Agricultural Policy Distortions

Which sector in the economy accounts for 70% of the global cost of trade distortions but only 3% of global GDP?  Agriculture.    

Kym Anderson, Gordon Rausser, and Jo Swinnen have an excellent review article in the newest issue of the Journal of Economic Literature on agricultural policy worldwide.  They reveal that agricultural markets are among the most distorted in the world, recent price spikes have been amplified by agricultural policies, and some of the poorest people in the world are hurt by agricultural policies in developing and developed countries alike.  

A few of quotes: 

For advanced economies, the most commonly articulated reason to restrict food  trade has been to protect domestic producers from import competition as they come under competitive pressure to shed labor. However, such measures harm not only domestic consumers and exporters of other products but also foreign producers and traders of food products. Accordingly, these measures also diminish national and global economic welfare

and

policies in developing countries have not been motivated by a desire to alleviate poverty in their rural areas (where most of the world’s poor reside) any more than have been the policies of developed countries.

and

In developed countries, agricultural policy remains disproportionately important compared to the relatively small shares of the upstream agriculture component in GDP and employment. For example, the Common Agricultural Policy (CAP) continues to absorb 40 percent of the entire EU budget

The paper is chock full of fascinating figures on trade distortions in agriculture, such as this one on international comparisons of relative rates of assistance (RRA), which measure the policy-induced price distortions in agriculture relative to a country's non-agricultural policy-induced price distortions.  A positive number means a country's policies are pushing up agricultural prices relative to the world price (and relative to non-agricultural sectors); a negative number implies the opposite.  The larger the number in absolute value, the bigger the distortion and thus the larger the misallocation of resources.

Food Fear Mongering

A colleague forwarded me this story from NBC news.​  It's really hard to know where to start in on all the misleading claims and innuendos.  There first couple paragraphs will give you a sense of the tone:

American eaters, let’s talk about the birds and the bees: The U.S. food supply – from chickens injected with arsenic to dying bee colonies – is under unprecedented siege from a blitz of man-made hazards, meaning some of your favorite treats someday may vanish from your plate, experts say.

Warmer and moister air ringing much of the planet – punctuated by droughts in other locales – is threatening the prime ingredients in many daily meals, including the maple syrup on your morning pancakes and the salmon on your evening grill as well as the wine in your glass and the chocolate on your dessert tray, according to four recent studies.

At the same time, an unappetizing bacterial outbreak in Florida citrus droves, largely affecting orange trees, is causing fruit to turn bitter. Elsewhere, unappealing fungi strains are curtailing certain coffee yields and devastating some banana plantations, researchers report.

​Strictly speaking, each of the above examples does indeed correspond to a real challenge faced in each of the above industries.  But, does it represent a "food supply under assault" as the title of the article suggests?  Are each of these the cause of global warming?  The author later blames problems on "mono-culture" agriculture but that doesn't fit well any of the commodities described above. 

Much of the paranoia seems to stem from an interview with one professor of public health at Johns Hopkins who is quoted as saying things like:​

We need to regard all of these (examples) as a very powerful motivator to try to work on the carbon emissions, to start pushing that parts per million of carbon dioxide back down

​and

“Maybe seeing this impact all this has on our ability to raise the food we depend on will get us to the tipping point of real policy change and real action,” Lawrence said. “I hope so.”

Another professor of environmental science is quoted as saying:

We’re in a situation where the food supply is more vulnerable than it has ever been

​Providing a few anecdotal stories does not constitute scientific evidence.  If we are indeed so vulnerable, why is it that crop prices in the US have come down off their highs a year or so ago.  If late corn planting were really a sign of disaster (as this article suggests), it would be reflected in high corn prices but that's not what we're seeing.    

Moreover, why didn't the author actually go to the data and look at per-capita food availability (which can be found here)​, which doesn't reveal any general lack of scarcity. Or, why didn't they turn to the research on the projected impacts of climate change on agricultural production, which suggests it may be beneficial for agriculture (for some counter evidence, see here).  Either way, yes climate change will likely hurt some regions and some commodities, but it will also help other regions and commodities.  Growing corn and melons in Canada will become much easier (and less costly) if it gets warmer there.  

Its this sort of fear mongering based on anecdotal evidence, rejection of modern technology, ​followed up by ill-advised (and under-researched) policy recommendations that largely motivated me to write the Food Police.

Fat taxes may be even less effective than previously thought

An article that just appeared in the most recent issue of the American Journal of Agricultural Economics by Yuqing Zheng of RTI and Edward McLaughlin and Harry Kaiser of Cornell University presents some interesting thoughts regarding fat and soda taxes.

Most of the studies on fat and soda taxes use elasticities of demand to simulate the effectiveness of a tax.  The elasticity of demand tells us how responsive consumption of a product is to a change in it's price.  So, for example, an elasticity of demand of -0.6 would tell us that for every 1% increase in price, consumption would fall by 0.6%

Zheng and colleagues point out, however, that most people don't "see" the tax when they're shopping.  It only shows up on the bill when you check out.  As such, it is incorrect to directly use the price elasticity of demand  ​to infer how consumption of soda or fatty foods will change after a tax.  

They show that an excise tax (​which is levied on the supplier rather than the consumer) is probably more effective at reducing soda (or fat) consumption than a retail sales tax, but even excise taxes are likely to to be less effective at reducing consumption than an equivalent price increase.  

As a result, researchers need to adjust the demand elasticities before calculating the effects of a soda or fat tax (regardless of whether the tax is excise or retail).  Yet, almost no one does this.  The researchers show, however, that the required adjustment can be fairly dramatic.  In their "baseline" scenario, they show that the elasticity of demand needs to be reduced by a factor of 0.14.  So, if the elasticity of demand was -0.6, then we'd project a 1% increase in sales tax would only reduce consumption by 0.6*0.14 = 0.084%.  Instead, previous research on this topic has applied the original elasticity (e.g., 0.6) rather than the adjusted elasticity (e.g., 0.084).  Clearly, the adjusted elasticity will imply much lower effectiveness of the tax.

The authors conclude:​

Therefore, even a large increase in the sales tax rate on food and beverages will only reduce demand by a moderate degree.

and

our analysis of sales and excise taxes offers some explanation (e.g., imperfect tax knowledge, slow learning) on why the impact of sales tax is so difficult to detect, thus bridging the gap between the simulation studies and the empirical findings

How the Poor Spend on Food

About a week ago, Derek Thompson put up a post at The Atlantic ​with a lot of really interesting graphics on how we spend our money on food and how it has changed over time.

​He shows that we spend a lower share of our income on food than ever before and less than anywhere else in the world.  I know there are some who would bemoan his development and wish we were more like the Europeans.  But for real, life flesh-and-blood consumers it has been a boon.  

My family lived in Paris during much of 2011 and we literally spend twice as much on food there as at home.  Yes, we had access to many things in Paris that we don't in Stillwater, Oklahoma but I think I can pretty honestly say that we didn't eat twice as well in Paris as we do in Stillwater.  You have to remember that living in Paris is not the same as vacationing in Paris - you can't eat at 5 star restaurants every night with two kids and still afford to pay the bills.  So, a lot of what we ate - from cereal to salads to baked chicken - was virtually identical to what we'd have at home; only much more expensive. (I will give the French their bread and wine - the two things that were much tastier and less expensive than at home).   

But, I digress.  The issue I want to point out relates to the focus of the Atlantic piece on how the poor spend their money on food relative to the rich.  The author shows that from 1984 to 2011, the lowest 20% of families spent 16.1% of their income food and that figure remain unchanged over the time period, but for the highest 20% of income earners, in 1982 13.2% of income was spent on food and it fell to 11.6% by 2011.  He says:

In the last three decades, food's share of the family budget has fallen for all but the poorest families, where it's stayed the same

​The first thing to note is that the observation that the poor spend a larger share of their income on food is very old news.  In fact it is something of an economic "law" - Engel's Law - postulated by Ernst Engel in the mid 1800s.  Moreover, because the economic gains at the bottom 20% haven't been terribly pronounced over this time period, it probably isn't that surprising to see that the % they spend on food hasn't much changed either.  However, it is important to note that these are not the same families being compared in 1984 and 2011.  I would suspect the bottom 20% include a lot of really young people and a lot of really old people in 1984 who today are in better paying jobs (or no longer living).  

Not only are these not the same people, it is not the same food being eaten in 2011 as in 1984.  In the conclusion, the author notes:

we can't rule out that the lowest-income households only spend one-sixth of their money on food, not only because real food prices are falling, but also because they're forced to consume less, as mortgages and gas prices eat into the budget.

​Yes, but we also can't rule out that the poor are getting more for their money today then they did in 1984.  The author shows some interesting graphs of total spending on food at home and away from home by the relatively poor and rich in (I assume) 2011 but what isn't shown is how that has changed over time. 

Has total spending among the poor gone up or down in real terms?  Are the poor eating out more than they once did?  I'm not at all surprised to see that the rich eat out more than the poor in 2011, but the better question is whether the poor in 2011 are eating out more than the poor in 1984.  ​

I wasn't even yet a teenager in 1984 but if memory serves me right, it was about that time we got our first microwave (and our first dishwasher I believe).  Over the intervening years, the grocery store has grown and the available flavors, brands, and variety has grown enormously.  In short, the quality of food (including taste, convenience, etc.) has changed a lot from 1984 to 2011.  

As a result, I'm not nearly as worried by statistics showing that the percent of income spent on food by the poor hasn't changed over time as I am about statistics showing potential increases in hunger among the poor.  ​

Moreover, if we really want to worry about the poor and hungry, we should look outside the U.S.​

Food Price Changes

I happened to run across this document put out by the USDA Economic Research Service about a month ago (see the associated spreadsheet). I occasionally get calls from reporters asking about changes in food prices, so I thought I'd put the data in a couple graphs for easy digestion.  

First, overall food prices continued to rise in 2012 (at a rate of 2.3% away from home and 2.5% at home).  However, the rate of increase in prices of food at home has fallen from 4.8% in 2011 to 2.5% in 2012, and exactly the opposite has happened for food away from home (going from 1.3% in 2011 to 2.4% in 2012).  

What about individual food categories at home?  The following shows the percent change price of various food types from 2011 to 2012.  Beef and veal, fats and oils, and poultry all experienced rapid price increases (all over 5%).  Interestingly, the price of fresh fruits only rose 1% and prices of fresh vegetables fell 5.1%.