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Free Trade Fact of the Day

Posted By Conn Carroll On July 8, 2008 @ 10:31 am In International | Comments Disabled

Looking at the relationship between protectionism, subsidies, and world hunger, American Enterprise Institute visiting scholar Adam Lerrick writes [1]:

The world has the ability to feed itself at affordable prices. There is no shortage of productive land. Large tracts in Ukraine, Kazakhstan, and Brazil offer huge potential. Putting fallow acres back into production could quadruple Russian cereal output to 300 million tons each year. The labor, technology, and capital are all at the ready.

So why has the market failed to respond to this most basic of human needs?

In the United States, we pay farmers $2 billion each year to put 36 million acres of cropland–an area the size of Iowa–out of production under conservation programs. In Europe, large, efficient farmers must leave 10 percent of their land idle. (In response to the food crisis, U.S. and European conservation programs have been suspended.) Biofuel subsidies and government production mandates force food and fuel to compete for crops and land. As figure 4 illustrates, $7 billion of subsidies now divert one-third of the U.S. corn crop to ethanol production.

High corn prices have displaced 12 million acres of soybeans and reduced U.S. soybean acreage to its lowest level in a decade. At the same time, a 54ยข per gallon tariff on Brazilian sugar-based ethanol limits imports that are grown on low-grade pastureland and that do not divert food capability to energy production. The livestock industry claims that ethanol subsidies raise corn prices by 50 percent. The International Monetary Fund calculates that one-fifth of the rise in food prices is due to the use of crops for fuel.

The developing world cannot fight hunger in the face of a distorted global food market. Agricultural trade barriers on imports and subsidy programs in the United States and Europe dump crops on world markets, depressing prices below international costs of production and forestalling the growth of a healthy farm sector in emerging economies.

In agriculture, even medium-term supply response is slow, thereby amplifying the price increases. Whether in Nebraska or Thailand, farmers who have survived the boom-and-bust cycles of their industry are cautious. It is only after a perceived fundamental shift in demand that output increases.


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[1] writes: http://www.aei.org/publications/filter.all,pubID.28240/pub_detail.asp

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