Thursday, June 26, 2003

The word out of Europe today is a "radical" reform of the Common Agricultural Policy. By cutting subsidies dramatically, the logic goes, trade "distortions" will be lessened as well, farmers in the Global South will gain new access to European markets, and all will be right with the world.

But are subsidies the real cause of agricultural overproduction and subsequent dumping on the world market? University of Tennessee ag economist Daryll Ray doesn't think so. According to Ray, "The subsidies did not cause the low prices, the low prices caused the subsidies."

The structure of agriculture in the US and EU today gives farmers and agribusiness every incentive in the world to overproduce regardless of subsidies. When there are no price floors, when you have minimal control over your conditions of production, when profit margins are miniscule and thus high volume is required to turn any profit at all, when public research money is plowed into new technological means to overproduce, you have a situation in which overproduction is written into the script.

This is true in major ag exporting countries of the Global South as well. As Ray says,
Brazil and Argentina have long-term development agendas and using their economic competitive advantage in agricultural production appears to be one of the strategies they are using to achieve their goals. U.S. policies and prices, exchange rates, and a host of other influences may marginally affect the rate of growth of soybean acreage and production in Brazil and Argentina, but basically it's a train that has left the station and it has considerable momentum.
The political consensus forged in the US in particular is built on cheap food, and low prices in agriculture are necessary for that political foundation to be maintained. Americans will protest a loss of their Doritos long before a loss of their democracy! The bottom line:
But is important to remember the direction of causation: the low prices caused the increase in subsidies, subsidies were not large and then prices fell. Another important point: just as farmers in other countries who do not have subsidy programs have not reduced production materially, neither would farmers in this country reduce production substantially if subsides were lower. Land prices would plummet and some land would change hands but production would continue unabated.


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