Tuesday, August 11, 2015

Does the US Have a "Cheap Food" Policy?

It's often said, in defense of payments to ag producers, that these subsidies constitute a "cheap food" policy. Advocates of the policy contend that the subsidies incentivize increased production such that food prices fall. It's a win-win: producers benefit directly from the subsidy and consumers (especially the poor) benefit from reduced prices at the grocery store.

Leaving aside the question of whether or not these types of policies should exist, it's interesting to see whether the subsidies actually result in lower food prices. It's important to note that direct payments to producers have been reduced as of the 2014 Farm Bill and that the USDA spends an increasingly greater percentage of its budget on direct food assistance. That said, the article's findings are still interesting today.

With all that out of the way, I want to summarize the findings of a paper by Corey Miller and Keith Coble of Mississippi State University. The paper is relatively old; it was published in 2007 in Food Policy, but it nevertheless provides some interesting insights. The gated, full version is here and an un-gated but incomplete version can be found here.

Here's a paragraph from the introduction:
This article focuses on a long-asserted source of the comparatively low proportion of consumer income devoted to food in the US, agricultural commodity policy. For many decades, US farm policy has been described as a "cheap food" policy—in the broadest sense meaning the results of actions taken by the federal government to affect agriculture include lower retail food prices for consumers. In their textbook Agricultural and Food Policy, Knutson et al. (1998) state, "a cheap food policy involves the government overtly pursuing policies that hold down the price of food below the competitive equilibrium price."
Miller and Coble go on to present two empirical models: a time series specification that examines the percentage of income spent on food and an SUR model that breaks food expenditure into six groups (meat products, fresh fruit, fresh vegetables, processed fruit and vegetables, bakery and cereal products, and fats and oils). They control for the effects of total factor productivity, per capita disposable income, and the farm-to-retail spread.

They find that direct payments have little impact on food prices. There is a small but statistically significant negative effect on fats and oils prices. They indicate that this is due to subsidies to soybean production. Direct payments have a positive and statistically significant effect on fresh fruits prices because subsidized crops are grown in place of fresh fruits, at least in some areas.

So, the "cheap food" policy doesn't actually drive food prices down. The silver lining for advocates of the policy is that direct payments are also not responsible for exacerbating the obesity epidemic in the US. I highly recommend reading the article, as the authors do a great job of explaining the real-world relationships at play and present some interesting data.

I'll have my own take on a related policy issue in the next few months. Stay tuned!

1 comment:

  1. One area the US definitely does not have a "cheap food policy" is with respect to sugar. Us sugar prices are much higher than world prices as a direct result of deliberate government policy intended to help sugar processors.