Now is the time to end farm subsidies

The farm belt is in a boom. With high prices in corn, wheat, and soybeans, 2007 farm income will be the best in years. Why not cutback farm subsidies in the 2007 Farm bill? It will have to be negotiated in the next few months. Not only can we wean farmers off these programs, but we will be able to move the Doha trade talks forward and provide an opportunity for developing country farmers to increase their farm income.

Farm programs over the last 25 years have been focused on massive subsidies to prop-up a way of life in the farm belt. Yet, if stabilizing the population involved in farming was the objective, the programs have been a failure. The number of workers involved in farmer continues to decline. Farm programs have not hindered the productivity in this sector which has driven the decline in workers.

Why should I care as a trader whether there are farm subsidies? Simply put, you would like farmers to make decisions based on the price of the crops they grow and not on what program the government may give them. Programs can change and this uncertainty actually creates new risks. It may be easier to deal with price risks than regulatory uncertainty. Adjustments in programs lead to large changes in the distribution of resources. The subsidies distort the decision of farmers even if it is in the form for a safety net.

If there is risk with farming, let market tools serve as the mechanism for managing risk. These tools will cost more because the pricing of risk in the private sector will generally be higher than if it is distributed over the entire taxpayer base; however, risk sharing for this length of time and magnitude may not be what the public desires.

The ethanol craze is a good example. Are the current decisions to plant more corn based on the true demand for the grain or is it a function of the large subsidies for energy production of ethanol. Currently, the federal subsidy for ethanol is 51 cent per gallon. Using a base of over 4 billion gallons of production in 2006, the subsidy is over $2 billion.

There will be dislocations if subsidies end, but cutting the subsidies when farmer income is high, prices are rising, and land values are increasing is the perfect time. Especially with the added benefit of increase the chances of getting a new free trade round, if not now when?