The Illogic of Farm Subsidies, and Other Agricultural Truths

by Dave

Insightful interview with Dan Sumner, ag economist, in keeping with the latest Doha round, and the moves by the India/Brazil-led G20 to have the EU, U.S. eliminate a few of these farm subsidies
Freakonomics – New York Times Blog

Q: Are there any good arguments that support farm subsidies? If so, to what extent and in what manner may they be justified?A: No.

My longer answer is here.

I look at a dozen suggested rationales for farm programs and reject them all except the last one — which is we(the U.S) have farm programs because we have had them for 75 years and people are afraid of even thinking about a world without subsidies.

Q: There seems to be some amount of talk that biofuel mandates have contributed to food inflation here and food crises in other parts of the world. How much responsibility, if any, do you think the government holds for those problems because of the mandate? Should it be repealed?

A: No question, biofuels have contributed significantly to farm commodity price increases. The range of a plausible estimate of the share of increase due to use of farm resources for biofuels ranges from 10 or 15 percent to 50 percent or more, depending on the precise time period considered, the commodity (corn or rice or wheat), and whether one is apportioning the total impact across suggested drivers.

Factors affecting recent commodity price increases include:

1. Biofuels policy in (a) the U.S.; (b) Europe and elsewhere.
2. Supply shocks due to weather or pests.
3. Reductions in E.U. production subsidy.
4. Demand growth in China, India, and other fast-expanding poor countries.
5. Export controls in places such as Thailand, India, etc.
6. Import expansion policies and stockpiling in the Philippines, etc.
7. Oil price shocks that increase costs of farm production and distribution.
8. Mistaken speculators who will lose money.
9. Hedge funds and other financial traders who are pouring money into commodities because stocks, bonds, and real estate look so lousy; and
10. Oil price shocks that increases the demand for biofuels.

Q: I’ve read Jeffrey Sachs’s
opinion that ending farm subsidies in the U.S. and Europe won’t have
much effect on poorer countries, as the main beneficiaries will be
high- and moderate-income countries with reasonably efficient
agriculture industries like Australia, New Zealand, and Argentina. Will
these countries see a much greater benefit from the end of European and
American farm subsidies than African countries for example?

A: To benefit from higher prices a farmer has to
have something to sell. Many farms in Africa are not really connected
much to the global markets. (That is not true for cotton.) Also, on a
national basis many African countries are net importers of farm
products and would pay more if subsidies ended.

There is no question that big gainers from ending subsidies would be
places like Brazil, Argentina (unless their government destroys their
productive agriculture)
, and others. For cotton, parts of Africa are
competitive net exporters and would gain substantially as we show in
our Oxfam paper.

Q: By how much should agricultural subsidies in theU.S. and Europe be reduced to start seeing an impact on the growth of
developing countries? What would be the positive impact of this
reduction for the U.S. and Europe themselves? What would be the
expected environmental impact of these reductions?

A: Simple questions, complicated answers. Farm
subsidies that lower prices hurt farmers in poor countries by helping
consumers in these countries. My best estimate in the case of cotton is
that the world cotton price would be about 10 percent higher if U.S.
farm subsidies for cotton were eliminated. The impact is likely smaller
for most other commodities. So the impacts would be a modest
improvement of farm incomes, but as we show in our paper for Oxfam, cited in my introduction, even most improvement of farm prices can make a measurable difference to the living standards of the very poor.

Q: If the U.S. is providing large subsidies that
depress cotton rates across the world, doesn’t it mean that it is
actually providing discounts to cotton consumers across the world (and
in W. Africa too)? That being the case, would it not be better to have
the W. African farmers shift to other crops (not subsidized by the
U.S./Europe) to get better prices?

A: Your economic intuition is just right. Subsidies
that make products cheaper help buyers just as they make it difficult
for competitive sellers. It would be nice to think that African farmers
could easily shift to other crops. Lots of effort has been devoted to
the issue. It seems that certain parts of Africa are simply very well
suited for cotton. We shall see how much longer U.S. cotton subsidies
last. They are pretty much gone now in the E.U.

Q: I have heard that the reasoning behind farm
subsidies is to keep farmers farming when market prices are low, so in
the event of a demand shift the capacity would be there to meet the
need. Do you think this supposed benefit outweighs the negative effects
of market interference?

A: This rationale, or rationalization, for farm
subsidies makes no sense. Farming is a long-run business and there is
no reason to think the government is better at regulating the markets
for farm commodities than are the farmers and other who are in the
business and have strong incentives to use storage, forward pricing,
lines of credit, and the like to deal with commodity markets. I deal
with this rational in my AEI paper: “Farm Subsidy Tradition and Modern Agricultural Realities.”

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