Agricultural Subsidies

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Contributed by:L. Kuhl

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This article is linked to Competing Demands Among Water Uses in the Apalachicola- Chattahoochee-Flint River Basin

Agricultural production has received far less attention than other water uses in the ACF, and agricultural management has been largely overlooked as a source of potential means of addressing the basin’s water issues. This is surprising, given that agriculture is generally a relatively inefficient user of water and may offer significant “low-hanging fruit” for water savings. Since agriculture is a dominant user of water in the ACF and the primary use of water in the Flint River sub-basin, attention should be paid to how agricultural policies and management can be used to improve water management in the basin.

Can agricultural policies, mainly rethinking subsidies, encourage water savings in the Flint River Basin, thereby helping to address basin-wide conflict in the ACF? Agriculture in the Flint River Basin is heavily subsidized. If direct subsidies heavily influence farmer decisions about which crops to grow, the question of what impact this has on Flint River Basin water use must be considered. Additionally, it seems likely that redirecting government subsidies could potentially improve agricultural water use in the Flint and elsewhere by encouraging farmers to grow less water intensive crops. Changes in subsidies could create incentives to grow different crops, thereby using water more effectively, increasing the resilience of the basin, and reducing the potential for conflict.

Agriculture in the Flint

The Flint River Basin, part of the greater ACF Basin, is located in southern Georgia. It is the most heavily irrigated area in the basin; where in the lower Flint over 90% of the water used is for agriculture. Flint River Basin water management is largely centered on providing sufficient and consistent flows for agricultural uses, with relatively little attention to water conservation, efficiency measures, or concern for other water uses throughout the larger ACF Basin.

The Flint River is one of Georgia’s largest agricultural production areas, with revenue contributions estimated at $5.8 billion in 2006, 34% of the regional economy. Cotton is the major commodity produced. Pecans require water throughout most the year, and vegetables and corn have seasonal spikes in the spring. Cotton and peanuts have peak demand in the summer months, which places them in direct competition with other basin demands that also peak during this time (fisheries and recreational uses).

In 2008-09, subsidized commodities show basin-wide losses, a reflection of a simplification made to include only direct payment subsidies in this analysis. Since capital costs are so high for commodities, farmers will continue to produce such crops even in years following a loss, as long as profits can be expected in the future. As confirmed by economic reports, 2008-09 was an especially difficult year for pecans; however, the price of pecans was expected to be 57% higher in 2012, a sign of how sensitive the market is to external forces (in this case demand from China).

Agricultural Subsidies

The United States pays $10 billion to $30 billion in cash subsidies to farmers per year, 90% of which goes to 5 crops (wheat, corn, soybeans, rice, and cotton). In addition to this, $5 billion is spent per year on indirect subsidies. Indirect subsidies include crop insurance, marketing support, statistical services, and research and development. In 2007, the last year for which an agricultural census is available for Georgia, a total of $224,523,000 in government payments was paid to farmers in Georgia. Considering that total farm income from the same year was $211,673,000, it is clear that government payments are essential to the agricultural industry. Based on these data, it appears that agriculture in Georgia is not viable without government support.

There are numerous types of agricultural subsidies. The major types of subsidies are described below.

Subsidy Types

• Direct payments: Based on a historical measure of a farm’s acreage used for production. It is not based on current production of prices
• Marketing Loans: Guarantees minimum prices for crops by creating and floor and reducing price variability
• Countercyclical Payments: Provides larger payments when market prices are lower
• Conservation Subsidies: Offered on a per acre basis to farmers for conservation purposes. Farmers are incentivized not to farm and to grow cover crops instead
• Insurance (Yield and Revenue): Provided to private insurance companies to lower rates for farmers. Crops with higher premiums due to greater risk are more highly subsidized.
• Disaster Aid: Offered whenever a state of disaster has been declared
• Export Subsidies: Intended to help US farmers compete with products from other countries with subsidies
• Agricultural Research and Statistical Services: Government-sponsored research and statistical services provide better information to farmers

Pros and Cons of Agricultural Subsidies

Agricultural policy is one of the most contentious areas of policy-making, both domestically and internationally, which may explain why agriculture has been relatively under-addressed in the ACF conflict. Most developed countries subsidize agricultural production, and it is one of the few sectors where barriers to trade have not been relaxed. Although agricultural subsidies are a key issue in negotiations for the World Trade Organization, they continue to be excluded from the WTO agreements. Apart from the strong agricultural lobby, there are multiple legitimate reasons to subsidize agriculture. One rationale is that farmers take on personal risks in order to feed the nation, and because they are providing a social good (food), some of this risk should be distributed through society. Another argument is that although every business venture has risk, weather is a less predictable type of business risk, and therefore deserves to be subsidized. A third rationale is that subsidies have regional not just individual benefits, benefiting society. In spite of these legitimate reasons to utilize subsidies as a policy tool to incentive agricultural production, current subsidies are critiqued for several reasons. One argument is that they create a negative feedback loop, perpetuating the system of subsidy support. Subsidies induce farmers to overproduce, which pushes down commodity prices, which in turn, necessitates additional subsidies. Another major critique is that US agricultural subsidies negatively impact food prices and farmer welfare throughout the world. The causal logic for this is the following: non-specific commodity transfers increase production overall by increasing farmer wealth and subsequent agricultural investment. By increasing farmer production, US exports increase and world prices decline because there is greater supply than demand. Other subsidy programs (such as direct crop subsidies) which are linked to the production of specific crops not only increase the total land in production and quantity of crops produced, but they also distort the mix of crops that are grown. It is this issue that we address in this analysis.

Farmer Decision-Making and the Impact of Subsidies

When considering the impact that subsidies have on farmer decision-making, it is helpful to look at microeconomic models of decision-making. In its most simple form, production decisions by farmers can be thought of as a decision based on the level of government payments and the expected marketplace returns of production. Because expected marketplace returns are significantly lower than the costs of production, the decision to produce (and what to produce) is heavily influenced by the level of government payments.

For land-constrained farmers, the model leads to an expectation of crop-switching in response to the level of government payments and expected marketplace returns. For farmers with additional land, the expectation is an expansion in cropland for those crops that are highly subsidized. Direct payments represent the largest category of subsidies. The advantage of this type of payment is that since its not based on current production or prices, there is less economic distortion. The problem, however, is that it means that subsidies can go to people who are not currently farming.

Subsidies increase the farmer’s ability to get loans, because the subsidies represented a guaranteed source of income. In addition to being able to get loans, the guaranteed income may make farmers more willing to make riskier investments. Because farmers tend to be risk averse, mechanisms that reduce risk may allow farmers to make better investment decisions, leading to improved productivity or efficiency. However, if the subsidies mask risk and allow farmers to make decisions that discount risk, they may invest in riskier decisions than would be ideal. To the extent that subsidies include premium payments or include loans, they can provide incentives to reduce drought vulnerability.

In addition to direct payments, government programs that reduce risk can change farmer expectations and decision-making. For example, if a farmer expects that future payments will be based on current payments, they may keep production high in order to ensure future payments, even if they are not interested in producing now. Another example is subsidized insurance. Although insurance is offered through private insurance companies, the government reduces the risk for the private insurers, allowing them to offer lower premiums to farmers. The amount of subsidies for the premiums are directly linked to the level of risk associated with a crop (ie, the higher the risk, the higher the subsidy). In this way, insurance subsidies reduce the risk experienced by farmers. Between 1991 and 2000 farmers paid $7.8 billion in insurance premiums and received payouts worth $14.7 billion, a net benefit of $6.9 billion. Young et al. (2001) modeled the impact of removing the federal crop insurance on crop decisions. They found that removing the insurance subsidies led to an increase in corn by 29,000 acres, and an increase in cotton of 59,000 acres, as farmers shift away from riskier crops. We do not look at the impact of crop insurance on decision-making in our analysis, but the literature suggests that this is an additional policy that could contribute to farmer decision-making and water use in the Flint.

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Agricultural subsidies are not the only way to manage water use in the Flint River. In fact, it is not the most direct approach, although it may be the most effective. More direct approaches could include water permitting and drought management policy. However, there is awareness that the current tools used to manage water in the Flint are insufficient. Alternative options suggested by Cummings et al. include purchasing/leasing of permits (rather than granting them for free), instituting a water tax, shifting surface water use to ground water use, building small, off-main-stream reservoirs, and increased water use efficiency. While these policy options may help address the specific interest of the paper (enhancing in-stream flows), it is unclear that they are appropriate from a systemic perspective. Shifting to a greater reliance on groundwater in an area expected to be increasingly impacted by droughts does not appear to be a wise direction to move in, and does not address the underlying causes of the problem.

The effectiveness of economic incentives for water conservation inherent in permit pricing and water taxes must be considered in light of the economic gains from agriculture, and here again, the role of subsidies is important. It is difficult for price instruments to work in environments in which the market is heavily skewed because farmers will not respond to the price signals as intended by the policy. Surprisingly, in light of the low efficiency of agricultural water consumption, Cummings et al. suggest that increased water use efficiency has only moderate potential to increase in-stream flows.

Following a major drought from 1998-2003, the state realized that current drought management was insufficient. The Georgia General Assembly passed the Flint River Drought Protection Act, which paid farmers to reduce pumping during extreme drought. This compensation plan was designed to reduce the tensions that developed between ecological and agricultural water needs. While effective in reducing water withdrawals, the plan is very costly, both from an economic standpoint for the state, which is paying farmers, and from an efficiency standpoint, in that agricultural production must be reduced.

In a new approach, the Flint River Soil and Water Conservation District and the USDA are working with the Nature Conservancy to help farmers adopt new technologies and growing practices that reduce the reliance on groundwater withdrawals. The program has three components. First, it works to redesign the current irrigation system to make it more efficient. Beginning in the 70s, farmers adopted a pivot irrigation system, which was relatively inefficient at delivering water to the root systems of plants. By retrofitting the existing nozzles with low-pressure nozzles, more of the water reaches the plants. The second component is conservation tillage practices to increase soil moisture and reduce erosion during rain events. The third component is variable rate irrigation. The system uses soil moisture monitors and a wireless broadband network to collect information on irrigated acreage, which farmers can use to selectively irrigate the land that needs it, instead of applying water uniformly across the fields.

These types of technological and behavioral innovations can help to reduce pressure on scarce resources and relieve tensions between different stakeholders to the water conflict. Whether they will be sufficient to address the water use issues in the Flint Basin is unclear, but pilot projects such as that conducted by the Flint River Soil and Water Conservation District, USDA and Nature Conservancy are essential for exploring the potential that these innovations may have. So far, the results look promising. Since the program began in 2003, farmers using variable rate irrigation have saved more than 10 billion gallons of water, and irrigation costs have fallen 15-30%. This example also demonstrates that non-traditional actors can play an important role in changing the incentives for stakeholders. Environmental groups helped pay for the costs of retrofitting equipment in order to reduce the water needed by farmers. This ended up being significantly cheaper than alternative plans to buy water (or the rights to water) from farmers during drought periods, and had the added benefit that farmers were able to increase production at lower costs with less time spent monitoring irrigation.

While technology can’t save us from unsustainable water use patterns or ensure that the impacts of climate change won’t be damaging to both ecosystems and economies, it is clear that solutions will require a combination of policy tools, including promotion of technological innovation and adoption by water users. Economic incentives, particularly large incentives such as agricultural subsidies, are also crucial to ensure that management decisions are implemented, but the wrong economic incentives can create additional problems by obscuring the market for water, as we observe with agricultural subsidies.

This case study suggests that agricultural policy and management, particularly in the Flint, offer a promising source of water efficiency and conservation in the ACF; while improved agricultural policy and management will not solve the ACF’s problems, they may allow for considerable water savings, which can help resolve existing conflict in the basin. The analysis suggests that altering government subsidies for certain crops could greatly impact water use in the Flint, potentially freeing up water for other uses. While altering agricultural subsidies will have considerable social and economic implications that need to be considered, greater attention should be paid to the potential of subsidies to provide a mechanism for reducing agricultural water demand in the Flint River Basin, the ACF, and elsewhere.

Two of the most important learnings from this case study and analysis are:

1. We need to look at water management in a basin or region as a whole, and seek to identify any potential levers that may help us achieve more sustainable water management. Agriculture has received far too little attention in the ACF, and greater focus needs to be directed at using agricultural policy to improve the basin’s water management.
2. Policies and decisions at all scales need to be considered in pursuing more sustainable water use. As this case demonstrates, decisions at the national level about agricultural subsidies heavily affect water use and management in the Flint River Basin, thereby impacting the entire ACF.

Additional Sources

Cummings, Ronald G., Norton, Nancy A. and Norton, Virgil J. Enhancing In-stream Flows In The Flint River Basin: Does Georgia Have Sufficient Policy Tools? Water Policy Working Paper #2001-002, September 2001.

Hook, J. (2010, April). Agricultural Irrigation Water Demand. Retrieved April 1-30, 2012, from National Environmentally Sound Production Agriculture Laboratory: http://www.nespal.org/SIRP/waterinfo/State/

USGS. (2009). Estimated Use of Water in the United States in 2005. Reston: US Geological Survey.</ref>

Watson, Reed and Scarborough, Brandon. Flint River Basin Irrigation: Wireless Water for Biodiversity. PERC Case Studies. 2010. Available at: http://www.ecosystemmarketplace.com/pages/dynamic/resources.library.page.php?page_id=8241&section=library&eod=1