Do Farm Policies Make Food Too Cheap or Too Expensive?

05/28/2010 05:36 pm ET | Updated May 25, 2011

Critics agree that farm policies have a bad effect on food prices. What they can't agree upon is whether farm policies make food too cheap or too expensive.

One camp argues that farm subsidies cause overproduction of crops like corn. The resulting cheap food prices hurt farmers in other countries -- that's why trade negotiations have tried to limit farm subsidies. Michael Pollan and other critics argue that cheap corn results in lower prices for everything from soft drinks to hamburgers, contributing to the nation's obesity epidemic.

The competing camp of critics focuses on biofuel policies. When more corn is used to make ethanol, less is available to feed people, livestock and poultry. The result is higher prices, not just for corn, but for a wide range of foods. Especially during the 2007-2008 spike in food prices, many were quick to point to biofuel policy as the cause of higher food prices and an increase in world hunger.

Both sets of critics make valid points. Many types of farm subsidies do push food prices lower, and biofuel policies do tend to push food prices higher. To be able to weigh these competing arguments, one has to be able to determine just how large these offsetting effects are likely to be.

Let's look at the question using some readily available statistics and basic economic logic. Furthermore, let's narrow the focus to the effect of subsidies paid to U.S. corn producers. Corn is a good place to start, because it is the number one crop produced in the U.S. and the world as a whole.

U.S. corn farmers receive about $2 billion per year from the direct payment program. A farmer does not have to grow corn or any other particular crop to get these payments. Instead, the payments depend on what was grown on the farm prior to 2002.

The federal crop insurance program subsidizes the premiums farmers pay for insurance they buy from private companies. In the case of corn, those premium subsidies also amount to about $2 billion per year.

The marketing loan and countercyclical payment programs used to make large payments to corn farmers. However these programs only make payments when corn prices fall below trigger levels. For the last four years, corn prices have been far above the levels that would trigger payments under these programs.

In summary, corn farmers currently benefit from about $4 billion in annual subsidies, half in direct payments and half in terms of subsidized crop insurance. To put that in context, U.S. corn farmers sold about $40 billion worth of corn in 2009. In other words, U.S. corn producers got about $10 from selling their corn for every dollar they received in direct payments and crop insurance subsidies.

Suppose that both programs were eliminated tomorrow. For the sake of argument, let's be economists and make a rather extreme assumption. Suppose that corn prices rise enough to completely offset the lost subsidies. It's far more likely that the price effect would be smaller, but even under this extreme assumption, corn prices would only rise by about 10 percent.

Tortillas, corn chips and soft drinks made with high-fructose corn syrup would all cost more to make. It would also cost more to feed the cattle, hogs, and poultry that produce the nation's meat and milk. Again, let's make an extreme assumption, and assume that every dollar of increased corn costs is eventually passed along to final food consumers.

A 10 percent increase in farm-level corn prices would increase consumer prices for corn-containing products by much less than 10 percent. That's because the cost of corn is only a small fraction of the price charged in the grocery store for soft drinks, corn chips or hamburger. And it is an even tinier fraction of the price a fast food restaurant charges for the same products.

Casting the net more broadly results in a similar story. Total U.S. farm program, crop insurance, and conservation subsidies total about $20 billion per year. U.S. consumers spend more than $1 trillion on food each year. In other words, farm subsidies are equal to about 2 percent of the value of the food purchased by U.S. consumers.

Bottom line: farm subsidies probably do make food cheaper, but the effect is not very big. As will be argued in a future posting, biofuel policies may do more to raise food prices than farm subsidies do to lower food prices. Food prices, of course, are also affected by much more than government policies. As discussed in my book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices, everything from the weather in Iowa to economic growth in Asia also affects the price of the food we eat.