The Subsidy Trap: Support, productivity & food security

Agricultural subsidies influence everything from farm business decisions to investment outcomes and national food systems.

In this Commentary, Jonty Armitage draws on more than 35 years of farm advisory experience working with landowners, farmers and investors to explore the incentives subsidies create and the outcomes they can produce. Since joining Craigmore’s London team in September 2025, Jonty has brought a global perspective to agricultural investment, reflected here through a comparison of subsidised farming systems and New Zealand’s largely unsubsidised sector.

Subsidies influence business decisions

For most of my 35-year career in farming advisory, I have been focussed on businesses whose profitability has been dominated by the presence of financial support from government. In all of that time, support has arrived at the farm gate in a variety of convoluted ways, ranging from the support of domestic commodity prices (by intervening in international markets with tariffs and trade subsidies) to direct payments by way of income support, production subsidies or environmentally led payments — largely for doing things other than farming.

All of this has a significant impact on decisions made (or not made!) by the recipient farming businesses. There are legitimate reasons for governments to care deeply about domestic food production, rural communities and resilience in an increasingly dangerous geopolitical environment. Hence, the ‘security’ blanket provided by policies which protect their farmers from the full force of global competition. However, if the aim is to build an efficient, productive agricultural sector – and to maximise national and global food security – broad production subsidies are usually the wrong tool.

The role of productivity and comparative advantage

Relative agricultural productivity is the result of a combination of natural advantage and human capability. Geography, climate, soils and water matter enormously, but within any given set of physical and economic circumstances, the decisive variable is often management – the skill with which land, labour, capital and technology are combined.

In an ideal world, production would gravitate towards places with the strongest climatic and geographical advantages, provided those places also have adequate capital, infrastructure and management capacity. Over time, that process allows countries and regions with genuine comparative advantage to supply more of the world’s food and fibre, improving efficiency and lowering the real cost of production.

How does subsidy distort this?

Subsidy interferes with this process. Indeed, it is designed to do so. By insulating producers from market signals, subsidies can keep resources tied up in activities and locations that are not globally competitive. They may support income, and self-sufficiency in the short term, but they also reduce the pressure to improve productivity, innovate, specialise, or redeploy land and capital towards more valuable and productive uses.

Food security verse self-sufficiency

This matters because food security is not the same thing as self-sufficiency¹. A country may reasonably want a degree of domestic production capacity, particularly for political, social or strategic reasons. It may also wish to sustain rural communities and avoid excessive dependence on fragile supply chains. But the pursuit of self-sufficiency can become very expensive very quickly, especially for countries whose diets depend significantly on products which they cannot produce efficiently at home. Anyone enjoying a glass of orange juice and a cup of coffee for breakfast in London is already relying on a global food system.

The risk is that subsidy encourages governments and farmers to confuse security with protected domestic output. True food security is better described as reliable access to affordable food through a diversified system of domestic production, trusted trade relationships, resilient logistics, strategic reserves, and the financial capacity to buy food in world markets. Subsidising inefficient production can weaken that system by raising costs, distorting trade and reducing the incentive for production to expand in those situations where it can be done best.

1. Roughly one third of countries are net exporters of food and two thirds are net importers. True self sufficiency over a diverse array of food products is rare indeed.

The scale and hidden costs

The global scale of this distortion is not trivial. In the United States, direct government farm payments are forecast by the USDA Economic Research Service at $44.3 billion in 2026, compared with forecast net farm income of $153.4 billion. In the European Union, the Common Agricultural Policy remains one of the largest areas of EU expenditure. In 2026 this is budgeted at €53.3billion, with €386.6 billion allocated for 2021–27. These are not marginal interventions, they shape investment decisions, land values, business models and political expectations.

Government Financial Support for Farming
2024 Total Support Estimate (TSE) as a Proportion of Gross Farm Receipts (GFR)

Source: OECD Agricultural Policy, Monitoring and Evaluation Data / Craigmore

Total Support Estimate (TSE) is the estimated total annual monetary value of gross transfers to agriculture from consumers and taxpayers as a result of government policies that support agriculture, regardless of their objectives and economic impacts.

There is also a more subtle impact. In complicated, subsidised systems, farmers and their advisers, can spend huge amounts of time planning around government schemes:² eligibility, compliance, payment rates, environmental options and a succession of policy programmes. That time is not necessarily wasted, particularly where schemes reward genuine public goods. But it is time and strategic attention diverted from the core commercial task of producing food and fibre more efficiently.

2. For many years, the most valuable time a British farmer and his advisors spent was correctly completing the application form for the Single Farm Payment.

Why does this matter for investors?

The implication for investment is that subsidy-heavy agricultural systems can conceal weak underlying economics. Payments may stabilise cash flows and support land values, but they can also create policy dependency, inflate asset prices and make returns vulnerable to unpredictable policy reform. Capital allocated into protected systems, therefore carries a different risk profile from capital allocated into businesses, which compete on productivity, cost discipline, market access and operational excellence. In agriculture, as in other sectors, durable value is more likely to come from genuine competitiveness than from the persistence of government support.

What does experience tell us?

My experience more recently in New Zealand agriculture has given me some valuable insights on this theme. After its agricultural reforms in the mid-1980s³, trade-distorting production policies largely disappeared, and producer support has remained among the lowest in the OECD. The transition was painful⁴, but it forced the sector to respond to world prices, specialise in those sectors in which it held real advantage, and become more commercially disciplined. Today, New Zealand remains a major exporter in sectors such as dairy, meat and horticulture, despite operating without the kind of broad subsidy architecture common in the US and Europe.

3. Farm subsidies were effectively abolished in New Zealand in the mid-80s, principally to remove the distorting and damaging effect on the wider economy.
4. Particularly for the wider farm supply chain, which indirectly fed off farm subsidies. It too had to adapt and become more efficient.

When and how does intervention make sense?

This does not mean that all government involvement is harmful. Public investment in infrastructure, biosecurity, research, skills, data, environmental protection and climate adaptation can improve productivity and resilience without dulling market signals. Nor does it mean that governments should ignore rural poverty, landscape management or strategic vulnerability. The question is whether support helps the sector become more productive and resilient or merely compensates it for remaining less competitive.

A better policy framework would distinguish clearly between the objectives: food security, public goods and farm income. Food security is best served by efficient production, diversified supply and resilient trade. Public goods, such as biodiversity, water quality, carbon storage and landscape stewardship, should be paid for transparently where markets do not reward them. Farm income support, if used, should be targeted, temporary and designed to help businesses adjust rather than preserve inefficiency indefinitely.

Summary: The implications for capital allocation

The central problem with agricultural subsidy is therefore that, despite the good intentions of policy makers, it often protects the existing pattern of production from the discipline required to improve. In doing so, it can make farming less adaptive, food more expensive, public finances more strained and global food security weaker than it needs to be. For investors, that should be a warning: the most attractive agricultural opportunities are not necessarily those most protected by policy, but those best positioned to prosper when policy support is reduced, redirected or made more demanding.