Tuesday, April 21, 2015

What's the big deal about farm subsidies? Four big questions about big ag, subsidies, food, and GMOs

There are a lot of misperceptions about farm subsidies that tend to surface in the media and in political discussions coming from commentators on both the right and the left. Below are four questions with answers that address issues related to farm subsidies that I have found to be most often misunderstood.

1) Do farm subsidies encourage farmers to plant biotech or GMO seeds?

There are no specific subsidies that target biotech crops. It is true in general that many corn and soybean growers receive subsidies related to their crops, and they are largely biotech, but a grower receives the same subsidy for a conventional vs. organic vs. biotech planted acre of field corn. Where the climate permits, most growers rotate corn, wheat, and soybeans, and while wheat crops qualify for many of the same subsidies associated with corn and soy, there are no biotech/GMO wheat crops planted in the US today. What would happen if we eliminated all farm subsidies? Because of the relative production benefits and risk reduction associated with planting biotech crops, elimination of subsidies might make these crops more attractive and increase their planting. Because we are largely subsidizing risk, removal of subsidies would lead the market to more efficiently price risk, and biotech traits would play a large role.

2) If subsidies drive the production of commodities and most of these are GMO,  aren’t we indirectly subsidizing GMOs?

The overall impact of completely eliminating U.S. commodity protection and subsidies at the commodity level in terms of total acres produced and commodity prices would be minimal, as reported by researchers at UC Davis. As their projections show, from a production standpoint, the impact is very small for the major biotech crops including corn and soybeans. If anything, the supply of wheat is impacted the greatest among row crop commodities, and it is not a biotech crop. Note that during the 2012 Midwest drought the impact on production was much greater than the impact of farm subsidies.  Even with the drastic drop in crop prices that have followed as the drought eased during the last two years (prices for corn have fallen almost 50% from the peak in 2012 to current futures prices) we have continued to have record acres planted.  And during the immediate post drought period, we did not see these record commodity prices translate into high retail prices or reduced consumption of processed foods. Extreme prices did not drastically alter the behavior on either the production or consumption side of the equation. The ‘positive’ impacts on fruit and vegetable production is modest at best and given the price elasticity discussion in the sections that follow, likely would not impact consumer choices at the retail level.

So why do we plant so much corn and soybeans? As stated in Alston et al (2010):

“Farm commodities have indeed become much more abundant and cheaper over the past 50 years in the world as a whole as well as in the United States, but not because of subsidies.This abundance mainly reflects the effects of technological innovations and increases in farm productivity, which has alleviated hunger and poverty throughout the world while at the same time reducing pressure on the world’s natural resources.”

3) Do farm subsidies make unhealthy foods cheaper and contribute to obesity?

Because subsidies have such a small impact on the overall supply of commodities, and wholesale prices (as illustrated above), the consequences of removing subsidies on prices at the retail level would be too small to have any meaningful impact on consumer choices. As stated in Alston, et al (2010):

“U.S. farm subsidies have had generally modest and mixed effects on prices and quantities of farm commodities, with negligible effects on the prices paid by consumers for food and thus negligible influence on dietary patterns and obesity. This result is consistent with some previous work by economists on the issue”

The implied price elasticity for retail food calculated in Alston (2007) is .08%. So a 1% increase in the retail price of food reduces consumption by .08% If we had another drought, causing corn prices to increase 50%, and even if that translated into a retail price increase of corn based food products by 50%, we would see a reduction in consumption of about 4%. More specifically, Alston (2010) found:

“Eliminating U.S. grain subsidies alone would lead to a small decrease in annual per capita caloric consumption—simulated to be 977 calories per adult per year, which would imply a 0.16% per year reduction in average body weight assuming 3,500 calories per pound. In contrast, removing all farm subsidies, including those provided indirectly by trade barriers, would lead to an increase in annual per capita consumption in the range of 200 to 1,900 calories—equivalent to an increase in body weight of 0.03% to 0.30%.”

4) Do farm subsidies largely prop up wealthy farmers vs. helping small farmers thrive in a volatile, competitive global and corporate dominated marketplace?

It's true that many subsidies are tied to commodity production. Those that grow more commodities (i.e. larger farms) will get more money from the government. As a result larger producers take in a larger share of all subsidies (especially those related to commodities). However, subsidies account for a much smaller percentage of income for large producers, and make up a much larger percentage of total income for medium or small producers.

As the chart above (from the USDA) shows, in 2008 farms earning less than $250,000 /yr recieved a much greater percentage of their income in the form of government payments, while subsidies only accounted for 4% of income for producers with the largest incomes. The chart below indicates that this relationship seems to hold across years for the last decade.

In general, a lot of perceptions about farm subsidies are incorrect. They do not favor large farms or biotechnology, and they do not encourage the consumption of unhealthy foods or impact obesity.

Further Reading and References:

Reduced costs and risk, chemical application, and production and environmental benefits:

Journal of Agribusiness 19,1(Spring 2001):51S67 © 2001 Agricultural Economics Association of Georgia
Biotechnology in Agriculture: Implications for Farm-Level Risk Management
Shiva S. Makki, Agapi Somwaru, and Joy Harwood

Genetically Engineered Crops: Has Adoption Reduced Pesticide Use? Agricultural Outlook ERS/USDA Aug 2000

GM crops: global socio-economic and environmental impacts 1996- 2007. Brookes & Barfoot PG Economics reportOctober 2010:Vol. 330. no. 6001, pp. 189 - 190DOI: 10.1126/science.1196864

Greenhouse gas mitigation by agricultural intensification Jennifer A. Burneya,Steven J. Davisc, and David B. Lobella.PNAS  June 29, 2010   vol. 107  no. 26  12052-12057

Impact of Subsidies on Commodity Production, Food Prices, and Obesity

Farm Subsidies and Obesity in the United States
Julian M. Alston, Daniel A. Sumner, and Stephen A. Vosti
Agricultural Resource Economics Update
V. 11 no. Nov/Dec 007
U.C. Davis

Choices. 3rd Quarter 2010 | 25(3)
Julian M. Alston, Bradley J. Rickard, and Abigail M. Okrent
JEL Classifications: I18, Q18

USDA Sources on Subsidies by Farm Type

USDA Report- Government Payments and the Farm Sector: Who Benefits and How Much?

USDA Report-Farm Income and Costs: Farms Receiving Government Payments