Agricultural subsidy

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Contents 1 Agricultural subsidies by region 1.1 European Union 1.2 Africa 1.3 Japan 1.4 New Zealand 1.5 United States 2 Benefits 3 Effect of subsidies on global food prices 4 Criticism 5 See also 6 References 7 External links

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, sorghum, barley, and oats), cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.

[edit] Agricultural subsidies by region

[edit] European Union

The European Union use agricultural subsidies to encourage self-sufficiency.

Agricultural subsidies to European farmers and fisheries make up more than 40 percent of the EU budget^[1]. There is a debate about whether it is really necessary to spend this enormous amount of money on supporting big agribusinesses in Europe that could otherwise not compete with global competitors.

The following list presents the principal arguments for and against agricultural subsidies:

Arguments for:

- Secure food supply (self-sufficiency)
- Guarantee high quality standards
- Positive impact of agriculture on society (preserve cultural heritage, landscape management, generation of bio-energy, agro.tourism,...)
- Strong lobbying groups (while the companies and other stakeholders that benefit from agricultural subsidies are well organized, potential losers like consumers and taxpayers are not)
- Growing populations will demand more agricultural commodities in the future.

Arguments against:

- Prices for agricultural commodities are a lot higher in Europe (e.g. sugar) and the population has to bear the tax burden.
- The subsidies cause an oversupply of agricultural commodities that is sold on the world market at a very low price and can harm local farmers in less developed countries who rely on stable prices for their products
- Countries like India, Brazil or Argentina have comparative advantage in producing agricultural commodities due to their favorable weather conditions. Those countries are harmed by the cheap exports from industrialized countries.
- Since the agribusiness becomes more and more industrialized in advanced nations, the market is dominated by a few corporations that get the major part of the EU agricultural subsidies. Benefitting from reduced competition, those firms set higher prices on the EU market than people would have to pay at "fair" competition. Thus, consumers have to take the main burden of agricultural subsidies.
- The security of food could also be guaranteed by diversifying supplier relations
- Bio-farmers have managed to be competitive without huge amount of subsidies, demonstrating that firms can compete, when they are innovative and take into account consumer preferences.
- That food is coming from within the EU does not automatically mean that it has a high quality (e.g. BSE originated in the United Kingdom)
- Agriculture can have negative effects on the environment causing extra external costs n(e.g. usage of pesticides, excessive usage of water,...).

This section requires expansion.

[edit] 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. The aim of introducing or re-introducing subsidies in several countries, is to shore up food security in the short term, while also implementing longer-term investments to raise productivity and stimulate growth and rural development in the long-run.

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 maximise production and economic and social gains. Many practical and political challenges remain in the programme design and implementation required to increase efficiency, control costs, and limit patronage and fraud.^[2]

[edit] Japan

Japan is best known for having agricultural subsidies put on its rice and wine industry, with the reasoning behind such moves being cultural.^{[citation needed]}

[edit] New Zealand

Until the neo-liberal reforms started in 1984 by the Fourth Labour Government, New Zealand farmers enjoyed a high level of subsidies and protectionism. After these reforms, New Zealand had the most open agricultural markets compared with anywhere else in the world.^[3]

[edit] United States

The U.S. Agricultural Department is required by law (various U.S. farm bills which are passed every few years) to subsidize over two dozen commodities. Between 1996 and 2002, an average of $16 billion/year was paid by programs authorized by various U.S. farm bills dating back to the Agricultural Adjustment Act of 1933, the Agricultural Act of 1949, and the Commodity Credit Corporation (created in 1933), among others.^{[citation needed]}

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.

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.^[4] 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).

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

Commodity	US Dollars (in Millions)	Percentage of Total
Feed Grains	2,841	35.4
Upland 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

Source USDA 2006 Fiscal Year Budget^[5]

[edit] Benefits

Some proponents of agricultural subsidies argue they are necessary because domestic crop yield can fluctuate considerably depending on the local weather. International crop supply and prices also vary depending on weather (e.g., drought in Australia), politics (e.g., farm seizures in Zimbabwe), war, and other factors that affect crop yields in foreign countries. As a result of these fluctuations in production levels and prices, there could be very large variations in farm revenues and food available for purchase on the global market. Price support and income guarantees can help to maintain a strong domestic farm sector and domestic food supply, by smoothing farmers' income over time and better ensure that farmers are not required to maintain a hefty float from year to year to maintain consistent income.

Farm subsidies have the effect of transferring income from the general tax payers to farm owners. It is argued in some countries that without support from government, domestic farmers would not be able to compete with foreign imports. Removing subsidies would therefore drive domestic farmers out of business, leaving the country with a much smaller (or possibly non existent) agriculture industry. A country that is unable to domestically produce enough food to feed its people is at the mercy of the world market, and is more vulnerable to trade pressure and global food shortages and price shocks. The loss of the domestic farming industry is also often seen as undesirable on a variety of grounds, including increases in (short term) unemployment, and the loss of a traditional cultural way of life.

Depending on the nature of the subsidies, agricultural subsidies may have the effect of increasing agricultural production and/or driving down domestic food prices. This means domestic producers and consumers would pay less for their food. Compared with wealthier individuals, poor people generally pay a smaller proportion of their income in taxes, and they generally spend a larger proportion of their income on food. Thus lower food prices, financed through tax revenues, will provide larger benefits for the poor than for the wealthy. In this respect, agriculture subsidies could be considered an indirect means of transferring wealth to lower income individuals.

[edit] Effect of subsidies on global food prices

Some believe that agricultural subsidies may lower food prices and cause domestic overproduction, and thus provide benefits for the poor. In the 1960s, 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]

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. Joseph Stiglitz, a Nobel laureate in economics, has argued that farm subsidies have a long term effect of raising global food prices, which in fact harms the poor, increases malnutrition, etc. [3] ,^[8]

[edit] Criticism

One criticism of subsidy comes from proponents of free market economics, stating that subsidies are against the principles of free trade. Prices are the signals by which farmers, and other entrepreneurs, find out what people want. Since profit is the difference between the value of your inputs and the value of your outputs, attempting to maximize profits will cause you to do that work which produces the greatest benefit to consumers at the least cost. Without the signals of profit and loss, the market has no way of suggesting that a farmer who has made poor decisions should change his behavior, or to reward those farmers who have made good decisions. Thus subsidized farmers may well produce the same worthless product every year, and dump it in the ocean, while turning a profit due to subsidies. Unsubsidized farmers who produce a worthless product will eventually have to choose between going out of business, or producing something that consumers demand.

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 does provide solutions, through insurance and the futures markets.

Critics of agricultural subsidies argue further that they promote poverty in developing countries by artificially driving down world crop prices.^[9] 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. 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.^[10]

Economists strongly rebuke the benefits of reduced retail prices derived from subsidizing 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. Even worse, subsidies are a deadweight loss to the welfare in the aggregate economy due to the misallocation of production spending caused by the price distortion in agricultural products. Also, in the hypothetical case that lower retail costs would outweigh the additional production costs, the manufacturers would simply lower their prices themselves until they are at a point of maximum profitability.

Others argue that the artificially low prices resulting from subsidies create incentives for mis-allocation of resources, such as replacing cane sugar with cheap corn syrup,^[11] and replacing grasses for grazing cattle with cheaper cattle corn.^[12] 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.^[13] 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.^[14] 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."^[15] 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. Although, in fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms.^[16]

Subsidies are often given in conjunction with strict laws reducing their benefit to farmers. For example, UK farmers have difficulty competing with Argentinian farmers, not only with higher labor costs, but with enforced meat traceability overheads from the same government.

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:

"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." ^[17][18]

[edit] See also

• Protectionism
• Free trade
• 2007 U.S. Farm Bill
• Agricultural policy
• Price support
• Food price crisis
• Farm Commodity Programs: A Short Primer, a Congressional Research Service Report for Congress, June 20, 2002.

[edit] References

[edit] External links

• Rethinking the Export-Import Bank by Aaron Lukas and Ian Vásquez
• 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 Barry on farm subsidies
• You Are What You Grow - Article on farm subsidies from The New York Times.
• Kick All Agricultural Subsidies (kickAAS) - a campaign run by The Guardian newspaper in the UK
• Ripe for Reform: Six Good Reasons to Reduce U.S. Farm Subsidies and Trade Barriers by Daniel Griswold, Stephen Slivinski, 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 Foundation arguing that farm subsidies are corporate welfare and do not benefit small family farms.
• Environmental Working Group's Farm Subsidy Database