Saturday, March 10, 2012


Food inflation is a concern shared by all countries, poor as well the rich ones and many suggestions have been articulated to reign in this trend that costs the consumer dearly in terms of diminishing disposal income. When there is a normal situation under a free economy the demand-supply gap determines the market price unless there is too much speculation and hording. That rich countries like the US and those in the European Union pay their farmers hefty agricultural subsidy is a fact of life though there is strong opposition to this unethical practice from poor developing countries at the WTO level. But in stead of these subsidies on the way out, they are actually increasing if the direction of economic policies of developed countries is any indication. For example the EU is slated to increase its subsidy quantum under the Common Agricultural Policy of the Union from the current Euro 55 billion to Euro 63 billion by the year 2020. According to economic experts such subsidies have a snow balling effect on food prices all over the world besides adversely affecting the land productivity. Here is a take on this issue.

"By 2020 the EU is planning to increase expenditure on the Common Agricultural Policy (CAP) by some €8billion a year at a time of catastrophically bad public finances. Despite the concern about pressure on food prices, reform of the CAP will not increase efficiency or lower prices to the consumer. The sweeping rejection of the benefits of new technologies and the proposals for more government control of food markets by many NGOs and lobby groups would exacerbate current problems. The geographical and economic realities are such that yields per hectare will have to increase substantially over the next 40 years. The CAP – especially after recent reforms – leads to farm yields well below the level of maximum efficiency. This lack of efficiency has several dimensions: land is not used for the most efficient crops; yields per hectare are well below the maximum attainable levels; and incentives to adopt – or research – new technologies that will increase productivity have been blunted. Research shows that farm subsidies do not necessarily help bio-diversity and that their abolition would lead to a less than corresponding fall in farm incomes. To a large extent, subsidies become capitalised in land values, thus increasing costs to farmers. Between 1992 and 2009 – the period since the introduction of direct payments under the CAP – the value of agricultural land and buildings in the UK rose 400 per cent compared with 38 per cent general inflation. This suggests that one of the effects of removing direct payments would be a decline in land prices, rents and associated production costs. The abolition of subsidies in New Zealand demonstrates how government subsidies damage productivity and their removal leads to increased productivity". 

Is it not ironical that in a country like the US super rich farmer families are paid large sums every year from the exchequer "for not cultivating the land"? Similarly direct subsidies in the EU make the farmers less innovative and industrious, satisfied with the return they are already getting and the chain effect is stagnation of crop yields while food needs are increasing continuously. If the demand outstrips supply as it is going to happen in a few years from now if the current practices continue, the food prices have to go north creating further hardships to the citizens. It is argued, probably with some justification, that removal of farm subsidies would wake up the farming community to work harder and use more efficient technologies to raise land productivity which in turn can be expected to reduce market prices of food materials. Whether this is going to happen depends on the collective wisdom of countries that make up the EU.


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