The Illogic of Farm Subsidies, and Other Agricultural Truths

Last week we solicited your questions for agricultural economist Daniel Sumner. You responded with terrific questions, including some that sounded a bit like riddles:

“How much would a gallon of milk cost tomorrow, in Chicago, if the dairy subsidies were eliminated today?”

Sumner has answers for questions about organic produce, biofuels, the logic of locavores, whether the U.S.’s attachment to cotton is emotional or financial, and how to talk to farmers about the economics of agriculture: “I do not start by challenging their passions, but I am pretty forthcoming about what most economic analysis finds about farm subsidies.”

His answer to whether there’s a good argument to be made for farm subsidies:

“No.”

I learned more from reading this Q&A than I have from all the miscellaneous reading I’ve done on these topics in perhaps a year, maybe more. Thanks to Sumner for his answers and to you for the questions.

Q: Is there any evidence to support the claim that agricultural subsidies contribute to obesity?

A: The short answer is no. There are lots of reasons for dissatisfaction with farm subsidies, obesity is not one of them.

The reasoning is that, although farm subsidies programs have made the price of corn and soybeans slightly cheaper for buyers in the U.S., the accompanying trade policies have raised the prices of sugar and dairy products. Furthermore, farm costs comprise such a small fraction of the retail price, the small farm price effects have tiny retail price impacts. Finally, in rich countries such as the U.S., buyers respond little to any food price declines or increases.

We might also note that Australia, which has no farm subsidies, just passed the U.S. as the fattest nation.

We published a popular piece on this here (Volume 11, Number 2, December 2007). There are also a few academic papers that come to the same result. The popular press and some literature in nutrition say the opposite, but I have never seen any careful analysis or evidence that explained the result.

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 have farm programs because we have had them for 75 years and people are afraid of even thinking about a world without subsidies.

Q:

1. I am suspicious that many food manufacturers call things “organic” only to pocket a price premium for their products. Where do the risks justify the cost of organic, antibiotic-free, etc. products?

2. I have heard that many “green” classifications are set by industry groups with the result that the bar is extremely low. How do different product standards rate?

3. I want to decide whether to buy an apple from New Zealand or the local farmer. The apple from New Zealand is cheaper; isn’t the price mechanism telling me that this apple has used less resources and is better for the planet?

A: Organic has a specific legal meaning in the U.S. and to use the word other than in accordance with the regulations is costly in fines and loss of reputation.

Other suppliers are the most likely watchdogs to keep their competitors in line. That does not mean fraud does not occur. Organic production is typically much more expensive and the products consequently sell for more. That certainly creates an incentive to cheat.

I have a friend who refers to “Texas organic,” which means farmers only spray pesticides at night.

We also hear stories of dairy farms that have an organic herd and a conventional side-by-side. Given that the price for organic milk is 50 percent higher, it should not be a surprise that the organic milk tank fills up much faster than the conventional tank (especially when we recognize there is no way to tell the two products apart).

Organic eggs cost far more than conventional eggs and even far more than eggs also grown in non-cage housing, because organic feed is far more expensive and the organic hens are much more prone to disease and death. As with most other organic products, most of the organic eggs are produced on farms that may have tens of thousands of organic hens and a million or more hens in conventional cage housing. I have no particular expertise about any health or environmental benefits of organic products.

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.

These are not all independent. For example, 1 and 10 may be hard to separate. The oil price shock may have expanded demand for biofuels given the policies, and without the policies an oil shock would not translate into a corn market shock.

Q: Right now a minority get some portion of their food from “local” sources (food that is purchased by the consumer directly from the producer). I’m guessing a fairly small but growing fraction of total food consumption is local. How feasible is it that the majority of U.S. food consumption be shifted to a local mode, how long would it take, and would it necessarily be a good thing?

A: I love to go out and buy strawberries from the little two-acre field a couple of miles from my house. Some days by the time I get there he has sold out of his daily harvest from that field and he will try to sell me the bigger prettier ones from his “other field.” But one taste is enough to make me wait for a day. The season here lasts until June when it starts getting too hot for strawberries, but I am a real glutton during those couple of months. We also get our lemons from the tree in our backyard and we store them on the tree to harvest about 7 months out of the year.

Because of where we live, many of the fruits and vegetables are from within 100 miles or so and most of the eggs, dairy products, tree nuts, and rice are also “local.” The same applies for staples such as wine, but not for bread. Farmers nearby grow plenty of wheat for my consumption, but California as a whole is a large net importer of wheat and it would not make much sense to plow under the grape vines to plant more wheat to go with the local wine. It would use far more resources and be far more expensive to attempt to grow rice or wine grapes in Minnesota. In food, especially, comparative advantage is tied to endowments of natural resources.

Local means the local season and most of us choose to eat grapes in May and strawberries in October no matter what the local season is. Most of us also enjoy variety of diet and the luxury of consuming from the global buffet. I am not about to say that such consumers are morally deficient.

It is also far from clear that local production is more conserving of energy, has a smaller greenhouse gas footprint, or is otherwise nicer to the environment.

Consider the energy it would take to grow lettuce in greenhouses compared to in the fields of Monterey County. It turns out shipping long distances is cheap in many ways compared to fighting natural comparative advantage to grow crops in inhospitable environments.

If wealthy consumers demand more local production they will get it. Rich folks in New York or San Francisco can hire personal gardeners to grow things for them in the backyard or on the roof tops as noted in recent NYT articles. But given the huge costs of such practices, that is unlikely to be a significant share of the food consumption for normal people.

Q: If the U.S. were to do away with all agriculture subsidies (in a similar manner as New Zealand), do you think that we would be better off in the long run?

A: U.S. farm subsidies tend to kick in with the big government payouts when prices are low. Big subsidies last flowed in 2005 (in the range of $20 billion in government program crop payments). Much of this money goes to farm landlords and farm operators with some going to suppliers of other inputs or buyers who get lower prices for grains and cotton.

Clearly the U.S. economy is a loser from farm subsidies and most of U.S. agriculture (hay, fruits, tree nuts, livestock, vegetables) also gets nothing much from the programs. It is also plausible that some of the taxpayer money saved from the farm subsidies would be redirected to public goods such as agricultural R&D, environmental conservation, nutrition education, and other food and agricultural activities that have at least some claim to public support.

For more on these topics I suggest readers check out a set of papers we did for the American Enterprise Institute. There are short readable papers on why the U.S. has farm programs and what effects they have. There are also longer, more technical versions available that have more details. Besides my own papers I suggest you may want to check out the papers by Bruce Gardner and Julian Alston. The URL for the short versions is here. Details found here.

Q: By how much should agricultural subsidies in the U.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.

Sugar is a special case. U.S. import barriers have a large effect. John Beghin has considered sugar policy in his paper for our AEI project found here.

These papers also consider environmental impacts of farm subsidies. Overall, the next environmental impacts are quite modest because of the modifications to the programs from 1985 through 1996.

Q: Do you have a personal garden at home? If so, what are your major crops and why?

A: We have lemons, plums, peaches, nectarines, oranges, and apricots in the backyard. We used to grow tomatoes, but the local tomatoes here are quite tasty and available during the same months when our backyard tomatoes are producing. Also, any friends and neighbors are happy to share their crops during the peak seasons.

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: If there were some additional background information as to how the animal was treated, where it came from, what it ate, etc., do you think this would change consumers’ buying habits (which would, in turn, alter the industrial farming system)? Is the disjoint between the notion of “meat” and “animal” that we, as a nation of meat-eaters, have willfully cultivated in the mind of consumers beneficial for anyone other than the major food producers?

A: I have a friend who has been in the business of selling identity-preserved beef for many years. His ranch has a self contained genetic stock and he has his own slaughter house. Of course, the beef is very expensive and only the rich are willing to pay the very much higher costs of these practices. But the point is, if very many consumers actually wanted more information to the point they were willing to pay for it, there are farms and marketers ready and willing to provide the service.

On a related point, Sebastien Pouliot is presenting a paper next week at the annual meeting of the agricultural economists in which he explores the very interesting case of cattle traceability in Quebec. The bottom line of his careful statistical work is that there is no evidence that buyers have been willing to pay any premium for cattle that can be traced all the way back to the farm of birth. Furthermore, the slaughter house in Quebec that dealt in the traceable steers could not compete successfully and the traceable Quebec steers are now all slaughtered in Ontario and commingled with Ontario cattle without the traceability characteristic.

Q: What are your thoughts on passing a mandate for gardens in the United States? Do you think having each person who owns a house in this country grow a garden could be feasible?

A: Do you really think “we” were ever willing to accept the backyard inspectors that would come around and check that I planted the government approved crops? Hard to picture John Adams or Ben Franklin happy about opening up their homes to the Crown or the Feds.

Mao tried to enforce backyard steel mills during the great leap forward, with pretty dismal results. Mandates would not work; how about subsidies? I remember when my clever tax-lawyer brother got Jimmy Carter (meaning some poor taxpayer somewhere) to pay for the plastic cover that kept the leaves out of his swimming pool. All he had to do was claim it provided a solar heating benefit.

Maybe we can get rid of farm subsidies sometime in the next decade or two. Please do not suggest instead we should expand the mandate or subsidy programs to every suburb in America.

Q: Does the U.S. government have policies (tariffs, etc.) in place that make processed sugar from corn a more economical choice than cane sugar for food producers? If so, could changing these policies provide incentives for food producers to use cane sugar instead of processed sugar?

A: The U.S. has big tariffs on imported sugar. Those tariffs keep out imports, keep the price here high, and provided the incentives for the use of high fructose corn sweetener (always referred to as HFCS) in soft drinks and processed foods. If we now got rid of the tariff we would shift to the use of more sugar and less HFCS. The shift in technology back to sugar would not be immediate however. John Beghin explores this question in detail here.

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.”

Q: Does the increasing demand for organic and free-range food in developed nations contribute to hunger in the developing world by reducing the worldwide supply of lower priced food? Is some level of “factory farming” necessary to feed the world’s ever expanding population?

A: The evidence is clear that organic production costs more and often a lot more. The spread of large dairy operations follows the spread of large beef feedlots and confinement hog operations.

The rich can pay more and have their food produced however they wish, even in their own backyards. Most people are not willing to pay for that.

For cost of production estimates, including for organic production, I refer you to the work of my colleague Karen Klonsky.

For some estimates of costs of eggs under alternative housing systems, I refer you to our new report about eggs produced by hens in cages compared to those raise in non-cage housing, which is the subject of a ballot initiative here in California.

Our study investigate the economic impacts of regulations that would ban the California production of eggs by chickens kept in conventional cage housing. The bottom-line impact would be elimination of the California industry with eggs produced here replaced in the market by eggs produced in cages in Iowa, Minnesota, and other states that already ship in about half of California’s consumption. Consumers in California probably would not notice any difference. The initiative would not affect how chickens would be housed, only where they would be housed — in Iowa rather than in California.

Q: From the little I read, it’s accepted as gospel in the locavore community that a locally sourced diet has a smaller carbon footprint than the typical mainstream American diet. This always struck me as odd. More recently I’ve noticed some articles that support my skepticism. One claimed that only 4 percent of our food’s greenhouse gas emissions are due to transportation. The other claimed that New Zealand lamb was vastly more energy efficient than domestic. The energy expended in the transportation was swamped by the efficiencies of the New Zealand lamb industry, which presumably enjoys an environment more suitable to raising lamb. Are there more general studies which confirm this or have I been brainwashed by Big Lamb?

Besides carbon footprint, are there other metrics that give any insight into the question of the relative sustainability of various methods of agricultural production?

A: I think you have it about right. “Sustainability” is complex and even the much more simple calculation of the greenhouse gas implications of some production path is not obvious without tracing through the full set of implications. Lamb in New Zealand is mostly grass fed on pastures that have lots of rainfall. Lambs in the U.S. tend to fattened on grain and alfalfa, often from irrigated fields.

The piece in Science last February by Tim Searchinger and others certainly challenged the claim that corn-based ethanol had a pretty big carbon footprint. That article simply pointed out if you use more corn for ethanol, people are still going to eat, so land will be drawn into agriculture that is not now under cultivation. It turns out that land use effect has huge greenhouse gas implications and reversed earlier assessments.

Q: In the western part of Kansas, agricultural subsidy and trade issues are deeply emotional; whole communities feel passionately that any change in our farm policies could quickly leave their towns impoverished. Is there any way you’ve found to open discussion about economic theory with folks who work in small farming communities? Is there any way to get past the intense fear and anger these issues provoke?

A: I talk to farmers all the time and find the exchanges really valuable. My experience is that farmers are smart, articulate, and very interested in an open exchange of ideas. I do not start by challenging their passions, but I am pretty forthcoming about what most economic analysis finds about farm subsidies. My experience is that most farmers do not disagree with the analysis, but that does not mean they volunteer to give up their subsidies.

Q: Do you have any advice for college students who want to be Agricultural Economists? Would a Ph.D. in an economics department or in agricultural and resource economics be a better program?

A: First, go to a graduate program that you will enjoy. Economics is wonderful fun for purely intellectual reasons and because it helps you understand the world. Second, make sure you get solid grounding in the tools of theory and statistical analysis. Third, go to a graduate program that encourages you to think about applying economic theory and statistical tools to real issues. If you can find a program that meets those characteristics you are set. Among economics programs, I may be biased towards Chicago, but there may be one or two other decent places to learn some useful economics.

Q: I grew up on a family dairy farm. Does government price fixing help or hinder small farmers?

A: The dairy programs have some small built-in features to help small dairy farms, but they have not been able to stem the tide of consolidation. If a farmer spends his days milking his 50 cows, he earns, at most, what a cow milker gets paid — say $10 per hour. To make a middle class living in the dairy industry, a farmer needs to pay milkers to do that job while he spends more of his time being a manager. That means a farm big enough to make better management pay.

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: Many things have been suggested about the current cattle and chicken industry regarding the treatment of animals. However, most of the industries’ policies surround efficiency, profit, and bringing extremely cheap meat to the American dinner table. If large farming complexes were to use more traditional grazing/butchering techniques how dramatically would this affect the price? How would this affect the environment?

A: We recently looked in some detail at the egg industry. Large scale farms seem to have much lower costs and the cage housing allows eggs to be produced much more cheaply.

The report is posted here.

I suspect the story is similar for other industries. Certainly larger farms which provide more scale economies and more scope for talented farmers seem to be expanding relative to smaller farms. There remain lots of small part time farms that are run by people retired from other jobs or who farm on nights and weekends, but those farms produce a small share of the total. The USDA’s economic research service has dozens of reports with these data.

Q: How much would a gallon of milk cost tomorrow, in Chicago, if the dairy subsidies were eliminated today?

A: These days the trade barriers that raise the overall price of dairy products are no longer binding. The government does run a pricing scheme that inflates the price of drinking milk (and reduced the price of cheese and other processed products). The net effect on a gallon of milk at retail in the Chicago market is probably in the range of 20 cents or so. Joe Balagtas has looked at that question and one place to see some of his work is here.

Q: Are sugar beets a better alternative for ethanol production?

A: The general consensus is that sugar cane in Brazil makes a good cheap feedstock for ethanol, but beets make no sense at all even relative to corn. That is doubly true in the U.S. where sugar is expensive because of our trade barrier.

Q: Why is there such a deep emotional attachment to growing cotton in the U.S.? Given the historical connection with slavery, I would have thought there would be no appetite to prop up an uneconomic industry.

A: The attachment is financial, not emotional. Cotton is a significant crop economically and politically in a few places and the cotton lobby has been very successful in explaining their case (and providing election assistance) to members of Congress.