Agricultural subsidy
Encyclopedia
An agricultural subsidy is a governmental subsidy
paid to farmer
s and agribusiness
es to supplement their income, manage the supply of agricultural commodities
, and influence the cost and supply of such commodities. Examples of such commodities include wheat
, feed grains (grain
used as fodder
, such as maize
or corn, sorghum
, barley
, and oat
s), cotton
, milk
, rice
, peanut
s, sugar
, tobacco
, and oilseeds such as soybean
s.
.
A study by the Overseas Development Institute
evaluates the benefits of the Malawi Government Agricultural Inputs Subsidy Programme, which was implemented in 2006/2007 to promote access to and use of fertilizers in both maize and tobacco production to increase agricultural productivity and food security. The subsidy was implemented by means of a coupon system which could be redeemed by the recipients for fertilizer types at approximately one-third of the normal cash price. According to policy conclusions of the Overseas Development Institute
the voucher for coupon system can be an effective way of rationing and targeting subsidy access to maximize production and economic and social gains. Many practical and political challenges remain in the program design and implementation required to increase efficiency, control costs, and limit patronage and fraud.
is reputed to have the most open agricultural markets in the world after radical reforms started in 1984 by the Fourth Labour Government
all subsidies were stopped. As the country is a large agricultural exporter, continued subsidies by other countries are a long-standing bone of contention, with New Zealand being a founding member of the 19-member Cairns Group
fighting to improve market access
for exported agricultural goods.
s. These bills pre-date the economic turmoil of the Great Depression
with the 1922 Grain Futures Act
, the 1929 Agricultural Marketing Act and the 1933 Agricultural Adjustment Act
creating a tradition of government support.
The beneficiaries of the subsidies have changed as agriculture in the United States
has changed. In the 1930s, about 25% of the country's population resided on the nation's 6,000,000 small farms. By 1997, 157,000 large farms accounted for 72% of farm sales, with only 2% of the U.S. population residing on farms. In 2006, the top 3 states receiving subsidies were Texas (10.4%), Iowa (9.0%), and Illinois (7.6%). The Total USDA Subsidies from farms in Iowa totaled $1,212,000,000 in 2006. From 2003 to 2005 the top 1% of beneficiaries received 17% of subsidy payments. In Texas, 72% of farms do not receive government subsidies. Of the close to $1.4 Billion in subsidy payments to farms in Texas, roughly 18% of the farms receive a portion of the payments.
"Direct payment subsidies are provided without regard to the economic need of the recipients or the financial condition of the farm economy. Established in 1996, direct payments were originally meant to wean farmers off traditional subsidies that are triggered during periods of low prices for corn, wheat, soybeans, cotton, rice, and other crops."
Top states for direct payments were Iowa ($501 million), Illinois ($454 million), and Texas ($397 million). Direct payments of subsidies are limited to $40,000 per person or $80,000 per couple.
The subsidy programs give farmers extra money for their crops and guarantee a price floor
. For instance in the 2002 Farm Bill
, for every bushel of wheat sold, farmers were paid an extra 52 cents and guaranteed a price of 3.86 from 2002–03 and 3.92 from 2004–2007. That is, if the price of wheat in 2002 was 3.80 farmers would get an extra 58 cents per bushel (52 cents plus the $0.06 price difference).
Corn
is the top crop for subsidy payments. The Energy Policy Act of 2005
mandates that billions of gallons of ethanol be blended into vehicle fuel each year, guaranteeing demand, but US corn ethanol subsidies are between $5.5 billion and $7.3 billion per year. Producers also benefit from a federal subsidy of 51 cents per gallon, additional state subsidies, and federal crop subsidies that can bring the total to 85 cents per gallon or more. (US corn-ethanol producers are also shielded from competition from cheaper Brazilian sugarcane-ethanol by a 54-cent-per-gallon tariff)
have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries, low prices are harmful to farmers not receiving the subsidy. Because it is usually wealthy countries that can afford domestic subsidies, critics argue that they promote poverty
in developing countries
by artificially driving down world crop prices. Agriculture is one of the few areas where developing countries have a comparative advantage
, but low crop prices encourage developing countries to be dependent buyers of food from wealthy countries. So local farmers, instead of improving the agricultural and economic self-sufficiency of their home country, are instead forced out of the market and perhaps even off their land. This occurs as a result of a process known as "international dumping" in which subsidized farmers are able to "dump" low-cost agricultural goods on foreign markets at costs that un-subsidized farmers cannot compete with. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round
of WTO trade negotiations stalled because the US refused to cut subsidies to a level where other countries' non-subsidized exports would have been competitive.
Others argue that a world market with farm subsidies and other market distortion
s (as happens today) results in higher food prices, rather than lower food prices, as compared to a free market.
Mark Malloch Brown
, former head of the United Nations Development Program, estimated that farm subsidies cost poor countries about USD$50 billion a year in lost agricultural exports:
is well documented. Agricultural subsidies depress world prices and mean that unsubsidised developing-country farmers cannot compete; and the effects on poverty are particularly negative when subsidies are provided for crops that are also grown in developing countries since developing-country farmers must then compete directly with subsidised developed-country farmers, for example in cotton and sugar. The IFPRI has estimated in 2003 that the impact of subsidies costs developing countries $24Bn in lost incomes going to agricultural and agro-industrial production; and more than $40Bn is displaced from net agricultural exports. Moreover the same study found that the Least Developed Countries
have a higher proportion of GDP dependent upon agriculture, at around 36.7%, thus may be even more vulnerable to the effects of subsidies. It has been argued that subsidised agriculture in the developed world is one of the greatest obstacles to economic growth in the developing world; which has an indirect impact on reducing the income available to invest in rural infrastructure such as health, safe water supplies and electricity for the rural poor. The total amount of subsidies that go towards agriculture in OECD countries far exceeds the amount that countries provide in development aid
.
, making high-sugar food less expensive; beet and cane sugar are subject to subsidies, price controls, and import tariffs that distort the prices of these products as well.
Market distortions due to subsidies have led to an increase in corn fed cattle rather than grass fed. Corn fed cattle require more antibiotics and their beef has a higher fat content.
Peer-reviewed research, however, suggests that any effects of U.S. farm policies on U.S. obesity patterns must have been negligible. Moreover, even entirely eliminating the current programs could not be expected to have a significant influence on obesity rates, according to agricultural economists.
Critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl at The Heritage Foundation
showed that nearly three quarters of subsidy money goes to the top 10% of recipients. Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. Between 1990 and 2001, payments to large farms have nearly tripled, while payments to small farms have remained constant. Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies—which they can use to buy even more small farms." Critics also note that, in America, over 90% of money goes to staple crops of corn
, wheat
, soybeans, and rice
while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy
has provisions that encourage local varieties and pays out subsidies based upon total area and not production. Other points aside, research has shown that small farms receive more payments in relation to value of their crops than big farms. The tariffs on sugar have also forced most large candymakers in the USA to Canada and Mexico where sugar is often half to a third the price.
, at €62.8m, and was followed by about a dozen sugar manufacturers which together reaped more than €103m.
Critics also suggest that subsidies are an inefficient use of taxpayer’s money as they represent transfer payments to above average Americans given that in 2006, the Department of Agriculture estimated that the average farm household income was $77,654 or about 17% higher than the average U.S. household income. From a public economics perspective, subsidies of any kind work to create a socially and politically acceptable equilibrium that is not necessarily Pareto Efficient.
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
paid to farmer
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
s and agribusiness
Agribusiness
In agriculture, agribusiness is a generic term for the various businesses involved in food production, including farming and contract farming, seed supply, agrichemicals, farm machinery, wholesale and distribution, processing, marketing, and retail sales....
es to supplement their income, manage the supply of agricultural commodities
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
, and influence the cost and supply of such commodities. Examples of such commodities include wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
, feed grains (grain
Cereal
Cereals are grasses cultivated for the edible components of their grain , composed of the endosperm, germ, and bran...
used as fodder
Fodder
Fodder or animal feed is any agricultural foodstuff used specifically to feed domesticated livestock such as cattle, goats, sheep, horses, chickens and pigs. Most animal feed is from plants but some is of animal origin...
, such as maize
Maize
Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...
or corn, sorghum
Sorghum
Sorghum is a genus of numerous species of grasses, one of which is raised for grain and many of which are used as fodder plants either cultivated or as part of pasture. The plants are cultivated in warmer climates worldwide. Species are native to tropical and subtropical regions of all continents...
, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...
, and oat
Oat
The common oat is a species of cereal grain grown for its seed, which is known by the same name . While oats are suitable for human consumption as oatmeal and rolled oats, one of the most common uses is as livestock feed...
s), cotton
Cotton
Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....
, milk
Milk
Milk is a white liquid produced by the mammary glands of mammals. It is the primary source of nutrition for young mammals before they are able to digest other types of food. Early-lactation milk contains colostrum, which carries the mother's antibodies to the baby and can reduce the risk of many...
, rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
, peanut
Peanut
The peanut, or groundnut , is a species in the legume or "bean" family , so it is not a nut. The peanut was probably first cultivated in the valleys of Peru. It is an annual herbaceous plant growing tall...
s, sugar
Sugar
Sugar is a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose, characterized by a sweet flavor.Sucrose in its refined form primarily comes from sugar cane and sugar beet...
, tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...
, and oilseeds such as soybean
Soybean
The soybean or soya bean is a species of legume native to East Asia, widely grown for its edible bean which has numerous uses...
s.
European Union
In 2010, the EU spent €57 billion on agricultural development, of which €39 billion was spent on direct subsidies. Agricultural and fisheries subsidies form over 40% of the EU budget. Since 1992 (and especially since 2005), the EU's Common Agricultural Policy has undergone significant change as subsidies have mostly been decoupled from production. The largest subsidy is the Single Farm PaymentSingle Farm Payment
The Single Farm Payment is an agricultural subsidy paid to farmers in the EU.-History:Historically, the EU's Common Agricultural Policy emphasised direct subsidies for agricultural produce...
.
Africa
Increases in food and fertilizer prices have underlined the vulnerability of poor urban and rural households in many developing countries, especially in Africa, renewing policymakers' focus on the need to increase staple food crop productivity.A study by the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...
evaluates the benefits of the Malawi Government Agricultural Inputs Subsidy Programme, which was implemented in 2006/2007 to promote access to and use of fertilizers in both maize and tobacco production to increase agricultural productivity and food security. The subsidy was implemented by means of a coupon system which could be redeemed by the recipients for fertilizer types at approximately one-third of the normal cash price. According to policy conclusions of the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...
the voucher for coupon system can be an effective way of rationing and targeting subsidy access to maximize production and economic and social gains. Many practical and political challenges remain in the program design and implementation required to increase efficiency, control costs, and limit patronage and fraud.
New Zealand
New ZealandNew Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
is reputed to have the most open agricultural markets in the world after radical reforms started in 1984 by the Fourth Labour Government
Fourth Labour Government of New Zealand
The Fourth Labour Government of New Zealand was the government of New Zealand from 26 July 1984 to 2 November 1990. It enacted major social and economic reforms, including reformation of the tax system. The economic reforms were known as Rogernomics after Finance Minister Roger Douglas...
all subsidies were stopped. As the country is a large agricultural exporter, continued subsidies by other countries are a long-standing bone of contention, with New Zealand being a founding member of the 19-member Cairns Group
Cairns Group
The Cairns Group is an interest group of 19 agricultural exporting countries, composed of Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Pakistan, Paraguay, Peru, the Philippines, South Africa, Thailand, and Uruguay.-History...
fighting to improve market access
Market access
Market access for goods in the WTO means the conditions, tariff and non-tariff measures, agreed by members for the entry of specific goods into their markets. Tariff commitments for goods are set out in each member's schedules of concessions on goods. The schedules represent commitments not to...
for exported agricultural goods.
United States
The United States currently pays around $20 billion per year to farmers in direct subsidies as "farm income stabilization" via U.S. farm billU.S. farm bill
In the United States, the farm bill is the primary agricultural and food policy tool of the federal government. The comprehensive omnibus bill is passed every 5 years or so by the United States Congress and deals with both agriculture and all other affairs under the purview of the United States...
s. These bills pre-date the economic turmoil of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
with the 1922 Grain Futures Act
Grain Futures Act
The Grain Futures Act , is a United States federal law enacted September 21, 1922 involving the regulation of trading in certain commodity futures, and causing the establishment of the Grain Futures Administration, a predecessor organization to the Commodity Futures Trading Commission.The bill that...
, the 1929 Agricultural Marketing Act and the 1933 Agricultural Adjustment Act
Agricultural Adjustment Act
The Agricultural Adjustment Act was a United States federal law of the New Deal era which restricted agricultural production by paying farmers subsidies not to plant part of their land and to kill off excess livestock...
creating a tradition of government support.
The beneficiaries of the subsidies have changed as agriculture in the United States
Agriculture in the United States
Agriculture is a major industry in the United States and the country is a net exporter of food. As of the last census of agriculture in 2007, there were 2.2 million farms, covering an area of , an average of per farm.-History:...
has changed. In the 1930s, about 25% of the country's population resided on the nation's 6,000,000 small farms. By 1997, 157,000 large farms accounted for 72% of farm sales, with only 2% of the U.S. population residing on farms. In 2006, the top 3 states receiving subsidies were Texas (10.4%), Iowa (9.0%), and Illinois (7.6%). The Total USDA Subsidies from farms in Iowa totaled $1,212,000,000 in 2006. From 2003 to 2005 the top 1% of beneficiaries received 17% of subsidy payments. In Texas, 72% of farms do not receive government subsidies. Of the close to $1.4 Billion in subsidy payments to farms in Texas, roughly 18% of the farms receive a portion of the payments.
"Direct payment subsidies are provided without regard to the economic need of the recipients or the financial condition of the farm economy. Established in 1996, direct payments were originally meant to wean farmers off traditional subsidies that are triggered during periods of low prices for corn, wheat, soybeans, cotton, rice, and other crops."
Top states for direct payments were Iowa ($501 million), Illinois ($454 million), and Texas ($397 million). Direct payments of subsidies are limited to $40,000 per person or $80,000 per couple.
The subsidy programs give farmers extra money for their crops and guarantee a price floor
Price floor
A price floor is a government- or group-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price.-Effectiveness of price floors:...
. For instance in the 2002 Farm Bill
Farm Security and Rural Investment Act of 2002
The Farm Security and Rural Investment Act of 2002, also known as the 2002 Farm Bill, includes ten titles, addressing a great variety of issues related to agriculture, ecology, energy, trade, and nutrition....
, for every bushel of wheat sold, farmers were paid an extra 52 cents and guaranteed a price of 3.86 from 2002–03 and 3.92 from 2004–2007. That is, if the price of wheat in 2002 was 3.80 farmers would get an extra 58 cents per bushel (52 cents plus the $0.06 price difference).
Corn
Maize
Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...
is the top crop for subsidy payments. The Energy Policy Act of 2005
Energy Policy Act of 2005
The Energy Policy Act of 2005 is a bill passed by the United States Congress on July 29, 2005, and signed into law by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico...
mandates that billions of gallons of ethanol be blended into vehicle fuel each year, guaranteeing demand, but US corn ethanol subsidies are between $5.5 billion and $7.3 billion per year. Producers also benefit from a federal subsidy of 51 cents per gallon, additional state subsidies, and federal crop subsidies that can bring the total to 85 cents per gallon or more. (US corn-ethanol producers are also shielded from competition from cheaper Brazilian sugarcane-ethanol by a 54-cent-per-gallon tariff)
| 2004 U.S. Crop Subsidies | ||
|---|---|---|
| Commodity | Millions of US$ | Share |
| Feed grain Feed grain Feed grain refers to any of several grains most commonly used for livestock feed, including corn, grain sorghum, oats, rye, and barley. These grains and the farms producing them historically have received federal commodity program support in the United States... s, mostly corn |
2,841 | 35.4% |
| Upland cotton and ELS cotton | 1,420 | 17.7% |
| Wheat Wheat Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice... |
1,173 | 14.6% |
| Rice Rice Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies... |
1,130 | 14.1% |
| Soybeans and products | 610 | 7.6% |
| Dairy Dairy A dairy is a business enterprise established for the harvesting of animal milk—mostly from cows or goats, but also from buffalo, sheep, horses or camels —for human consumption. A dairy is typically located on a dedicated dairy farm or section of a multi-purpose farm that is concerned... |
295 | 3.7% |
| Peanut Peanut The peanut, or groundnut , is a species in the legume or "bean" family , so it is not a nut. The peanut was probably first cultivated in the valleys of Peru. It is an annual herbaceous plant growing tall... s |
259 | 3.2% |
| Sugar Sugar Sugar is a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose, characterized by a sweet flavor.Sucrose in its refined form primarily comes from sugar cane and sugar beet... |
61 | 0.8% |
| Minor oilseeds | 29 | 0.4% |
| Tobacco Tobacco Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines... |
18 | 0.2% |
| Wool Wool Wool is the textile fiber obtained from sheep and certain other animals, including cashmere from goats, mohair from goats, qiviut from muskoxen, vicuña, alpaca, camel from animals in the camel family, and angora from rabbits.... and mohair Mohair Mohair usually refers to a silk-like fabric or yarn made from the hair of the Angora goat. The word "mohair" was adopted into English before 1570 from the Arabic: mukhayyar, a type of haircloth, literally 'choice', from khayyara, 'he chose'. Mohair fiber is approximately 25-45 microns in... |
12 | 0.1% |
| Vegetable oil Vegetable fats and oils Vegetable fats and oils are lipid materials derived from plants. Physically, oils are liquid at room temperature, and fats are solid. Chemically, both fats and oils are composed of triglycerides, as contrasted with waxes which lack glycerin in their structure... products |
11 | 0.1% |
| Honey Honey Honey is a sweet food made by bees using nectar from flowers. The variety produced by honey bees is the one most commonly referred to and is the type of honey collected by beekeepers and consumed by humans... |
3 | 0.0% |
| Other crops | 160 | 2.0% |
| Total | 8,022 | 100% |
Impact of subsidies
Farm subsidies have the direct effect of transferring income from the general tax payers to farm owners. The justification for this transfer and its effects are complex and often controversial.Global food prices and international trade
Although some critics and proponents of the World Trade OrganizationWorld Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries, low prices are harmful to farmers not receiving the subsidy. Because it is usually wealthy countries that can afford domestic subsidies, critics argue that they promote poverty
Poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...
in developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
by artificially driving down world crop prices. Agriculture is one of the few areas where developing countries have a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
, but low crop prices encourage developing countries to be dependent buyers of food from wealthy countries. So local farmers, instead of improving the agricultural and economic self-sufficiency of their home country, are instead forced out of the market and perhaps even off their land. This occurs as a result of a process known as "international dumping" in which subsidized farmers are able to "dump" low-cost agricultural goods on foreign markets at costs that un-subsidized farmers cannot compete with. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round
Doha round
The Doha Development Round or Doha Development Agenda is the current trade-negotiation round of the World Trade Organization which commenced in November 2001. Its objective is to lower trade barriers around the world, which will help facilitate the increase of global trade...
of WTO trade negotiations stalled because the US refused to cut subsidies to a level where other countries' non-subsidized exports would have been competitive.
Others argue that a world market with farm subsidies and other market distortion
Market distortion
In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and...
s (as happens today) results in higher food prices, rather than lower food prices, as compared to a free market.
Mark Malloch Brown
Mark Malloch Brown
George Mark Malloch Brown, Baron Malloch-Brown, KCMG, PC is a former Minister of State in the Foreign and Commonwealth Office of the British government with responsibility for Africa, Asia and the United Nations...
, former head of the United Nations Development Program, estimated that farm subsidies cost poor countries about USD$50 billion a year in lost agricultural exports:
"It is the extraordinary distortion of global trade, where the West spends $360 billion a year on protecting its agriculture with a network of subsidies and tariffs that costs developing countries about US$50 billion in potential lost agricultural exports. Fifty billion dollars is the equivalent of today's level of development assistance."
Poverty in Developing Countries
The impact of agricultural subsidies in developed countries upon developing-country farmers and international developmentInternational development
International development or global development is a concept that lacks a universally accepted definition, but it is most used in a holistic and multi-disciplinary context of human development — the development of greater quality of life for humans...
is well documented. Agricultural subsidies depress world prices and mean that unsubsidised developing-country farmers cannot compete; and the effects on poverty are particularly negative when subsidies are provided for crops that are also grown in developing countries since developing-country farmers must then compete directly with subsidised developed-country farmers, for example in cotton and sugar. The IFPRI has estimated in 2003 that the impact of subsidies costs developing countries $24Bn in lost incomes going to agricultural and agro-industrial production; and more than $40Bn is displaced from net agricultural exports. Moreover the same study found that the Least Developed Countries
Least Developed Countries
Least developed country is the name given to a country which, according to the United Nations, exhibits the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world...
have a higher proportion of GDP dependent upon agriculture, at around 36.7%, thus may be even more vulnerable to the effects of subsidies. It has been argued that subsidised agriculture in the developed world is one of the greatest obstacles to economic growth in the developing world; which has an indirect impact on reducing the income available to invest in rural infrastructure such as health, safe water supplies and electricity for the rural poor. The total amount of subsidies that go towards agriculture in OECD countries far exceeds the amount that countries provide in development aid
Development aid
Development aid or development cooperation is aid given by governments and other agencies to support the economic, environmental, social and political development of developing countries.It is distinguished...
.
Impact on nutrition
Some critics argue that the artificially low prices resulting from subsidies create unhealthy incentives for consumers. For example, in the USA, cane sugar has been replaced with cheap corn syrupCorn syrup
Corn syrup is a food syrup, which is made from the starch of maize and contains varying amounts of maltose and higher oligosaccharides, depending on the grade. Corn syrup is used in foods to soften texture, add volume, prevent crystallization of sugar, and enhance flavor...
, making high-sugar food less expensive; beet and cane sugar are subject to subsidies, price controls, and import tariffs that distort the prices of these products as well.
Market distortions due to subsidies have led to an increase in corn fed cattle rather than grass fed. Corn fed cattle require more antibiotics and their beef has a higher fat content.
Peer-reviewed research, however, suggests that any effects of U.S. farm policies on U.S. obesity patterns must have been negligible. Moreover, even entirely eliminating the current programs could not be expected to have a significant influence on obesity rates, according to agricultural economists.
Corporate farms
Some proponents view farm subsidies as appropriate for "family" or small farmers, but inappropriate for "corporate" or large farms. Many subsidy programs have limits on the size of the farm that can receive subsidies.Critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl at The Heritage Foundation
The Heritage Foundation
The Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
showed that nearly three quarters of subsidy money goes to the top 10% of recipients. Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. Between 1990 and 2001, payments to large farms have nearly tripled, while payments to small farms have remained constant. Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies—which they can use to buy even more small farms." Critics also note that, in America, over 90% of money goes to staple crops of corn
Maize
Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...
, wheat
Wheat
Wheat is a cereal grain, originally from the Levant region of the Near East, but now cultivated worldwide. In 2007 world production of wheat was 607 million tons, making it the third most-produced cereal after maize and rice...
, soybeans, and rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy
Common Agricultural Policy
The Common Agricultural Policy is a system of European Union agricultural subsidies and programmes. It represents 48% of the EU's budget, €49.8 billion in 2006 ....
has provisions that encourage local varieties and pays out subsidies based upon total area and not production. Other points aside, research has shown that small farms receive more payments in relation to value of their crops than big farms. The tariffs on sugar have also forced most large candymakers in the USA to Canada and Mexico where sugar is often half to a third the price.
Non-farming companies
Subsidies are also given to companies and individuals with little connection to traditional farming. It has been reported that the largest part of the sum given to these companies flow to multinational companies like food conglomerates, sugar manufacturers and liquor distillers. For example in France, the single largest beneficiary was the chicken processor Groupe DouxGroupe Doux
Groupe Doux is Europe's largest producer of poultry with 1 million tons produced each year. It is one of largest exporters of poultry and poultry products....
, at €62.8m, and was followed by about a dozen sugar manufacturers which together reaped more than €103m.
Public Economics Implications
In Economics, agricultural subsidies are considered a price support put in place to serve as a primary instrument of supporting farmers’ income and protecting the country’s food supply. However, agricultural commodities are considered private goods; goods that are rival and excludable in consumption. Therefore, the government’s involvement in the agricultural sector can be contentious. Some proponents argue that without subsidies, rural America’s economy would suffer greatly and America would become dependent on foreign food sources, which is considered a national security threat. However, critics argue that the intervention of government in agricultural subsidies prohibits the price mechanism to drive commodity prices as they would in the private market, therefore creating crop overproduction and market discrimination.Critics also suggest that subsidies are an inefficient use of taxpayer’s money as they represent transfer payments to above average Americans given that in 2006, the Department of Agriculture estimated that the average farm household income was $77,654 or about 17% higher than the average U.S. household income. From a public economics perspective, subsidies of any kind work to create a socially and politically acceptable equilibrium that is not necessarily Pareto Efficient.
Income Eligibility Cap Reduction
In order to reduce the deadweight loss and market discrimination induced by agricultural subsidies, the United States could begin to cut spending on subsidy programs by reducing the income eligibility cap for farm subsidy recipients when the Food, Conservation, and Energy Act of 2008 is reauthorized. The current cap allows anyone making less than $750,000 eligible for direct payment subsidies. Proponents argue that the benefits of reducing the income eligibility would include lower food prices because it would open the market to other countries because the largest farms would produce an efficient level of output rather than the current overproduction due to incentivized subsidies. The current overproduction crowds out the domestic market, providing little incentive for the global trade of agricultural commodities in which other countries may have a comparative advantage. Allowing countries to specialize in commodities in which they have a comparative advantage in and then freely trade across borders would therefore increase global welfare and reduce food prices. It would also force the bigger farms to provide for themselves, helping smaller farms become more competitive which would make the entire market more efficient. Alternatively, opponents of this solution are concerned about becoming dependent on foreign food sources that may have the same safety standards and they are also against disrupting the farm lobby.Deregulation of the Farm Industry
Another solution to the agricultural subsidy issue would be to end direct payments to farmers entirely and deregulate the farm industry. The benefits of this alternative would be the creation of a free market environment in the agricultural sector, eliminating inefficiencies and deadweight loss created by government intervention. Proponents of this alternative also argue that the reorientation of farm subsidies in the United States would significantly boost global welfare because trade across borders would be determined purely by supply and demand. Costs to this solution involve political backlash and short term economic adjustment periods occurring when small farmers become unable to compete with large corporate farms without support, and must find alternative incomes.See also
- ProtectionismProtectionismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
- Free tradeFree tradeUnder a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
- Agricultural policyAgricultural policyAgricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets...
- Price supportPrice supportIn economics, a price support may be either a subsidy or a price control, both with the intended effect of keeping the market price of a good higher than the competitive equilibrium level....
- 2007–2008 world food price crisis2007–2008 world food price crisisWorld food prices increased dramatically in 2007 and the 1st and 2nd quarter of 2008 creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the worldwide increases in food prices continue to be the subject...
- Electrical energy efficiency on United States farmsElectrical energy efficiency on United States farmsElectrical energy efficiency on United States farms covers the use of electricity on farms and the methods and incentives for improving the efficiency of that use.U.S...
Further reading
- Farm Commodity Programs: A Short Primer, a Congressional Research ServiceCongressional Research ServiceThe Congressional Research Service , known as "Congress's think tank", is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a...
Report for Congress, June 20, 2002.
External links
- Rethinking the Export-Import Bank by Aaron Lukas and Ian VásquezIan VásquezIan Vásquez is director of the Cato Institute's . He is a member of the Mont Pelerin Society and a term member of the Council on Foreign Relations...
- Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry
- Why Congress Should Repeal Sugar Subsidy
- Ten Reasons to Cut Farm Subsidies by Chris Edwards
- Should the United States Cut Its Farm Subsidies? - Daniel Griswold, director of the Cato Institute’s Center for Trade Policy Studies, and Bob Young, chief economist for the American Farm Bureau, debate whether the United States should be subsidizing its farmers
- Farm Security: The mohair of the dog that bites you - Comedy writer Dave BarryDave BarryDavid "Dave" Barry is a Pulitzer Prize-winning American author and columnist, who wrote a nationally syndicated humor column for The Miami Herald from 1983 to 2005. He has also written numerous books of humor and parody, as well as comedic novels.-Biography:Barry was born in Armonk, New York,...
on farm subsidies - You Are What You Grow - Article on farm subsidies from The New York TimesThe New York TimesThe New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
. - Kick All Agricultural Subsidies (kickAAS) - a campaign run by The GuardianThe GuardianThe Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
newspaper in the UK - Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers by Daniel Griswold, Stephen SlivinskiStephen SlivinskiStephen Slivinski is a senior economist for the Goldwater Institute. He is an expert in tax and budget policy at the state and federal level. He has previously worked for the Cato Institute, the Tax Foundation and the James Madison Institute. He has written extensively on the United States...
, and Christopher Preble (September 5, 2005). - Still at the Federal Trough: Farm Subsidies for the Rich and Famous Shattered Records in 2001- a paper presented by the Heritage FoundationHeritage FoundationThe Heritage Foundation is a conservative American think tank based in Washington, D.C. Heritage's stated mission is to "formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong...
arguing that farm subsidies are corporate welfare and do not benefit small family farms. - Environmental Working Group's Farm Subsidy Database