See also: List of Economic Topics

Agricultural policy

Subsidies status

The instrument of western subsidy policy and majority receipient of subsidies is massive Agri-business. It is of some little interest that economic studies place the average farmer subsidy at US$17,000/year for European farmers, and US$16,000/year for U.S. farmers. The subsidies are mainly in the form of tax reductions and very low prices on the water needed to grow plants.

What does this amount to in real terms? Consider the following: the average rice farmer in the US received $1,000,000 per year from the US government from 1985 to 1990 to protect him from competition in Malaysia and other producers of cheaper rice. The average Malaysian farmer's income is, by contrast, under $1000 per year.

Another example is that in Europe alone, the subsidies given out by the Common Agricultural Policy (CAP) is equal to the GDP of Spain.

Yet another example: in Canada, the average cow receives more funding from the government than is earned by the average worker in sub-Saharan Africa.

Arguments for subsidies

The argument for subsidies is gain or market share. Agricultural policy or subsidy has the purpose of profit. A very strong evidence for this is that huge amounts of excess food are often disposed of very cheaply, therby gaining market share e.g. by export to developing nations as foreign aid, or as part of local food bank or food stamp programs. Agricultural economics studies these 'other purposes' to see what insights they provide into economics, and to help set such policies in the context of a larger economy in which most activity is not agricultural.

A trumpeted but secondary goal of agricultural subsidies is food self-sufficiency to prevent the shock of rapid price rises in essential groceries. To submit the entire food supply of a nation to the whims of commodity markets is considered a poor idea. Another alleged goal is to improve biosecurity by minimizing the amount of overall organic material imported, e.g. recent United States Food and Drug Administration rules applied to foreign exporters of food to the US.

Another stated but unproven goal is to encourage organic farming and precision agriculture, often combined in the idea of the "garden economy". When the USSR was unable to feed itself it was anecdotally observed that over half of the local food supply was coming from small private gardens growing native varieties with organic means, despite the fact that the government had done everything in its power to discourage such small-scale organic entrepreneurs.

Opposition to subsidies

Every classical economic text and some farmers are actually opposed to subsidies because they tend to result in overproduction and lower prices, which then increases future reliance on subsidies. Thus a vicious downward spiral is formed, which becomes increasingly more difficult to escape from.

Many argue that the real rationale is simple vote-seeking - politicians aim for votes from a voter who follows unenlightened self interest. There is incontrovertible and conclusive evidence that through agri-grants, we in the Western World have been enriching ourselves by destroying the livelihoods of our fellow humans in the Third World while lying to ourselves that we aid them. It is our greatest self-deception. Food was their main export. We simply subsidised it down to almost half the cost of production and engaged in open free competition. Of course we outsold them everywhere. We have debilitated their economies so effectively that their undermined agriculture could not afford fertiliser and irrigation and we even gained big segments of their home markets. It’s been nothing but brilliant export success for us because we could sell at half price, but disaster for them, destruction of their very subsistence. We perpetrate economic damage of more than 8 times the aid we give. Oxfam, Green Peace, Friends of the earth, Canada's Minister of Agriculture, India’s National Newspaper [The Hindu] and Harvard Political Review say this. Every nation needs to export in order to live. We have systematically withered away their exports and destroyed their economies for 25 years. We have brought them to their knees. People know that Africa, in particular, is stricken by recession, grinding poverty, famine and declining incomes and research I have done shows that we think it’s all their own fault. Now the third world has hunger, dislocation, aids, revolution and famine and we have the money.

Subsidies are an incentive for our farmers to overproduce food, creating a surplus that is dumped into developing nations at prices that undercut the cost of production of locally produced goods and destroy their access to the lifeblood of exports. If this and other intangible damage were accessed it would be nearer to 10 times the aid bill. The destruction we have wreaked is manifested in the political turmoil, plagues [aids], famines and plunging standards of living.

Lyle Vanclief, Canada's Minister of Agriculture, recently asked Harvard's Institute of Politics to “consider a farmer in Ghana who used to be able to make a living growing rice. Several years ago, Ghana was able to feed its people and export their surplus. Now, it imports rice. From where? Developed countries. Why? Because it's cheaper,” "Even though it costs the rice producer in the developed world much more to produce the rice, he doesn't have to make a profit from his crop. The government pays him to grow it, so he can sell it more cheaply to Ghana than the farmer in Ghana can. And that farmer in Ghana? He can't feed his family anymore."

"If developed nations eliminated subsidy programs, the export value of agriculture in lesser developed nations would increase by 24 percent, plus a further 5.5 percent from tariff equilibrium" according to figures published by the United States Department of Agriculture (USDA). Almost 1/3 more export value would utterly transform any national economy! And the 30 million aids sufferers would get the medicine they need. It would give the people the same equal chance every free man hopes to get – a chance they last had before we came to their continent hundreds of years ago.

Canada's Department of Agriculture estimates that developing nations would benefit by about $4 billion annually if subsidies in the developed world were even halved. If abolished this would be $8M, which earning interest on a net present value basis over 10 or 20 years gives such an astronomical sum, about $300 billion, that their economies might dwarf the historic growth seen in Germany, Japan and the Asian Rim.

U.S. Representative Barney Frank said "These free market fakers [Republicans in the House of Representatives] act like there is some footnote in the economics textbooks that says free markets don't apply to agriculture". The Farm Act [US 2002] is "the worst example of congressional suspension of free markets."
We are indebted to Kevin Watkins of Oxfam for the example of maize farmers in the Philippines. The World Trade Organisation [WTO] has extracted commitments from the Philippines government forcing it to lower import barriers to half their present levels over a span of six years and allow in drastically increased competition from the industrialised and heavily subsidised farming systems of North America and Europe. A recent Oxfam report estimated that average household incomes of maize farmers will be reduced by as much as 30% over the six years as cheap imports from the US drive down prices in the local markets. The report estimates that in the absence of trade restrictions, US subsidised maize could be marketed at less than half the price of maize grown on the Philippine island of Mindanao; and that the livelihoods of up to half a million Filipino maize farmers (out of the total 1.2 million) are under immediate threat.’ Speaking as an economist I can say that if a similar blow hit a western country it would find itself in the third division for many years.

[WTO] say that they are merely brokers between the nations. Mere implementers. They fail to mention that it is their duty to implement on behalf of the majority voting powerful countries – the rich Western countries. In the early nineties food was added to fair trade rules. Duty bound, WTO implement the “fair” rules for food trading and so many exceptions and exemptions that the US is able the pay farm subsidies today, 8 years later, vastly greater than ever before. The powerful countries impose an Alice in Wonderland isolation from reality in which the word ‘protection’ means whatever the WTO, their “honest broker,” says it means.

According to Watkins, quoted by Third World Network [TWN] the US and European agri-corporations need free foreign markets to absorb domestic surpluses. He says that the problem is that the "free" market in world agriculture does not exist, and that US and European supremacy in world markets stems primarily from access to subsidies. According to the OECD (Organisation for Economic Cooperation and Development), each US farmer receives a subsidy of about $29,000. This is roughly 120 times the average income of maize farmers in the Philippines. ‘The upshot is that exporters can offer US surpluses for sale at prices around half the cost of production - destroying local agriculture and creating a captive market in the process.' The corporate grain traders who market US and European surpluses, the big farmers who get most of the production subsidies, and chemical companies providing the fertiliser that produce the surpluses are destroying the economies and livelihoods of Third World.

The Institute for Agriculture and Trade Policy [IATP] on February 11, 2003 reported on the cost of production of corn, soybeans, cotton, wheat and rice, and, using data from the U.S. Department of Agriculture (USDA) and the Organization for Economic Cooperation and Development (OECD), compared the cost to the price at which these commodities are sold on international markets. In all cases, the commodities were sold below the cost of production. Levels of dumping hover around 40% for wheat, between 25% and 30% for corn (maize) and levels have risen steadily over the past four years for soybeans, to nearly 30%. These percentages means that wheat, for example, is selling for 40% less than it costs to produce. For cotton, the level of dumping for 2001 rose to a remarkable 57%, and for rice it has stabilized at around 20%. Said IATP Trade Director Sophia Murphy. "Dumping is a gross distortion of commodity markets. It undermines the livelihoods of 70% of the world s poorest people. Trade rules provide the tools needed to address agricultural dumping. Now is the time for governments to act."

Through the pernicious device of food subsidies we steal enough the take 14 million people off the starvation line. And it’s of trivial value to us. What we steal benefits us by 1% of our standard of living. We make the rules. We tilt the playing field. For the sake of a 1% gain in our living standards we rip off the critical 10% of the living standards of the starved, sick and undernourished. While this 10% can mean the difference between life and death for the poor, it means almost nothing to us. The 10% we shave off their wealth under our tilted rules only improves out lot by 1%. We steal 10%, enjoy 1%.

Much less significant is the effect on western economies. Only a small percentage of the population actually works in agriculture in the West (about 5% in the European Union in 1997 and 1.7% in the United States in 1990). The subsidies that benefit this minority indirectly drive up food prices for the majority (that milk carton you buy actually cost more to make than you paid for it - the other 40% of its cost came from your tax dollars which the government gave to the farmer who made it!).

These small farmers are not the primary beneficiaries: rather, the majority of the monies go to larger agricultural firms. Such cases sometimes provoke considerable publicity, since these policies usually claim to support the small farmer. Another critique is that these subsidies prevent national economies in the third world from competing in local and export markets as exemplified by the 2003 Cancun WTO ministerial conference, where 22 third-world nations introduced evidence against agriculture subsidies in US and Europe. Their showed that the first world talks about free trade and free markets, but reneges when their agriculture products are subject to competition by cheaper products from the third world.

In April 2004 the WTO ruled that $3 billion in US cotton subsidies violate trade agreements and that almost 50% of EU sugar exports are illegal.

Corn subsidies in the US have been indicted as a major cause of obesity; subsidized and consequently cheaper corn syrup is often used instead of plain sugar to sweeten processed foods.

Other opinions

Most green economists argue that such measures ought to be strongly encouraged, and so consider agricultural policy that exempts small gardens and greenhouses from regulations to be desirable, especially if produce is consumed locally. They argue for tax, tariff and trade rules to exempt such production for local use, especially family farm or farm co-op production, and strongly deny that agricultural and industrial policy should be linked, or should be subject to the same law. One rationale is that local production of organic produce by families in their own gardens for their own consumption is not taxed or regulated, and that little or no use of the energy-and-land-intensive transport system, or energy-and-labor intensive regulation system is required for these same people to sell the same product to neighbors.

Rules for rural land ownership typically affect both agricultural policy and family farms. Some economists, e.g. Hernando de Soto, Joseph Stiglitz, argue that comprehensive land reform would be more effective than a tax, tariff and trade system, and more likely than any specific agricultural policy, to improve life in developing nations.

Immigration policy in some developed nations has exceptions specifically to enable agricultural policy, e.g. migrant farm workers in Canada and the US.

U.S. initiatives

The United States has feinted with the ending of farm subsidies several times, most recently with the enactment of the "Freedom to Farm" act, which was intended to provide diminishing payments to farmers over a period of years in lieu of price supports and production subsidies. It was supplanted in 2002 by new legislation that contained direct subsidies and countercyclical payments designed to limit the effects of poor prices and yields in bad years. Grain crops are most heavily subsidized.

Another major U.S. subsidy program is the "conservation reserve program" (CRP) which leases land from producers who take marginal land out of production and convert it back to as near its natural state as possible, by planting native grasses and other plants. In addition, there are major regulatory frameworks that have environmental, safety, and food quality goals.

Another program is the "environmental quality incentives program" (EQIP) which subsidizes improvements which promote water conservation and other measures. This program is conducted under a bidding process using a formula where farmers request a certain percentage of cost share for an improvement such as drip irrigation or a LEPA center pivot conversion (Low energy precision application). The producers which offer the most environmental improvement (based on a point system) for the least amount of government money are funded first. The process continues until that year's allocated funds are expended.

Other, more subtle measures enacted by the states and local governments affect farming, such as zoning and tax policy.

Since imported/exported agricultural produce is mostly traded and entirely priced on commodity markets, but presents special biosafety and biosecurity risks, there is a strong bias in all agricultural markets to compromise safety to achieve low prices.

International initiatives

Safe trade rules to encourage organic farming and self-reliance, led by opponents of genetically modified food and monoculture, e.g. Greenpeace.
Fair trade rules to ensure that poor farmers in underdeveloped nations that produce crops primarily for export are not exploited to put local farmers in developing nations out of work - which advocates consider a dangerous "race to the bottom" in agricultural labor and safety standards. Opponents point out that most agriculture in developed nations is produced by industrial corporations (or "agribusiness") which are hardly deserving of sympathy, and that the alternative to exploitation is poverty.
Free trade advocates desire the elimination of all market distorting mechanisms (subsidies, tariffs, regulations) and argue that, as with free trade in all areas, this will result in aggregate benefit for all. This position is particularly popular in competitive agricultural exporting nations in both the developed and developing world, some of whom have banded together in the Cairns Group lobby.
Plans to reduce or remove agricultural subsidies have led often to violent confrontations even in developed nations, e.g. very often in France. The issue is very politically loaded and there are strong constituencies both for and against agricultural reforms.

See also

Agriculture
Agricultural economics
Common Agricultural Policy
Corn Laws
Fair trade
Free trade
Land reform
Organic farming
Safe trade
Trade barriers
World Trade Organization