Blog Post

AEIdeas

The phrase “economic sustainability” is frequently used by farm subsidy advocates to justify wasteful expenditures on agricultural programs. However, in an agricultural context, the exact meaning of economic sustainability is often misunderstood. Unlike environmental and ecological notions of sustainability, economic sustainability conveys a specific and clear concept about the long run viability of any industry, including the US farm sector.

In his recent paper, Vincent Smith discusses the definition of economic sustainability in the context of the agriculture sector and its implications for agricultural policy.

At the firm level, economic sustainability means that a farm is managed in a way that ensures its long-term profitability. To be economically sustainable, a farm does not have to make profit every year. In fact, competent farmers know that they will not be able to cover their operating costs all the time, and plan accordingly. Farm revenues are inherently volatile. Crop yields and prices are volatile, and livestock production is subject to debilitating diseases, forage shortages, and the vagaries of harsh weather. Market prices for livestock products (milk, beef, chicken, etc.) also vary substantially from year to year.

The economic sustainability of the sector does not rest on the survival of any particular farm operation. It depends on the economic performance of the sector as whole.

To ensure the economic sustainability of their operations, effective farmers adopt a wide range of rational private sector-based risk management practices. Examples include maintaining low debt to asset ratios, diversifying the farm’s resources among livestock and crop enterprises, and using market-based risk management strategies. Nevertheless, not all farms are well managed and, as in any other industry, an individual farm business can fail for many reasons.

The economic sustainability of the sector does not rest on the survival of any particular farm operation. It depends on the economic performance of the sector as whole. An individual farm’s failure has no implications for the economic sustainability of the agricultural industry. In fact, when poorly managed farms eventually fail, the land is typically transferred to more efficient farmers. Paradoxically, such failures make the agricultural sector more productive and sustainable. Some advocates for farm sector interests do seem to argue that a sustainable farm sector needs subsidies because any individual farm failure poses a substantial threat to US food production. A sector-wide understanding of economic sustainability points to the inherent fallacy in such arguments.

A sector-wide perspective also highlights the importance of improving agricultural productivity. The longer-run ability of the farm sector to meet the needs of US consumers ultimately depends on farmers producing more crops on a relatively fixed amount of farmland. Accomplishing that objective require farmers to have access to a sustained flow of technological innovations, which enable farmers to increase crop yields and the overall productivity of their operations. Improvements in agricultural technology rest on the fruits of adequate levels of investments in public and privately funded agricultural research programs, not on lucrative farm subsidy programs that keep inefficient and poorly managed farms in business.