Subsidies and food prices
Can the USDA put our tax money where they want our mouths to go?
Source: Physicians Committee for Responsible Medicine.
The public subsidizes food producers in a variety of ways. Most directly, the United States Department of Agriculture pays a variety of subsidies to food producers – direct payments to farmers or landowners for growing or not growing certain crops; counter-cyclical payments that are paid when crop prices fall below a level set by Congress; market-loss payments that are distributed when prices fall as a result of economic changes; a crop insurance program that reimburses growers for weather-related and other losses. These subsidies disproportionately benefit big food growers. According the to the Environmental Working Group’s Farm $ubsidy Database, the largest and wealthiest 10 percent of farm aid recipients received 74% of all farm subsidies between 1995 and 2009, with an annual average payment of $445,127 per recipient to this top tenth, compared to an average of $8,682 for the bottom 80 percent of farmer recipients.
Another type of subsidy comes through safety net programs such as SNAP (formerly called Food Stamps) and the school food program. These programs feed hungry people but also provide a guaranteed market for food producers, limiting their vulnerability to economic downturns. In Fiscal Year 2009, federal spending on SNAP was about 54 billion dollars and on other food programs about $20 billion for a total of $74 billion.
A variety of other public programs subsidize the food industry more indirectly. Tax laws that allow food (and other) manufacturers to claim advertising costs as business expenses means that tax payers are indirectly subsidizing the marketing efforts designed to persuade people to eat unhealthy products. A study by the National Economic Research Board found that the elimination of tax deductibility tied to fast food advertising would reduce childhood obesity at a rate of 5-7 percent. The authors estimated that since the corporate income tax rate is 35 percent, the elimination of the tax deductibility of food advertising costs would be equivalent to increasing the price of advertising by 54 percent.
Laws that shield food manufacturers from liability for the health consequences of their products constitute another huge subsidy. According to the National Restaurant Association, 23 states have passed “Cheeseburger Bills,” which bar lawsuits against fast food companies for their contributions to obesity. As a result, food prices don’t include these “externalized” costs. Avoiding liability or penalties for food safety violations or escaping paying the costs of treating the victims of food outbreaks constitutes another externalized subsidy to the food industry. Unsafe food costs Americans $152 billion per year. As Marion Nestle has observed, “the high externalized cost of our present food system is a good reason to reconsider current food policies.”
While more research is needed to calculate the full costs of all food subsidies, Ken Cook of the Environmental Working Group estimates that the federal government paid out a quarter of a trillion dollars in federal farm subsidies between 1995 and 2009. The other types of subsidies such as tax deductions, lax regulation and liability protection make the full costs much higher.
How do these subsidies affect food prices? In general, subsidies lower the cost of the subsided products, especially in comparison to unsubsidized products that consumers could choose as an alternative. However, given the multiple sources of subsidies and the product-specific consequences, there is no simple or single answer to this question. Some analysts have pointed to the significant effects of one subsidy or another while others have disputed the claim that subsidies play a major role in food prices or health.
For example, in an analysis of the impact of federal subsidies to corn growers, Alicia Harvey and Timothy Wise at the Global Development and Environment Institute at Tufts University, concluded that these policies provided high fructose corn syrups producers an implicit subsidy of $243 million dollars a year and more than $4 billion since 1986. However, they concluded that HCFS subsidies are not the primary cause of soda overconsumption.
In my view, analyses of specific subsidy programs for specific products, while necessary to build a comprehensive body of evidence that can guide policy, miss the larger point of health impact. In almost all cases, subsidies are enacted at the behest of the food industry, not consumers or health advocates. Not surprisingly, their intended goal is to benefit the subsidized industry not to advance public health.
Given the central dynamics of the food industry in the last five decades – more industrialized production, higher profits for more processed and less healthy food, more advertising spending on less healthy than on healthy food, emphasis on national and global rather than local markets, heavy reliance on a few crops such as corn, wheat and soy – most industry-supported subsidies end up reinforcing rather than challenging the status quo. And from a health perspective, the most problematic element of the current status quo is that unhealthy food is cheaper and more available than healthy food. To change that dynamic will require a transformation in how government uses subsidies, not simply tinkering at the margins.
Currently, two disparate groups support large federal agricultural subsidies. Agribusiness wants to maintain the flow of public money that helps to maintain profitability while supporters of entitlement programs want to protect and expand programs such as SNAP, school meals and various rural programs. Together these constituencies have a powerful voice in Washington.
Similarly, opponents of the current pattern of subsidies include two groups with very different interests: health advocates who want to switch subsidies from less healthy to healthier food and the most conservative Republicans who want to end or significantly shrink safety net programs and let free markets reign. Recently Republican House leader Representative Paul D. Ryan, Republican of Wisconsin and the chairman of the House Budget Committee, told reporters, “We shouldn’t be giving corporate farms, these large agribusiness companies, subsidies. I strongly believe that.” Ryan has also called for a 20 percent cut in SNAP funding, reductions amounting to $127 billion by the year 2021.
From a public health perspective, an urgent priority is for advocates to develop strategies that can unite supporters of anti-hunger programs and those concerned about diet-related health conditions such as obesity, diabetes and heart disease without making unacceptable compromises with the food industry or the politicians who want to end entitlement programs. Forging such a policy agenda will require advocates to develop far more sophisticated understandings of the causes and consequences of rising food prices. Several of the alliances working on the 2012 Farm Bill such as the Community Food Security Coalitionand the National Sustainable Agriculture Coalition are engaging their members in just such dialogues.
Speculation and food prices
At the Global Commodities Forum in Geneva in January 2011, hosted by the UN Conference on Trade and Development, Michael Dunn, a Commissioner of the U.S. Commodity Futures Trading Commission (CFTC), noted that commodity derivatives markets, places where financial instruments based on food commodities are traded, perform a “critical price discovery function.” He said the CFTC should ensure stable and orderly markets and not prevent or limit volatility that arises as a result of a change in market fundamentals. But how does that financial goal affect the ability of the world’s population to get the food they need to sustain health?
Speculation can lead to increases in food prices when food producers from small farmers to multinational agribusiness corporations withhold products from the market in hopes of causing or benefiting from subsequent price increases. More indirectly, investors can buy “food futures” in commodity markets and hold on to these investments in the hope that as demand increases or supply falls, the re-sale price of the food future will increase, leading to more generous returns on their investments.
Some observers believe that the collapse of the housing and derivatives markets in the United States that began in 2006 encouraged speculative investors to move their money out of housing and real estate and into seemingly safer commodities markets, including energy, metals and food. In early 2008 such investments contributed to sharp increases in the price of food staples such as rice and wheat, as shown in Chart 1 below. After this bubble inevitably burst, food prices collapsed, further contributing to market volatility and disadvantaging the small producers least able to survive periods of market disruption.
Source: Ghosh J.
As Susanne Amann and Alexander Jung observed last summer in the German news weekly Der Spiegel, investors are now “betting big again on commodities like wheat, coffee, rice and soybeans.” “As a result,” they wrote, “prices are no longer determined by supply and demand, but by investment banks and hedge funds.” In 2009, Goldman Sachs earned $5 billion in profits from commodities speculation. Other financial institutions involved in commodities trading are Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan, many of the same cast of characters who helped to precipitate the 2008 financial crisis. In fact, these banks have created new financial instruments known as collateralized commodities obligations, CCOs, which are similar to the subprime mortgage derivatives that helped to burst the housing bubble.
These developments have led some officials and advocates to call for tighter regulation of food speculation. In 1936, as part of the New Deal reforms, Congress passed the Commodities Exchange Act, restricting speculation in food products. In the 1990s, however, the financial industry successfully lobbied Congress to weaken these limits, leading to increased trading in agricultural products, led by Goldman Sachs.
In a report published in Harper’s Magazine last July, Frederick Kaufman investigates the rise of the financialization of food commodities. He concluded that the 80 per cent increase in world food prices between 2005 and 2008 suggests that investors will continue to invest in food commodities and quoted a hedge fund manager who wrote his clients that “the fundamentals argue strongly that these sectors have significant upside potential.”
Other analysts disagree. In a 2011 research report written for Deutsche Bank, Claire Schaffnit-Chatterjee concluded that deeper structural factors influencing food supply and demand were more important than speculation, which in her view generally follows rather than creates a price bubble. She did note that since food has a low price correlation with other asset classes, “agricultural commodities are likely to remain an interesting instrument for portfolio diversification.”
Acknowledging this debate about the role of speculation, Olivier de Schutter, United Nations Special Rapporteur on the Right to Food, observed that volatility in food prices, viewed by market proponents as a necessary price correction, has a particularly disruptive impact on poor and food-insecure populations. He argued that “reforming the global financial system should therefore be seen as part of the agenda to achieve food security, particularly within poor and food-importing countries.” By framing food security as a basic human right, he opens new avenues for the pursuit of affordable, healthy food.
In the fourth and final post on food prices and health, I will consider various strategies that have been proposed to better align food subsidies and health, reduce the adverse health consequences of food speculation and reverse the current situation in which unhealthy food is often cheaper than healthy food.
 Physicians Committee for Responsible Medicine. Agricultural and Health Policies in Conflict How food Subsidies Tax our Health. 2011.
 Cook K. Government’s continued bailout of agribusiness. Environmental Working Group Farm $ubsidy Database.
 Richardson J. The Federal Response to Calls for Increased Aid from USDA’s Food Assistance Programs. Congressional Research Service, 7-5700 R41076, February 17, 2010.
 Chou S-Y, Rashad I, Grossman M. 2008.”Fast-Food Restaurant Advertising on Television and Its Influence on Childhood Obesity,” Journal of Law & Economics,2008; 51(4),599-618.
 Nestle M. Food is cheap at market but costs a lot elsewhere. San Francisco Chronicle, April 3, 20ll.
 Cook K. Government’s continued bailout of agribusiness. Environmental Working Group Farm $ubsidy Database.
 Harvie A, Wise TA. Sweetening the Pot. Implicit Subsidies to Corn Sweeteners and the U.S. Obesity Epidemic. Global Development and Environment Institute. Tufts University. February 2009.
 Bittman M. Don’t End Agricultural Subsidies, Fix Them. New York Times, March 1, 2011.
 Steinhauer J. Farm Subsidies Become Target Amid Spending Cuts. New York Times, May 6, 2011.
 Rosenbaum D. Ryan Budget Would Slash SNAP Funding by $127 Billion Over Ten Years Low-Income Households in All States Would Feel Sharp Effects. Center on Budget and Policy Priorities, April 11, 2011.
 Ghosh J. Commodity Speculation and the Food Crisis. In Excessive Speculation in Agriculture Commodities: Selected Writings from 2008–2011, Lilliston B, Ranallo A, editors. Institute for Agriculture and Trade Policy, 2011., pp. 51-56.
 Amann S, Jung A. Speculators Rediscover Agricultural Commodities. Der Spiegel Online, July29, 20101.
 Kaufman F. The Food Bubble. Harper’s Magazine, July 2010, 2734.
 Schaffnit-Chatterjee C. Where are food prices heading? Deutsch Bank Research March10, 2011.
 De Schutter O. Food commodities speculation and food price crises. Briefing Notes 02, September 2010. United Nations Special Rapporteur on the Right to Food.
3. StephenZacharias via Flickr.
4. US Mission Geneva via Flickr.