Wednesday, February 25, 2009

Do subsidies keep the cost of food down?

Canberra, ACT: Jack Thurston over at the CAP Health Check blog recently set me a challenge. An argument that is increasingly heard is that farm subsidies are a good thing because they keep the cost of food down at a time of economic recession.

First, it's an inefficient way of delivering the subsidy to those most in need. In so far as the cost is reduced, the benefit reaches the rich as well as the poor. It would be better to ensure that the least well off members of the population had enough money for a balanced and nutritious diet.

Second, the protectionist aspects of the CAP mean that consumers in the EU do not have unhindered access to agricultural goods at world market prices. The EU price is generally above the world price.

What about the single farm payment? Much of the money spent on the CAP does not reach the farmer, but is absorbed by administrative costs (pushed up by the complexity of the system), traders and food processors (just look at how much Tate & Lyle has received) and by criminal organisations.

As a rational decision-maker, the farmer is not going to use the subsidy to lower prices. He may invest in the farm, thereby benefiting suppliers of agricultural equipment which is why they favour the CAP so much. Or he may decide to use the money for personal consumption - or more likely some mixture of both.

Some of my colleagues at Warwick HRI think that food is too cheap. By that they mean that it costs so little that people do not value it enough and the emphasis is on low cost production, regardless of some of the negative externalities. There is something in this, but one has to consider the impact of higher food prices on the constrained budget of the typical family.


Anonymous said...

"As a rational decision-maker, the farmer is not going to use the subsidy to lower prices."

But the evidence is that many farmers do exactly this. Facing the prospect not being able to meet costs of production through farm revenue, they will bank the subsidy as part of the bottom line and this allows them to stay in business.

Perhaps you are making the argument that if non-viable farmers leave farming their land would just be put to use by another farmer and that this mean production is maintained at the previous level, and prices too.

The question is, I suppose, how much land would be abandoned or put to a different use in the absence of subsidies, and what would be the impact on production and prices.

Wyn Grant said...

Orange. NSW: Perhaps I was not being very clear. I was thinking of the effect on consumer prices. Of course if lots of farmers went out of business and there was no change in protection, prices would rise, hence the case for not abolishing subsidies overnight. Incidentally, one argument I have heard here is that subsidies allow a higher level of veterinary care.

Anonymous said...

Jack, Wyn, Have you never heard about the Commission's programme of food distribution for the most deprived in the Community? Have a look at this:
The rationale behind this programme is quite interesting actually, and the fact that it is within the CAP is not without consequences...

Wyn Grant said...

One of the things I have learnt about the CAP after decades of working on it is that is so complex a policy that you can always learn someyhing new. I will follow this link up.

seattle chiropractor said...

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.