Policies that Raise Prices to Farmers Direct Subsidies

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/R 004548. 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/kidsfield 600/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/afri 96_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/CIMMY T_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 Ø$600 million - $1. 84 billion Ø$4. 2 billion Ø$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_tractor 203 bbc. 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, 1970 s – 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/363 x 233/rm/023 DBD 00_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/cocoa 250. jpg

Overvalued domestic currency • Demand 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-niger 1_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%20 and%20 flowers. jpg • Earn more: food security • Nutrition better • Can afford fertilizer – Ex: Carnations in Columbia • Earn 80 x 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 -%20 satellite%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