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Karl Rains

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Karl Rains

    Eco-Econ

    Paper #3: Allocation

    August 5, 2004

    Allocation of Agricultural Resources & Subsidies

     “Allocation is the process of apportioning resources to the production of different

    goods and services” (Daly, 2004). In the global and domestic agricultural markets,

    governments play an important role in influencing the supply and demand for market goods through the use of taxes and subsidies. By law, the U.S. Department of Agriculture (USDA) is required to subsidize more than two dozen specified agricultural commodities (Becker, 2002). In 2000, the United States Federal government spent $32 billion in direct payments to farmers and export subsidies, for these commodities (Environmental Defense, 2001). This enormous allocation of government funds can have a significant effect on the supply and demand of agricultural products, both domestically and globally, in addition to all of the externalities associated with the farming process.

     Subsidy programs operate globally in a wide variety of ways and they are

    currently generating much controversy within the WTO. Current U.S. subsidy programs are being attacked for inhibiting global free trade of certain commodities. Domestic price supports work through legislated target prices and loan rates set well above market prices. U.S. producers will continue to over-produce supported commodities, distorting market prices and global trade (Becker, 2002). This distortion causes negative impacts on many small farmers throughout the world.

    In the U.S., traditional farm support programs focus almost entirely on the growth

    of “commodities” – animal feeds, grains, and cotton (See Figure 1). These crops actually

    generate only one-fifth of the value of the country’s agriculture. The other four-fifths of

    farm production in the United States including cattle-raising, dairy, and production of

    fruits and vegetables is generally ignored in domestic programs. Commodity price

    supports function by stimulating crop surpluses, which leads to lower crop prices, hurting

    small farmers and increasing the need for more federal aid. This vicious cycle also

    encourages farmers to replace grass fields with commodity crops that provide fewer

    habitats for wildlife, require the use of more chemicals, and lead to increased soil erosion.

    The current commodity structure favors farming systems that have harsher environmental

    impacts over farming methods that are easier on the land (Environmental Defense, 2001).

     The $32 billion spent on Federal farm programs in 2000 was greater than funds

    spent to run America’s parks and refuges, clean up toxic waste sites, and build

    wastewater treatment plants. It was more than the total budgets of the Environmental

    Protection Agency and the Department of Interior combined (Environmental Defense,

    2001). Shifting the allocation of government financial resources from the perverse

    commodity crop subsidies to conservation supports would have drastic benefits for the

    environment, smaller farmers, and the general public.

    Conservation subsidies would provide a wide range of benefits to local farmers

    and the environment. These benefits include improved water quality, protection against

    urban sprawl, restoration and preservation of wildlife habitat, protection and

    enhancement of pasture and range land, and a reduction in the threat of global climate

    change. A few specific examples of how these programs could work are; Congress could

increase expenditures to acquire development rights on a voluntary basis from farmers

    and forest owners on land in the path of sprawl, and/or Congress could provide income

    support through stewardship payments that reward farmers for practices designed to

    reduce polluted runoff and combat global climate change (Environmental Defense, 2001).

    These improved land-use incentives are important on a number of levels.

    A significant portion of the land in the United States is also allocated to agriculture. “Farmland dominates the American landscape, occupying 55% of the land of

    the contiguous U.S., or 1.1 billion acres” (Environmental Defense, 2001). These

    statistics demonstrate the considerable importance, both financially and in physical terms,

    that agriculture plays in the U.S. economy. The enormity of this industry explains why

    significant environmental degradation occurs as a result of inappropriate land

    management and the inclusion of perverse subsidies. The Conservation subsidies

    previously discussed, as well as many others, would have a positive impact on the

    reallocation of agricultural land back into natural habitat and provide a more diverse

    portfolio within the government’s farm support program.

Figure 1: Highest Subsidy Programs in the U.S.

    Program

    (click for top recipients, payment Number of

    concentration and regional Recipients Subsidy Total Rank rankings) 1995-2002 1995-2002

    1 Corn subsidies 1,365,459 $34,552,627,460

    2 Wheat subsidies 1,144,887 $17,247,966,489

    3 Conservation Reserve Program 627,618 $13,018,173,430

    4 Soybean subsidies 791,340 $10,967,530,537

    5 Cotton subsidies 204,182 $10,663,566,847

    6 Rice subsidies 54,403 $7,795,799,116 http://www.ewg.org/farm/region.php?fips=00000

    References

    Becker, Geoffrey S. 2002. “Farm Commodity Programs: A Short Primer.” CRS Report for Congress. Congressional Research Service, The Library of Congress. Order Code

    RS20848, June 20, 2002.

Daly, Herman E. and Farley, Joshua, 2004. Ecological Economics: Principles and

    Applications. Island Press, Washington DC.

Environmental Defense, 2001. “Food for Thought: The Case for Reforming Farm

    Programs to Preserve the Environment and Help Family Farmers, Ranchers and

    Foresters.” Environmental Defense, Washington DC.

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