United Liberty
How Agriculture Subsidies Distort Food Prices
Sat, 12/06/2008 - 2:02am | posted by Charles Kennedy
Note: This is a revision of a previous article that was entitled “Falling Prices: Why is Food Not Part of This Trend?”. The author has made the revisions to reflect the fact that crop commodities are in fact deflating, while maintaining that agriculture subsidies did in fact play a role in pushing the prices artificially high, prior to the current correction.
Lew Rockwell posted an excellent article (“The Force Is With Us”) on the downward trend in prices we are seeing in some sectors of the economy, and why this is a good and absolutely necessary thing to be happening. As we all know, the powers-that-be at the Federal Reserve, in the federal government, and on Wall Street are trying their best to make sure that prices do not come down. In seeing falling prices as one of the big problems of “the economy”, they fail to understand that housing prices (for example) must be allowed to fall to market levels so that more people can afford to buy houses at mortgages they can afford, and so that the huge surplus of housing that won’t sell at previous prices will be able to sell. In other words, take the shackles off of the free market and allow natural forces to bring prices where they should be.
At the moment, it appears that some relief from high food prices may be on the way, as crop commodity prices are deflating (see http://www.larouchepac.com/news/2008/10/06/world-commodity-prices-deflate-u-s-farmbelt-faces-below-brea.html). It seems likely, however, given the attitude described above and the fear that appears to be rippling through the agriculture world, that the prices will not be allowed to fall for very long, as there will be much pressure upon Congress to enact more subsidies, price supports, quotas, and other forms of intervention in an attempt to “rescue” the situation, much as was done with Franklin Delano Roosevelt’s New Deal. What we are really seeing, however, is a very necessary correction from the distortions to the food markets caused by agriculture subsidies.
These programs, which were a huge part of the New Deal, and have remained a pillar of U.S. agriculture policy, have been responsible to a large degree for pushing crop commodity prices high, resulting in higher food prices for consumers. The basic strategy of the New Deal was to “prop up” the prices of agricultural goods (in other words, making them artificially high), so that farmers would be “helped” by more money from the higher prices. (Never mind that people who had very little money to spend couldn’t afford food at the artificially high prices, having instead to subsist on as little as one meal a day, with farmers meanwhile getting no income from food that wouldn’t sell). Prices supports, quotas, and subsidies for non-production (setting aside or “idling” land) aimed to make crops more scarce at a time when more food was needed at lower prices. Of the last example, the late Senator Barry Goldwater once said, “I cannot conceive of a more absurd and self-defeating policy than one which subsidizes non-production.” He was absolutely right. It is worth pointing out that most farm subsidies these days go to large, corporate operations that have come to be known as “agri-business”, as opposed to the “family farm”.
Agriculture subsidies have also had the effect of placing American farmers of certain crop commodities at an artificial disadvantage to those of other commodities, as well as to farmers of the same in other countries. For example, the sugar subsidy program, with its upward pressure on sugar prices, led the U.S. food industry to rely more heavily on corn, substituting corn syrup for sugar cane syrup, which, for example, was originally found in recipes for famous cola beverages (such as coca-cola). At the same time, imported sugar is cheaper that American-grown sugar, for the same reasons, posing a further disadvantage to U.S. sugar farmers. An interesting article (http://www.newyorker.com/archive/2006/11/27/061127ta_talk_surowiecki) in The New Yorker from about two years ago discusses in detail the role the sugar subsidy program has played in keeping U.S. sugar prices much higher (almost double, as of 2006) than those of imported sugar.
Meanwhile, the corn ethanol subsidy program, which is one of the greatest scams foisted on the American people in the name of “environmentalism”, pushed the prices of corn products used in food (again, corn syrup among them) higher, and further impacted the world markets by pushing prices of wheat higher by making wheat more scarce, because the land that could be used to grow wheat is being used instead for corn. Corn is actually harmful to land when grown for too many seasons without relief. Farmers who are not under the tempting pressures of such subsidies would instead rotate their lands seasonally for different kinds of crops, including giving the land a rest from farming when necessary. It is also known that more carbon-based fuels are consumed in the production of corn-based ethanol than would be the case without the program. It’s no wonder that more perceptive environmentalists have come to oppose not only the corn ethanol program, but also farm subsidies in general. Farm subsidies are yet another example of government intervention that is harmful to the environment and to conservation.
The existing policies of agriculture subsides make no sense whatsoever. It’s arrogant of those in government to think that they have the wisdom and the intelligence to determine, via subsidies, quotas and price supports, how much farmers ought to be growing and what the prices ought to be, and whether they should rise or fall. These are decisions that can only be properly made by the complex decisions of millions of consumers charged with feeding themselves and their families, in concert with the decisions made by farmers on how best to provide for those needs in an economical fashion. It’s time to end agriculture subsidies, once and for all, and to allow the forces of the free market to set prices and production levels for our nutritional needs. Only then can the prices be allowed to adjust to a level that more people can afford, especially in the difficult times which lie ahead. And perhaps then we can see the demise of the undue influence of the agriculture-industrial complex (“agri-business”) in its never-ending quest for corporate subsidies, and the simultaneous “rise from the ashes” of the nearly extinct family farm. And perhaps small farming operations, such as those specializing in organic farming methods, will be better able to compete without the unfair advantages of corporate farm subsidies.
Hey I decided to digg this article— If anyone has digg:
http://digg.com/business_finance/Falling_Prices_Why_is_Food_Not_Part_of_…
I am from middle America, but the urban centers (and coasts) who only consume and do not produce food should not have to pay to prop up the prices for some corporate farms in Iowa.
Kerri, you are absolutely right. Thanks for “digging”!
http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/ “The Consumer Price Index (CPI) for all food has been rising at an accelerated rate in 2007 and 2008, a trend that is expected to continue into the first half of 2009. Higher commodity and energy costs are responsible for higher retail prices. The main factors behind higher food commodity costs include stronger global demand for food, increased U.S. agricultural exports resulting from stronger demand and a weaker dollar, weather-related production problems in some areas of the world, and the increased use of some food commodities, such as corn, for bioenergy uses
http://www.time.com/time/world/article/0,8599,1717572,00.html “The push to produce biofuels as an alternative to hydrocarbons is further straining food supplies, especially in the U.S., where generous subsidies for ethanol have lured thousands of farmers away from growing crops for food.”
http://www.boston.com/business/personalfinance/articles/2008/03/09/surging_costs_of_groceries_hit_home/”American families, already pinched by soaring energy costs, are taking another big hit to household budgets as food prices increase at the fastest rate since 1990. After nearly two decades of low food inflation, prices for staples such as bread, milk, eggs, and flour are rising sharply, surging in the past year at double-digit rates, according to the Labor Department. Milk prices, for example, increased 26 percent over the year. Egg prices jumped 40 percent.”
http://www.usnews.com/articles/news/2008/03/07/the-growing-food-cost-cri… “The United States, like most western countries, has been spared from riots, but the sharp hikes in food prices that have triggered violence abroad are also being felt here. According to the Department of Agriculture, grocery prices are rising at rates not seen since 1990. On the wholesale market, the country’s biggest commodity crops—corn, wheat, and soybeans—are selling at record highs; wheat prices are up nearly 50 percent since the first of the year.”
Thanks, Shana, for the information above, all of which point to the numerous factors causing rising food prices. Of course, what I did not discuss, as it was my intent to focus on the role farm subsidies play in distorting the market, is the falling value of the dollar. This is, probably more than anything else, a reflection of the reality of the dollar crisis. Ending farm subsidies would, I believe, help provide some relief from the distortions in the market and perhaps allow prices to fall a bit. However, as long as we allow the Federal Reserve to continue inflating the currency, food prices will continue to rise, as well all other prices, in varying degrees.
Great article, Charles. You correctly point to the total absurdity of farm subsidies as the leading cause of higher food prices, as well as food shortages worldwide. America used to be the “breadbasket of the world”. Now we are a net IMPORTER of food! WHAT HAPPENED? Government meddling in the marketplace, that’s what. This is as good an argument as I can think of for the necessity of maintaining free markets.
Here are a couple of articles about how ending farm subsidies in New Zealand helped consumers and farmers:
Farming without subsidies in New Zealand
http://www.newfarm.org/features/0303/newzealand_subsidies.shtml
Surviving Without Subsidies: How New Zealand Milk Farmers Got Off the Government Teat
http://www.nytimes.com/2007/08/02/business/worldbusiness/02farm.html?ex=…
Subsidies aren’t what’s causing our food prices to go up. It is possible that they may have had a role in the initial increase, but they aren’t the reason they’re staying high.
http://www.thattalldude.com/main/2008/12/8-months-later-food-prices-stil…
Thank you for your response and for directing me to what I believe is your blog responding to this article. I should point out first, that I said “part of the answer” is to be found in agriculture subsidies, my decision being to focus on just one aspect of the equation. This is really a very complex issue, and there are many other factors that cause food prices to be high. In your blog you point to many examples, the high cost of which can be ultimately traced to many other distortions caused by various forms of intervention in the markets by government. Ultimately, though, the biggest factor in pushing prices higher is that we are in the midst of a dollar crisis. Trillions (I’ve lost count!) of dollars have been “pumped’ into the economy by the Federal Reserve over the past few months amidst all the various “rescues” and bailouts, which means they have created money that never existed before for which nothing of value was produced. As more of the money has come into circulation, with nothing of value attached to the money the value of the dollar has been diluted, leading to price increases. These price increases never happen equally, but always affect various portions of the markets at different times.
We should end agriculture subsidies, because they are morally wrong (legal plunder) and because they distort the market. But we need to end all other kinds of subsidies, corporate welfare and bailouts (also legal plunder)\ and start living within our means, and we need to end the Federal Reserve System and return to sound money, which means commodity-based money backed by gold or silver, as required by the Constitution. If we had been following the Consitution in all these areas, the situation would be a whole lot different than what we see today. Getting back to these sound principles will not be easy, but the sooner we do it, the easier it will be. Otherwise, the whole system will eventually come crashing down with hyperinflation and the collapse of the monetary system.
I agree and disagree — let me explain.
Firstly — have you been following farm commodity prices lately? Grain prices are 2/3rds to 1/2 the price they were when they peaked. Food prices, however, remain at a high level. But have you ever bothered to calculate the amount the farmer gets from the grain that goes into a loaf of bread? Where I live you can spend $2 to $3 for a loaf of bread where the wheat in that loaf is worth 10-30c (read: that’s what the farmer gets). Most people in USA and Canada aren’t actually impacted by the higher price of farm commodities — because they aren’t buying in that market. When was the last time you bought a bushel of wheat? or a bushel of corn?
You buy from a grocery store, and the grocery store buys from a supplier, and the supplier gets their stuff from various companies, and the various companies take raw wheat, add a ton of capital investment and operating expenses and create a product which is very different. Grocery stores have been quite opportunistic at raising prices and blaming grain prices (which are usually are negligible). The real people who lose are those in developing nations who do buy at a link closer to the producer, who make substantially less money, and have come to depend on very cheap grain.
But to continue: here commodity prices dropped during harvest time (before we had a chance to sell). There are a lot of farmers who have very high costs for inputs (fertilizer, seed, etc) who risked $300,000 to grow a crop which they must now sell for $250,000 — that’s right for a loss. I am in this very situation — I will actually end up paying money for the privilege of producing food. This does not even take into account the time I spent working — 80hrs a week for 6 months, now at zero pay.
Now — about subsidies and quotes: I agree they are evil. Subsidies and minimum prices distort market feedback about demand — think about it — the price I get for my wheat tells me whether or not I should grow wheat next year. If the price is low (indicating excessive supply or lax demand) I should grow less of it next year, if the price is high (indicating short supply or high demand) that tells me I should grow more next year.
And what about minimum prices coupled with quotas? well the two cancel out. A quota means I must sell less of what I may have grown. So in the end I might get a higher minimum price at the cost of selling less product.
Subsidies prevent the market from reorganizing to reflect the needs of the consumer.
I will tell you that farming is very boom and bust. Some years you make a lot (much of this is taken in income taxes so you can’t save it for the bad years) but most years you make very little, and sometimes nothing (or in some cases you end up owing money). The last two years were rather profitable — but the second year fertilizer and input costs doubled taking away most of that profit (and increasing the risk).
I don’t like high food prices any more than the next guy (most farmers actually buy their food at the grocery store). But look at the real irony here: I’m a farmer and I can’t afford these high food prices. <— what’s wrong with this statement?
So the real question should be: who’s getting the money?
One final thing about subsidies — they are a disease. The problem is that farmers who disagree with them and choose not to take them are at a financial disadvantage to those who do. So if Farmer Brown takes the subsidy and Farmer Jones doesn’t — Farmer Brown will be able to outbid Farmer Jones when buying a new piece of land. The end result is that you (the consumer) and me (the farmer who disagrees with subsidies) lose no matter what.
Farm subsidies should be eliminated along with all other subsidies.
Excellent comments, James. Although I have not looked at the most recent data, wheat prices may indeed be adjusting downward from the peak levels, which I would say is a good thing, if it is a natural correction of market forces. My reason for using grain/wheat as an example was to illustrate the impact that subsidies on one particular commodity may have on another commodity. In spite of subsidies, market forces still are at work and do affect what happens with prices, because, no matter how much the markets get distorted by subsidies and other forms of government intervention, the laws of supply and demand cannot be completely avoided. As you state, boom and bust is a big part of a farmer’s life. There are other economic factors that play in as well, such as how much income people have available to pay the bills and take care of their other needs. One cannot take the agricultural sector of the economy and isolate it from the other sectors of the economy, because it all relates together. Similarly, I say the same thing about the relationship among the issues of sound money, deficit financing, foreign policy and immigration: they are all really one big issue. But I digress.
You also bring up the issue of risk the role it plays in decisions over how much to grow, especially when one expects prices to remain higher when instead they suddenly drop for various other reasons. That’s one aspect of the market that can be very tricky, and the distortions subsidies cause only make it more difficult for farmers to make the right calculations of how much to grow and how much money to expect at harvest time. Some use this as an excuse for the government to provide “insurance” against that sort of thing, which of course is another distortion of the market. Alas, it’s the nature of the market not to always be kind to producers, and there is simply no way to guarantee against loss.
With respect to how much of the money in a loaf of bread actually gets to the farmer, that brings up a whole other set of issues. Obviously, wheat isn’t the only ingredient going into a loaf of bread. Overhead costs certainly play a big role, all the more so when one deals with the bureacracy of large corporate farming operations known increasingly as “agri-business”.
One disclaimer here: my article was originally intended as a general, short impromptu commentary posing some questions about food prices, inspired by Lew Rockwell’s article. It turned into something a bit longer, and I hardly expected all the attention it seems to be getting, which of course I am pleased to see. At some point perhaps it would be good for me to follow up with a more detailed article with lots of data and statistics… or someone else at this site may beat me to the task!
One word of clarification I should add here: when I suggest that, “after all, wouldn’t this be an ideal time for food prices to come down, so that people in dire financial straights can better afford to keep food on the table?”, I am posing a question while not in any way suggesting that we should, under the current circumstances, expect the prices to fall. I am also speaking strictly from the point of view of the consumer, realizing of course that producers have plenty expenses requiring them to set prices higher than they might wish. Some commodity prices (such as wheat, see the comment above from James) are beginning to adjust downward, which suggests that the laws of supply and demand are still functioning, in spite of the distortions in the market. I certainly do not blame farmers for the high prices, as they have many expenses they must meet that are well beyond the reach of farm subsidies, while most certainly affected by other distortions in the market (subsidies and bailouts of various kinds).
As I’ve already said in my other comments above, it all really comes down to the dollar crisis with the breakdown of our fiat currency. That’s where the greatest distortions occur, and until we recognize this and take the steps needed to return to sound, honest money and following the Constitution (no subsidies or bailouts, no legalized plunder), we will continue to see all kinds of hardship on the American people, consumers and producers alike, resulting from our failing system.
I will follow up soon with another article about food prices, which will discuss the primary role that the dollar crisis is playing in keeping food prices (and other prices) high and causing all kinds of distortions.
I agree. Monetary meddling played a big part in the high food prices — and high prices in general (oil, housing, etc). They will come down — they will have to, but not until enough people need them to come down.
The prices of many grains have been dropping for the last 4-9 months — but in the last month or two they have been getting dangerously close to the cost of production (or below that).
Food prices still need to catch up (not so much to the price of grain but probably the price of oil) — but as we’ve already agreed — most of the food we buy is greatly value added. Most food processors are less flexible with their fixed costs such as wages and the like. Laying people off or giving them lower wages gets a lot of bad press. It’s easier to continue selling the product at a high price. Most farmers are self employed — and there are many more of us, so we are forced to bear the burden immediately — we cannot choose to sell higher (to avoid loss) no matter how much we need to.
Now I can say “wouldn’t it be nice if the government would just quit messing around with the market” but the problem isn’t so simple. People seem to expect the government to fix all our problems, and in any instance where the government does nothing it is blamed for the bad situation (even when its not to blame). The benefits of doing something are always very visible (and politically favourable) — no matter how many hidden costs are involved. It could be possible that all government intervention causes more harm than it avoids — but most people don’t see this, nor do they believe it even when they do see it.
Libertarian ideas are somewhat difficult to implement in the realm of politics. It’s really an all or nothing thing — cutting down slowly (on things like subsidies) never works. Because then you have one group whining about the loss of their subsidy when someone else gets to keep theirs Plus once you start subsidizing you create dependency. When the subsidy is removed it often leads to a major financial shock — much worse than the one the subsidy was meant to protect against.
I am presently writing an article for my blog about an idea which gets around most of these problems. I’ll be sure to inform you when I have completed it.
I need to offer some further disclaimers: unfortunately I did not research the latest trends on crop commodity prices, which it turns out have been deflating (the very thing that Lew Rockwell speaks in praise of in the linked article above). Thus, while everything I said is true (regarding the impact of subsidies on food prices), it really speaks to where we were several months to a year ago. It is fortunate that, in spite of all the government intervention we’ve seen and are seeing in the economy at this time, the laws of supply and demand still apply. In other words, the correction is occurring, and I myself stand corrected regarding the trends in crop commodity prices. Given the falling commodity prices (see http://www.larouchepac.com/news/2008/10/06/world-commodity-prices-deflat…), we will surely see pressures on Congress to increase the amount of intervention in agriculture by imposing even more farm subsidies and price supports, none of which will help matters at all. Perhaps it might be best to revise the article under a different title that reflects the new realities. That’s my next project!
This is a comment I left at Digg:
Even though crop commodity prices are deflating (as are oil prices), I predict that we will not see a decrease, in the long run, of retail food prices, for two reasons: 1. the agri-business lobby will not stand for the falling prices, and there will be immense pressure upon Congress to prop up prices and effectively bail out the agriculture sector of the economy; 2. The massive amounts of new money being created and already created in the last six months by the Federal Reserve (in the trillions of dollars) in its desperate attempts to prop everything up will eventually result in massive price inflation, destroying the dollar in the process. Therefore we can expect food prices to go up substantially in the next several years, along with everything else, the current deflationary trends notwithstanding. All of this is much bigger than the effect of agriculture subsidies as I’ve described in my article.
Sadly, you also see the influence of subsidies in the Food Pyramid. The Food Pyramid is not designed to help you make sound dietary choices but to allow food companies to increase their profits. If we are ever going to improve the current health care crisis, our nation’s food policy must be addressed and corrected.
You also bring up the issue of risk the role it plays in decisions over how much to grow,NS0-502 especially when one expects prices to remain higher when instead they suddenly drop for various other reasons,That’s one aspect of the market that can be very tricky,HP0-D07 and the distortions subsidies cause only make it more difficult for farmers to make the right calculations,70-685 of how much to grow and how much money to expect at harvest time. Some use this as an excuse for the government to provide “insurance” against that sort of thing, which of course is another distortion of the market. Alas,SK0-003 it’s the nature of the market not to always be kind to producers, and there is simply no way to guarantee against loss.