Climate Change, Food Security and Farm Subsidies

www.foodpolicy.com, 3/18/06

Farm Policy Issues

One key and every present issue impacting agriculture is the weather. Although the weather is always unpredictable and changing, a news article from today documented that in some parts of the U.S., the conditions don't seem normal.

Kirk Johnson
http://select.nytimes.com/mem/tnt.html?_r=1&emc=tnt&tntget=
2006/03/21/national/21drought.html&tntemail0=y&oref=slogin, writing in today's New York Times, reported on unusual weather conditions occurring mostly in the Western part of the U.S.

"Spring is here, and the West is dry and ready to burn. Winter is over, and the West is snowpacked and facing flood.

"Meteorologists say both are true. What it adds up to, when the extremes of wet and dry are averaged out, is that the long Western drought, which began in the late 1990's, is still on but without some of its past punch.

"'This year the magnitude of the variability is probably greater than we've seen in as long as I can recall,' said Mike Gillespie, a snow survey supervisor for the Natural Resources Conservation Service, a federal agency that monitors soil and water conditions.

"The Arkansas River is a case study in the region's bipolar condition. It drains the Colorado Rockies south and east toward Kansas and is socked with snow at its headwaters around the town of Leadville, where the snowpack is nearly 140 percent of average for mid-March. Just a few hours south on the river, however, are places that have not had significant precipitation since October and are setting records for drought," the Times article said.

Meanwhile, two interesting analytical items regarding the future debate over U.S. farm policy appeared on Friday.

The first, written by Urban C. Lehner, DTN Editor-in-Chief, (link requires subscription
<http://www.dtn.com/agriculture.cfm?sidenav=sn_ag_producer&amp;content=ago_trial>) provided a look at farm policy and arguments regarding food security.

"When producers and Congressmen meet to discuss the farm bill, as they've been doing in listening sessions across the country lately, 'food security' inevitably pops up. Producers, or some of them, are telling their elected representatives that if the government stops supporting farm incomes, some farmers won't make it and dependence on foreign food will rise.

"That sounds like a powerful argument. The U.S. still runs an agricultural trade surplus but it has narrowed sharply in recent years. This year, USDA expects record exports of $64.5 billion and record imports of $61.5 billion, for a surplus of only $3 billion, down from $4.7 billion in 2005.

"As recently as 2003, the surplus exceeded $10 billion. Now we're closing in on parity, maybe even a deficit. Surely no Congressman wants the U.S. to depend on foreign food the way it depends on foreign oil."

Mr. Lehner then moved on to note some counter-arguments to this general proposition.

"[T]he opponents might invite us to delve into the details of the agricultural products the U.S. imports. They would point out that $8.5 billion of our $61.5 billion in imports are things that aren't produced in the U.S. -- coffee, cocoa, rubber and spices. Another $8 billion are things that are not exactly essential to our economy -- beer, wine and flowers. Our overall trade deficit would be in better shape if we didn't import all these things, but that's a financial issue, not a food-security problem. Should France declare war and cut off our Champagne, we'll muddle through, somehow.

"Having discussed imports, the opponents might then turn to our agricultural exports, and note the growing importance of products that don't receive federal payments, such as meats, live animals, fruits and vegetables. Of course, U.S. livestock producers do benefit indirectly from federal subsidies of grains and oilseeds. But almonds receive no such benefit. For 2006, USDA is predicting a $600 million increase in U.S. exports of tree nuts, led by almonds, to a record $3 billion total."

The DTN article went on to point out that, "As it happens, imports of fruits and vegetables are also rising rapidly, in part because U.S. consumers now want the same foods year round and in part because fruits and vegetables are labor-intensive, meaning low-wage countries have a comparative advantage. China, which is taking acres out of grain production and putting them into fruits and vegetables, has wrested the Thai market for apples away from U.S. producers and is now selling Americans apple juice.

"This is where the food-security battle takes one of its strange twists. If food security really justifies government subsidies, shouldn't more of these subsidies go to fruit and vegetable growers, who are engaged in hand-to-hand combat with a very tough foreign opponent, China? The opponents of subsidies might not make that argument -- they're against subsidizing any group of farmers. But the Congressional delegations of California and Florida might well make it."

Concluding, Mr. Lehner noted that, "Depending on how the [federal agricultural subsidy] pie is sliced between old diners and new, sharing the pie with fruits and vegetable growers may leave current farm-bill beneficiaries worse off than a simple reduction in the size of the pie."

The second analytical article was written by Steve Ford <http://www.southern-farmer.com/ME2/Audiences/dirmod.asp?sid=&amp;nm=&amp;ty
pe=Publishing&amp;mod=Publications%3A%3AArticles&amp;amp;amp;amp;mid=8F3A702
7421841978F18BE895F87F791&amp;AudID=A523CDEF7F074462AB3A26852B83651C&amp;tie
r=4&amp;id=C74C59F5A084418FB> , and was posted at the Southern Farmer webpage. Dr. Ford noted another interesting aspect and potential argument that could be used in the farm policy debate on agricultural spendinglevels: offsetting tax revenue.

"What is ignored in discussions about agricultural spending is offsetting tax revenue. The net cost to the government of commodity support is far less than its outlays because many of these payments end up in profit on which taxes are paid. Reductions in farm spending will reduce profits to farmers and firms both upstream and downstream in the marketing channel. The exact impacts of reduced agricultural spending are difficult to estimate off the cuff, but here are areas to begin to examine."

Dr. Ford then indicated that, "Government payments to farmers bring farm incomes up to profitable levels. More tax is paid by farmers with farm programs than without. U.S. 2005 net farm income is estimated to be $71.5 billion. An average tax rate of 10% generates $7 billion."

In addition, "Farmers buy things. They spent $8.3 billion on machinery and equipment and another $6.5 billion on farm structures and land improvements in 2004. They spent $36.5 billion on fertilizer, pesticide, fuel, and electricity and $10 billion on seed in 2005. Any cut in farm program payments would result in lower high-margin sales by companies who sell to farmers and tax revenue would fall," the article said.

Other factors noted were impacts on lower feed costs for livestock producers and rural tax dollars derived from the value of farmland, where Dr. Ford stated that, "The U.S. value of farm real estate totals over $1.3 trillion. A 10% reduction in land values equals $130 billion of wealth sucked out of rural America, and a 10% reduction in local taxes."

As the article ended, Dr. Ford stated that, "What bothers me most about the issue of offsetting tax revenue is that no one else seems to be interested. Only the initial outlay is considered."