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Policies that Raise Prices to Farmers Direct Subsidies and Eliminating Urban Bias

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.

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Policies that Raise Prices to Farmers Direct Subsidies and Eliminating Urban Bias

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  1. Policies that Raise Prices to FarmersDirect Subsidies and Eliminating Urban Bias Text extracted from: The World Food Problem Leathers and Foster, 2004 http://www.lastfirst.net/images/product/R004548.jpg

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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 http://www.rightgrrl.com/cartoons/wto.jpg

  7. 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 U.S. subsidies 1995-2004 • $600 million - $1.84 billion • $4.2 billion • $1.84 - $4.2 billion http://www.ewg.org/farm/redraw/

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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 http://media.expedia.com/media/content/shared/images/363x233/rm/023DBD00_ss.jpg

  13. 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

  14. 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 http://static.howstuffworks.com/gif/exchange-rate-ch.jpg

  15. 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

  16. 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 Flower Market, Columbia http://www.eastlondonmarkets.com/images/man%20and%20flowers.jpg

  17. 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

  18. 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 Manila, Philippines http://www.buyusa.gov/greatlakes/48.jpg

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