In the 18th Century economist Adam Smith identified the “invisible hand” of the marketplace as the true, efficient regulator of prices. This is now conventional wisdom, and the idea that free trade is best is so pervasive that the diplomats and politicians of every country seem to exert themselves ceaselessly to abolish or minimise the barriers in its way; globalisation appears an unstoppable trend, opposed only by the fringe protesters of the anarchist left.
There’s no more important commodity than food. So do we practice free trade in food? Of course not.
The truth is that today almost no country on earth is prepared to allow a laissez-faire agricultural system. A secure supply of food is so central to public contentment that no politician can risk endangering it, and almost every government fiddles with the food chain through subsidies on prices or other kinds of payments to domestic food producers. In this way, farmers are encouraged to grow more crops, raise more animals. This intervention results in food that is more expensive than it would otherwise be (although part of the price may be concealed as taxes).
There’s a long tradition of such fiddling with food prices that stretches back at least to ancient Rome, in which the cura annonae - a grain dole to registered heads of households - was used at first to hold down prices to a set level, and later on became a totally free handout of bread to citizens of the Imperial city. It’s notable that it was introduced when Rome was a republic and citizens held at least a semblance of democratic power. Electors were wooed by rich candidates with low food prices. The grain dole imposed costs on the empire (and therefore on taxes) and must have been a nightmare to administer. It caused endless political problems, but nevertheless it worked well enough to endure from the grain laws of Gaius Gracchus in 123 BC through to the Empire and at least the late 3rd Century CE.
Today, such fiddling with food prices continues on a previously unimaginable scale. The world’s largest producer of food, the United States of America, up until 2014 regulated the market through price support not only of cereals but also of numerous other commodities. Responding to criticism of this market-distorting expenditure, the Farm Bill of that year phased out direct payments to farmers (some of those previously available did not require the recipient to grow any crop at all), but despite this change the USA’s food market is still regulated by a hand that is far from invisible. The US Department of Agriculture’s budget is so large (the total outlay for 2016 is estimated at US$148bn) and so complicated that it’s difficult to say exactly how large is the total direct and indirect subsidy actually paid to US farmers - but some idea of the scale of intervention can be seen from the 2016 USDA budget estimates. According to the OECD, the benefits to farmers in 2015 totalled $38.7bn. Despite the 2014 Farm Bill, support payments for particular commodities are still made as “agricultural risk/price loss coverage” (the total for 2016 is estimated to be $7.1bn). Moreover, there are numerous other billion-dollar-scale benefits to farmers, such as crop insurance to the value of $8.2bn (effectively providing a guaranteed income from a planted field) and environmental payments such as the “conservation reserve program” (a $1.8bn fund similar to the EU’s stewardship programme).
The EU is another big subsidiser of food production. According to the EU itself, from 2016 it will spend €42bn per year on direct payments to producers based on land area (the so-called “first pillar” of support to farmers). A further €13.6bn is provided for rural development (“second pillar”) funding. Again, it’s difficult to track every actual subsidy, and the OECD reckons that the total subsidy in 2015 was much more than this, at €81.1bn.
Launched in 1962 (before the UK was a member), the EU’s Common Agricultural Policy (CAP) initially caused various kinds of food prices to be supported by interventionist purchase of surplus harvest, and had the desired effect of increasing production. It was so successful that it quickly resulted in the notorious “mountains” of butter, sugar and grain, and “lakes” of wine and olive oil that in the 1980s were almost daily excoriated as a scandal by British tabloid headline writers. The EU is typically represented by its critics as exceptionally unresponsive to media pressure of this kind, but - by 1992 - the Commission was obliged to reform the policy by reducing price supports and paying farmers not to grow crops at all (“set-aside”). Subsequently, in 2003, the EU’s agri-food policy was modified again, so that subsidies for particular crops were withdrawn altogether, while maintaining much the same level of total support for farmers through area-based “single farm payments” which now account for most CAP spending. The idea is to make farmers more responsive to agricultural product markets, and less strongly driven by the level of subsidy. Does that mean that Europe has at last achieved an Adam Smith-style laissez-faire agricultural policy? Hardly. The level of payments to farmers is still massive, representing around 40% of the whole EU budget.
The OECD gives figures for subsidies as a percentage of total farm income. The 2015 figure for the 28 countries of the EU is 28%, while that for the USA is only one third of that at 9.4% - and both these superstates are far from the top of the subsidy list. The biggest spenders are small, rich states. In both Norway and Switzerland, for example, subsidies represent more than 60% of total farm income. In fact price supports and other interventionist instruments are alive and well in the agricultural systems of almost all the countries listed in the OECD table. Although at the World Trade Organization talks of 2001, the rapidly developing BRIIC countries (Brazil, Russia, India, Indonesia and China) opposed the distorting effects of the agricultural subsidies of the developed world (especially the USA and the EU), the strategy of the former has since been to emulate the policies of the latter. China’s total payments to farmers ($160bn per year in 2012, representing 21% of farm income), in point of fact, now dwarf those of the USA, both in total and proportionally.
Although globalisation is nominally all about tearing down barriers to free trade, there’s little sign that the interventionist policies of the biggest food producers are about to change. Evidently free trade is thought to be a good idea as long as it’s not free trade in food. One reason for this is simple but scandalous: the farm payments that are the core of these policies go overwhelmingly to the biggest landowners. The recent press reports identifying the top 100 recipients of EU farm subsidies as a roll call of the very rich make interesting but horrifying reading. In the USA the picture is similar with three quarters of the money going to only one tenth of recipients. These big landowners are of course prominent among the people who bankroll politicians (in some cases they are actually the same people), and they make it clear that they want the farm payments to continue. Viewed in this way, farm subsidies look like politically sanctioned schemes to transfer wealth from poor to rich.
But inequitable political power is volatile, and meddling with food prices comes at a political cost - at least where democracy is practised. Populist politicians don’t have to work hard to persuade electors of the merits of cheap food policies. Direct payments to farmers that aren’t tied to food production are particularly hard to justify. And it’s difficult to keep corruption from creeping in when very large sums of money are sloshing around. Although farmers are effective lobbyists in many countries, it’s hard work to defend payments to plutocrat landowners. And how come the biggest landowners receive larger proportional subsidies than small ones?
The result of these conflicting pressures is a trade-off between laissez-faire policies that yield cheap food (popular with voters) and intervening to ensure a consistent supply (popular with farmers). Evidently the enhanced security of the food supply makes higher prices palatable to the electorate at least some of the time.
Farm payments don’t only affect farmers at home. Direct payments to farmers can also lead to price distortions on world markets that amount to the dumping of surplus food at low prices, effectively hindering access to the agricultural products of less-developed countries and generating food insecurity. The EU and the USA have also both been accused of dumping their own surpluses as food aid to regions suffering food shortages; this feeds those who are starving, but has the disastrous effect of impoverishing local food producers. Responding to criticism of this kind, in the last twenty years donors have increasingly chosen to purchase food aid locally instead of sending aid from stores in the donor country - but this is still a controversial area.
There are also arguments other than economic ones to be made against political intervention in agricultural markets. One of these is that price supports not only boost the incomes of farmers, but also determine what kinds of crops farmers grow, regardless of whether they are actually needed. It isn’t an accident that maize (corn) is the US’s biggest crop – it’s also the most heavily subsidised. Almost all of the maize grown is not for human consumption, and most is destined to be eaten by cattle. It is the availability of cheap corn that has enabled the vastly increased production of feedlot beef cattle, and hence the growth of the burger industry.
But there aren’t enough cows to eat all the maize that is produced, and something else must be done with it. In recent years, with awareness of climate change and the need to limit fossil fuel consumption, there has been enthusiasm for turning it into alcohol for use as fuel - and in 2009 some 29% of US corn production was used in this way. But there are now serious doubts about the environmental benefits of ethanol-based fuels, and official enthusiasm for biofuel has waned. The other main non-cattle use for maize is the production of corn syrup, a commodity that is actively looking for both food and non-food uses, despite the fact that it probably isn’t a very healthy choice as a food. Low-cost sugary drinks are a direct consequence of growing all that corn. The knock-on consequences of growing the wrong kinds of food are serious, being directly relevant to the state of public health and the (huge) costs of healthcare systems. Too many burgers, too many sugary drinks? It won’t do simply to blame the people who follow such a diet. The fact is that that these are the cheap foods that many poor people are obliged to consume. The modern epidemic of obesity is at least in part due to agricultural policies followed by the US and other developed nations.
Green activists have also finally realised that many kinds of farm subsidy are very bad for the rural environment. Any system that promotes bringing as much land as possible under the plough is bound to diminish biodiversity. The whole point of agriculture is to promote the growth of a single kind of crop at the expense of whatever would be there otherwise. The more efficient is the agriculture, the fewer other species will be able to live alongside it. The 2016 State of Nature report, which was produced by a consortium of green NGOs and pressure groups, concluded that in the UK “policy-driven agricultural change [is] by far the most significant driver of [biodiversity] declines”. It’s true that the EU has in the past made a portion of payments to producers (currently about 20% of the total) contingent on negotiated plans for environmental stewardship, but the complex bureaucracy involved is formidable and unpopular with many farmers.
What are the prospects for a world-wide reduction in the scale of agricultural subsidies?
It’s notable that interventionist policies tend to be implemented when memories of shocks to the food supply chain are still strong. The notorious British Corn Laws (tariffs on wheat imports designed to maintain a minimum price for the domestic product) were introduced in 1815, just after the battle of Waterloo brought the Napoleonic wars to a close. US farm payments began in the 1920s, following a period of volatility in farm gate prices, and were consolidated in the depression years. The European Union’s Common Agricultural Policy (CAP) was negotiated over a decade of wrangling in the 1950s, less than 10 years after World War II’s food rationing. The idea in all these cases was to ensure food security. This suggests that when politicians who never experienced the nutritional deprivation associated with war or other food price shocks, rationing, or even starvation, finally come to power, they will fret much more about high food prices than did the previous generation, and worry much less about continuity of supply. Perhaps this is what’s happening now; perhaps we can expect a rapid change in food policy as the baby boomers of the late 1940s retire from the political scene.
Reducing or eliminating farm subsidies makes most sense for countries with secure domestic food supplies that are also net exporters of food. Today, the states that intervene least in food pricing by some way are New Zealand and Vietnam, both of which have subsidies less than 1% of farm income. These are both countries with large farming sectors occupying particularly favourable geographic positions from the point of view of agriculture-friendly climates combined with closeness to the emerging market of China. There are other nations (like Australia, Brazil, Chile and South Africa) that have low levels of subsidy (all less than 5% of farm income), but they don’t come close to these two.
New Zealand is particularly interesting, because it took the decision to deregulate its highly developed and previously highly subsidised agricultural industry only in 1984, and has since prospered. The country’s animal industry is particularly successful, exporting grass-grown beef, lamb and dairy goods. Enthusiasts for deregulated agriculture argue that the abolition of price intervention and other supports in 1984 has allowed New Zealand farmers to innovate and become successful exporters. This is a remarkable achievement given that New Zealand farmers don’t sell into an unfettered supply-and-demand market, because most international competitors operate under interventionist conditions and many of their customers impose tariff barriers to imports. Surely, it is argued, this kind of success is what every country should aim to emulate? But the period since 1984 has coincided with the unprecedentedly rapid growth of the Chinese economy and a concomitant huge increase in exports of New Zealand agricultural products to China. This was consolidated in the 2008 zero-tariff free trade agreement with China. Would New Zealand’s non-interventionist food policy stance have been possible in a time of less impressive market growth? Will its success continue? The questions have at least to be asked.
Here in the UK there is already widespread discussion about what will happen to UK food and agriculture policy after Brexit, when we in the UK can in principle decide to do as we like?
British politicians have never been happy about Europe’s interventionist CAP, perhaps being influenced by long-lasting memories of the problems caused by the 1815 Corn Laws, which enriched big farmers but inflated grain prices and caused misery for the poor. A parliament stuffed with landowners was reluctant to forego the profits, but it was only too obvious that eventually the Corn Laws would have to go. Only the disaster of the Irish Potato Famine caused their repeal in 1846, and British statesmen have been suspicious of food price intervention ever since. However, it is ironic that during the years of EU membership, British politicians have evidently become so accustomed to the EU’s system of agricultural support payments that in the recent past, far from demanding to scrap it, they have featured among its fiercest proponents. In the latest iteration of the CAP, provision is made for national governments to impose a ceiling on payments; unlike most EU countries, the UK government has chosen not to do so. It’s quite difficult to explain this, but it’s hard to avoid the conclusion that the continuing preference of the landed classes for the Conservative party may have had something to do with it.
Some kind of reform seems at least desirable. Vested interests, such as the big landowners and perhaps the politicians whom they support, will doubtless argue that what is needed is simply to institute a local version of the CAP, which will continue to intervene in various ways to support farmers’ incomes (perhaps especially those of big landowners). But the press has already smelled blood over the level of payments to the very rich, and popular sentiment for a redistribution of payments in favour of small farmers seems certain to grow. Politicians don’t like populist campaigns like this (remember the fuss about MP’s expenses?) but inevitably they are obliged to respond when votes are at stake.
A further shift towards green farming also seems likely. NGOs such as the National Trust are already arguing that Brexit offers an opportunity to enact a policy that will do more to protect the countryside from the undesirable environmental effects of intensive farming. It is uncertain to what extent, however, these campaigns will be successful in a time of austerity.
It isn’t hard to predict that politicians will be most concerned to respond to electors’ worries about the cost of feeding their families. For this reason, a reduction in the total extent of farm subsidies now looks inevitable. Farmers, whether plutocrats or crofters, will doubtless squeal, and the National Farmers’ Union will campaign to maintain direct payments at pre-Brexit levels. Perhaps there will even be French-style protests involving invasions of tractors in central London. But there can be little doubt that much of the referendum support for Brexit came from those who feel neglected by the existing political system, and who have little sympathy with farmers and farm workers, who are now so few in number that they can exert little political leverage except through lobbying at the highest levels. The success of the Brexit campaign rested at least in part on promises to repatriate the UK's payments to the EU and to redirect them to popular worthy causes such as the National Health Service. There are high expectations that at least something of this kind will be delivered. But given that maintaining direct farm payments until 2020, as already promised by the Government, will consume almost half of this money, the political pressure to reduce agricultural subsidies after that date will be very hard to resist.