An Agricultural Subsidy Is A Governmental Subsidy Paid To Farmers

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.

European Union The European Union use agricultural subsidies to encourage self-sufficiency within itself. 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 should give you an idea of the reasons for the persistency of agricultural subsidies and the main arguments of both, proponents and opponents of those subsidies: Reasons for subsidies: - 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. Reasons against subsidies: - 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 does have negative effects on the environment causing extra external costs n(e.g. usage of pesticides, excessive usage of water,...).

Japan

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

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.[2]

[edit] United States See also: Agricultural policy of the 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, 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.[3] 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).

Benefits Some proponents of agricultural subsidies argue that they are necessary because of the fluctuating nature of agriculture. Domestic crop yield can fluctuate considerably depending on the local weather. International crop supply and prices also fluctuate considerably depending on weather (eg, drought in Australia), politics (eg farm seizures in Zimbabwe), war, and other factors affecting 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 in order to maintain a 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. Agricultural subsidies, resulting in lower food prices, and domestic overproduction, can also provide benefits for the poor in other ways. 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.[5][6]

[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. Another is the issue of fairness. Many manufacturers and retailers do not receive relief from the market and therefore neither should farmers. 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.[7] 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.[8] 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,[9] and replacing grasses for grazing cattle with cheaper cattle corn.[10] 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.[11] 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.[12] 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."[13] 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.[14] 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. Over $55 billion per year are expended on agricultural subsidies under the Farm Bill in the United States. These subsidies keep American farmers in business since their costs would otherwise be too high if forced to compete in undistorted markets.

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Background: Billions for the ag industry Debate: Support our farmers v. Unfair to the rest of the world Country Comparison: European countries Recent Legislation: 9 lawsuits up until 2002

Background 

The Farm Bill is renewed by the US congress every 5 years and extends $286 billion in crop-related subsidies to American farmers and agribusiness. Subsidies are given for the production of large commercial crops, primarily corn, cotton, rice, and wheat. The Farm Bill also includes around $44 billion in other subsidies for food

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assistance for farmers, land conservation in agricultural areas, money for rural communities, and more. The bill was first approved in 1996 as the Farm Bill, renewed in 2002 under the Farm Security and Rural Investment Act, and is up for renewal again at the end of the 2007 crop year..

Debate 

Opponents argue that farmers in countries whose governments cannot afford to subsidize agriculture are unable to enter these crucial markets because their products are more expensive than the subsidized products. Products that can enter US and EU markets are sold at lower prices to compete with subsidized American and European products. Affected countries tend to be some of the poorest countries in the world, such as the cotton belt in Western and Central Africa. In an address given at the 2003 WTO Doha development round, the President of the west African country of Burkina Faso reported that Mali received US$37 millions of dollars in development aid from the United States and Europe but lost US$43 million from lower export revenues as a result of trade-distorting subsidies in rich countries (Source: WTO). According to economic theory, taxpayers and consumers lose, as a tariffed market would result in higher food prices, and a subsidized market uses

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taxpayer's dollars. This results in overall inefficiency of resource allocation. Proponents sympathize with the struggling agriculture industry, which is often portrayed as small farmers but corporate farms enjoy most of the subsidies.

Country Comparison 

The European Union also engages in similar trade-distorting practices. The United States and Europe have been jointly criticized because agricultural subsidies are inconsistent with their own principles of free trade and the rules of the World Trade Organization (WTO). Subsidies keep the price of American and European agricultural products artificially low and tariffs are imposed on competing imports.

Recent Legislation 

American and European agricultural subsidies have been central issue at Doha trade round since it was established in 2001 for the purpose of lowering barriers between developed and emerging economies. In the June 2007 round, negotiations broke down over the issue of agriculture subsidies. The United States offered to cap subsidies at only US$22 billion, which was met an equally ungenerous offer for limited cuts on industrial

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tariffs from the Brazilian trade minister. Currently, the bill provides subsidies to corn ethanol and imposes tariffs on imports from Brazil that are less expensive and more environmentally sound. But demand for ethanol has increased the price of corn and land (which is raising the price of other grains). The rise in prices has prompted President Bush to attempt a cut in crop-related subsidies to $7 billion a year and sustain the $44 billion a year on other kinds of farmer assistance. He also hopes to increase conservation spending from $4.9 billion a year to $5.7 billion. The President wishes to divert some of this assistance to smaller farms, which is popular with many Democrats (Source: The

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Economist). On July 27th, passed the 2007 Farm Bill. The Senate is expected to begin deliberations on its version of the farm bill in September 2007.

Why Agricultural Subsidies Don't Mean Lower Food Prices

Do agricultural subsidies lower food prices? When I looked at this question last month, I dismissed it as a secondorder effect: they might, they might not, either way it's not going to be a big deal when compared to the enormous swings in food prices that we've seen of late. But Dean Baker is still bashing his drum, and now, after what I learned yesterday about rice in Japan, I'm

much less indulgent of this sort of thing: The truth is that the U.S. and European subsidies that cause the Post, the NYT, the World Bank and many NGOs to get apoplectic have the effect of lowering world food prices. That means that fewer people go hungry than would be the case without these subsidies. This isn't rocket science, it's almost definitional. The U.S. and European effectively pay their farmers to keep farming, thereby producing more food than otherwise would be produced. This may have negative consequences for farmers elsewhere in the world, but it does mean that supply is greater and prices are lower than they would be in the absence of the subsidies. Dean seems to live in some kind of frictionless econoworld where prices fall as supply rises. But the world of agricultural subsidies is anything but

frictionless: for one thing, it's dominated not by direct subsidies so much as by tariffs. And so you end up in a situation where Japan is sitting on 1.5 million tons of rice, which it's not allowed to sell at any price to, say, the Philippines, which is in desperate need of it. Instead, the rice will be allowed to rot to the point at which it's useful only for pig food. High rice prices aren't a function of low supply - rice production is at record highs. But the market is broken, thanks largely to the system of subsidies and tariffs which distorts incentives and prices around the world. As Paul Collier says, what's needed is much more large-scale agricultural production in developing countries. The model he uses is Brazil, which by no coincidence is a major agricultural exporter. In order for the supply of agricultural goods to rise substantially, we need much more in the way of

agricultural exports, especially from the developing world. And one way to get there is to increase the demand for agricultural imports from Europe, Japan, and the US. No one in Africa is going to bother trying to grow sugar for export to the US, not with the present subsidies and barriers in place. But if they came down - then we might see some large-scale agricultural investment in Africa. Of course, none of this would change food prices overnight. But if our goal is feeding the planet over the long term, then it would be a great idea to abolish agricultural subsidies and tariffs. Defending them on the grounds that they lower food prices is therefore counterproductive, and largely wrong. They might lower food prices in theory; in practice, I doubt they do. (Is this the same argument which I dismissed last month as being "all a bit

vague and hopeful"? Yes. The ricebubble paper changed my mind on this one, and moved me from the subsidiesare-irrelevant camp and into the subsidies-are-actively-harmful camp.)