Policies that Raise Prices to
Farmers
Direct Subsidies and Eliminating Urban Bias
Text extracted from:
The World Food Problem
Leathers and Foster, 2004
http://www.lastfirst.net/images/product/R004548.jpg
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
http://www.oznet.ksu.edu/fieldday/kids/pictures/kidsfield600/cg_wheat_closeup.jpg
How to help farmers produce
more?
• Increase prices using
subsidies
• Increase prices by
removal of taxes on
farm output
Grain Market, Ethiopia
http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_region_
africa/afri96_50.jpg
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/CIMM
YT_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
http://www.rightgrrl.com/cartoons/wto.jpg
• World Trade Organization limits
this kind of subsidy
– Will be fewer in the future
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:
U.S. subsidies 1995-2004
$600 million - $1.84 billion
$4.2 billion
$1.84 - $4.2 billion
http://www.ewg.org/farm/redraw/
• do not increase the subsidy
payment
• Not limited by WTO
agreements
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
development
Rice 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
http://newsimg.bbc.co.uk/media/images/39146000/jpg/_39146320_tractor203bbc.jpg
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
http://www.cimmyt.org/worldwide/CIMMYT_Regions/CIMMYT_Africa/images_regi
on_africa/images_africa.htm
• All result in implicit subsidies to
consumers
• All result in implicit taxes on
farmers
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
Food Ration Shop, India
http://india.eu.org/IMG/jpg/ration_card_shop_2004014.jpg
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
Jamaica Market
• Only available to poor rural
consumers at high price
– much more than without
government policy.
http://media.expedia.com/media/content/shared/images/363x233/rm/023DBD00_ss.jpg
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
http://static.howstuffworks.com/gif/exchange-rate-ch.jpg
– Low prices benefit consumers
– Disincentive for farmers
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
Millet Farm, Niger
http://www.usaid.gov/locations/sub-saharan_africa/initiatives/images/IEHA-niger1_millet_dryland_farm.jpg
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
Flower Market, Columbia
http://www.eastlondonmarkets.com/images/man%20and%20flowers.jpg
• 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
Tax alternatives
• Agricultural land
– Use satellite imagery to
determine use
• Agricultural income
– Target large landholders
• Retail Consumption
– Shifts burden to urban
consumers
Wisconsin farm
http://www.trautman.net/farm/land/trautman/farm%20-%20satellite%202002-11_noted.GIF
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”
Manila, Philippines
http://www.buyusa.gov/greatlakes/48.jpg
• Economy grows slowly
– Fewer jobs