The cost of food subsidies

A report published in September 2019 by the Food and Land Use Coalition estimates the total value of world food production at $10 trillion per year. However, the report argues that the environmental cost of food production is an additional $3.1 trillion, an amount that is not being paid by consumers, but being passed on in debt to future generations.*

As the graph below shows, the report’s authors estimate that the annual hidden costs of our current system of agriculture are even greater once you add in health and development. However, I am not sure that one can blame our farmers for, say, the world obesity epidemic, nor for malnutrition.

However it is not clear where subsidies fit into the calculations. The International Food Policy Research Institute (IFPRC), using OECD data, estimate that governments pay out $700 billion in farm subsidies each year, three-quarters of which are paid directly to farmers.

The Food and Land Use Coalition estimate the figure at closer to $1 trillion per year, and argues that the world has to “switch these subsidies into explicitly positive measures.” They say that they are a massive lever that could be used “to incentivise the farming community across the world to act differently.”

The EU agricultural subsidy bill comes to $65 billion per year, accounting for around 40 percent of the EU’s annual budget. However, as the New York Times recently reported, it is not always clear where the money ends up. One well-known statistic is that about 80 percent of EU agricultural aid goes to the top 20 percent of farmers; some 125,000 beneficiaries receive around $14.3 billion, or about $113,500 per farmer.

In the past couple of years the Trump administration has given US farmers about $28 billion in additional subsidies to offset the effect of the trade wars and the resulting higher Chinese tariffs on US agricultural products.

However, when it comes to agriculture, direct subsidies are just one of the screwdrivers in a government’s toolbox. As the Food and Land Use Coalition write in another report, there are three types of agricultural support:

• Trade or border measures such as tariffs or quotas that provide market price support;
• Direct subsidies on output or on the inputs (such as fertilizers or seeds) that create incentives to increase output;
• Decoupled subsidies that avoid incentives that change output levels but provide direct income support to farmers.

The nature of agricultural support has changed substantially in the past 20 years or so. The traditional pattern of agricultural support involved substantial support to farmers in the rich countries, while poor countries, on balance, used to tax agriculture. In wealthy nations, average rates have fallen and there has been a move away from trade measures and towards decoupled protection that seeks to avoid pushing for higher agricultural production and reducing the market access opportunities of other countries.

In developing countries, agricultural policy has shifted from net taxation to net assistance: most support is provided through border measures that generate revenues, such as tariffs, rather than subsidies paid by governments.

In an interview for my 2015 book The Sugar Casino, Sunny Verghese, CEO of Olam and current chair of the World Business Council for Sustainable Development, estimated that “between 55 and 60 percent of global agriculture is unviable (economically and environmentally), only supported by government subsidies and transfers from taxpayers to the farmers.” He cited 2012 figures that showed that the 30 OECD countries paid out US$387 billion in farm subsidies, while the rest of the world paid out around $615 billion.

I asked Sunny how he would resolve the dilemma that you need higher agricultural prices to reflect the true cost of food, but that higher prices will affect the poor people the most. He suggested a “simple” answer: transfer all the subsidies that the rich world gives to farmers who don’t actually need the money – to the poor.

“We need to start to try and use those subsidies to ensure that people below the poverty line are not impacted by high food prices,” he told me.

© Commodity Conversations ®

*I remember seeing another study, perhaps by the WWF, that estimates the annual environmental cost of food production at $2 trillion, but I have been unable to locate the report. If anyone does know where I can find it, please let me know.