Agricultural subsidy

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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 on international markets. 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.

1 Agricultural subsidies by region
2 Benefits
3 Criticism
4 See also
5 References
6 External links

[edit] Agricultural subsidies by region

[edit] European Union

Main article: Common Agricultural Policy

See also: Intervention storage

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[edit] Japan

Main article: Agriculture, forestry, and fishing in Japan

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

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[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.

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[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.^[1] 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 is 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^[2]

[edit] Benefits

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The majority of the arguments in favor of agricultural subsidies are based largely on social and cultural values. Farm subsidies have the effect of transferring income from the general tax payers to farm owners. There is a common perception in many countries that farmers are among the hard working poor, thus there is often public support for using tax dollars to supplement farmers' incomes. (In most developed countries however, the majority of farm owners are not poor, and many are quite wealthy. Also, in many cases farm subsidies benefit rich farmers at least as much, and sometimes significantly more than poor farmers.)

It is also 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. The loss of the domestic farming industry is 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. A country that is unable to domestically produce enough food to feed its people, may also be more vulnerable to trade pressure.

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 would pay less for their food. It can not be argued that this makes consumers in general better off, since it was their own taxes that paid for the subsidies in the first place (see below). However, it may benefit certain consumers in particular. 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 a (very indirect) means of transferring wealth to lower income individuals. As noted below though, the net effects on national income are likely to be negative, and this would not generally be considered an efficient way of transferring money to the poor.

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.^[3]^[4] In other cases though, export subsidies from developed countries can drive third world farmers out of business, or lower the prices they can receive for their crops, which will ultimately increase poverty in developing countries.

Some proponents of agricultural subsidies argue that they are necessary because of the fluctuating nature of the agricultural industry. Domestic crop yield can fluctuate considerably depending on the local weather. International crop prices also fluctuate considerably depending on weather 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 between years. Price support and income guarantees can help to smooth farmers' income over time and ensure that farmers are not required to maintain a hefty float from year to year in order to maintain a consistent income. Critics note, though, that there are other ways of smoothing income (such as insurance programs and the futures market) that do not rely on substantial government financial support.

[edit] Criticism

One criticism of subsidy comes from proponents advocating the economic theory of the free market, stating that subsidies are against the principles of free and fair trade. For example, poor store owners do not receive relief from the market and therefore neither should poor farmers. Furthermore, 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 (for example, insurance).

Critics of agricultural subsidies argue further that they promote poverty in developing countries by artificially driving down world crop prices.^[5] 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.^[6]

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 resources, such as replacing healthier cane sugar with cheap corn syrup,^[7] replacing grasses for grazing cattle with cheaper cattle corn,^[8] and using corn as automotive fuel instead of food.^[9]

In America, 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.^[10] 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.^[11] 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."^[12] 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 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.^[13]

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.