Agricultural Subsidy - Budget Coupon

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, oilseeds such as soybeans, and meat products such as beef, pork, and lamb and mutton.

Agricultural subsidies by region

European Union

In 2010, the EU spent €57 billion on agricultural development, of which €39 billion was spent on direct subsidies. Agricultural and fisheries subsidies form over 40% of the EU budget. 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.

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.

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 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.

New Zealand

New Zealand is reputed to have the most open agricultural markets in the world after radical reforms started in 1984 by the Fourth Labour Government stopped all subsidies.

In 1984 New Zealand's Labor government took the dramatic step of ending all farm subsidies, which then consisted of 30 separate production payments and export incentives. This was a truly striking policy action, because New Zealand's economy is roughly five times more dependent on farming than is the U.S. economy, measured by either output or employment. Subsidies in New Zealand accounted for more than 30 percent of the value of production before reform, somewhat higher than U.S. subsidies today. And New Zealand farming was marred by the same problems caused by U.S. subsidies, including overproduction, environmental degradation and inflated land prices.

As the country is a large agricultural exporter, continued subsidies by other countries are a long-standing bone of contention, with New Zealand being a founding member of the 20-member Cairns Group fighting to improve market access for exported agricultural goods.

United States

The United States currently pays around $20 billion per year to farmers in direct subsidies as "farm income stabilization" via 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 US population residing on small farms. In 2006, the top 3 states receiving subsidies were Texas (10.4%), Iowa (9.0%), and Illinois (7.6%). United States Department of Agriculture (USDA) subsidies from farms in Iowa totaled $1,212,000,000 in 2006. From 2003 to 2005, the top 1% of beneficiaries received 17% of subsidy payments. In Texas, 72% of farms do not receive government subsidies. Of the close to USD$1.4 billion in subsidy payments to farms in Texas, roughly 18% of the farms receive a portion of the payments.

The Environmental Working Group states:

The 1996 Freedom to Farm Act envisioned a move away from subsidized farming and into a free-market system. As a transition, the 1996 farm bill established a direct payment program to wean farmers off the government dole. Payments are based on a formula involving the historic production on a given plot of land in 1986. This set payment went to the current landowner or farm operator every year. The program has been maintained beyond its intended lifetime and became a federal entitlement program for farmers that cost the government about $5 billion per year.

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.

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 2002â€"03 and 3.92 from 2004â€"2007. That is, if the price of wheat in 2002 was $3.80, farmers would get an extra 58¢ per bushel (52¢ plus the 6¢ 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 benefitted 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. However, the federal ethanol subsidy expired December 31, 2011. (US corn-ethanol producers were shielded from competition from cheaper Brazilian sugarcane-ethanol by a 54-cent-per-gallon tariff; however, that tariff also expired December 31, 2011.)

Asia

Farm subsidies in Asia remain a point of contention in global trade talks.

In 2009, Japan paid USD$46.5 billion in subsidies to its farmers, and continued state support of farmers in Japan remains a controversial topic.

South Korea has made attempts to reform its agricultural sector, despite resistance from vested interests.

Impact of subsidies

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.

Global food prices and international trade

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, 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. Generally, developing countries have a comparative advantage in producing agricultural goods, 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 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 c osts 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.

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 Programme, 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.

Poverty in developing countries

The impact of agricultural subsidies in developed countries upon developing-country farmers and international development is well documented. Agricultural subsidies can help drive prices down to benefit consumers, but also mean that unsubsidised developing-country farmers have a more difficult time competing in the world market; 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. The IFPRI has estimated in 2003 that the impact of subsidies costs developing countries $24 billion in lost incomes going to agricultural and agro-industrial production; and more than $40Bn is displaced from net agricultural exports. 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. The total amount of subsidies that go towards agriculture in OECD countries far exceeds the amount that countries provide in development aid. In the case of Africa, it is estimated that a 1% increase in its total agricultural exports could lift its GDP by $70 billion, nearly five times what the region is provided in total foreign aid.

Haiti and US rice imports

Haiti is an excellent example of a developing country negatively affected by agricultural subsidies in the developed world. Haiti is a nation with the capacity to produce rice and was at one time self-sufficient in meeting its own needs. At present, Haiti does not produce enough to feed its people; 60 percent of the food consumed in the country is imported. Following advice to liberalize its economy by lowering tariffs, domestically produced rice was displaced by cheaper subsidised rice from the United States. The Food and Agriculture Organization describes this liberalization process as being the removal of barriers to trade and a simplification of tariffs, which lowers costs to consumers and promotes efficiency among producers.

Opening up Haiti's economy granted consumers access to food at a lower cost; allowing foreign producers to compete for the Haitian market drove down the price of rice. However, for Haitian rice farmers without access to subsidies, the downward pressure on prices led to a decline in profits. Subsidies received by American rice farmers, plus increased efficiencies, made it impossible for their Haitian counterparts to compete. According to Oxfam and the International Monetary Fund, tariffs on imports fell from 50 percent to three percent in 1995 and the nation is currently importing 80 percent of the rice it consumes.

The United States Department of Agriculture notes that since 1980, rice production in Haiti has been largely unchanged, while consumption on the other hand, is roughly eight times what it was in that same year. Haiti is among the top three consumers of long grain milled rice produced in the United States.

As rice farmers struggled to compete, many migrated from rural to urban areas in search of alternative economic opportunities.

Impact on nutrition

One peer-reviewed research suggests that any effects of US farm policies on US obesity patterns must have been negligible. However, some critics argue that the artificially low prices resulting from subsidies create unhealthy incentives for consumers. For example, in the USA, cane sugar was replaced with cheap corn syrup, making high-sugar food cheaper; beet and cane sugar are subject to subsidies, price controls, and import tariffs that distort the prices of these products as well.

The lower price of energy-dense foods such as grains and sugars could be one reason why low-income people and food insecure people in industrialized countries are more vulnerable to being overweight and obese. According to the Physicians Committee for Responsible Medicine, meat and dairy production receive 63% of subsidies in the United States, as well as sugar subsidies for unhealthy foods, which contribute to heart disease, obesity and diabetes, with enormous costs for the health sector.

Market distortions due to subsidies have led to an increase in corn fed cattle rather than grass fed. Corn fed cattle require more antibiotics and their beef has a higher fat content.

Cross-border movement of businesses

Tariffs on sugar have also caused large candy makers in the USA to relocate to Canada and Mexico, where sugar is often half to a third the price. The Dominican Republic Central America Free Trade Agreement (CAFTA), though, does not seen to be very impact in this area but known to not amounting to much. The sugar issue causing alarm had reasoning due to what plausible effects could come through the tariffs as well as the undetermined future of these types of negotiations considering sugar importation in the United States. Due to various continuing disputes in trade, Mexico began to have fewer exports of sugar into the United States, where the North American Free Trade Agreement (NAFTA) allowed. Those who left and sought out other companies for sugar have leaned marginally more towards Canada than Mexico. The tariffs are what keeps the large pressure from competition from south of the Rio Grande at bay.

Non-farming companies

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.

Public economics implications

Government intervention, through agricultural subsidies, interferes with the price mechanism which would normally determine commodity prices, often creating crop overproduction and market discrimination. Subsidies are also an inefficient use of taxpayer’s money. For instance, in 2006, the Department of Agriculture estimated that the average farm household income was $77,654 or about 17% higher than the average US household income. From a public economics perspective, subsidies of any kind work to create a socially and politically acceptable equilibrium that is not necessarily Pareto efficient.

Environmental implications

The monoculture system associated with subsidized large-scale production has been implicated as a contributory factor in Colony Collapse Disorder which has affected bee populations. Bee pollination is an essential ecosystem service essential for the production of many varieties of fruits and vegetables. Subsidies often go towards subsidising meat production which has other nutritional and environmental implications; and it has been found that out of the $200Bn subsidies to subsidise crops from 1995â€"2010 around two thirds of this went to animal feed, tobacco and cotton production. On the other hand, farmers producing fruits and vegetables received no direct subsidies. The environmental impact of meat production is high due to the resource and energy requirements that go into production of feed for livestock throughout their lifespan, for example, a kilogram of beef uses about 60 times as much water as an equivalent amount of potato. The subsidies contribute to meat consumption by allowing for an artificially low cost of meat products.

Alternatives

Neoliberals argue that the current subsidies distort incentives 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. Ending direct payments to farmers and deregulating the farm industry would eliminate inefficiencies and deadweight loss created by government intervention.

However, others disagree, arguing that a more radical transformation of agriculture is needed, one guided by the notion that ecological change in agriculture cannot be promoted without comparable changes in the social, political, cultural and economic arenas that conform and determine agriculture. The organized peasant and indigenous based agrarian movements, e.g. Via Campesina, consider that only by changing the export-led, free-trade based, industrial agriculture model of large farms can what they call the downward spiral of poverty, low wages, rural-urban migration, hunger and environmental degradation be halted.