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Subsidies and overproduction: Which is the egg?

by Paul Beingessner
Canadian farmer, writer

(Monday, May 3, 2004 -- CropChoice guest commentary) -- The chicken and egg argument would seem a good one for farmers to engage in. It is such a very agricultural analogy. In fact there is a growing and useful argument of the chicken and egg type over the issue of farm poverty.

The two sides break down like this. One says subsidies cause overproduction, which results in low prices. This idea has been the guiding principle behind Canadian and American farm policy at the international level. Our governments have told us over and over that if we can negotiate proper trade agreements that reduce subsidies, those heavily subsidized countries will stop over-producing. Prices will rise and we will all live happily ever after.

A contrary notion has been advanced lately. It says that low prices bring on subsidies. In this argument, subsidies are the effect, not the cause.

There is some interesting evidence for this theory. If subsidies cause overproduction, countries with large subsidies should in fact be increasing production. Not so. Between 1994 and 2000, wheat production increased the least in heavily subsidized countries. In the U.S., it actually fell by 3.8 percent. In unsubsidized Argentina, wheat production grew 46 percent in the same time period. Australia and Canada, with low subsidies, came in at 34 and 16 percent growth respectively. The European Union only saw production rise 9.5 percent.

It all may seem a bit like chasing one's tail, but the important thing about the argument is this: if low prices cause subsidies (as surely we've seen in Canada this year, with loads of new money trying to save the cattle industry from BSE) then fighting the good fight at the WTO and elsewhere may be a useless endeavor. It may, in fact, be keeping us from dealing with the real problem.

The get-rid-of-subsidies side says if you succeed, production will fall because it will not be economic. Over the long term, that may be true. Over the short term, it is dramatically false. When prices fall, farmers will try their best to produce more. They need more bushels to cover the same costs, and more bushels to give them a return for their labour. This may not be true in each individual case, but, overall, it is a definite trend.

Farms got bigger, in most cases not simply because it was really profitable to do so, but because farmers had to expand in order to have something left over to live on.

It would be easy to declare that over-production was the cause of low prices. It would be easy because it would be partly true. Supply and demand works at a certain level. But the truth is more that low prices are caused by a lack of market power. Farmers don't like to hear that because they see it as a threat to their independence. If they have no power as individuals, they might have to work together.

Oddly enough, farmers usually understand this on the political level. They form farm organizations, and work together to lobby governments. They don't understand it at the economic level, though. Unions, which some farmers love to hate, understand the economic thing very well. They know that if each worker bargains separately with the employer, the employer has all the power. So they form a union and bargain with a single voice. The playing field levels out a bit.

Farmers' lack of power isn't a conspiracy. It is just the natural order of things. Two companies control the meat packing business in Canada. It got that way because they merged and bought each other out. They generally have done very well. The world's largest meat processor, Tyson Foods, reported its second-quarter profit surged 65 percent on higher prices for chicken, beef and pork. For farmers to have any clout with Tyson's, they would have to bargain from a position of power. It can't be done as individuals.

Which takes me back to the original problem - how to deal with low prices. We need to ask who benefits from low prices. Tyson appears to. So do Kellogg's and Coca-Cola. Both their net earnings rose 35 percent this quarter. Processors and exporters benefit nicely. Perhaps this is really whom governments are trying to protect with the bogus notion that removing subsidies will bring lower production and better prices.

Don't get me wrong. I think it may well be a good thing to lower subsidies. Reducing subsidies on cotton in the U.S., for example, would help out some of the poorest countries in the world that also produce cotton. That would be good. But lower subsidies won't save us from over-production, or give us more market power. We will have to find a way to take that.

(c) Paul Beingessner (306) 868-4734 phone 868-2009 fax