Policies that Raise Prices to Farmers

Direct Subsidies and Eliminating Urban BiasText extracted from:

The World Food ProblemLeathers and Foster, 2004

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Increasing Ag Production Important

• 89 undernourished countries had similar undernutrition– 1979-81

• Countries with high yield cereal growth 1998-2000– Undernutrition sharply reduced

• Countries with low yield cereal growth 1998-2000– Undernutrition increased

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How to help farmers produce more?

• Increase prices using subsidies

• Increase prices by removal of taxes on farm output

Grain Market, Ethiopia

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Direct Subsidies

• Target-Price Deficiency Payment Programs– Government sets target price– Farmer sells crop at market

price– Government makes up

difference if market price is lower than target price

Wheat Harvest, Sudan

http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_region_africa/images_africa.htm

Problems with Subsidies• Iraqi case study

– Saddam Hussein’s government subsidized Iraqi farmers

• Seeds• Fertilizer• Chemicals• Below-market prices

– No incentive to produce quality grain• Gummed up flour mills

• U.S. continued subsidy but– Fed Iraqi grain to animals

• Or burned it– Imported wheat for flour

http://www.un.org/av/photo/subjects/iraq.htm

Distortionary Subsidies• Work through price mechanism• Farmer given subsidy per unit of

production– More farmer produces, more subsidy

received– This distorts farmer decisions

• Plants more

• Interferes with free trade– Reduces imports– Increases competition in export market

• World Trade Organization limits this kind of subsidy– Will be fewer in the future

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Non-Distortionary Subsidies

• Do not work through price mechanism– U.S. farmers

• paid based on how many acres historically farmed

– Increases in acreage or yield:• do not increase the subsidy

payment

• Not limited by WTO agreements

$600 million - $1.84 billion$4.2 billion $1.84 - $4.2 billion

U.S. subsidies 1995-2004

http://www.ewg.org/farm/redraw/

Urban Bias• Rural and Urban

populations compete – for policy control

• Urban population wins– Better education– Lower poverty– Better organization

• Get super highways – Instead of water pumps to

grow rice• Biggest problem in

developmentRice Paddy Irrigation Pump

http://www.globalservicefoundation.org/photo.html

Urban Bias

• Developed countries– Strong farm subsidies

• Developing countries– Low farm prices– Subsidize consumers

• Discourages farmers– Produce less

Farming in Scotland

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Implicit Subsidies to Consumers• Subsidies carried out in name of

lower food prices:– Noncompetitive procurement of grain

from farmers– Below market food prices set by law– Foreign trade controls– Support of overvalued domestic

currency– Limits on cash cropping

• All result in implicit subsidies to consumers

• All result in implicit taxes on farmers

http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_region_africa/images_africa.htm

Fair-Price Ration Shops

• India, 1970s– Subsidized food at

about ½ price– Farmers had to sell at

below market price– Therefore farmers bore

much of the cost of food subsidy

http://india.eu.org/IMG/jpg/ration_card_shop_2004014.jpg

Food Ration Shop, India

Administered pricing• Case Study: Jamaica

– Government set ceiling on retail price of wheat flour

• Imported in capitol city (Kingston)– Barely profitable for supermarkets to

sell it in Kingston• Available to urban consumers at good

price– Not profitable in remote locations,

• Flour sold on black market– At considerable premium

• Only available to poor rural consumers at high price

– much more than without government policy.

Jamaica Market

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Export Taxes

• Generates revenue for governments

• Lowers domestic price of agricultural products– Farmers get world price

• Minus cost of tax

• Disincentive to production• Example: Cocoa in Ghana

– 1980-1982

http://www.ghanaembassy.or.jp/business/cocoa250.jpg

Overvalued domestic currency• Demand for foreign products drives

currency deficit– Local currency value falls

• Governments fix exchange rate in country– Higher than international rate

• Export prices based on international rates– Farmer gets little for crop

• Domestic prices based on Export prices– Low prices benefit consumers– Disincentive for farmers

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Overvalued Domestic currency

• African countries reducing problem of overvalued domestic currency– Had increasing agricultural

production

• African countries increasing level of overvalued domestic currency– Had declining agricultural

production

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Millet Farm, Niger

Limits on Cash Cropping• Cash crop: for sale or export

– Subsistence crop: for home use• Food First: cash crops bad

– Reduce local food supply• Raise prices

• Disagrees with Food First– Farmers better off growing cash crops

• Earn more: food security• Nutrition better• Can afford fertilizer

– Ex: Carnations in Columbia• Earn 80x more/hectare• Can afford to buy grain• Employs more workers

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Flower Market, Columbia

Tax alternatives

• Agricultural land– Use satellite imagery to

determine use• Agricultural income

– Target large landholders• Retail Consumption

– Shifts burden to urban consumers

http://www.trautman.net/farm/land/trautman/farm%20-%20satellite%202002-11_noted.GIF

Wisconsin farm

Cost of Urban Bias• Ag prices lowered

– Disincentive for farmers• Grain taxed

– Poor undernourished– Grain (untaxed) used to produce meat

• Benefits wealthy

• Local industry favored– Imports discouraged by high tariffs– “Import Substitution”

• Economy grows slowly– Fewer jobs

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Manila, Philippines