The Economics of Agricultural Policy

Abstract

Because agriculture makes up over nine percent of world merchandise trade, it is no surprise that agricultural issues are very important to a lot of people. There are many issues currently affecting the world agricultural market. One of the largest debates is over the use of agricultural subsidies and whether the effects are beneficial or detrimental to the agricultural market. Another issue is the prevalent practice of genetically engineering agricultural products. There are valid arguments both for and against this practice as it can be very beneficial to impoverished nations but the risks related to its use are still largely speculative and unknown.

The Economics of Agricultural Policy

Because agriculture makes up over nine percent of world merchandise trade, it is no surprise that agricultural issues are very important to a lot of people. There are many issues currently affecting the world agricultural market. One of the largest debates is over the use of agricultural subsidies and whether the effects are beneficial or detrimental to the agricultural market. Another issue is the prevalent practice of genetically engineering agricultural products. There are valid arguments both for and against this practice as it can be very beneficial to impoverished nations but the risks related to its use are still largely speculative and unknown.

Agricultural subsidies are defined as "financial assistance to farmers through government-sponsored price-support programs" (Columbia Encyclopedia, 2001). Beginning in the 1930s most industrialized countries developed agricultural price-support policies to reduce the volatility of prices for farm products and to increase, or at least stabilize, farm income. In food-exporting countries, such as the United States and France, agricultural subsidies have been designed primarily to increase farm income, either by raising the long-term level of prices above free-market levels or by providing direct payments to farmers.

The European Union has, arguably, the most aggressive subsidy program to protect their agricultural industry. The Common Agricultural Policy (CAP) is the agricultural policy of the European Union (EU) for assisting the farm sector. The United States was forced to raise its export subsidies for farmers sharply in the 1980s in response to CAP, although American subsidy policies are still not as great as those of the European Union. The main aims of the CAP are fair living standards for farmers and an improvement in agricultural efficiency. The CAP is administered by the European Agricultural Guidance and Guarantee Fund, with major policy and operational decisions (e.g. the fixing of annual farm prices) residing in the hands of the Council of Ministers of the EU. The farm sector is assisted in four main ways:

I. Approximately 70-75% of EU farmers benefit directly from the operation of a price-support system that maintains EU farm prices at levels much higher than world market prices. The prices of milk, cereals, butter, sugar, pork, beef, veal, certain fruits and vegetables and table wine are fixed annually and, once determined, are then maintained at this level by support-buying of output which is not bought in the market. Monetary compensation amounts are used to convert the common price for each product into national currencies and to realign prices when the exchange rates of member's currencies change;

II. Variable tariff rates are used to increase import prices to internal price-support levels in the cases of the products referred to above, thus ensuring that EU output is fully competitive. The 25% of EU farm produce that is not subject to direct price support relies entirely on tariff protection to maintain high domestic prices.

III. Export subsidies are used to enable EU farmers to lower their export prices and thus compete successfully in world markets;

IV. Grants are given to facilitate farm modernization and improvements as a means of improving agricultural efficiency.

Agricultural subsidies are the largest single component of the European Union's total budget. In 1998, it accounted for 48% of total EU spending. Over 90% of the CAP's budget in recent years has been spent on price support and export subsidies. The CAP can claim a number of successes, most notably the attainment of European Union self-sufficiency in many food products. Agricultural subsidies have become somewhat less protectionist in recent years as world opinion has changed to support a more globalized agricultural policy that is not as harmful to developing countries as the current, subsidy-heavy policy seems to be.

There are differing opinions on the use of agricultural subsidies and whether the effects are beneficial or detrimental to the agricultural market. The EU and U.S. use differing methods in order to subsidize its agricultural industry. The European Union sets prices at a level higher than world market prices to increase profits for their farmers. The US farm policy is to make direct support payments to farmers based on acreage owned and the type of crops produced.

Since its inception, the European Union's Common Agricultural Policy (CAP) has been one of the biggest public-policy disasters in the rich world. It has been hugely expensive for taxpayers and consumers. It takes up half the EU budget, although farmers are less than 5% of the workforce. It keeps food prices in Europe far above world levels. It has produced big surpluses that have been exported with subsidies. It has badly hurt farmers in poor countries, who have not only seen exports shut out by European tariffs but also suffered at home from dumped surpluses. As if all this is not enough, the CAP has failed in its main aim of protecting small farmers' incomes, which have fallen inexorably throughout Europe, driving people off the land and encouraging the consolidation of farms into large agribusinesses.

The EU's efforts to boost prices paid to farmers have made its citizens pay much more than the world market prices for their food. The average family in the EU is thought to have paid around $1,200 a year extra for it as a result of the EU's farm policies. (The Economist, 2001, p.45) For example, the price of butter is about 2.5 times higher in the EU than in New Zealand, which has eliminated farm subsidies.

The U.S. subsidies are equally as effective as the EU's CAP program. Billions of dollars are funneled to American grain, cotton and soybean growers each year. Farmers and ranchers also receive federal money to idle environmentally