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Source link: http://archive.mises.org/21130/a-few-ways-that-governments-distort-food-markets/

A few ways that governments distort food markets

February 21, 2012 by

Prices are increasing for land in the corn belt:

Land values are uniformly rising throughout the Corn Belt and the Great Plains, thanks to farmers being the primary buyers and to the value of commodities. Higher prices for grain have spurred the most significant demand for land since the 1970’s.

These price increases will work their way into the cost of food for consumers, and let’s not forget that corn (among other crops grown in the corn belt) is a subsidized crop, so taxpayers get to pay for the corn twice.

As mentioned by one farmer in the film King Corn, “I don’t know a single farm out here that isn’t in a government program.”

The profitability of farm land may also be linked to the proliferation of genetically-modified crops in recent years. In addition to corn, the linked article also notes that much of the land may be used for soybeans. There is nothing free-market about soybeans either since soybeans are another case of a type of government subsidy being used to enhance private profits (soybeans are also directly subsidized). In this case, the subsidy takes the form of a government-granted monopoly known as a patent. This patent is on the soybean genes themselves, since these genes are from herbicide-resistant soybeans. (Most corn/maize also is also genetically-modified (GM) and patented.)

The patenting of crops in turn leads to less innovation in crop varieties and in consumer choice since the owners of genes can prosecute any farmer who plants varieties of non-GM crops that may have been unintentionally crossed with GM crops via wind. Farmers who have the bad luck of owning farms downwind are then likely to be sued by the the owners of the patents should the downwind farmer attempt to harvest seeds from his own crops.

This use of monopoly power to crush the planters of other varieties of corn and soybeans constitutes a third way that government intervention leads to consumers paying extra for food. This time, the extra payment is in the form of fewer choices in food.

This isn’t an attack on GM food, mind you, which may have many benefits. However, the growth of government monopoly power over all varieties of GM crops and over crops that even happen to be planted near GM crops (which is most crops) has led to a severe retardation in innovation and the use and development of other varieties of these crops everywhere.

In the developing world, however, Reuters reports that GM crops are booming, and it is hard to begrudge the residents of poorer countries their desire to grow food that is less likely to spoil or fall victim to disease. On the other hand, one cannot know the long term effects of government monopoly on the future of innovation in agriculture in the absence of a free market in planting and development of new crops.

On the other end of the spectrum is Europe, where most GM crops are simply banned. This is just another type of tax on consumers, although Europe is notorious for meddling in even the tiniest aspects of agriculture, so who can be the least bit surprised?

A recent Reuters story notes that the bans on GM crops will likely continue well into the future, although they have approved one variety of maize controlled by Monsanto via its monopoly on the patented gene. But otherwise, any consumer who actually wants these goods is simply out of luck.

So, while farmland is now profitable, the taxpayer and consumer is certainly paying his fair share. He pays in his tax dollars, and he pays for the government monopolies (known as patents) which in turn diminish his choices of crops via government intervention. And, he pays more for food through price inflation. The feds point to the CPI and claim that prices increases are mild, but even the CPI shows food price increases at 3.5 percent to 4 percent over the past year, and this is well above income growth for the same period. If food prices are growing faster than income, that’s not the kind of “stability” that leads to wealth creation. Of course, As the New York Fed has informed us: Who needs food when you can just buy an iPad?

{ 21 comments }

Luton Ian February 21, 2012 at 6:13 pm

“These price increases will work their way into the cost of food for consumers,”

I’m not so sure.

More likely, to my mind, that the high land prices are being paid in the hope of earnings to be made, either in rents, or returns from farming it.

If those earnings do not live up to expectations, then mal investments have been made. There is no direct route for those prices to be passed on to consumers, if consumers are unwilling to pay them.

bill wald February 21, 2012 at 8:00 pm

Worse, the government money mostly goes to automated mega-farms that minimize manual labor and almost nothing goes to labor intensive row crop veggie and orchard farmers.

Dave Albin February 21, 2012 at 9:35 pm

This may be the worst part of the subsidies – the cronyism. Only a small number of crops get the bulk of the subsidy payments, and this encourages these favored enterprises to expand rapidly to get even more payments next year. There is nothing wrong with mechanization in farming or anything else, but you have to wonder if the subsidizes drove the mechanization, or if the market played a role (which it surely did, to some level).

In yet another strange event of government agencies grappling within themselves, the USDA does not even subsidize what it says you should be eating, such as fruits. Most corn and soybeans are fed to livestock, which are raised for meat.

Dave Albin February 21, 2012 at 9:39 pm

In some respects, farmland is treated like gold – long-term wealth. But, this article gets it right on. Also, keep in mind that some corn and soybeans would almost certainly be produced in a free market.

SLibertarian February 22, 2012 at 8:20 am

Of course it would. Supply and demand would dictate it. Here is what will happen if government gets out of the food market entirely. When and if food shortage happens, prices go up, and, then other people, seeing this would say “Wow, I can make quite a bit of money selling food.” And they begin to do that, and then.. supply and demand again.. Since the supply is now rising faster than demand, prices will drop.. this cycle would continue until such time as it mostly balances out. There may be a brief period as some people get out, and others get in, but eventually, it will balance out. These things always do.

Michael E Picray February 22, 2012 at 1:26 pm

IN A FREE MARKET prices reach equilibrium via supply and demand. BUT we do not have a free market. Government subsidies encourage farmers to grow the Blessed crops, and discourage the growing of Evil crops (Those unblessed by government subsidies) Land prices are currently a bubble. (If a farmer cannot borrow to buy land and pay for the loan via making the land cash flow, then either land prices are too high – as now – or crop prices are too low to reimburse the cost of inputs.)

The Federal government also pays farmers to NOT grow crops… but ONLY AFTER they have grown the subsidized crops for a specified number of years and the land meets other base requirements. (See: CRP and WRP)

While corn is used as a fuel (ethanol – subsidized at somewhere around 40 to 50 cents per gallon) and in a vast number of food products (corn sweeteners and corn oil is in almost everything), the US government imposes an import tariff on sugar – so the cost of sugar is artificially high, thus making a better market for corn sweeteners.

“If the government got out of the food business,” prices would probably stabilize at just above production costs with a VERY low profit margin. Even if it appeared that there were vast profits to be had by farming, the reality would be highly unlikely because of the hidden costs of inputs – such as the cost of land, farm equipment cost and maintenance, fuel and other inputs that the person in the grocery store aisle is unaware of and doesn’t care about. And it is unlikely that most people would be willing to pay the unsubsidized cost of food – so consumption would fall… (we know some city folks who grow tomatoes and cucumbers next to their central A/C units even though “vegetable gardens” are prohibited by their HOA)

Another aspect to be considered is that the nature of farming is entirely dependent on weather and climate conditions which are highly variable. If year 1 looks like huge profits are being made, years two through 8 will probably eat that profit and force the farmer to take out production loans. A good example right now is the high price of beef. The droughts and fires in the Southwest US is forcing beef producers to either spend huge amounts of money bringing feed (hay and grain) long distances to maintain minimal breeding stock (with nothing to sell at the end of the year.) This means that beef prices will be high for at least two to three years after the weather becomes more amenable to raising beef. (Can’t sell them if you haven’t bred them & fed them.)

And those people who look at food prices and say, “Wow, I can make quite a bit of money selling food.” are ignorant of the industry. And if they want to try it, they’re welcome to do so – if they have a LOT of money to spend just establishing the basic inputs. When I bought my small farm, banks were requiring a minimum of 50% down payment on the land, and equipment and seed was cash and carry. (Also assuming the nascent “farmer” knows what to DO with the inputs! It’s not as easy as it seems.) In my first 5 years of “farming” I had taxable income only one year – I made a whole $40 that year. The framing operation is subsidized by off farm jobs. (No. We do NOT take or participate in government programs or subsidies.)

One of the truest statements I’ve ever heard about farmers is that they are the biggest gamblers in the world – the ORIGINAL “high rollers” who bet it all every year.

SLibertarian February 22, 2012 at 1:41 pm

“We do not currently have a free market system” <- This is completely correct, and is why I prefaced my entire post with "If government gets out of it." And yes, I'm well aware of the issues facing many farmers. My maternal grandfather owned several acres of land, and most of it was pecan orchards. He also mixed in some virginia pines in some of the land near his home, and we sold them as christmas trees during that season. Not to mention, he also had several citrus trees mixed in, plus a friend of the family has a citrus farm.

And the ones who think they can make a lot of money may be ignorant, but that's all part of the "game" This is simply how the market works, as I'm sure you are aware. :)

Sheena Picker February 22, 2012 at 2:19 am

Prices of land normally appreciate through time and it goes that the prices of the crops planted on these farmlands rise as well. Whether they like it or not, consumers are burdened with the responsibility of paying taxes (directly or indirectly). It is everyone’s responsibility but I also feel for your concern about prices rising faster than the income of the consumers. That would be a very difficult situation to be in.

Dave Albin February 22, 2012 at 6:24 am

That is the situation we are in. Depending on the measurement method and the items, food prices may have risen by as much as 30% annually (for a year or two, at least). This, of course, is much greater than income.

Michael E Picray February 22, 2012 at 1:32 pm

Dave – are you considering the 15 to 30% inflation we’ve been experiencing lately? Perhaps that has something to do with rising prices? And since wages NEVER keep up with inflation…

Luton Ian February 22, 2012 at 9:13 am

Food prices have risen in the past 3 to four years, but for the twenty years prior to that they were falling.

I don’t see any free market mechanism for the real price of Agricultural land to rise, other than increasing number of mouths to feed, and encroachment of other uses onto agricultural land. Sure, there may be a bad year for some crop, say a frost in Brazil raising the price of coffee growing land in Kenya for a year or so, but long term, no. If anything, improving productivity should lower the price, and this is seen with all of the redundant farms in the eastern USA.

The coerced market of course has myriad mechanisms to distort prices.

What do I think the current drivers are?

Ethanol production,

over printed currencies (land and internationally traded foodstuffs, also such international commodities as oil and metals, are measuring the declining purchasing power of money),

and money printing being loaned to farmers.

To some extent, there is an increasing market for meat. the newly prosperous Chinese and Brazillians want to get to eat some of it.

Sean February 22, 2012 at 9:26 am

I believe this article overlooked one important “ingredient”; ethanol. Many jurisdictions have mandated that gasoline contain a certain percentage of ethanol. These mandates have helped to fuel (pun intended) the increasing prices of corn and hence, farmland.

None of the forgoing says anything about the lost purchasing power of the fiat dollars the Fed has been pumping out since late 2008.

Concerned Citizen February 22, 2012 at 10:52 am

You forgot to mention the real problem with GMO foods. There dangerous health side effects are covered up by the Government. If GMO did not have Government backing I’m sure they would fade away.

Dave Albin February 22, 2012 at 12:37 pm

That’s a little bit of a stretch, although I’m not saying it’s impossible. Eating a lot of processed foods versus unprocessed food, or simply eating too much, are much bigger health problems.

You may be right that GMO’s might not exist without government funding, research, etc. There would most likely be more concern about safety and efficacy if it was all privately done.

Tom Hayden February 22, 2012 at 11:37 am

Investors are driving farmland prices higher because interest bearing investments are earning so little.I’ve seen farm investments advertising 7% return.Local land prices (western Kansas) have doubled in 3 years.

Dave Albin February 22, 2012 at 12:32 pm

Exactly – some advertise closer to 15%. Farmland prices are up almost everywhere.

Luton Ian February 22, 2012 at 3:00 pm

It’s a bubble, and it is being fuelled by the QE money which the banks got.

James T. Fisher February 22, 2012 at 2:22 pm

The World Trade Organization has made a preliminary ruling that European Union restrictions on genetically engineered crops violate international trade rules. The United States, Canada, and Argentina together grow 80 percent of all biotech crops sold commercially, by which the EU regulates such crops. The countries argued that the EU’s regulatory process was far too slow and its standards were unreasonable given that the overwhelming body of scientific evidence finds the crops safe.

Ned Netterville February 24, 2012 at 11:15 am

The US Department of Agriculture is at least as much a threat to freedom and security as the Department of Education. (See, for example: http://www.amazon.com/Mad-Sheep-Story-Behind-Family/dp/1933392762)

Mushindo February 27, 2012 at 4:21 am

As regards cheap I-pads relative to expensive food, the observation is right as far as it goes.
For the whole of my adult lif,e I have noted that while the established basics of human life ( food, energy, housing) tend to increase in price over time, technology tends to get ever-cheaper ( relative to those essentials), with ever-more functionality per dollar spent. whats missing is a good theory of WHY this should be. I have an hypothesis:

the newer any technology is, the less opportunity any given government has had to assert control over it, in terms of specifications, pricing, raw materials, and logistics, and the greater the potential for innovation and market efficiency to drive further improvements in functionality, reliability and cost to the consumer. Conversely, the longer any given product has existed, the greater th elikelihood that potential economies of scale and innovative product enhancement have been exhausted, and the greater the likelihood that government has established controls and constraints on the choices of producers in developing further innovation in respect of th eproduct concerned. This manifests itself in ever-higher production and distribution costs, and hence prices, for the product concerned.

Mushindo February 27, 2012 at 4:36 am

Put another way, new products start off expensive, scarce and bespoke, and government hasnt figured out how to control it yet. The market, driven by the twin forces of demand and th einnovation of entrepreneurs, uses this window of opportunity to develop the product to ever-greater levels of usefulness, with ever-greater availability, at ever-lower cost, while government imposes ever-more costly restrictions and compliance regimes on production. Once a product is completely commoditised and established as a quasi-necessity for most people, the market’s benign influence on its future production and pricing is outweighed by the malign burden of regulation. This is why a basic 4-function pocket calculator in 1975 cost perhaps a week’s wages, while today a hamburger costs more than a very much more sophisticated calculator.

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