Free Essay

Impact of Agricultural Subsidies

In: Business and Management

Submitted By Euael
Words 4143
Pages 17
WHO REALLY BENEFITS FROM AGRICULTURAL SUBSIDIES? EVIDENCE FROM FIELD-­‐LEVEL DATA Barrett Kirwan University of Maryland

Michael J. Roberts North Carolina State University February 2010 [Preliminary and Incomplete] ABSTRACT The idea that agricultural subsidies are fully capitalized into farmland values forms the foundation of the argument that subsidies are entitlements and removing them would drastically reduce farmland asset values. Surprisingly little evidence substantiates this claim. Using field-­‐level data and explicitly controlling for potentially confounding variables we find that landlords only capture between 14 – 24 cents of the marginal subsidy dollar. The duration of the rental arrangement has a substantial effect on the incidence. Initially, landlords extract 44 cents of the marginal subsidy dollar, but the incidence falls by 1.5 cents with each additional year of the rental arrangement. This duration effect reveals that rental market frictions play an important role in the farmland rental market.

Introduction In the twenty-­‐first century, subsidized American farmers have gleaned, on average, $8,824 annually in subsidy payments, making agricultural subsidies one of the largest per-­‐capita transfer programs in the U.S. Although originally motivated by equity concerns, farm subsidies today are generally considered entitlements.1 According to conventional wisdom, since subsidies are fully capitalized into farmland values, the first generation of subsidy recipients reaped a windfall gain in the form of higher asset values, while all subsequent generations have purchased the “right” to agricultural subsidies by purchasing subsidy-­‐inflated farmland.2 Recent evidence from farm-­‐level data, however, indicates that only 23 to 64 cents of the marginal subsidy dollar gets capitalized into farmland values (Goodwin et al 2005; Kirwan 2009). These estimates weaken, and at the low end of this range effectively eliminate, a primary rationale supporting transfer payments to American farmers. The fundamental unit in the theory of agricultural subsidy incidence is the plot of

land being transacted, i.e., the field. This paper augments recent farm-­‐level analysis focused on subsidy capitalization by using nationally representative field-­level data to test the theory at the ultimate level of analysis. These unique field-­‐level data pair a field’s subsidy rate with its rental rate. Farm-­‐level analysis, in contrast, pair the farm-­‐average rental rate to the farm-­‐average per-­‐acre subsidy. Although previous analysis (Roberts et al 2005, Kirwan 2009) used farm-­‐level longitudinal data to control for farm-­‐level unobserved

1 Agricultural subsidies began in 1933, when average farm income was 32% of average non-­‐farm income (Gardner, 1992), and aimed to give “agriculture a fair share in the national income” (Nourse et al 1937). By 1970 farm and non-­‐farm income had essentially converged. 2 Orden, Paarlberg, and Roe (1997) provide a historical perspective on the evolving justification for farm subsidies, emphasizing the ‘entitlement’ argument.

2

heterogeneity, the incidence question fundamentally calls for field-­‐level data to relate changes in the subsidy per acre to changes in the per-­‐acre rental rate. The farm-­‐level incidence estimate may be biased downward if farmers own most of their subsidized acres and rent unsubsidized acres. In the extreme case where no subsidized acres are rented, but the farmer owns subsidized acres, a farm-­‐level analysis would estimate no relationship between subsidy changes and rental rate changes, even if the implicit rental rate of subsidized acres rises one-­‐for-­‐one with the marginal subsidy dollar This paper overcomes the farm-­‐level aggregation issue by bringing field-­‐level data

to bear on the question. Using a nationally representative sample of soybean and rice fields, we find, similar to Kirwan (2009), that landlords extract less than one-­‐quarter of the marginal subsidy dollar through higher rental rates. These findings provide further evidence that subsidies are not fully capitalized into the land values and, consequently, are not entitlements. The findings also restore confidence in the usefulness of farm-­‐level data to address important policy questions. This paper also attempts to explain why theory and evidence diverge substantially by examining the institutions surrounding the farmland rental market. We find evidence that landlords are typically retired and often depend heavily on the income stream provided by the farmland, as if it were an annuity. Evidence of thin rental markets, i.e., few tenants, combines with landlords’ inelastic demand for tenants to provide the marginal tenant with substantial bargaining power.

The paper is structured as follows. First, we search the historical literature for clues to answer the incidence question, and we highlight the importance and novelty of this approach by contrasting it with the previous research. We explain the advantages of farm-­‐

3

level data in the context of past research. Next we examine the available evidence on the institutional structure of the farmland rental market. We then develop our empirical model and perform the analysis, and finally we interpret the results in light of the institutions surrounding the farmland rental market. The Incidence Question A common weakness of the literature is the inability to identify the effect of

subsidies. This identification problem arises from estimating a fundamentally unidentified system. Consider the standard workhorse model of farmland value determination: the present value model (e.g., Melichar, 1979; Robison et al., 1985). Many unknowns characterize the present value model. The unknowns of greatest concern are the expected subsidy stream, the discount rate, and the proportion of the subsidy that becomes capitalized into the land value, i.e., the incidence. The present value model, however, is a single equation. As a system, the present value model of land price determination is underidentified. No parameter of this system can be identified without further information or restriction on the other unknown parameters. Typically, investigators assume (often implicitly) that the entire subsidy dollar gets capitalized into the land value, thereby restricting the incidence parameter to equal one. Ultimately, investigators have left unanswered the most policy-­‐relevant question: what proportion of the marginal subsidy dollar is capitalized into land values? The answer to the question confirms or repudiates the conventional wisdom that the landowner primarily benefits from agricultural subsidies; it clarifies who benefits from agricultural subsidies and how much they benefit; and it supports or discredits the contention that subsidies are entitlements. The incidence question lays the groundwork for welfare

4

analysis of agricultural subsidies and illustrates the distribution of subsidies. Knowing the incidence of the marginal subsidy dollar enlightens our understanding of the political process by illuminating the value transferred to key benefitting constituencies. To study the incidence question, one must appropriately deal with expected subsidies and the discount rate. Roberts et al. (2003) and Kirwan (2009) demonstrate how to do this by focusing on the farmland rental market. Because rental rates are per-­‐period prices reflecting the productive value of agricultural land, this approach avoids making assumptions about expectations or the discount rate over future periods. By focusing on farmland rental rates, these investigators can cleanly estimate the incidence without relying on strong assumptions about other key parameters. The Farmland Rental Market In the U.S., farmers rent 360 million acres of farmland, an area equal to 38 percent of all farmland and comparable to all the farmland in the 13 Corn Belt states.3 Table 1 reports statistics on the farmland rental market from the 1992, 1997, and 2002 Censuses of Agriculture. In 2002, farmers paid $8.7 billion in cash rent, a 47% increase from 1992. This expense accounted for 11.3 percent of total production expenditures by renters. At the same time the number of tenants dropped 25 percent while their farm sizes increased 11 percent.

The importance of the farmland rental market cannot be overstated. The farmland rental market is also an important market for subsidized land. The

1999 Agricultural Economics and Land Ownership Survey (AELOS) reveals that farmers rent a majority of cropland acres, which are the only type of land that is subsidized. Data

3According to the 2002 Census of Agriculture, there are 361.7 million acres of farmland in Iowa, Indiana,

Illinois, Ohio, South Dakota, Nebraska, Kansas, Minnesota, Wisconsin, Michigan, Missouri, Kentucky, and North Dakota.

5

from the 1996 Agricultural Resource Management Survey (ARMS) demonstrate that 45 percent of subsidized acres are rented.

According to the conventional wisdom, landowners are the primary beneficiaries of agricultural subsidies. In the U.S., non-­‐farmer landlords own 87 percent of rented farmland.4 Since the vast majority of rented, subsidized land is likely owned by non-­‐ farmers, the conventional wisdom implies a significant share of agricultural subsidies leaves the agricultural sector and accrues to non-­‐farmer landlords. A New Approach This paper overcomes the shortcoming of previous work by using novel, acreage-­‐

level data to estimate the incidence of agricultural subsidies on farmland rental rates. In 2006, the USDA’s Agricultural and Resource Management Survey (ARMS) phase II survey of soybean and rice fields elicited information on rent paid and subsidy payments received on all cash-­‐rented parcels of land. The survey also obtained information on expected yields and historical rotations, which serve as powerful controls for land quality. The data are unique in that they link subsidies to the specific cash-­‐rented parcels to which the subsidies are tied. Table 2 contains summary statistics from these data. Table 2 illustrates some differences between soybean fields and rice fields. Notably,

the average rice-­‐field rental rate is 30 percent higher than that of the average soybean field. This reflects both the higher yield, 41.6 bushels/acre of soybeans versus 72.7 bushels/acre of rice, and an historically higher price. Rice acres receive substantially higher subsidies, too. At nearly $60/acre, the average rice subsidy is 3½ times greater than the $17/acre average soybean subsidy. Further contrasts are that the rice field is almost twice as likely

4 The 1999 AELOS data reveal that non-­‐farmer landlords also own 55 million farmland acres that are not rented out and, presumably, are left unfarmed. 6

to be harvested for seed, and the crop rotation for rice fields is evenly spread between a rice-­‐soybean rotation, continuous rice, and a rice-­‐fallow rotation. In contrast most soybean fields are in a corn-­‐soybean rotation. Overall, the summary statistics suggest that rice and soybean fields are sufficiently distinct to warrant separate analysis. Empirical Strategy The model we use to estimate the incidence of agricultural subsidies on farmland rental rates is (1)

,

where ri is the rental rate for field i. The per-­‐acre Direct Payment subsidy is gi,. Xi is a vector of observable covariates, including field-­‐level costs and returns. Regional differences in production practices are accounted for by fj, a fixed effect for region j. In the U.S., agricultural subsidies and farmland rental rates are mechanically

connected. Agricultural subsidies are a function of program yield, a parameter that reflects the underlying productivity of the subsidized field. Since more productive fields command a higher rental rate, the simple correlation between subsidies and rental rates not only reflects the causal effect of subsidies, but it also incorporates a spurious, positive mechanical relationship, resulting in upwardly biased incidence estimates. Typically, a field’s underlying productivity is unobserved, and the econometrician

has to resort to other methods to account for the spurious upward bias, e.g., fixed effects. The 2006 ARMS, however, explicitly asked farmers for their expected yield on the field. Presumably the farmer knows the field’s underlying productivity and bases his answer on this, thus providing an explicit measure of each field’s underlying productivity. Armed with this information, we account for the spurious mechanical relationship by explicitly

7

controlling for each field’s underlying productivity. We thereby isolate the causal effect of subsidies on farmland rental rates. Results—Rental Rates Incidence In light of the differences between rice and soybean fields illustrated in table 2, we

initially perform the analysis separately for each crop. Results from this analysis are reported in tables 3 and 4. Table 3 contains the results using the sample of soybean fields to estimate equation 1. The first column reports the results of a simple bivariate regression of rental rates on subsidies. At the field level, before controlling for any field characteristics we estimate an incidence of 0.45; in other words, rental rates increase by 45 cents with the marginal subsidy dollar. Even the simple correlation rejects the conventional wisdom that the landlord extracts a substantial portion of the marginal subsidy dollar. Controlling for observable characteristics of the soybean fields lowers the incidence estimate to 0.25. Accounting for region-­‐specific unobserved heterogeneity with region fixed effects lowers the estimate to 0.24. Interestingly, this estimate is nearly identical to that found by Kirwan (2009) using farm-­‐level data. Table 4 contains the results for the sample of rice fields. Here the story is very much

the same. The bivariate relationship in column one is very different than the conventional wisdom, which posits the coefficient should equal 1. Here, the coefficient is 0.16, but it is statistically indistinguishable from zero. Adding covariates to control for field level observable characteristics provides a statistically significant estimate of 0.19. Including region fixed effects results in a still-­‐significant 0.14. This estimate is substantially smaller than the soybean-­‐subsidy incidence, suggesting that differences in the farmland-­‐rental market structure could help explain the lower-­‐than-­‐expected incidence estimates.

8

Although the soybean and rice farmland rental markets appear to be somewhat

different, both reveal that landlords capture a surprisingly low portion of the marginal subsidy dollar. Table 5 combines the two crops into a single analysis. The bivariate relationship reveals a 0.27 estimate; the estimate falls to 0.14 after controlling for observable field characteristics, and ultimately the combined analysis yields an incidence estimate of 0.08. In any case, the conventional wisdom that landlords extract a substantial share of the marginal subsidy dollar appears to be wrong. Results—Net Returns The analysis above establishes that 75 – 85 cents of the marginal subsidy dollar are

not extracted by the landlord and are available for the tenant. Whether the remaining subsidy accrues to the tenant or another factor of production owner, however, is an empirical question. Following the identification strategy outlined above, we examine the effect of the marginal subsidy dollar on tenants’ net returns, controlling for field quality and farming practices. Column 4 of table 4 reports the results for soybean fields. Sixty-­‐ three of the remaining 76 cents are retained by the tenant farmer. Contrary to conventional wisdom and standard economic theory, the vast majority of the marginal subsidy dollar stays with the tenant farmer. Discussion One of the fundamental assumptions behind the standard model of economic incidence is perfect competition. Yet the farmland rental market might not be perfectly competitive. Kirwan (2009) found evidence that tenants have some market power. Market power may arise as farms grow larger and distance between parcels embodies transactions costs that could limit local competition. Additionally, Young and Burke (2001) hypothesize

9

that social norms may play a role in share-­‐rent contracts, and they find evidence supporting this hypothesis. Examining the available data on the farmland rental market and the tenant-­‐landlord relationship could inform us of the degree of market competition and the reasonableness of Young and Burke’s social norms hypothesis. Farmland Rental Market Frictions The empirical results demonstrate the failure of the standard economic model to

explain the farmland rental market. As with many other markets, the perfect-­‐information, frictionless-­‐markets assumptions appear untenable. Explaining the incidence results requires a closer look at the how the farmland rental market functions. One exceptional characteristic of the farmland rental market is the longevity of tenant-­‐landlord relationships. Allen and Lueck (2002) report an 11.5-­‐year average tenant-­‐landlord relationship duration in Nebraska and South Dakota. In Illinois, Sotomayer, Ellinger, and Barry (2000) report the mean tenant-­‐landlord relationship duration to be 14.4 years. According to the 2006 ARMS data, the average rental duration among soybean producers is 13 years, and the median duration is 10 years. Long-­‐lived contracts may be indicative of several rental-­‐market frictions. For

instance, heterogeneous land and farmer quality might result in a matching problem. Once tenants and landlords find a suitable match, the likelihood of separation will be low and decreasing with longer matches. Alternatively, transactions costs could explain long-­‐lived contracts, but the separation likelihood would increase with contract length as fixed transactions costs are spread over a longer period. We explore the role of rental arrangement duration in the incidence findings

introducing the duration of the landlord-­‐tenant relationship into the model and interacting

10

it with the subsidy measure. Table 6 contains the results of this analysis. Column 1 repeats the results from column 3 of table 3. The rental duration has a substantial direct effect— reducing the rental rate by 32 cents for every year of rental arrangement. Adding only the rental duration, however, has no effect on the incidence estimate. Interestingly, interacting the rental duration with the subsidy results in a substantial change to the direct incidence estimate, which nearly doubles to 0.44. The direct effect of the rental duration becomes insignificant, while the interaction term is marginally significant with a p-­‐value of 0.105. According to these estimates, the rental rate incidence falls by about 1.5 cents for every year of rental duration. At the median duration (10 years) the rental rate is 15 cents (roughly 33 percent) lower than in the first year of a the rental arrangement. The Tenant-­Landlord Relationship The tenant-­‐landlord relationship is an important, yet relatively unstudied aspect of the farmland rental market. Allen and Lueck (2002) report simple contractual arrangements, often “sealed with a handshake.” Typically, rental contracts are renegotiated annually (Allen and Lueck, 2002), but, as noted above, tenant-­‐landlord relationships appear to be quite long-­‐lived. Little more, however, is known of the representative tenant-­‐landlord relationship. Nationally representative data do not exist to answer fundamental questions such as the following: “How do tenants and landlords match?”; “Why are tenant-­‐landlord relationships so long-­‐lived?”; and “Do rental rates adjust annually, or only when there is a new tenant-­‐landlord match?” Understanding tenant and landlord characteristics can facilitate a better understanding of tenant-­‐landlord relationships. As reported in Kirwan (2009), the average tenant appears to farm about 30 percent more land than the typical subsidized-­‐crop

11

producer. Tenants are more profitable on average, earning 6 percent more per acre than the average farm, and they are 8 percentage points more likely to receive subsidies.

Generally, farmland rental contracts are between a farmer and a non-­‐farmer landlord; the 1999 AELOS, which surveys every landlord associated with a random sample of farm operators, gives a glimpse at the characteristics of non-­‐farmer landlords. As reported in table 2, the median non-­‐farmer landlord is retired (52 percent are), and nearly half (42 percent) of the retired landlords are retired farmers. The median age among retired landlords is 74. Figure 1 illustrates the importance of rental income as a share of total income by landlord type. As illustrated in figure 1 and reported in table 2, rental income comprises more than half of total income for 11 percent of non-­‐farmer landlords. Retired farmer landlords are particularly dependent on rental income; 29 percent of them derive over half of their income from renting out farmland.

Another important characteristic of non-­‐farmer landlords is their proximity to the rented land. A majority (51 percent) of non-­‐farmer landlords live within 5 miles of the land they rent out. Nearly 70 percent live within 25 miles, and only 13 percent live more than 150 miles away. Although landlords generally live near their farmland, not all landlords are rural residents. Forty-­‐eight percent of all landlords live in a non-­‐rural setting. Thirty-­‐ eight percent of all landlords live on a farm. These data provide some insight into the workings of the farmland rental market and the landlord-­‐tenant relationship. They indicate that landlords are close enough to their land and, since they are retired, have enough time to monitor the tenants’ use of the land. Landlords also might be subject to social norms as Young and Burke (2001) suggest. Since most landlords are local, they likely interact with their tenants in other settings. Because

12

rental income can be a large share of landlord income, it is important for landlords to find a tenant rather than leave their land idle. These characteristics suggest that tenants will have some bargaining power. That power derives from the landlord’s social and search costs associated with breaking a relationship with a current tenant and establishing a relationship with a new one. While such costs are likely bi-­‐lateral, it is not difficult to imagine how these departures from perfect competition could allow tenants to extract a share of subsidy benefits. Conclusion Economists have long suggested that agricultural subsidies become fully capitalized

into farmland values, and that subsidies only benefit farmers inasmuch as they are landowners. This rationale has lead to the argument that current landowners bought the “right” to the stream of subsidy payments when they paid for their land at subsidy-­‐inflated prices. In other words, by this line of thought, subsidies are entitlements. This paper refutes that notion by demonstrating that the landowner captures only 14 – 24 cents of the marginal subsidy dollar. Since subsidies have such a minor effect on farmland prices, the entitlement argument for continued agricultural subsidies falls. This paper improves on previous analysis by using data at the appropriate level of

aggregation and explicitly controlling for each field’s fundamental productivity, thereby overcoming omitted variable bias. Subsidies are a positive function of the subsidized land’s underlying productivity, hence, failure to account for the land’s fundamental productivity results in an upward biased incidence estimate. We explicitly control for the farmland’s underlying productivity by using farmers’ self-­‐reported expected productivity of the field. Using field-­‐level data, which is commensurate with the unit of analysis in standard

13

incidence theory, we find that farmland rental rates for subsidized soybean fields increase by 24 cents with the marginal subsidy dollar, and subsidized rice field rental rates increase by only 14 cents. To explain the low incidence estimate we look to the limited data on the farmland

rental market. Available evidence on tenant-­‐landlord relationships indicates that landlords have a relatively inelastic demand for tenants. Coupled with the increasing size of tenant farms, tenants appear to have substantial bargaining power, enabling them to extract most of the subsidy rents. In spite of the volume of research on the relationship between farmland values and agricultural subsidies, investigators, hampered by conventional wisdom and poor data, have not adequately addressed one of the most fundamental questions of agricultural policy analysis: “how much of the marginal subsidy dollar accrues to the landowner?” This paper answers the question using unique data that overcome several endogeneity concerns. We also highlight the need for more data on the farmland rental market to adequately explain the severe departure from economic theory.

14

References Allen, Douglas W. and Dean Lueck. 2002. The nature of the farm: contracts, risk and organization in Agriculture, Cambridge, Massachusetts: Massachusetts Institute of Technology Press. Goodwin, Barry K., Ashok K. Mishra, and François Ortalo-­‐Magné. 2005. “Landowners' Riches: The Distribution of Agricultural Subsidies.” Working paper, February 2005. Kirwan, Barrett E. 2009. “The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates." Journal of Political Economy. 117(1). Just, Richard E., and John A. Miranowski. 1993. "Understanding farmland price changes." American Journal of Agricultural Economics 75, (1) (Feb.): 156-­‐68. Melichar, Emanuel. 1979. "Capital gains versus current income in the farming sector." American Journal of Agricultural Economics 61, (5, Proceedings Issue) (Dec.): 1085-­‐92. Orden, D., R. Paarlberg, and T. Roe. 1999. Policy Reform in American Agriculture. Chicago, IL: The University of Chicago Press. Nourse, Edwin, Joseph Davis, and John Black. 1937. Three Years of the Agricultural Adjustment Administration. Washington, DC: Brookings Institution Press.

Roberts, Michael J., Barrett Kirwan, and Jeffrey Hopkins. 2003. The incidence of government program payments on agricultural land rents: The challenges of identification. American Journal of Agricultural Economics 85, (3): 762-­‐9. Robison, L. J., D. A. Lins, and R. Venkataraman. 1985. Cash rents and land values in united-­‐ states agriculture. American Journal of Agricultural Economics 67, (4): 794-­‐805. Sotomayer, N.L., P.N. Ellinger, and P.J. Barry. 2000. “Choice among Leasing Contracts in Farm Real Estate.” Agricultural Finance Review 60: 71-­‐84. U.S. Department of Agriculture. 1996. Agricultural Resource and Management Survey (ARMS) ERS and NASS. Washington DC. U.S. Department of Agriculture. 1999. Agricultural Economics and Land Ownership Survey (AELOS) NASS. Washington DC.

15

Young, H.P. and M.A. Burke. 2001. “Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture.” The American Economic Review 91 (June): 559-­‐ 573.

16

17

18

19

20

21

22

23

24

Similar Documents

Premium Essay

Agricultural Subsidies

...Business September 25, 2012 Agricultural Subsidies and Development Summary of Case Study: Agricultural Subsidies and Development The closing case describes the government sponsored subsidies and tariffs on agricultural products in the United States and EU countries. The subsidies and tariffs protect farmers in those countries from low commodity prices, however at the same time, hurt farmers in the developing nations. According to the United Nation, the subsidies and tariffs effectively cancel out the aid provided by the developed world to the developing nations by limiting export earnings from agricultural products. Discussion of this case can revolve around the following questions: 1) If agricultural tariffs and subsidies to producers were removed overnight, what would the impact be on the average consumer in developed nations such as the US and the EU countries? What would the impact be on the average farmer? Do you think the total benefits outweigh the total cost or vice versa? I believe if agricultural tariffs and subsidies were removed overnight the impact on the average consumer in a developed nation would be, the prices of goods would rise because developed nations would no longer be dumping the surplus of good on the world market. The impact on the average farmer would be that they are no longer protected from international demand and prices. I do not think the total benefits outweigh the cost; they should remove all tariffs and subsidies and make it possible for...

Words: 336 - Pages: 2

Premium Essay

Agricultural Subsides and Development

...Business September 25, 2012 Agricultural Subsidies and Development Summary of Case Study: Agricultural Subsidies and Development The closing case describes the government sponsored subsidies and tariffs on agricultural products in the United States and EU countries. The subsidies and tariffs protect farmers in those countries from low commodity prices, however at the same time, hurt farmers in the developing nations. According to the United Nation, the subsidies and tariffs effectively cancel out the aid provided by the developed world to the developing nations by limiting export earnings from agricultural products. Discussion of this case can revolve around the following questions: 1) If agricultural tariffs and subsidies to producers were removed overnight, what would the impact be on the average consumer in developed nations such as the US and the EU countries? What would the impact be on the average farmer? Do you think the total benefits outweigh the total cost or vice versa? I believe if agricultural tariffs and subsidies were removed overnight the impact on the average consumer in a developed nation would be, the prices of goods would rise because developed nations would no longer be dumping the surplus of good on the world market. The impact on the average farmer would be that they are no longer protected from international demand and prices. I do not think the total benefits outweigh the cost; they should remove all tariffs and subsidies and make it possible for...

Words: 317 - Pages: 2

Premium Essay

Agricultural Tariffs and Subsidies

...If agricultural tariff and subsidies to producers were removed overnight, what would the impact be on the average consumer in develop nations such as the United States and the EU countries. What would be the impact on average farmer? Do you think the total benefits overweight the total costs, or vice versa? A. For decades the rich countries of the developed world have levied subsidies on their farmers typically guaranteeing them a minimum price for the products they produce. The aim has been to protect the domestic industry from the foreign competition and give an impact on the average consumer in develop nations such as the United States and the EU countries If agricultural tariff and subsidies to producers were removed overnight, the average consumer in developed nations would probably see a slight rise in the cost of commodities as the commodity price reached a global equilibrium. The effect on the farmer would be more substantial because they would no longer be protected from international demand and prices. On the contrary also, the removal of tariffs and subsides to developed nation farmers could allow the average consumers to save as well. The prices for these products might become cheaper and the taxes paid would be eliminated because there would no longer be any subsidies to pay for. On the other hand, this would be a negative for the average farmers in these nations. There would no longer be a surplus of goods that could be sold to monopolize the market. Farmers...

Words: 324 - Pages: 2

Premium Essay

The Impact of Trade Liberalization on Developing Countries

...2001, are considered to be the first of nine negotiating rounds to address the “needs and the interests” of developing countries (Elliott, 2007, p. 1). There have been many attempts to reach an agreement between countries on agricultural liberalization. The failure to reacha solution still persists, however, as was seen at the “Battle in Seattle”, in November of 1999 where strong anti-WTO sentiment took to the streets in mass protests. (Fabiosa, 2008, p. 1). This anti-trade stance asks the fundamental question whether agricultural trade liberalization is beneficial to developing countries or not. The growth of globalization creates interdependence among countries and increases the capacity of the economy of the countries to engage in international trade. Trade liberalization in agriculture has significant benefits to individuals who devote their lives to agriculture, mainly small farmers from developing countries. This idea would also promote economic growth in these countries. In order to make trade liberalization in agriculture an ideal concept, there are still a few hurdles that need to be cleared, such as granting developing nations funds to meet environmental goals, abolishment of export subsidies, and lost tariff replacement. In order to allow participants to increase trade globally and benefit from it, WTO’s goal is to lower trade barriers as much as possible among its members and to develop fairer trade policies...

Words: 2118 - Pages: 9

Premium Essay

Agriculture And Obesity

...Therefore farming and its governmental implications has a large impact on obesity, or the increasing levels of body mass index of citizens in the U.S. A number of characteristics associated with the nature of agriculture are inevitable, i.e. once a crop is planted, relatively little can be done to adjust production. Also farmers cannot vary influence prices because of weather and pests. Therefore they are continually seeking to reduce unit costs, hence taking advantage of government subsidies. This leads...

Words: 1126 - Pages: 5

Premium Essay

Agriculture Subsidies and Development

...AGRICULTURE SUBSIDIES AND DEVELOPMENT QUESTION 1 IF AGRICULTURAL TARIFFS AND SUBSIDIES TO PRODUCERS WERE REMOVED OVERNIGHT, WHAT WOULD THE IMPACT BE IN THE AVERAGE CONSUMER IN DEVELOPED NATIONS SUCH AS THE UNITED STATES AND THE EU COUNTRIES? WHAT WOULD BE THE IMPACT ON THE AVERAGE FARMER? Lowering the tariffs and getting rid of subsidies would allow the average consumers to save. The prices for these products would be cheaper and the taxes paid would eliminate because there would no longer be any subsidies to pay for. On the other had this would be a negative for the average farmers in these nations. There would no longer be a surplus of goods that could be sold to monopolize the market. Farmers would no longer benefit from the subsidies they received all profits would be based on production. Lower commodity prices in developing nations would cause farmers to lose revenue because in order to make a profit they would have to raise prices causing them to not be competitive within their market. QUESTION 2 WHICH DO YOU THINK WOULD HELP THE CITIZENS OF THE WORLD’S POOREST NATIONS MORE, INCREASING FOREIGN AID OR REMOVING ALL AGRICULTURAL TARIFFS AND SUBSIDES? Foreign aid comes with strings attached and it does not come without a cost. Foreign aid only seems to balance out the “goodwill” of developed countries. As stated in the case the foreign aid that these developing nations receive from developed countries is less than what they are losing if allowed to sell the commodities...

Words: 630 - Pages: 3

Premium Essay

Trading

...Case study (2) Agricultural Subsidies and Development For decades the rich countries of the developed world have lavished subsidies on their farmers, typically guaranteeing them a minimum price for the products they produce. The aim has been to protect farmers in the developed world from the potentially devastating effects of low commodity prices. Although they are small in numbers, farmers tend to be politically active, and winning their support is important for many politicians. The politicians often claim that their motive is to preserve a historic rural lifestyle, and they see subsidies as a way of achieving that goal. This logic has resulted in financial support estimated to exceed $300 billion a year for farmers in rich nations. The European Union, for example, has set a minimum price for butter of 3,282 euros per ton. If the world price for butter falls below that amount, the EU will make up the difference to farmers in the form of a direct payment or subsidy. In total, EU dairy farmers receive roughly $15 billion a year in subsidies to produce milk and butter, or about $2 a day for every cow in the EU—a figure that is more than the daily income of half the world’s population. According to the OECD, overall EU farmers receive approximately $134 billion a year in subsidies. The EU is not alone in this practice. In the United States, a wide range of crop and dairy farmers receive subsidies. Typical is the guarantee that U.S. cotton farmers will receive at least $0.70 for...

Words: 1625 - Pages: 7

Free Essay

Economic Cotton Paper

...The US policy for cotton subsidies has affected the market internationally and domestically, united stated by producing 19 percent of world cotton production is one of the most influence country in cotton market. Although there is argument weather US should cut their subsidies on cotton or not but cutting the subsidies and replacing with the new recommended program has much greater benefit for the cotton market domestically and internationally. However the supporter of US subsidies believe that current program supports domestic farmers ,but according to below chart only 10 % of US farmer are enjoying the benefits of cotton subsidies. Eliminating billions of dollars in federal subsidies to American cotton growers each year would make competitive environment for domestic farmer to be more productive and grow plants efficiently. In addition it cause raise in prices by about 10 percent which improve the incomes of millions of poor cotton farmers in Africa especially in Benin, Burkina Faso, Mali, and Chad. The reductions in developed country cotton subsidies as a means to fight rural poverty in the developing world, the added income would help families feed and educate millions of children. This statement is very good reason that Congress should cut cotton subsidies. Current Cotton Subsidies Program and its consequences: The main forms of subsidy includes: (1) direct payments to farmers and landlords; (2) price supports implemented with government purchases and storage; (3)...

Words: 1131 - Pages: 5

Premium Essay

Agriculture Subsidies and Development

...AGRICULTURE SUBSIDIES AND DEVELOPMENT QUESTION 1 IF AGRICULTURAL TARIFFS AND SUBSIDIES TO PRODUCERS WERE REMOVED OVERNIGHT, WHAT WOULD THE IMPACT BE IN THE AVERAGE CONSUMER IN DEVELOPED NATIONS SUCH AS THE UNITED STATES AND THE EU COUNTRIES? WHAT WOULD BE THE IMPACT ON THE AVERAGE FARMER? Lowering the tariffs and getting rid of subsidies would allow the average consumers to save. The prices for these products would be cheaper and the taxes paid would eliminate because there would no longer be any subsidies to pay for. On the other had this would be a negative for the average farmers in these nations. There would no longer be a surplus of goods that could be sold to monopolize the market. Farmers would no longer benefit from the subsidies they received all profits would be based on production. Lower commodity prices in developing nations would cause farmers to lose revenue because in order to make a profit they would have to raise prices causing them to not be competitive within their market. QUESTION 2 WHICH DO YOU THINK WOULD HELP THE CITIZENS OF THE WORLD’S POOREST NATIONS MORE, INCREASING FOREIGN AID OR REMOVING ALL AGRICULTURAL TARIFFS AND SUBSIDES? Foreign aid comes with strings attached and it does not come without a cost. Foreign aid only seems to balance out the “goodwill” of developed countries. As stated in the case the foreign aid that these developing nations receive from developed countries is less than what they are losing if allowed to sell the commodities...

Words: 325 - Pages: 2

Premium Essay

World Trade Organisation

...WTO AND INDIAN ECONOMY (AGRICULTURAL IMPLICATIONS) BY: RAYNAH FERNANDES 13 SRUSHTI GANGAN 14 NEHA GAONKAR 15 INDEX 1. WORLD TRADE ORGANISATION  GATT  Principles of WTO  Objectives & Function 2. INDIA & WTO 3. INDIAN ECONOMY 4. INDIAN AGRICULTURE  Agricultural Trade  Agricultural Support Policies  Importance Of Indian Agriculture 5. AGREEMENT ON AGRICULTURE  The Three Boxes: Green, Amber and Blue  Trend In Pattern Of Consumption  Implication Of Agreement : Short Term and Long Term 6. WTO & INDIAN AGRICULTURE  India’s Commitment  India’s Agricultural Trade Under WTO Regime 7. A STUDY & ITS FINDINGS 8. SUGGESTIONS 9. BIBLIOGRPHY ACKNOWLEGEMENT We would like to acknowledge and express our sincerest gratitude for the efforts and timely guidance of our professor Mrs. Neelam Shetty of Managerial Economics for providing us the opportunity to study the impact of WTO agreements on the Indian economy especially focused on the agricultural sector. We would also like to thanks and express our gratitude towards professor Mr. Agnelo Menezes of economics from the Bachelors of Arts faculty and his student from XRCVC Master Prashant Lindayat. Each and every team member gave in his best to make sure that this report has all the necessary inputs and is completed on time. We definitely had a knowledgeful and enriching experience. WORLD TRADE...

Words: 12777 - Pages: 52

Premium Essay

Business

...to what would help the citizens of the poorest nations more the first being to increase foreign aid and the second, to remove all agricultural tariffs and subsidies. The main problem surrounding subsidies is it allows first world exporters to drastically reduce the prices of their goods and, thus have a commercial advantage over the farmers of poorer nations. The question remains would it in fact benefit the developing world greater to remove subsidies and tariffs on agricultural products or, simply increase foreign aid to these poorer nations? It is an important issue as it concerns many factors including fundamental morals, world economics, the welfare of the developing world and welfare of the developed world. This essay will help to establish the fact that although the past increases and, possible future increases of foreign aid received by developing countries is not unwelcomed, the fact the foreign aid continues to be necessary shows that it is not a permanent solution for the economy of poorer nations. The problems still remain that aid will continue to have negligible impact if subsidies and tariffs are not significantly restricted. There is an underling dilemma between the ethics and practices of international trade and business. The point put simply is rich countries can maintain their own standards with tariffs and agricultural subsidies and, ease their conscience with foreign aid. The issue with this form of reasoning is it doesn't solve the real problem in the long...

Words: 301 - Pages: 2

Free Essay

Agricultural Subsidies and Development

...Agricultural Subsidies and Development In recent decades, rich countries and organizations have taken measures to preserve their agro industry. In many of the largest countries as a measure to stimulate the production, subsidy is made for the proceedings or part of the necessary crops. Nowadays we are faced in a big question: What is the impact of these subsidies on world market prices and the producers do not receive subsidies for their production? There are many opinions from different parts of the world and it is like that because each country has its own point of view and depends how much are they involved in the situation. I will try to distinguish myself and to be objective. I think that if the subsidies were removed overnight the impact on the average consumer and producer will be very bad. Family farmers will be driven into bankruptcy and this will lead to production falls. With less production the market will have risen on food prices and this will reflect directly to the average consumer. Another thing that will probably happen is that big corporation will continue their growth and they will kill smaller farmers with their prices. This will cause no competition in the agriculture and will lead to unfairly high prices. Another important thing that may occur is the lower quality of the products, because every farmer corporation will try to get as much as they can and they will no longer care about the quality because the competition is gone. I think that the benefits...

Words: 770 - Pages: 4

Premium Essay

Wto and Its Imapact from 1992 to Present

...SUBJECT- MANAGERIAL ECONOMICS TOPIC- IMPACT OF WTO ON INDIAN ECONOMY FOR THE PAST 10 YEARS. NAME - NITESH SHUKLA DIV - C ROLL.NO -324332 INTRODUCTION WTO is basically an internationally recognized global organization which clearly defines the role of trade between the nations and to avoid conflict over it. The primary goal of WTO is to help various intermediaries conduct their business. It also aims to improve the welfare of the people of the member countries. CONCEPTS: * WTO is basically a place where trade problems are sorted out with each other which the countries face as a whole and also with each other. * The rules or better say agreements which are made in WTO are scrutinized and negotiated by the bulk of the world’s trading nations before being passed. * WTO not just supports carrying out trade in a peaceful way but also supports maintaining of trade barriers. Ex: protecting consumers and nation as a whole. * WTO works upon the rules framed with the participation of all the member countries with the prime focus on settlement of disputes. * WTO has a characteristic feature of ‘member-driven’ wherein...

Words: 2426 - Pages: 10

Free Essay

Literature Review on Autism.Doc

...Executive Summary: [pic][pic]Economists often proceed with impact studies of fertilizer subsidy without first making an examination of the structure and dynamics of subsidy. This may lead to misleading focus and to seeking solutions generally in adjustment of administered prices. Substantial gains in efficiency can be realized by looking into structural questions of subsidy. The case of Bangladesh provides an example of how a proper procedure of accounting can shift the onus of correcting numerous distortions that arise from current practices, from farmers to industries. The case study also shows that farmers receive less subsidy than usually claimed and the hidden subsidy to industries is passed on to farmers. The Bangladesh case may represent developing countries in a general manner. Introduction: In the early 1970s, Bangladesh pursued a highly restrictive trade and exchange rate policy characterized by import regulations, high import tariffs, export taxes, pervasive quantitative restrictions, and an overvalued exchange rate, similar to policies of the 1960s when it was part of united Pakistan. The policy regime in the 1970s was especially restrictive for the agricultural sector.. Major reforms in markets for fertilizer and irrigation equipment markets were begun during the late 1970s (Appendix Table A8). Under the New Marketing System established in 1978, private trade in fertilizer was liberalized, leading to a large expansion in the number of wholesalers and retailers...

Words: 2531 - Pages: 11

Premium Essay

The Doha Round

...began in 2001 in Doha, Qatar. The aim for this current round is to enable developing countries to trade fairer. As a result, the Doha round seeks to build on the Uruguay Round’s progress by lowering trade barriers found at national borders and domestic practices, to promote free trade between countries of different prosperity. Agriculture is the centre of focus in this current round.1 With average agricultural tariffs allowed at 62 percent, trade in this sector has been vastly distorted.2 Therefore, the agricultural goals of Doha seek to tackle trade barriers afflicting the agricultural trade through lowering export subsidies, opening market and eliminating trade distorting domestic policies.3 The Doha Round also emphasized on encouraging countries to expand trade, so that they can promote economic growth and reduce poverty through the benefits of trade. As such, market access and trade liberalization remained key objectives of this round where developed nations bargain for access into developing nations’ markets in exchange for a reduction in their own subsidization in agricultural products.4 Currently, talks in the Doha Round are stalled over disagreements on major issues regarding agriculture, non-agriculture market access (NAMA), industrial tariffs, non-trade barriers (NTB) and services. The most significant being the persistent difference in interests between developed and developing nations, led by the EU, USA and Japan in the formal and Brazil, China, India, South Korea...

Words: 846 - Pages: 4