End the Bailouts, Save the Farmers

Disaster has been averted, but it’s time to change course on soy exports.

President Trump’s trade war with China has reached a detente, but it is far from over—both soybeans and rare earth elements will remain in the headlines in the years to come. We depend on China to buy the former, and are dependent on China for the latter, giving the adversarial nation leverage in trade negotiations.

Our agricultural system has emerged as a key vulnerability in this conflict. During the marketing year of 2023/2024, the United States shipped nearly 25 million tons of soybeans to China. Some might assume, the fact that we provide them with such a large quantity of a valued product might give us leverage over them. But this is not necessarily the case. In 2017, during the renegotiation of NAFTA, Commerce Secretary Wilbur Ross assumed just that about Canada and Mexico, who are also major customers for America’s agricultural commodities. Of course, precisely the opposite was the case: When we export a large amount of a commodity like soybeans to another country, the leverage is in their hands, not ours.

At various times since 2017, China has punished the United States by cutting off purchases of soybeans, inflicting pain on American farmers. Our farms are extremely productive; we produce far larger quantities of key commodities than our domestic markets can absorb. If soybean farmers suddenly lost China as a customer, it could lead to a massive, traumatic dislocation in the farm belt, equal to or surpassing the farm crisis of the 1980s. For this reason, the farm lobby has pressured Trump to cut trade deals to open markets, and farmers have received massive bailouts to get them through trade conflicts. In 2018, Trump paid farmers $16 billion, which rose to $61 billion by November 2020. Prior to the recent detente with China, he was planning a bailout of at least $10 billion this year. Liberal media delights in the spectacle, as in a New York Times guest essay titled, “Trump’s Self-Inflicted Soybean Debacle” (subtitle: “They’re Small, Round, Yellow, and They Prove Trump’s Tariffs Don’t Work”). When protectionism hurts America’s most beloved and emblematic social group, it’s presented as evidence of a failed policy.

Why can’t we pressure China by threatening to cut off its soybean supply? The reason is that soybeans are a basic commodity. Although America is one of the biggest soybean producers in the world, many countries can produce soybeans. China was never entirely dependent on the United States to supply its soybeans. For example, Brazil is the world’s largest soybean producer and can comfortably substitute the lost American imports. If something were to happen to Brazil’s supply, other countries such as Argentina or India could step up to fill demand.

Although the Trump administration is taking steps to strengthen our position on rare earth elements, it should also address the soybean problem. Our reliance on China to buy our surplus crop is the result of long-term policy decisions, not economic necessity. Our export-driven soybean farming model flows from a subsidy structure lobbied for by agribusinesses. The U.S. government essentially pays farmers to cover their losses when they produce more than they can sell in the domestic market, thus enabling them to continue to “feed the world” with their exports. This benefits the fertilizer and pesticide companies that sell the inputs necessary for farming on such a large scale, and it benefits the owners of concentrated animal feeding operations (CAFOs), who get cheap feed grains to feed their livestock. This includes CAFOs in China, which are indirectly subsidized by American spending as part of the Farm Bill. This is not a small expense. The previous five-year Farm Bill authorized $428 billion in spending. Without subsidies, many of our farmers would rapidly go bankrupt.

Twentieth-Century Erosion

To prevent China from using soy exports as a trade threat in the future, the U.S. government should help farmers transition away from this model. Farm activists outside the mainstream agricultural lobby have long pushed for a revival of the older system of “supply management” to support farmers. Supply management means the government would buy and store commodities like soybeans at a guaranteed minimum price in exchange for farmers substantially reducing their acreage under cultivation. It is essentially a managed reduction of the scale of American farming that would allow farmers to stay in business.

This system served as the basis for the agricultural New Deal, which itself was an adaptation of longstanding proposals for agriculture dating back to the Populist movement of the 1890s. It was also inspired by the “ever-normal granary” policy of imperial China, of which New Deal-era Agriculture Secretary Henry Wallace was enamored. Supply management was a response to the catastrophically falling farm incomes of the Depression era and the consequent surge of farmer protest.

Under the New Deal program, the Commodity Credit Corporation (CCC) issued loans to farmers based on the crop they had produced. The CCC set the terms of the loan at a rate deemed sufficient to provide farmers the equivalent of a living wage. To pay the loan, farmers remanded their crop to the CCC, which would sell some of it to food processors and store the rest. If commodity shortages led to rising prices, the CCC would release the stored crops into the market until prices fell, affording the nation an “ever-normal granary” that never ran short. A key feature, as mentioned above, was that farmers had to agree to reduce their acreage to participate in the program. Were it not for this condition, farmers would have produced as much as they could, relying on the government as a guaranteed customer. The New Deal farm program ensured supply aligned with demand, while providing a cushion by purchasing inadvertent excess production for storage.

Skeptics might wonder why the government is necessary to align supply and demand. The reason is that farmers plant their crops months before they sell them. They don’t know what demand will be when they make the decisions that determine supply. The final level of supply is also uncertain, as yields vary according to weather and other factors. Unlike a factory, which can rapidly shift its production to account for a rise and fall in demand, farmers can only make imperfect guesses as to how much they should plant. A misalignment between supply and demand is common, leading to rapid price swings. Farm household income fluctuates wildly year to year, commonly by more than 100% of the median household income. This is why the sudden loss of a market can be so devastating to American farmers. Even if alternative export markets eventually open up to replace the closing of the Chinese market, farmers can’t afford to wait.

Free market adherents will interject that there is already a sufficient instrument to address uncertainty: the futures market. In theory, the futures market allows farmers to lock in a contract to deliver a certain amount of produce at an agreed-upon price in advance. In practice, however, they close out their obligation to provide by buying an identical contract at harvest time at the prevailing price. If the price has gone down from the price at which they sold their original contract, they are credited with the difference, because they have canceled their obligation for less money than they are owed. This mechanism provides some security because if prices drop below what farmers expected at planting, they make a profit on the futures market that compensates for their loss. The problem is that the farmer still has to deliver physical grain to a local market, and if the price at that market has dropped more than the price on the national futures market, they can still lose out. Markets are localized enough that this happens frequently. It is called “basis volatility,” and it is why only around 2% of farmers use the futures market at all. The futures market is primarily a tool for professional speculators, not farmers seeking security.

So, if the New Deal farm program worked well, what became of it? After a few decades, there was a gradual shift away from price floors conditioned by acreage restrictions toward an unrestricted production system supplemented by government subsidies. In the 1950s, the government lowered the price floors, and in the 1960s, it introduced the first subsidies. Post-New Deal agriculture secretaries, most notably the Nixon administration’s Earl Butz, encouraged farmers to forego acreage limitations altogether and instead plant “fencerow to fencerow.” Finally, in 1996, the last vestiges of the old system were thrown out with the neoliberal “Freedom to Farm Bill.” The predictable consequence of this system has been an enormous concentration of farmland and the demographic devastation of rural communities through the closure of small family farms. There were more than 6 million farms in the United States in 1930, and there are fewer than 2 million today.

Powerful interest groups influenced this policy change. Agribusiness benefits from more acreage under cultivation and more industrialized, high-production farming. Buyers of grains benefit from low prices and an over-supplied market. And employers benefit from a large supply of labor and fewer people living independently on the land. Farm activists historically blamed a corporate think tank called the Committee for Economic Development (CED). In 1962, the group released a report asserting that agriculture was inefficient and recommending the elimination of “excess human resources.” Today, almost all human resources possible have been squeezed out of our agricultural system.

The last serious political effort to oppose the free-market-with-subsidies model was the Tom Harkin-Dick Gephardt “Save the Family Farm” bill of 1987. The two members of Congress introduced the legislation amid a massive foreclosure crisis driven by falling farm prices and record-high indebtedness. Farmers had taken out large loans and invested in maximizing production, based on a few good years in the 1970s and on encouragement from the agribusiness establishment. In the 1980s, they suffered the consequences of trusting the Department of Agriculture’s advice, as millions lost land that had been in the same families for generations. Suicides roiled the rural Midwest during this period. Harkin and Gephardt, who hailed from Iowa and Missouri, respectively, believed that a return to the New Deal model could save farms and lives. Their bill would have gradually raised farm prices to slightly above the cost of production, while requiring farmers participating in the program to limit output to a level sufficient to meet domestic and export demand, as well as humanitarian and reserve purposes. Agribusiness and the American Farm Bureau Federation heavily opposed the bill, and it was defeated in committee.

Toward a High-Value Future

The Harkin-Gephardt bill formula should be the basis for reform today. Acreage allotments could be reduced step-wise while simultaneously raising floor prices and cutting subsidies. The end goal should be a level of production that doesn’t much exceed domestic demand. It is not necessary to implement a fully autarkic agricultural system with no exports. However, we must ensure that our farms are not primarily dependent on exports to survive. Product exceeding domestic demand, modest export, and food aid needs would be stored in a strategic “ever-normal granary” reserve. Should domestic prices ever rise above a reasonable ceiling price, these stores would be released until prices fell.

The soy-mineral asymmetry with China shows the importance of developing high-value industries. It also indicates that heavily producing commodities can be a vulnerability in a contentious trading relationship. Whether or not one values the family farm, it has become clear that export dependence is a strategic disadvantage. We should use industrial policy to increase rare earth element production while implementing supply management policies to reduce our soy production. This is how the United States can gain the upper hand in a new international trading system.