Agricultural subsidy

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An agricultural subsidy is a governmental subsidy paid to farmers to supplement their income, help manage the supply of agricultural commodities, and bolster the supply of such commodities on international markets. Examples of such commodities include wheat, feed grains (grain used as fodder, such as maize, sorghum, barley, and oats), cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.

1 Agricultural subsidies by region
2 Agricultural subsidies by crop
3 Benefits
4 Criticism
5 See also
6 External links
7 Reference

[edit] Agricultural subsidies by region

[edit] European Union

Main article: Common Agricultural Policy

[edit] Japan

Japan is best known for having agricultural subsidies put on its rice industry, with the reasoning behind such moves being cultural.

[edit] United States

The U.S. Agricultural Department is required by law to subsidize over two dozen commodities. Between 1996 and 2002, an average of $16 billion/year was paid by programs authorized by federal legislation dating back to the Agricultural Adjustment Act of 1933, the Agricultural Act of 1949, and the Commodity Credit Corporation, among others.

The beneficiaries of the subsidies have changed as U.S. agriculture changes. In the 1930s, about 25% of the U.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.

The subsidy programs give farmers extra money for their crops, as well as 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^[1] . That is, if the price of wheat in 2002 was 3.80 farmers would get an extra 58 cents per bushel. The effect of this is that subsidies encourage overproduction, and therefore low food prices, because they pay farmers more than what the free market would.

[edit] Agricultural subsidies by crop

The following is the subsidies by crop in 2004 in the United States.

Commodity	US Dollars (in Millions)	Percentage of Total

Feed Grains	2,841	35.4
Wheat	1,173	14.6
Rice	1,130	14.1
Upland and ElS Cotton	1,420	17.7
Tobacco	18	0.2
Dairy	295	3.7
Soybeans and products	610	7.6
Minor Oilseeds	29	0.4
Peanuts	259	3.2
Sugar	61	0.8
Honey	3	0.0
Wool and Mohair	12	0.1
Vegetable Oil products	11	0.1
Other Crops	160	2.0
Total	8,022	100

Source USDA 2006 Fiscal Year Budget ^[2]

[edit] Benefits

Proponents of agricultural subsidies argue that they are necessary because of the unusual nature of the agricultural industry. For one, a big part of crop yield, and therefore price, is based upon the weather both at home and abroad in remote parts of the world. Because of the uncertain nature of the weather, price subsidies are necessary to ensure that farmers receive a liveable wage.

Another problem with this market is that it does not behave like a natural market. Today, farms are too efficient, and produce more food in industrial countries than can be eaten. ^[3] In other markets, this would cause producers to cut back until a new equilibrium was reached. However, in agriculture, this does not happen as land will always be farmed and therefore is fixed. Demand is also inelastic in the case of food. That is, people will not eat more if food is cheap. As the commodity prices lower, farmers work to become more and more efficient in order to minimize their losses.^[4] This causes supply to increase and the price to lower further, exacerbating the problem. In economics, this problem is known as the fallacy of composition. It should also be noted that subsidization makes this problem worse.

Farm subsidies have the effect increasing production and therefore lowering the price of food. Today, consumers spend less on food than they ever have before. Food is, of course, a necessity and so every dollar saved on food can be spent elsewhere in the economy. Over the past 70 years, food spending has steadily declined in America. In 1929, before agriculture subsidization, Americans spent 23.9% of their income on food, by 1997 this had lowered to only 10.7%. However, this is most likely due to the general rise in production by the American populace, rather than some special effect of the subsidies. ^[5]

In the 1960's, President Lyndon B. Johnson made food surpluses a weapon in the war on poverty. Since then, food has been donated to poor urban areas in the United States. Also both critics and proponents of the WTO have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries. ^[6] ^[7]

[edit] Criticism

One criticism of subsidy comes from conservatives and libertarians arguing that subsidies is against the will of the free market. For example, poor store owners don't receive relief from the market and therefore neither should poor farmers. Furthermore, justification of subsidies from the uncertain nature of the weather can be countered by considering that many other areas of economy experience equivalent risks for which the free market can provide solutions e.g. insurance.

Critics of agricultural subsidies 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 competitive advantage. This makes developing countries into dependent buyers of food from wealthy countries, causing local farmers to lose their land rather than allowing them to develop their own agriculture and therefore self-sufficiency. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade negotiations stalled because America refused to cut subsidies to the other countries' desired level. ^[8]

Economists strongly rebuke the benefits of reduced retail prices derived from subsidising over-production. If the government were to subsidize car manufacturers to produce more cars then this would indeed lower the showroom price but it would be the consumer's own money collected through tax that would be used to fund the over-production. It would be impossible for the lower retail costs to outweigh the additional production costs otherwise the manufacturers could simply implement this technique themselves.

In America, critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl the Heritage Foundation showed that nearly three quarters of subsidy money goes to the top 10% of recipients.^[9] Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. The discrepancy is only widening. Since 1990, payments to large farms have nearly tripled, while payments to small farms have remained constant. ^[10]. 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."^[11] 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 encourage local varieties and pays out subsidies based upon total acreage and not production. Although, in fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms.^[12]