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Jay

The Farm Security and Rural Investment Act of 2002 is wide-reaching legislation touching farming, energy, forestry, and nutrition, among other industries. Over 90% of the funding for the Farm Bill, as its otherwise called, goes towards subsidization of U.S. farmers, and it heavily favors five grains in particular: corn, wheat, cotton, rice and oilseed (i.e., soybeans). This bill expires this year and if its 2002 passage is any indication, the renewal and specific focuses of the 2007 Farm Bill will be highly contentious.

Farmers Better Off

Farmers have experienced growing financial stability over the years. Corn, soybean, wheat and rice all returned significantly higher returns per acre in 2007 year to date than in 2006. Cotton, on the other hand, remained relatively flat. Corn in particular nearly tripled in returns per acre ($120 vs almost $350), while rice, soybeans and wheat saw increases around 50%. In addition, farms have the lowest debt levels since 1960 with a 12% debt to asset ratio. Debt ratios peaked at 22% in 1985 and remained around 15% through the early 2000s.

Total assistance from the U.S. government averaged approximately $17 billion per year from 2002-2006.

• 43% of all farms received government payments in 2005.
• Subsidies accounted for about 11% of gross revenue and 39% of net income for farms receiving payments in 2005.
• The largest 10% of farms (by gross revenue) received nearly 60% percent of all subsidies in 2005.

Source: USDA

International Challenges

The Farm Bill legislation has truly global effects, as subsidies can profoundly affect the price of commodities traded on worldwide markets. And if the bill was contentious in Washington, D.C., it may be even more so on the international stage. The legislation gives U.S. growers such pricing advantages, the World Trade Organization (WTO) responded in 2004 by ruling the Farm Bill's cotton subsidies illegal on the grounds of "dumping," or selling below cost. Similar challenges to corn, wheat, rice and/or soy may have far-reaching consequences for commodity growers in the U.S., especially if the country makes concessions to lower subsidies in order to gain negotiation leverage at the Doha Round, the WTO's important forum for global free trade discussions.

Companies Positively Affected by Current Farm Subsidies

• Commodity farmers such as Archer Daniels Midland (corn growers) benefit from currently existing subsidies, which are counter-cyclical--meaning that growers are buffered from downturns in commodity markets
• Seed and pesticide companies such as Monsanto and Syngenta experience higher levels of demand as more farmers are financially able to grow key commodities
• Farming machinery companies such as John Deere also benefit from subsidies due to increased demand from commodity growers
• Processed food companies such as Sara Lee, Coca Cola, Pepsi and Kraft Foods pay lower effective costs for key inputs in food manufacturing (e.g., corn syrup, wheat flour) as a significant portion of commodity growers' revenue and profit comes from the government.

Companies Negatively Affected by Current Farm Subsidies

• International grain growers become less competitive than domestic growers in the U.S. because government subsidies in effect lower prices to customers
• Organic food growers such as SunOpta suffer from subsidies of corn, wheat, cotton, rice and oilseed because fruits and vegetables become relatively more expensive compared to processed foods, and competition for farming land increases
• Health and organic food retailers such as Whole Foods and even Wal*Mart, which entered the organic foods market in 2006, are negatively affected as fruit and vegetable prices are relatively higher to consumers than food products which heavily utilize by-products of corn, soybeans and wheat.