Agriculture Adjustment Act: The Birth of Crop Insurance

Today farmers benefit from financial safety nets that provide the opportunity to weather bad years. We have federally subsidized crop insurance that provides a baseline guarantee on production. While there will always be qualms about how the program is run and who benefits the most, there is no doubt that it is a vast improvement over nothing. While these policies help farmers, they raise an interesting question; should the US government put their thumb on the scale of commodity markets? While government interference in the agriculture economy doesn’t even garner a second thought today, there was a time where it was almost unheard of.

About 100 years ago, the farm sector was undergoing a financial crisis due to low commodity prices and weather events like the Dust Bowl. Farmers had always had the fallback of consuming the food they produced if times were really bad, but the Dust Bowl meant that some farmers couldn’t even do that. In 1933, in one of his first actions, President Franklin D. Roosevelt championed the Agriculture Adjustment Act (AAA) of 1933 into law as part of the New Deal aimed at revitalizing the US economy.

The AAA was designed to boost shrinking agricultural prices by reducing existing surpluses and existed as a department under the USDA. Initial legislation included cotton, wheat, corn, rice, hogs, milk and tobacco, although by 1935 it had expanded to include rye, barley, grain sorghum, cattle, flax, peanuts, sugarcane and potatoes. So you might ask yourself, why these particular commodities? Well there were three primary reasons for their inclusion.

The first and primary was that these commodities were operating at surplus levels. This meant that they could be purchased by the government and the price managed to gently manipulate it to desired levels. The next reason was that all of the items required additional processing in order to be fit for human consumption. This was a two birds with one stone approach, as the downstream processors would also see a boost from the boost in productivity. More jobs were created and retained in two industries while allowing for consumer prices to be managed from the government level. The final reason was that these commodities were identified as ones that were vital to the overall agricultural market and served as a barometer of sorts that raised the prices of other crops indirectly.

A tool used by the Secretary of Agriculture through the AAA was voluntary reduction in acres in crops affected by utilizing direct payments. Essentially, the US government put out the call asking farmers to get paid not to farm. Don’t plant anything, and you still get paid. This is an interesting tool because you can control a market and consumption strictly with dollars. You don’t have to figure out where to use grain that is produced, or develop new ways to use surpluses. Instead, you just write a checks and next year there is less grain. This is manipulated supply and demand economics. Demand is adjusted because the supply has been reduced by a third party interfering in the market. In a truly fair market, this would resolve itself because too much supply that overwhelms demand will eventually incentivize participants to quit producing, bringing supply closer to demand and increasing prices along the way. FDR couldn’t wait for this to happen. Farms were at stake and they didn’t have years to wait out this issue.

This created a few interesting results. Prices did rise, but the sharecroppers who operated much for the agricultural land of the South were greatly affected. Initially, the program called for payments to the landowners with the stipulation that tenant farmers, or farmers who operated the land in conjunction with the lands owner in exchange for a portion of what was produced, would also be paid by the government directly. However, Southern Democrats in Congress fought vehemently against this provision, leading to increased unemployment for the tenant farmers and those who worked for them as the grand lay unused. This lead to the creation of a number of sharecroppers activist organizations such as the Southern Tenant Farmers Union and the Delta and Providence Cooperative Farms, which will be in pieces to come.

Another consequence of this act was that it failed to meet agriculture everywhere it was hurting. While some were hurting from the abundance of production, others were hurting from nonexistent production. Due to extreme weather events, they were faced with not being able to feed livestock or themselves. Part of the AAA program revolved around buying surpluses, calling for the selling of pregnant sows as hogs for slaughter and even dousing fruits and crops with kerosene to prevent their consumption. While this lowered the surpluses in some areas, the destroyed crops could have been better used in other places were people and animals were starving. Some farmers were actually surviving through the lack of crop production because of the low cost of grain that could be bought from other farmers and fed to their animals. However, the AAA effectively raised prices and forced them out of business because of high feed prices.

The AAA program also had a strong regulatory undertone. In an effort to better control the flow of agricultural products, stricter regulations and licensing was required of commodity processing facilities in order to insure that unfair practices were not occurring. This also lead to a study into how to appropriately (let’s not lie, when the government uses words like this, it means increase) tax processors. The goal was to use these funds to expand markets for commodities and purchase surpluses. While this benefited the farmers, it was hardly fair for the processors. Yes, it boosted business to some extent, but you are taxing an industry to make sure that it has to pay higher prices for the commodities they purchase. Doesn’t seem very fair does it?

Much of the criticism levied by farmers was that it helped larger farmers while actively hurting smaller farmers. This is a familiar complaint because it is one still bandied about the industry today when government programs are brought about. Large landowners were able to lock in guaranteed returns on their ground which enabled them the opportunity to gain additional financing and fuel expansion. Smaller farmers and sharecroppers with less access to capital who were more reliant on good crop years to account for their survival were negatively impacted.

The Thomas Amendment, named after Senator Elmer Thomas of Oklahoma, blended economic beliefs in the hope of creating an “honest dollar”, one that served both creditor and debtor equally. Without getting too much into the weeds of economic policy, this put restrictions on currency expansion by the Federal government that started the change in how they were able to exhibit power over monetary policy. The overall goal of this amendment was to reduce the amount of silver held in private hands while increasing the amount of currency in circulation.

The first iteration of the AAA came to an end in 1936, when the Supreme Court ruled in United States vs Butler that it was unconstitutional to levy the tax on processors and then turn around and pay it directly to farmers. Additionally, it was deemed that the regulation of agriculture was as state power, and as such the federal government had no jurisdiction to force states into adopting the AAA.  In 1938, this Act was adjusted and the existing technical issues were remedied, allowing for the program to continue.

So what is the legacy of this Act? It’s a mixed bag overall, but was groundbreaking for its time. While the objectives might not have always been met, the program was operating without the bumpers of previous institutional knowledge to guide the creation of such a sweeping legislation. Agricultural is a massive industry, an economy unto its own for much of history. While this wasn’t eh first governmental interference into the industry, it might have been one of the most forceful. Entering a third component into the supply and demand economics of the commodities was an intriguing concept and lead to more questions about the reach and scope of the federal government. Like many of the New Deal policies, this attempt to disrupt and jolt an industry into upward movement was achieved through direct government interference, whether it was limiting acres of production or destroying surplus crops. The payments directly to landowners and bypassing the actual producers creates an interesting discussion about land rights while showcasing the influence of the Southern delegation. This will not be the last time that we will talk about the Souths impact and favoritism in agricultural legislation, as we are still feeling their impact in government programs today.

While the AAA wasn’t perfect by any means, it has been the precursor to expanded government programs to assist farms economically. Food production is vital to our success as a nation, both for trade and for our own independence. Occasionally, the industry requires government response to insure its long term viability. It is interesting, that in all of the research I did for this piece, there was rarely a discussion about government overreach in disrupting the farming economy. Most of the dispute was over how it was dispersed rather than if it should happen at all. I expected more push back from citizens and negative thoughts about big government. Like it or hate it, the AAA has set us down a path of government interference in the agricultural sector. 

As always, thank you so much for taking the time to read this. For more reading on Ag Act history, check out my post on The Farm Loan Act.

Ag Acts: The Farm Loan Act