conclude that different policies are needed while others may claim that concentration in agriculture is inevitable.

It is important to understand the reason for government interference in any market. Many believe that "the market is always right" because of the propensity of our free-wheeling system of competitive bidding to direct resources to the highest return use and provide goods and services at the least cost. However, the unfettered market, for all its strengths, may not provide the best outcome for society. If important matters are excluded from the competitive bidding process the market cannot provide the best economic solution – that is to provide maximum satisfaction, given the resources available. Economic efficiency does not equate to production at lowest cost and highest profit, in dollars, if significant income distribution and non-market cost and benefit issues are ignored.

A basic question in agriculture is whether the family farm structure has value that the market ignores. At some level of non-market benefits and costs there is justification to guide the market to a more favorable outcome. Of course, government intervention should not occur if it creates greater problems than it solves.

Thomas Jefferson firmly believed that small independent farmers were the bedrock of democracy. Franklin Roosevelt stated that farmers are the source from which the reservoirs of our nation’s strength are constantly renewed. But times change. In 1930 the farm population was about 25 percent of the US total and in 1990 it was less than two percent.

Currently, there is debate on whether family farms are better environmental stewards, better at insuring a diverse, dependable food supply, and whether they are more involved in and responsible to the local community than are very large farms.

However, it is difficult to deny that more farms mean more people -- not just farmers, but their relatives, friends and visitors -- are exposed to a rural, outdoor lifestyle of raising crops and animals. In the past, many children learned a lesson about life and the source of food with a summer stay at a grandparent’s, uncle’s or aunt’s farm. Many city workplaces have been enlightened by the experiences and work ethic of employees who grew up on family farms in a culture where people mobilize to plant or harvest the land of a neighbor stricken by medical tragedy. And what traveler is not uplifted by the view of a small New England dairy with cattle grazing in a scenic valley? The market ignores all of this.

Proponents of industrialized agriculture question whether the non-market or social benefits of the family farm structure are significant and emphasize the cost efficiencies of large-scale production.

Are values fostered by farm family farms unique? Or have exposure to media and education, increased mobility and off-farm jobs made them indistinguishable from those of the urban population? Will our food supply remain abundant and safe? Or should we be concerned as the food supply becomes more controlled by a few vertically integrated firms? Can family farms afford to comply with environmental regulations as well as large capitalized firms? In the face of these questions, policymakers and society must ask: Why should the family farm structure be preserved?

Surveys show that the public still supports the concept of family farms and thereby perceives social benefits. Images of the traditional family farm, like apple pie, motherhood and the flag stir strong emotions. Even large agribusiness firms recognize this and try to give the impression of association with, and support of, the traditional family farm through their advertisements.

What is happening to small and moderate size family farms?

Large farms tend to have a cost advantage mainly in lower labor requirements per unit of production because of scale of operation, and also lower input prices because of volume purchasing. In addition, volume of production can increase sales opportunities. Simply put, a large crop farmer with $10 lower production costs per acre can afford to pay up to $10 more for land rent. Over time, land shifts away from smaller producers. Notice that landlords are a beneficiary in this process.

To halt the economic cannibalism of small and moderate size farm by large farms, farm policy would have to offset the market forces that cause it. Neither policies which increase the prices of farm commodities nor government payments based on output, without limit, will change this trend. A large operation with a slight cost of production advantage will still maintain that advantage. However, proper limits on government payments by level of production or per farm household should be successful. The advantage of a large farm could be offset, once its payment limit has been reached, by government support for which the small farm would still be eligible. Farms would be free to be any size, but there would be no government subsidy for production in excess of the family farm payment limit.

An argument against payment limits is that the concept is not fair -- the market should determine the winners and the losers. However, the reason for limits is recognition that the market has failed to provide the best outcome. Also, payment limits are fair in the sense that the limit applies equally to all farm families.

The concept of payment limits was first introduced in 1938 farm legislation. However, current limits are too loose to be effective in halting farm consolidation. Not all government benefits have limits, and large farms can organize their operations into multiple entities to maximize government payments. Government payments are at record levels, last fiscal year averaging, nationwide, more than $80 per harvested crop acre. But a recent report from the Government Accounting Office reported that in 1999 the largest 7 percent of farms received 45 percent of government agricultural subsidies. The report concluded that subsidies have increased land costs and make it more difficult for young farmers to get established. It is necessary for young farmers to replace retiring farmers for the family farm structure to continue.

Is the statement posed by agricultural economists Harold Breimyer and Wallace Barr in 1972 still pertinent? "The policy question is not whether things will be kept just as they are; it is nether desirable nor possible to do so. Rather, the basic question is whether some version of a dispersed farm production and marketing organization is to prevail or whether the control of U.S. farm production and marketing will be concentrated in a relatively small number of large firms."

Source: North Dakota State University Extension Service, August 2001