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Have Farm Subsidies Outlasted Usefulness?

Posted on: Thursday, 8 December 2005, 12:00 CST

By Alexei Barrionuevo and Keith Bradsher

Alexei Barrionuevo reported from Warsaw, Illinois, and Keith Bradsher from Hong Kong.

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The first architects of agricultural subsidies aimed to bail out farmers during bad harvests so they would not abandon the vital task of producing food.

But these days, not only are farmers in the developed world overcoming droughts and floods; their farming technologies are ushering them into an era of surging production that is likely to outstrip global demand for years to come.

Parched-earth conditions this season were supposed to spell doom for the corn crop in Illinois. Instead, the farmers in the state, which ranks behind only Iowa among U.S. corn producers, harvested 16 percent more per acre than expected, helping the country produce its second-largest crop ever.

The bountiful harvest, much of which was likely to end up on world markets, has added to a fundamental problem facing the sector too much success. Despite the worst Midwest drought in 17 years, seed technology allowed farmers to continue their relentless increase in production.

That presages a challenge that will continue to dog farmers across the industrialized world and bureaucrats negotiating global trade agreements: how to sell ever-larger harvests, often increased by the latest genetic advancement, without causing too much economic pain in farm states.

Even as businesses have cut back on employee benefits and limited job security in the face of more intense global competition, many governments have clung to one of the oldest forms of trade protectionism: farm subsidies.

Washington, Tokyo and Brussels have spent heavily on subsidies for decades and have erected many other trade barriers to slow the demise of their farmers facing similar competitive pressures.

Some of these farm subsidies have reached extraordinary levels. Trade Minister Mark Vaile of Australia recently calculated that European Union subsidies work out to $2.20 per cow per day; more than a billion people around the world live on less than that each day.

The subsidies have not retarded the advance of farm productivity, but food prices in poor countries tend to be much lower than in affluent countries. That is because the United States and European Union pull large quantities of food off the market at home each year to support prices for their farmers and sell the food instead at subsidized prices overseas or donate it as foreign aid.

These practices have prevented people in poor countries with rich soil from trying to export their way to prosperity with farm goods, the way countries like South Korea and Japan exported their way to prosperity with industrial goods. The current round of global trade talks, which include a ministerial conference of the World Trade Organization in Hong Kong that starts on Dec. 13, is supposed to address the problem but has stalled, mainly over French opposition to sharper curbs on EU subsidies.

But the current system of subsidies faces another challenge: increasing yields from crop strains emerging from the laboratories at seed companies like Monsanto and DuPont's Pioneer Hi-Bred International.

New crops, some produced through the breeding and grafting of existing strains and others through genetic manipulation, are increasing corn production in the United States and Europe every year. This is exacerbating surpluses, depressing global prices and driving up the costs of subsidies, which have already hit $20 billion a year for trade-related subsidies alone in the United States, and almost $85 billion a year in the European Union.

"As a grower I hate to admit it, but the people in the labs really helped us out this year," said Joe Zumwalt, a third- generation farmer here in southern Illinois. "If it weren't for the seed genetics they have been offering us the last few years, our yields and our outcome wouldn't have been nearly what they were."

But for farming communities as a whole, bumper crops can be bad news. "An increase in yield rewards the producer with a disproportionate drop in price and profitability," said Neal Harle, an agricultural economist at Iowa State University. "Farmers would be better off if the whole crop got a haircut of 15 percent or so."

The difficulty in trying to obtain a deal limiting subsidies at the WTO meeting is that countries as varied as Japan, Switzerland, France and the United States are each worried that their farmers of certain crops would be among the first to fail if subsidies were reduced. Developing countries that export agricultural commodities, like Brazil, Guatemala and Malaysia, are clamoring for the WTO to halt moves by the United States and the European Union to limit the cost of their subsidies by dumping the excess food on world markets at low prices. Barrionuevo

In the United States, some say that the answer to overproduction lies in creating more demand through greater exports, which have proved elusive lately, and through building more plants that use corn to produce biodiesel and ethanol fuels. Democratic and Republican administrations have tried to bring down foreign trade barriers, at least for crops like grain, in which the United States is competitive and could be expected to gain at the expense of European and Japanese farmers.

Harle and other critics of the current system have pushed for limits on domestic subsidy payments to encourage farmers to curb overproduction, a separate step that a global trade agreement could force the United States to pursue. Efforts by farmers to try to diminish output through organized action have not worked because there are simply too many farmers, he said.

But even as efforts to restrict production in rich countries take on added impetus, they must contend with university researchers and seed companies working feverishly to increase corn yields. The push in the past 15 years has also been to make seeds capable of retaining more moisture so they can better withstand droughts. Bumper crops show that farmers may have entered a new era of even higher output, far more than consumers around the world can eat.

Source: International Herald Tribune

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