U.S. ag subsidy effects

Following up on this earlier post, I thought I'd post this comment sequence from Michael Roberts' Green, Green and Grains.

R: Your argument that ag subsidies don't boost production is very interesting. I don't understand how the conservation acreage is determined (or by whom) - is it centrally decided, or do farmers have the option in any given year of either growing crops or receiving a fixed (or varying?) payment for setting aside land?

Also, I think I saw you mention somewhere that most subsidies are not volume-related - is that true? If so would be interested to learn more.

Michael: Good questions. Conservation acreage is determined by legislation. I also know from first-hand experience that program administrators in USDA anticipate, even now, about how they might change the size and nature of conservation programs in the event commodity prices rise. Congress ultimately sets the acreage goals, but things change quickly when commodity prices change and bureaucrats know to expect this.

And yes, most payments received by farmers are not tied to the amount the produce. Most are tied to the amount and mix of crops they produced many years ago. The payments are attached in some sense to the history of the land, and so they transfer from one farmer to the next. These payments are called "direct payments" and "counter-cyclical payments."

It could be that some farmers plant particular crops today in anticipation of payments in the future. But since programs and prices change so much over time, only farmers very confident in their foresight might try to game the system in this way.

Subsidies that are connected to production volume come from the "loan rate program," which effectively servers as a price floor--the government pays farmers the difference between the price they receive and the "loan rate" should it turn out lower than the marketed price. The ostensible purpose of the program is to give farmers flexibility about when they sell their crop. But if they can't sell it for more than the loan rate, the loan rate serves as a price floor. Loan rates have been well below market prices for quite awhile.

One last point: The demand for commodities is really steep. Prices go up a lot if production falls just a little short. So, the purpose of farm programs is to keep farm incomes high then the best way to do this is to limit production somewhat. This helps to keep prices high. Paying farmer to produce too much really defeats the purpose because that steep demand curve means that extra supply will drive down prices a lot. So restricting production is the easiest way to keep farm income high.

R: Hmm. So who has the final say on conservation acreage for a given season? I have to imagine it's the USDA since it must be impossible to get Congress to turn on a dime in response to commodity prices...

Also, how are the top-down acreage targets cascaded down to thousands of producers? Is there any choice at the individual producer level, and how are they compensated for not growing?

And finally... if removing rich-world subsidies wouldn't materially shift world production or prices, why are developing countries so hung up on them in free trade negotiations like Doha? Do they simply misunderstand the mechanics and implications of the subsidies, or is there something else going on?

Michael: In some cases the USDA (the Secretary of Agriculture) has discretion for the amount of acres so long as it is beneath a target set by congress. That discretion can vary somewhat from bill to bill.

Today all the land is in the Conservation Reserve and the amounts in that program do appear a bit more "sticky" than more discretionary set-asides in the past (probably more environmentally beneficial, too). But when prices spiked last summer, there was serious pressure to reduce the size of the program, and they did. If prices staid high, I'm quite sure CRP would have further declined. Right now about there are about 34 million acres in the program and that is begin ratcheted down to 32 million. Before the run-up in prices the cap was 39 million acres. If prices staid high acreage would have fallen much more (I'd guess another 10-15 million acres).

Enrollment in CRP is up to the farmer. Most acres are enrolled in a competitive process wherein the farmers offer parcels with certain environmentally friendly covers, request a rental rate, and then all offers are scored and ranked. Some of the land is more targeted (like buffers for streams and lakes). For the targeted lands farmers are offered generous sums that they are unlikely to refuse.

I don't completely understand the trade negotiations. Clearly developing countries don't like us giving cash to our farmers. They like our conservation program (that's a "green box" program) because they keep prices high. The politics here must be very complicated. I've speculated here that agriculture may be something of a red herring to muck of the negotiations or other purposes. But I just don't know.

To make things stranger, I think developing countries as a whole would benefit more from lower commodity prices than from higher prices. The U.S. exports food to developing countries and this helps to feed more people in the world. But the hungry masses aren't the ones sitting at the trade negotiation table...

Anyway, on fairness grounds alone, I can see why people really don't like the big cash payments to farmers.

R: I had a quick look and both the FAO and IFPRI project world price rises in full trade liberalization scenarios. I'm guessing they are knowledgeable enough to know what they're talking about (what do you think?). So two hypotheses:

1) Are EU ag subsidies more volume-linked or otherwise production-increasing than ours?

2) Maybe there is also an effect from removing the domestic price controls (usually caps) in many developing countries?

Food prices are a double-edged sword. On one hand, it irritates me when people like Pollan root for higher food prices without acknowledging (or even realizing?) how they would increase undernourishment in poor countries, since most hunger is due to lack of purchasing power, not physical access. On the other hand, low ag commodity prices make it harder for agriculture to be an engine of economic development in rural areas of poor countries (where it is often 80-90% of the rural economy). So low prices are definitely good for poor urban food buyers, but their net effect on the rural poor is tricky to judge.

Interesting stuff, and great to have someone with such substantial academic and practical knowledge on the other side of the conversation.