An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses 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 oats), cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.
Contents |
In 2010, the EU spent €57 billion on agricultural development, of which €39 billion was spent on direct subsidies.[1] Agricultural and fisheries subsidies form over 40% of the EU budget.[2] 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 Payment.
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 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.[3] 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.[3]
New Zealand is reputed to have the most open agricultural markets in the world[4][5][6] 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,[7][8] with New Zealand being a founding member of the 19-member Cairns Group fighting to improve market access for exported agricultural goods.
The United States currently pays around $20 billion per year to farmers in direct subsidies as "farm income stabilization"[9][10][11] via U.S. farm bills. 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.[12] From 2003 to 2005 the top 1% of beneficiaries received 17% of subsidy payments.[12] 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.[13]
"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."[14]
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.[14]
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.[15] 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 $7.3 billion per year. Producers also benefit from a federal subsidy of 51 cents per gallon, additional state subsidies, and federal crop subsidies that can bring the total to 85 cents per gallon or more.[16] (US corn-ethanol producers are also shielded from competition from cheaper Brazilian sugarcane-ethanol by a 54-cent-per-gallon tariff[17][18])
| 2004 U.S. Crop Subsidies[19] | ||
|---|---|---|
| Commodity | Millions of US$ | Share |
| Feed grains, mostly corn | 2,841 | 35.4% |
| Upland cotton and ELS cotton | 1,420 | 17.7% |
| Wheat | 1,173 | 14.6% |
| Rice | 1,130 | 14.1% |
| Soybeans and products | 610 | 7.6% |
| Dairy | 295 | 3.7% |
| Peanuts | 259 | 3.2% |
| Sugar | 61 | 0.8% |
| Minor oilseeds | 29 | 0.4% |
| Tobacco | 18 | 0.2% |
| Wool and mohair | 12 | 0.1% |
| Vegetable oil products | 11 | 0.1% |
| Honey | 3 | 0.0% |
| Other crops | 160 | 2.0% |
| Total | 8,022 | 100% |
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.
Although some critics and proponents of the World Trade Organization have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries,[20][21] 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.[22] 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.[23]
Others argue that a world market with farm subsidies and other market distortions (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 US$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."[24][25]
The impact of agricultural subsidies in developed countries upon developing-country farmers and international development 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.[26][27] 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.[28] 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.[29] The total amount of subsidies that go towards agriculture in OECD countries far exceeds the amount that countries provide in development aid.
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 syrup, making high-sugar food less expensive;[30] 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.[31] Corn fed cattle require more antibiotics and their beef has a higher fat content.[31]
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.[32]
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 showed that nearly three quarters of subsidy money goes to the top 10% of recipients.[33] 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.[34] 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."[33] 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.[35] 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.[36]
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 Doux, at €62.8m, and was followed by about a dozen sugar manufacturers which together reaped more than €103m.
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.[37] From a public economics perspective, subsidies of any kind work to create a socially and politically acceptable equilibrium that is not necessarily Pareto Efficient.[38]
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.[39] 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.[40] 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.[41]
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 include 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.