Agricultural Subsidies: Ethical Issues
For nearly a century, governments around the world have been supporting their agricultural sectors to a degree that has few sectoral parallels. The preferred mechanism has been a subsidy, be it to bolster output prices, lessen input costs, take land out of production, or simply supplement incomes. More recently, however, agricultural subsidies have come under attack at world trade meetings, and even within poverty-focused civil society organizations, based on arguments that invoke or at least imply ethics. Subsidies in the developed world, and especially in Europe, the United States, and Canada, distort market signals and stunt growth in the developing world by flooding markets with underpriced goods, thereby undercutting efforts by farmers in the south to sell their own produce. These subsidies, which in 2016 for all OECD countries totaled US$228 billion (OECD 2017), not only stymie export opportunities but often result in the importation of foodstuffs into countries whose economies are largely based on agriculture.
Undoubtedly, there is merit to this claim. In particular, export subsidies, which governments provide to off-load surplus output at below-market costs, have a particularly devastating impact on farmers in the developing world, who find themselves unable to compete even within their home markets. As such, it is highly appropriate that export subsidies were targeted in the Uruguay Round of the General Agreement on Trade and Tariffs (GATT), the conclusion of which, in 1994, established the World Trade Organization.
That said, would the elimination of remaining subsidies, such as the price supports long used by the Europeans and extended under the 2014 US Farm Bill, necessarily enable increased agricultural exports to the north and thereby solve the problems of development among the world’s poorest countries? Would agricultural commodity markets free of government intervention generate better market signals? Are farm subsidies truly the cause of so much suffering? This entry seeks to address this question through a historical review of agricultural subsidies in the West, including its rationales, and a critical assessment of the implications of subsidy removal.
A Brief History of Agricultural Subsidies in the West
The first calls for national scale farm support can be traced to the collapse of commodity prices following World War I. In the United States, the McNary-Haugen Plan, which aimed to raise American farm incomes through export subsidies, was prepared and submitted to the Congress in the early 1920s. However, the bill met defeat at the urging of President Hoover who, presciently, feared that it would lead to inflation, overproduction, and oligopolistic control.
Curtailed investment in agriculture during the depression of the early 1930s brought renewed calls for government support. Some have argued that pressure from agribusiness, rather than from the farm community, advanced and secured state intervention (e.g., Benedict 1955); commodity prices were too variable for agribusiness to secure stable returns for their tractors and fertilizers. Whatever the ultimate cause, at the tail end of the depression, legislation, such as the 1933 United States Agricultural Adjustment Act and, in Canada, the 1935 Prairie Farm Rehabilitation Act and the 1934 Natural Products Marketing Act, was passed to, respectively, pay farmers to take land out of crop production and plant cover crops to prevent soil erosion and establish single-desk marketing boards such as the Canadian Wheat Board.
Food scarcities in Europe during World War II created a new and powerful rationale for agricultural support – achieving food self-sufficiency. In 1957, the Treaty of Rome established Europe’s Common Agricultural Policy (CAP); its goals, as articulated in Article 39(1), were to increase agricultural productivity; ensure a fair standard of living for farmers; stabilize markets; and ensure the food supply and fair consumer prices.
In the United States in the 1950s, the challenge was not too little food, but too much. Support payments were espoused to deal with overproduction and farm income concerns, which were delivered in 1954 through United States Public Law 480. The key support mechanism was an export subsidy, which not only disposed of surplus stocks and stabilized farm incomes but also helped to develop foreign markets, gain political influence abroad, and serve humanitarian purposes. Income instability was similarly an issue in Canada, which was addressed through the Agricultural Stabilization Act (ASA) of 1958, providing support payments to producers during periods of low commodity prices. This was coupled with below-market credit and crop insurance so that producers could invest without fear of devastation owing to weather events or price downturns. It is hardly a surprise, then, that output levels in Canada, as in the United States, expanded significantly over the ensuing decades.
By the mid- to late 1980s, excess production had become the problem of agriculture throughout the industrialized world, including in Europe. Guaranteed prices for key commodities had achieved the desired effect, but the resultant food surpluses only served to put downward pressure on market prices, thereby necessitating even greater subsidization by governments to ensure fair prices and incomes for producers. Indeed, an export subsidy war developed between the United States and the European Union with reverberations well beyond those two jurisdictions. Recognition of a “farm crisis” by the late 1980s prompted calls for reform through international cooperation. Writing at the time, Goodman (1991, p. 60) concluded: “Agriculture in advanced capitalist countries now exhibits precisely those characteristics which state regulation was intended to attenuate – market instability, low returns on capital, falling farm incomes, and farm failure.”
Agriculture’s virtual exemption from the GATT rules ended with the completion of the Uruguay Round (1986–1994). The Agreement on Agriculture opened market access (by converting import bans into tariffs, which were then reduced by an average 36%), lessened domestic and export subsidies (by 20% and 36%, respectively), and created new rules around sanitary and phytosanitary standards (SPS) to limit their use as a barrier to trade. These reforms, and those that have followed, have been celebrated by governments in the Global South and poverty activists as critical steps to levelling the international trade playing field. Might further reform be possible? Might agricultural subsidies become unnecessary or at least unjustifiable?
Why Subsidize Agriculture?
As exemplified by conditions in Europe through the first half of the last century, insufficient food supply relative to demand had long justified government intervention in commercial agriculture; Robinson (1989) labels this the “food problem.” In their desire to secure reliable, safe, and inexpensive food supplies for their populations, governments have provided subsidies on key inputs like fertilizers, offered below-market-value credit and insurance, and offered guaranteed prices for commodities that might never be sold in competitive markets.
More commonly, governments have subsidized agriculture because of the “farm problem,” which is primarily the problem of instability, be it of prices, a farmer’s output level, or income. This instability derives from a number of sources. First and foremost, the biological basis of agriculture, with its dependence on variable climatic conditions and its lengthy production cycle, leads to variable output levels and therefore unstable returns. This supply variability combines with generally inelastic demand for most agricultural output to create a second source of instability – price variability. That is, a supply-induced change in price creates a less than proportionate change in demand. From the perspective of the producer, this means that a small change in aggregate supply (typically upwards as a result of technology adoption) produces a disproportionally large change in price (typically downwards). For example, between 1978 and 1999, the price of Western Red Spring Wheat in Canada varied from year to year, on average, by 15.7% in nominal terms and 16.5% in real terms (Bradshaw 2004). This level of price variability is significantly higher than that of markets for manufactured goods. For example, over the same period, the average change in the price of a Canadian car from the previous year was 5.1% in nominal terms and 1.9% in real terms (Statistics Canada 1999).
Another source of instability centers on market failure because of imperfect competition. Neoclassical economic price theory assumes the existence of market equilibrium in the absence of government intervention. However, that equilibrium is rarely, if ever, achieved within agricultural commodity markets due to the vastly dissimilar degrees of competition between primary producers and agribusiness. This feature of agriculture is widely understood and far from radical – indeed, the 1969 Canadian Royal Commission on Farm Machinery reached a similar verdict with respect to the cost of tractors and replacement parts in the Canadian market place. This feature provides one further reason for the chronic tendency for unstable and generally low agricultural commodity prices. That is, the “farm problem” is more than just about instability; rather, highly inelastic demand, the slow growth of total demand, an imperfectly competitive market structure, rapid technological change leading to growing supply over time, and the tendency of resources to get fixed within the industry cause commodity prices to be highly variable and, in real terms, decline over time. Hence, governments have intervened by purchasing output, erecting tariffs on imports, or subsidizing prices and incomes. Of course, the net-effect of all this support has been to create surpluses that markets cannot absorb, leading to drastic declines in market prices and, paradoxically, further calls from producers and their representatives for government support. Is it indeed time to revisit the use of agricultural subsidies to address the “farm problem”? What might we expect from such reform?
Implications of Agricultural Subsidy Reform
As introduced earlier, a key reason why poverty activists and many political leaders have long called for agricultural subsidy reform is due to the perverse impact of subsidies on agricultural commodity markets into which producers in the Global South seek to sell their goods. While there is considerable merit to this claim, subsidy removal is no panacea. First, market access is often a separate issue to the provision of subsidies. Subsidies may be cut, but access to markets may still be limited by existing marketing channels, cultural norms, food safety standards, or, most blatantly, import duties. If unqualified access to northern markets can indeed be achieved, opportunities for enrichment may be realized for competitive producers in the developing world in the near term, but the longer-term prospects of pursuing economic development based on the export of a limited number of unprocessed cash crops are less certain. Not only are such commodities prone to wild price fluctuations, but, again, over time they tend to deflate in value relative to manufactured goods. These declining terms of trade can severely limit long-term wealth generation, especially when coupled with challenges facing southern producers around access to land, capital, technology, and value-added opportunities. Of course, the export of cash crops also has implications for food security given that, where cash crops such as coffee replace food crops such as cassava, local food supplies become less reliable. This is especially troubling where farming of food crops on prime agricultural lands is displaced by cash crop production for foreign markets, thereby relegating subsistence production to marginal lands.
Even in the Global North, the fate of farmers selling into markets free of government intervention is uncertain. Though the “farm problem” can be exacerbated by government supports, these supports are not its cause. Over time, productivity gains have been achieved irrespective of government intervention, and this has largely contributed to declining prices. As intimated above, a vicious cycle exists; in export-oriented sectors in particular, farmers have internalized the need to increase production in order to combat highly variable and, over the long term, declining prices for their goods. Expansion is required for success, yet this expansion adds to depreciating prices. Hard-core free-marketers argue that, in the absence of government interference, a state of equilibrium will eventually be achieved in the market place and the industry, but this belies the historical realities of commercial agriculture (see Fraser 1992; Bradshaw 2004).
In addition to these market troubles, farmers deal with numerous inevitable risks of production, such as droughts and diseases. Some analysts suggest that subsidies that buffer these risks only hinder adaptation efforts, and there is certainly some truth to this. However, there may also be limits to such individual efforts, and in many cases, public support may be necessary to cover initial losses and kick-start adaptation. This is one of the great lessons from the Dust Bowl days on the prairies. It was support from government that first enabled farmers to plant trees and thereby secure the topsoil. This event taught the Canadian public that it has a vested interest in agricultural lands and can play a financial part in supporting good stewardship. For these and other reasons, certain farm subsidies can play a useful role in stabilizing food production systems. The key is to find a means of supporting producers without distorting markets; this requires that programs provide income supports rather than price supports, as exemplified by Canada’s Net Income Stabilization Account (NISA) program. In short, though considerable evidence reveals problematic unintended consequences of agricultural subsidies, it is, perhaps, naïve to imagine that their removal will solve the longstanding problems of commercial agriculture.
- Benedict, M. R. (1955). Can we solve the farm problem? New York: The Twentieth Century Fund.Google Scholar
- Goodman, D. (1991). Some recent tendencies in the industrial reorganization of the agri-food system. In W. H. Friedland, L. Busch, F. H. Buttel, & A. P. Rudy (Eds.), Towards a new political economy of agriculture (pp. 37–64). Boulder: Westview Press.Google Scholar
- OECD. (2017). Producer and consumer support estimates database. Available at http://www.oecd.org/tad
- Robinson, K. L. (1989). Farm and food policies and their consequences. Englewood Cliffs: Prentice Hall.Google Scholar
- Statistics Canada. (1999). CANSIM data base: Canadian socio-economic information management system. Ottawa: Statistics Canada.Google Scholar