August/September, 1999

From the Editor

Multiheaded Monstrosity

Corn prices are the cheapest in memory, soy-beans sell at half the price they did a few years back, and a severe drought has simply destroyed crops in many parts of the United States. It is a worst-of-times and more-worst-of-times story for the farmers of big U.S. grain crops and ranchers of livestock.

Some farmers and ranchers are suffering since the drought has denied them crops to sell, while other farmers and ranchers are suffering because they have bumper crops so large that the markets are depressed and they can’t make any money selling their crops.

It all must look peculiar to observers of the U.S. economic and political scene. It looks peculiar because it is peculiar. In politics, the focus is always on the producer. So problems at the production level seem as disasters for the U.S. economy. But the reality is different.

Only a tiny fraction of Americans are producers of food; all Americans are consumers of food. As such, one might think that low food prices would be politically popular as so many Americans benefit and so few are damaged.

But in the American system, exactly the opposite occurs. Watch the upcoming presidential election carefully. Don’t be surprised if a few weeks before the election, Bill Clinton (or Al Gore) is in some dairy state announcing an increase in milk price supports – an action that would raise the price of milk for consumers. This seems odd. Why would a politician or political party benefit from raising prices on milk just before an election?

Such is the peculiarity of the way the American system has developed. Exactly because there are so few farmers, a rise in the price of milk is very beneficial to each farmer. In all likelihood, dairy farmers would notice this type of activity on their behalf and would deliver both campaign contributions and votes to candidates and political parties interested in helping dairy farmers in this way.

On the other hand, such an increase in milk prices would probably cost the typical family just loose change each day. It is highly unlikely that most consumers would even notice such a policy change, much less consider it a crucial vote-deciding issue.

So, the American political system encourages counter-productive policy decisions – that is to say, policy decisions that provide concentrated benefits to small groups while imposing highly diffused costs over the mass of consumers.

Of course, some argue that low prices, being unprofitable for growers, are unsustainable in the long term. So, any benefit to consumers is merely a short-term aberration, and long-term prosperity requires higher prices.

Though it is true that a secure food supply depends on farmers making a living that is not quite the same as saying that farmers have to make a profit for the U.S. to have a secure food supply.

A very significant cost for farmers is land costs. Whether this is the cost of leasing land or buying it, the focus on producers and the desire to ensure their profitability has unintended and often perverse effects. If, for example, the government decides to subsidize the income of growers of wheat, these subsidies have the perverse effect of increasing the value of land capable of growing wheat. What this means is that a new farmer buying land to start up a farm will pay a premium price since the land carries with it an expected supplemental income in the form of the governmental subsidy.

Of course, if this subsidy stops, then the farmer might have trouble making a profit because the land cost was too high for the economics of wheat growing.

This all matters because when farmers have bad times, Congress looks to act and this, of course, is likely to lead to higher priced crops. Higher priced crops lead directly to lower exports, and lower exports means reduced demand – which leads to lower prices thus setting the cycle in motion again: low prices to more subsidies to higher prices to less exports and back to lower prices.

The whole thing becomes unmanageable as the value of the subsidies serves as such a draw that it soon leads to acreage restrictions, and surpluses become so vast that other countries restrict trade to prevent dumping. It just becomes a multi-headed monstrosity of a program.

Is there a solution? Sure, and most segments of the U.S. farm economy already function under it. It is called free enterprise, and the typical fruit and vegetable farmer, for example, pretty much lives under it. He succeeds or fails in accordance with his business smarts, the general market and his luck at the draw.

The great advantage of being an insignificant part of the U.S. economy is that, say, asparagus growers have to fend for themselves. The big grain growers get attention, almost certainly more than is good for them or consumers or international trade.  EXP