What is in this article?:
- Many commentators have claimed that American farm subsidies have contributed significantly to the “obesity epidemic” by making fattening foods relatively cheap and abundant, and that reducing these subsidies will go a long way towards solving the problem.
- The following research shows that U.S. farm subsidies have had generally modest and mixed effects on prices and quantities of farm commodities, with negligible effects on the prices paid by consumers for food and thus negligible influence on dietary patterns and obesity.
Many commentators—including prominent economists, nutritionists, journalists, and politicians—have claimed that American farm subsidies have contributed significantly to the “obesity epidemic” by making fattening foods relatively cheap and abundant, and that reducing these subsidies will go a long way towards solving the problem. These commentators often treat the issue as self-evident, and do not present either details on the mechanism by which farm subsidies are supposed to affect obesity, or evidence about the size of the likely impact. In this article we examine the consequences of U.S. farm subsidies—including indirect subsidies provided by trade barriers as well as direct subsidies—for prices of farm commodities and thus food products and caloric consumption patterns in the United States. We show that U.S. farm subsidies have had generally modest and mixed effects on prices and quantities of farm commodities, with negligible effects on the prices paid by consumers for food and thus negligible influence on dietary patterns and obesity. This result is consistent with some previous work by economists on the issue (see Alston, Sumner, and Vosti, 2008 and the papers they cite), but contradicts the mainstream view in the media.
Farm policy and commodity prices
A simplistic model of farm subsidies and obesity, which is implicit in some writings on the subject, presumes a textbook subsidy policy that results in an increase in both production and consumption of the subsidized good by increasing the net return to producers—the market price plus the subsidy—and lowering the market price paid by consumers. However, the main elements of U.S. farm subsidy programs are significantly different from simplistic textbook subsidy policies.
Farm subsidies have resulted in lower U.S. prices of some commodities, such as food grains or feed grains, and consequently lower costs of producing breakfast cereal, bread, or livestock products. But in these cases, the price depressing—and consumption enhancing—effect of subsidies has been contained, or even reversed, by the imposition of additional policies such as acreage set-asides that restricted acreage or production. So the effects of the subsidy on quantities produced and consumed, and consumer prices, are smaller than the textbook model would suggest.
In addition, for more than a decade, about half of the total subsidy payments have provided limited incentives to increase production because the amounts paid to producers were based on past acreage and yields rather than current production. Moreover, for the commodities that are subject to U.S. import barriers, the policy increases farm and food prices domestically, and provides a disincentive to consume foods that use these commodities as ingredients. Trade barriers that apply to imported sugar, dairy, orange juice, and beef increase the prices of these agricultural commodities, and thereby increase the cost and discourage consumption of foods that use these commodities.
The combination of subsidies for some commodities and trade barriers for others makes the story complicated at times. A case in point is the market for caloric sweeteners. Corn is often the target of criticism as a contributor to obesity, especially because of its use in production of high fructose corn syrup (HFCS), which is used as a caloric sweetener in many foods and beverages. Farm subsidies are responsible for the growth in the use of corn to produce high fructose corn syrup (HFCS) as a caloric sweetener, but not in the way it is often suggested. The culprit here is not corn subsidies; rather, it is sugar policy that has restricted imports, driven up the U.S. price of sugar, and encouraged consumers and food manufacturers to replace sugar with alternative caloric sweeteners, especially HFCS. Combining the sugar policy with the corn policy, the net effect of farm subsidies has been to increase the price of caloric sweeteners generally, and to discourage total consumption while causing a shift in sweetener use between sugar and HFCS (Beghin and Jensen, 2008).
Measures of commodity price impacts
Producer Support Estimates (PSEs) are often used to represent agricultural support as a share of the total value of agricultural production, and Consumer Support Estimates (CSEs) represent the support provided to food consumers as a share of the total value of food commodity consumption. Calculated values for total PSEs and CSEs in the United States between 1986 and 2009 are shown in Figure 1. These PSEs and CSEs are not perfect measures of the effects of farm policies, but they are commonly used by agricultural economists to summarize the support applied to farm commodities. The policies represented in these measures include hundreds of specific provisions under farm bill programs and trade barriers that raise U.S. farm prices and incomes for producers of favored commodities, either through transfers from taxpayers, or at the expense of consumers, or both. Farm subsidies that encourage agricultural production may lead to lower relative prices and increased consumption, but trade barriers—like U.S. policies for sugar, dairy, orange juice, and beef—make agricultural commodities more expensive, increase the cost of certain food products, and if anything discourage consumption of foods that use these commodities. The PSEs and CSEs in Figure 1 show that while U.S. farm policy has, overall, subsidized farm commodity producers it has taxed food consumers relative to world market prices. Figure 1 also shows that subsidies for producers and taxes on food consumers related to farm policies fell between 1986 and 2009.
However, some U.S. farm subsidy policies also affect world market prices, and a more complete measure of the effect of farm policies on consumer prices has to take these effects into account. Economists have modeled and projected the likely economic consequences of U.S. farm subsidies for prices and production. Work in this area has found that eliminating existing farm programs would have very modest effects on farm prices and production of the main farm commodities. Alston, Sumner, and Vosti (2008), for instance, reported estimates indicating that the removal of U.S. farm policy in the mid 2000s would have yielded only modest reductions in grain and oilseed production and prices, ranging between 5 percent and 10 percent. Only sugar and rice would have experienced a reduction in production of more than 10 percent, and only sugar would have seen a price change of more than 10 percent. These modest impacts were based on simulations beginning with relatively large market distortions before subsidy rates fell with the recent increases in commodity market prices. The effects would be even smaller if policies were eliminated today. An important point is that removing U.S. farm policy would have mixed effects on commodity prices. Elimination of farm subsidies would result in increases in prices only for wheat and corn. For every other commodity category the net effect of eliminating subsidies would be to reduce prices, encouraging the consumption of meat and dairy products, fruits and vegetables, and sugar, with mixed implications for nutritional outcomes.