The Economics and Politics of U.S. Agricultural Policy James Dunn Pennsylvania State University

Since 1990, 17% of political contributions from agriculture have come from sugar growers. Sugar is less than 1% of agricultural output Why?

Sugar in New Farm Bill Traditionally sugar program cost nothing NAFTA changes that Mexican sugar comes in w/o tariff or quota since Jan 2008 Buy Mexican sugar for 21 cts/lb and sell it to ethanol producers for 6 cts/lb $140 million per year cost to taxpayer, plus much more to consumer ($1.5 bil.)

Impact of technological change in agriculture

History Started in 1930s as temporary measure Political support remained after depression Farm problems recur regularly Lots of programs – I’ll talk about price and income programs

Economics of Agricultural Policy Idea- raise farm incomes, end farm failures Give one time boost Don’t work in long run Don’t stop farm exit Subsidize large farms more Subsidize rich at expense of others -average farm family has higher income and much higher wealth than the average US household

Types of Policies Simple price supports – creates surplus that must be purchased and sold at loss – usually exported - expensive Quotas – limits production – makes it difficult to expand – quota gains value if sold

Price support Government purchases

Purchases What do you do with the surplus you buy? If you give it away what about the farmers trying to compete with free food?

Quota

Dairy Cows If milk price is high, what happens to price of cows? Who will pay the most? Do higher cost farmers make any money?

Rentable Quota Who will pay the most to rent the quota? How much will they pay? Who will pay the least rent? How much will they pay? Who makes money?

Capitalization of Programs Farmers learn program will continue Price of land and cows and other specialized assets reflects value to best farmers Artificially high milk prices drive up prices of cows Poorest farmers still lose money

Loss of markets Price supports reduce competitiveness in international markets, e.g., loss of soybean exports to Brazilian producers Higher prices stimulate substitution by other commodities in consumption, e.g., high fructose corn syrup

Some important points Very few farmers House of Representatives based on population – disproportionately urban Senate – two members per state – more rural interests represented Often control of Congress very close - in 2008 –Senate (independents caucus w/ Dems) –House (3 vacant)

Other Points Farmers vote together In a close election farm vote can be very important No one wants to tell farmers no

The Coalition Farmers Consumers Environmentalists Other food sector participants, e.g., fertilizer companies

Program Commodities Feed grains – mostly corn Oil seeds – mostly soybeans Wheat Cotton, rice, sugar, peanuts Dairy products Wool, mohair, honey, dry peas 13% of Farm Bill spending

Bio-Fuels Subsidies for corn from ethanol Loans for bio-refineries Corn and soybean prices are very high Vegetable oil prices very high Very little savings in petroleum use

Geographic distribution of government payments as a proportion of gross cash income from farming Source: USDA

Main Milk Producing States Bill. lbs. 0 to 5 5 to to to to 40

Non-controversial Parts Can’t fight over everything Rest is non-controversial –Research –Extension –Trade –Environment No change unless everyone agrees Inertia

Policy and GATT Small countries walked out in Cancun. Why?

Policy and freer trade Free trade agreement with Australia (January 1, 2005) Duties on most industrial goods eliminated Special treatment for agriculture, especially sugar and dairy products Central American Free Trade Agreement was held up over agriculture (sugar) but passed in 2005 NAFTA disputes - many over agriculture (tomatoes, sugar)

Concluding Comments Not a big success Very costly Extremely important politically – domestically and internationally With close elections – won’t go away