Subsidies to US farmers ballooned in 2019 and 2020, driven by ad hoc payments aimed at offsetting the impacts of President Trump’s trade war and COVID-19.

Despite the effects of both, farm income in 2020 was at the highest level since 2013. While the expectation was that 2021 farm income would fall as a result of reduced direct payments, it is in fact forecast to increase, supported by a continuation of increased ad hoc payments and strong commodity prices (Figure 1).

Weaning US farmers off heightened levels of direct payments as farm input costs increase and legislators start to consider the 2023 farm bill will likely be a significant challenge for the Biden administration.

Overall, farm subsidies in 2020 were recorded at $45bn, more than three times the average of the previous five years

In 2020, direct payments to farmers in the US accounted for 48% of net farm income, higher than the previous 20 years, according to United States Department of Agriculture (USDA) data (Figure 3). Overall, farm subsidies in 2020 were recorded at $45bn, more than three times the average of the previous five years.

In the period 2000-2017, direct payment to farmers averaged $15bn per year. A combination of the impact of the Trump era trade wars and COVID-19 resulted in a surge of funding flowing into US farming.

2021 farm income projections

Net farm income, which is a broad measure of profitability in US farming, is forecast by USDA to increase by $18.5bn (19.5%) from 2020 to $113bn in 2021. This would be the highest level since 2013. This comes on the back of an almost 20% increase in income in 2020. While ad hoc supplementary payments are forecast to decline in 2021, they will be at the second highest level in the past two decades.

Trade wars and COVID-19

US trade was in a volatile position in the 2017-2019 period as trade wars with Canada, China, Mexico and the EU put pressure on prices for some agricultural commodities and revenues for some producers.

In both instances, the Trump administration stepped in

Not long after a trade deal was signed between the US and China, the coronavirus pandemic hit, disrupting supply chains and affecting the demand for food and some commodity prices. In both instances, the Trump administration stepped in, providing assistance to the sector by way of supplemental and ad hoc disaster payments.

During 2018 and 2019, the USDA announced two rounds of trade aid valued at $28bn providing both direct and indirect assistance to farmers affected by trade damage. The Market Facilitation Programme (MFP) valued at $24.5bn over 2018 and 2019 provided direct payments to producers of trade-damaged commodities.

In 2019, the USDA made several modifications to the MFP including increasing funding, expanding the list of eligible commodities and expanding payments limits. This essentially enabled more farmers to receive more money for more of their crops. Livestock farmers also received funding under this programme.

As COVID-19 disrupted society and economies across the world, the USDA introduced programmes to address the economic impacts valued at $35bn in 2020. More than three-quarters of this relief went directly to farm operators in the form of direct payments, half of which came from new ad hoc programmes responding to COVID-19.

Analysis by a former USDA chief economist Joseph Glauber suggests the surge in supplementary funding into the sector came at a time when farm solvency measures and bankruptcies were well below levels experienced during the farm financial crisis of the mid 1980s. In fact, after adjusting for inflation, net farm income in 2020 was among the highest levels seen in the past 50 years.

The challenge for the new administration in Washington is how to wean farmers off this heightened level of direct support

Glauber’s analysis of spending levels in US agriculture concludes that US trade-distorting support for 2019 and 2020 has likely exceeded the current World Trade Organisation bound level of domestic support of $19.1bn to which the US is committed.

The challenge for the new administration in Washington is how to wean farmers off this heightened level of direct support. Several lobby groups are already justifying the need for continued increased payments to their members. Under the Build Back Better agenda, the current administration has made a series of announcements and commitments to support US farmers and agriculture. Since early 2021, a series of financial commitments aligned to the Build Back Better agenda and the American Rescue Plan Act have been made. The funding to date amounts to somewhat over $5bn, not all of which is direct support to farmers.

The unprecedented level of funding provided to US farmers since 2018 was met with very little resistance in the US and appears to have received even less debate elsewhere.

Questions remain as to whether this ad hoc funding, and certainly at the levels it was provided, was genuinely needed for reasons beyond normal market shifts. According to the OECD, on average prices received by US farmers in 2018-2020 were higher than in world markets.

Unlike European farmers, US farmers are comfortable

As the balance of agricultural supports in the EU are shifting further from direct income to environmental supports, the US appears comfortable on its current route. Moreover, European and Irish farmers are poised to take the lead in addressing greenhouse gas emissions from agriculture as the US and others have committed to ‘sustainable productivity’ for food security and resource conservation. Unlike European farmers, US farmers are comfortable, with no fear of production curtailments, and are likely to benefit from a slow unpicking of the current high levels of ad hoc funding.