Recently, I have taken an interest in Option 5 of the budgetary policy proposals as published by The Concord Coalition. The proposed Option 5 is to remove the current system of the agricultural subsidies for agricultural producers and to replace it with a more farmer friendly Risk Management Account system also known as the RMA.
One reason for the implementation of this new policy and
that RMA systems is that the current agricultural subsidy program has benefited
most, the large multi-million dollar producers which resulted in over
production and depressed prices. Such subsidy program would provide more
incentives for these companies to exert their market power to set market value
of their products low to displace smaller farmers from the sector’s total
market share. The subsidy program coupled with more and more consolidations and
vertically integrated supply chains among large agricultural producers have
caused smaller family farmers not being able to match the massive production
scale of these large firms. Over the years for example, Tyson Foods for example
has vertically intergrated their chicken business making them the number
chicken producer both in the US and globally.Also, over the years we have
witnessed a number of significant merges in the agriculture sector in the US
such as the Tyson-IBP merger in 2004 and the Smithfield and Premium Standard
Farms merger in 2007 has resulted in an ever concentrated agricultural sector.
Such can be seen through the CR4s of the Beef and Pork industry which yields
about 84% and 66% respectively.
As such, smaller family farmers now facing not only the
competition by these large producers but also the market power of
oligopsonistic firms along the supply change and the unpredictable nature of
the agricultural sector would need a system of a safety net which could support
their market activities. The larglely concentrated meat industry in the US for
example has created a range of oligosopnisitc firms in the middle of the supply
chain such as meat packers, food producers and wholesalers who exert their
market buying power over smaller family farmers. Tyson Foods for example was
once accused of having deliberately depressed prices it paid to cattle ranchers
through forward contracts which is deemed "illegal" in areas of
anti-trust policies.Also, the demand of agricultural product especially meat products
is not stable over time due to health concerns such as threats of E.Coli or in
some cases due to an economic downturn too. The IBIS World Report on the US
farming industry has also stated that the current recession has also affect
demand of premium and quality meat products. As such, amidst of all these
market challenges, under the RMA, farmers would be able to use the money they
have collected to compensate these unforeseen market losses beyond what they
receive from crop insurance policies besides planning for future investments.
In all, the RMA would provide more individual incentives for farmers.
One may also argue that due to the industry unpredictable
nature that input prices especially prices of feeds are often fluctuating that
energy cost has also been increasing for the past five years agricultural
subsidies are thus important in aiding agricultural producers. Yet, the RMA
system if implemented will still have the same fundamental function as the
agricultural subsidies in such aspects, only to do it better than the
agricultural subsidies in the terms of the budgetary spending – to be able to
save about 55 billion dollars in ten years if the RMA system is implemented.
Besides, US agricultural subsidies, historically has faced
strong criticism from global trading partners and the WTO who accused the US
government to have created adverse market distortions. Joyce Mulama of IPS
Africa has reported an article that the US agricultural subsidies which created
low agricultural prices has been hurting African Farmers. Such as similar issue
can be seen in the issue pertaining to the trade protection once implemented by
the Bush Administration on behalf of the US steel industry. As such, a removal
of the current subsidy program would send positive signals to the global trade
market and also WTO.
Also, they are a number of operational reasons that the
agricultural subsidies should be removed. According to Chris Edwards , the
director of tax policy of CATO Institute, farm programs are prone to mismanagement
and scandal. Since 2000, about 1.3 billion dollars have been paid to people who
owned "farmland" that is not even used for commercial farming. In
addition to that, he has also argued that farm households are more stable
financially today as compared to the past that these households have other
non-farm sources of income. This can be true when we take in account that due
to the intense competition in the farming industry, small family farmers which
still position themselves strongly today in their respective industry must have
been strong amidst of the intense market challenges.
I must however, agree with an argument by the opposing side
of this policy which suggested that a drastic change in the US agricultural
sector will create destabilizing effects over the many family farmers. As such,
I would suggest and recommend that this policy to be implemented periodically
while slowly phasing out the amount of agricultural subsidies of the current
system. Meanwhile, we can also implement alternative policies which can aim at
reducing unnecessary subsidies for example.
With the current political landscape – amidst the US debt
crisis – proposals of cutting government spending will be attractive and thus
have potential political feasibility. This is what we are witnessing in the
current debate for Senator Debbie Stabenow’s proposal of agricultural reform
under the Agriculture Reform, Food and Jobs Act. The act aims to cut
unnecessary subsidies which could save taxpayers money up to 23 billion dollars
have garnered strong bipartisan support in the US senate recently with a voting
result of 90-8 in favor of the proposed bill. Even before the bill has been
brought to the senate, it has already garnered similar bipartisan support when
the US Senate Committee of Agriculture , Nutrition and Forestry has adopted the proposal via a
16-5 vote. According to Senator Stabenow, this bill is well received and
praised by farm and food organizations due to its common-sense reforms, deficit
reduction and investments for the future economic growth
Theoretically, while the policy will benefit the family
farmers and somehow reduce the benefits obtained by large agricultural
producers the policy would have a win-loss situation in succeeding
(concentrated benefit vs concentrated loss). However with the current political
outlook based on the recent senate consensus on Senator Stabenow’s proposed
reform, this policy proposal is poised to have strong political potential in
succeeding
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