Government Subsidies (Farm, Oil, Export, Etc)

Government Subsidies (Farm, Oil, Export, Etc) explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Government Subsidies (Farm, Oil, Export, Etc)

Each year, the U.S. federal government subsidizes a wide range of economic activities that it wants to promote. What exactly are subsidies? The definition may be broader than you think. Find out about the most well-known subsidies, the history of these subsidies and some of their costs.

What Are Subsidies?

st subsidies are cash grants or loans that the government gives to businesses. It encourages activities the government wishes to promote. The subsidy depends on the amount of the goods or services provided.

One level of government can also give subsidies to another. This includes federal grants given to state or local governments and state grants given to municipal governments. (Source:  “Subsidies,” Bureau of Economic Analysis.)

The World Trade Organization has a broader definition of subsidies. It says a subsidy is any financial benefit provided by a government which gives an unfair advantage to a specific industry, business or even individual. The WTO mentions five types of subsidies:

  1. Cash subsidies, such as the grants mentioned above.
  2. Tax concessions, such as exemptions, credits or deferrals.
  3. Assumption of risk, such as loan guarantees.
  4. Government procurement policies that pay more than the free-market price.
  5. Stock purchases that keep a company’s stock price higher than market levels.

These are all considered subsidies because they reduce the cost of doing business. (Source: “Defining Subsidies,” World Trade Report 2006, World Trade Organization.)

Farm Subsidies

Many experts argue that U.S. farms don’t even need subsidies. After all, they are located in one of the world’s most favorable geographic regions: rich soil, abundant rainfall and access to rivers for irrigation when rainfall fails. In addition, today’s farms have all the advantages of modern business: highly trained labor, computerized equipment and cutting-edge chemical research in fertilizers and seeds.

America’s food supply must also be protected from droughts, tornadoesand recessions. In fact, agricultural subsidies were originally created to help farmers ravaged by the Dust Bowl and the Great Depression of 1929. This price support system lasted until the 1990s.

In short, the federal government guaranteed farmers a high enough price to remain profitable. How did it do this? It paid farmers to make sure supply did not exceed demand. One, the government subsidized farmers to keep croplands idle in order to prevent overproduction. Two, it bought excess crops then either stored them or gave them away to feed low-income people throughout the world.

Most subsidies went to farmers of grains, such as corn, wheat and rice. It’s because grains provide 80 percent of the world’s caloric needs. By 1999, farm subsidies had reached a record $22 billion. (Source: “American Agriculture: Its Changing Significance,” U.S. State Department)

Between 2001 and 2006, farm subsidies tapered off a bit, averaging $19 billion a year. Of this, about 15 percent was wasteful, unnecessary or redundant. (Source: “Harvesting Cash,” The Washington Post, December 2006.

Between 1995 and 2010, farm subsidies had ballooned to $52 billion a year on average. Of this, more than 6 percent went toward four “junk food” components: corn syrup, high-fructose corn syrup, corn starch and soy oils. Many people wondered why the federal government was subsidizing food that contributed to America’s obesity problem. (Source: “Billions in Farm Subsidies Underwrite Junk Food, Study Finds,” Huffington Post, September 22, 2011. AG Subsidies Fund Junk Food, Report Says,” Food Safety News, September 22, 2011.)

During the recession, as lawmakers looked for ways to cut the budget, many asked, “Do corn growers need subsidies?” In 2011, a record 14 billion bushels of corn were produced. In 2012, 94 million acres of corn were scheduled to be planted. This was more than in any year since World War II.

By 2017, large farms dominated the industry. Farms generating $1 million or more in sales produced two-thirds of the nation’s agricultural output. Only 4 percent of farms were that large. That’s because big farms survived by gobbling up the small ones who couldn’t compete. They relied on economies of scale to produce more food at a cheaper price. That sent prices down even more, putting more small farmers out of business.

As a result, the 2012 budget proposed a 22 percent cut to farm subsidies, including the $5 billion direct payment program. Half of farmers receiving subsidies made more than $100,000 a year. In fact, 74 percent of farm subsidies went to just 4 percent of the businesses. The House budget also proposed $180 billion in cuts to the farm subsidy program. Of that, $133 billion would come from the food stamp program, affecting eight million consumers, not farmers. (Source: “Subsidizing Big Ag,” San Jose Mercury News, April 19, 2012.)

Oil Subsidies

In March 2012, President Obama called for an end to the $4 billion in oil industry subsidies. Some estimates though indicate that the real level of oil industry subsidies is higher, between $10 and $40 billion. At the same time, oil company profits benefited when oil prices reached a record of $145 a barrel in 2008. (Source: “Obama: Taxpayers Shouldn’t Subsidize Oil Industry’s Profits,” Christian Science Monitor, March 29, 2012.)

The oil industry subsidies have a long history in the United States. As early as World War I, the government stimulated oil and gas production in order to ensure a domestic supply.

In 1995, Congress established the Deepwater Royalty Waiver Program. It allowed oil companies to drill on federal property without paying royalties. This encouraged the expensive form of extraction since oil was only $18 a barrel. The Treasury Department reported that the federal government has missed $50 billion in foregone revenue over the program’s lifetime. It argued that this may no longer be needed now that deepwater extraction has become profitable. (Source: “Federal Energy Subsidies,” Energy Information Administration. “Oil Companies Have a Rich History of U.S. Subsidies,” Los Angeles Times, May 25, 2010.)

Here is a summary of the 2011 oil industry subsidies compiled by Taxpayers for Common Sense in its report, “Subsidy Gusher.”

  • Volumetric Ethanol Excise Tax Credit – $31 billion.
  • Intangible Drilling Costs – $8.9 billion.
  • Oil and Gas Royalty Relief – $6.9 billion.
  • Percentage Depletion Allowance – $4.327 billion.
  • Refinery Equipment Deductions – $2.3 billion.
  • Geological and Geophysical Costs Tax Credit – $698 million.
  • Natural Gas Distribution Lines – $500 million.
  • Ultradeepwater and Unconventional Natural Gas and other Petroleum Resources R&D – $230 million.
  • Passive Loss Exemption – $105 million.
  • Unconventional Fossil Technology Program – $100 million.
  • Other subsidies – $161 million.

Greenpeace argues that the oil industry subsidies should also include the following activities:

  • The Strategic Petroleum Reserve.
  • Defense spending that involves military action in oil-rich countries in the Persian Gulf.
  • The construction of the U.S. federal highway system which encourages reliance on gas-driven cars.

The BEA though, argues that these federal government activities were primarily done to protect national security and not promote specific activities within the oil industry. Even though the intent was not to directly subsidize it, they may have benefited the industry indirectly.

Ethanol Subsidies

Between 1979 and 2010, the corn industry has received $20 billion in federal subsidies. Congress wanted to divert production into ethanol, a component of gasoline. The subsidies were meant to help producers meet a 2005 federal law that required 7.5 billion gallons of renewable fuel to be produced by 2012. In 2007, a revision increased the goal to 36 billion gallons by 2022. Only 6.25 billion gallons were produced in 2011.

The corn subsidy, a tax credit of $0.46 a gallon, ended in January 2012. Though ethanol producers would have liked to see a larger credit, of $1.10 per gallon remain. The credit was to research cost-effective ways to convert other bio-fuels, like switchgrass, wood chips and nonfood corn byproducts. (Source: “Ethanol Subsidy Dies But Wait There’s More,”, December 29, 2011. “Congress End Era of Ethanol Subsidies,” MPR News, January 3, 2012.)

When the corn subsidy ended in 2012, ethanol producers were left in a bit of a glut. But that was because  gasoline refiners stocked up on subsidized ethanol before prices went up. The glut was absorbed over time. Demand increased during the U.S. summer driving season. Growing markets, such as Brazil, couldn’t keep up with their own need for ethanol. They began importing it from the United States. (Source: “Ethanol Subsidy Loss,” MPR News, February 28, 2012.)

Converting corn for fuel became controversial when it helped drive food prices higherin 2008. That created food riots throughout the world. That was just one reason for the high price for corn and other commodities. Also, investors fled to the commodities markets in response to the global financial crisis of 2008.

Many experts argue that using corn for fuel is a poor allocation of natural resources when 60 percent of the world’s population is malnourished. Furthermore, corn is not an efficient fuel source. Even if all the corn in the United States was converted to ethanol, it would only meet 4 percent of America’s fuel consumption needs. (Source: “Corn Ethanol as Energy,” Harvard International Review, October 26, 2009.)

Export Subsidies

The WTO bans export subsidies. But it allows two U.S. federal “government export subsidy programs. They help U.S. farmers compete with other countries’ subsidized exports. The U.S. Department of Agriculture promotes:

  • The Export Credit Guarantee Program finances U.S. farm exports. The USDA guarantees the buyers’ credit when they can’t get credit approval locally.
  • The Dairy Export Incentive Program pays cash subsidies to dairy exporters. It helps them meet the subsidized prices of foreign dairy producers. (Source: “Export Programs,” USDA.)

Housing Subsidies

Housing subsidies promote homeownership and support the construction industry. They total about $15 billion a year.

Housing subsidies come in two forms: interest rate subsidies and down-payment assistance. The biggest interest rate subsidy is the mortgage interest deduction on the federal income tax. There are also some smaller interest subsidies that subsidize mortgages for low-income families. An example is tax exemptions on municipal bond interest.

The federal government also matches the amount low-income families save for a down-payment. This came to $10.9 million in 2008. (Source: “Homeowner Subsidies,” Federal Reserve Bank of Cleveland, February 23, 2011.)

These direct homeowner subsidies paled in comparison to what the federal government spent to support its Federal Housing Authority mortgage loan guarantee program.

The real trouble started when it created two government-sponsored enterprises. Fannie Mae and Freddie Mac provided a secondary market to buy these mortgages from banks.  But they bought too many. That forced the government to spend $130 billion to bail out Fannie and Freddie. Even this wasn’t enough, and the government nationalized them.

Was the bailout a subsidy? Yes, in a sense. That’s because without it, there would have been no housing activity whatsoever after the subprime mortgage crisis. Fannie, Freddie and the Federal Home Loan Guaranty Corporation were behind 90 percent of all home loans. The agencies replaced the private sector’s role in the home mortgage market in the United States.

Other Subsidies

The U.S. federal government offers many more subsidies that it thinks will improve the economy. For example, the Cash for Clunkers program in 2009 was a subsidy to auto dealers, according to the BEA. In the program, dealers received a $3,500-$4,500 subsidy from the federal government after discounting a new vehicle to a consumer who traded in an old car. The goal was to jump-start the economy after the recession. It also aimed to encourage people to buy more fuel-efficient vehicles and lessen U.S. reliance on foreign oil. (Source: “How Is the CARS Program Reflected in the National Income and Product Accounts (NIPAs)?” BEA FAQs.)

Government Subsidies (Farm, Oil, Export, Etc) Conclusion

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