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May 22, 2008

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Yep. I've been meaning to write about this, but got distracted by Clinton and Zimbabwe. So let me take this one-time-only occasion to say: good for Bush, bad for Obama.

No no no no no no no! The farm bill must keep getting porkier and slushier for the foreseeable future so it increases the value of my Iowa farmland to obscene levels.

Screw the environment and the poor, gimme gimme gimme!

The farm bill really embodies the the conservative criticism of government--it has useless spending, it has vote buying, it has really nasty unintended consequences, it has vanity projects, its has ickyness all over the place. (Please note that I am not saying that Republicans in general are on the side of angels on this bill, I'm talking about the conservative criticism of government).

If you can figure out a way to get it under control that can be applied in other areas, you will have gone a long way toward allaying my fears about how to deal with government programs in the real world.

But heck, if we can *just* get rid of the farm bill on a regular basis, that is a great step too.

(And we don't have to praise Bush too much, this farm bill is somewhat worse than other recent farm bills, but not much. He really should have been vetoing all of the recent farm bills).

Now if Congress hadn't left out those 34 pages when they sent the bill to Bush, they might not look like idiots (nothing new) this morning.

Man, hilzoy, publius, and Sebastian are all Ugh-haters.

*pouts*

The Farm Bill is useless except when it's dangerous, in general.

HOWEVER:

A fair bit of the "$5 billion in automatic payments" is one of the few reasonably-sane programs in the Farm Bill--a program to pay farmers a small amount to leave marginal land out of cultivation.

What? Paying farmers not to grow stuff is sane?

In that case, I demand that you pay defense contractors not to work in slack times, just to keep us from falling into rot in case we're needed.

Good on Bush. It's about time he wielded the veto pen to good effect.

to good effect.

...which translates roughly to "in a way I agree with". If I'm being honest, I mean.

Paying farmers not to grow stuff, on land that should never have been used for plowed-ground crops in the first place, is IMO good policy from an environmental perspective.

"they are quite literally starving people across the globe"

That's a little overstated. Ethanol subsidies are bad, but they are a small part of the food crisis. The rise in meat consumption and the poor performance of many currencies have a much greater effect of grain prices. Bad trade policies also have a big impact. And when you consider that rice isn't used for ethanol and isn't a substitutable crop for grains that are, it's pretty obvious that ethanol is a small part of the problem. The subsidies need to go, but they aren't really starving people.

And when you consider that rice isn't used for ethanol and isn't a substitutable crop for grains that are, it's pretty obvious that ethanol is a small part of the problem.

Corn ethanol has made corn prices go higher and made livestock farmers switch to sorghum for livestock, which made sorghum prices higher, people who eat sorghum (and who were already being priced out of Maize) switched to rice. Rice prices went up much faster than others because so little of it is traded on the world market and the biggest producing countries quickly moved to protect their local consumers.

The rise in meat consumption and the poor performance of many currencies have a much greater effect of grain prices.

FWIW, one of the more recent issues of Time had a major article on why this isn't the case. Random African pretty much sums it up: ethanol subsidies are massively distorting the grain markets in completely unexpected ways.

The other angle that Time focussed on, incidentally, was the increased devastation of the Amazon Rainforest due to ethanol subsidies. How so? Because American corn that would have been turned into food was instead side-tracked into ethanol; which in turn made Brazilian food corn more valuable, causing farmers to expand their fields and, in some cases, convincing ranchers to take up farming; which in turn (the price of beef not having changed) convinced more people to start ranching in worse lands, i.e. the littoral rainforest. [I think I have the links right there.] Now this is just a Time article so take it FWIW, but I can say this tracks with other things I've been reading about the externalities of ethanol subsidization.

It's not just wasteful spending. It's helped ruin the American diet.

I think the key to reframing the farm bill is to talk about it as a food bill and discuss its effects not only on taxpayers but on consumers.

Paying farmers not to grow stuff, on land that should never have been used for plowed-ground crops in the first place, is IMO good policy from an environmental perspective.

Did you have any particular place(s) in mind? And does anyone actually plow, anymore? No-till farming was all the rage, for a while, near where I lived.

I think what helped push the Farm Bill through so successfully was that it combined the actual farm stuff with hunger programs (e.g., food stamps). I was surprised this morning to see a mass email urging support of the Farm Bill from a group I would not have expected to hear that from. When I read into it, their reasoning was that while the subsidies are bad, they really want the food stamp increases now. (They also said that if the bill failed, things would revert to the 2002 bill which was worse on foodstamps and worse on subsidies.)

If anyone cares about attacking pork, their ought to be some reform that legislative bills can only deal with one issue at a time, rather than roll things up in these huge bundles that hold good things hostage to get garbage passed.

Hey, whatever happened to Willie Nelson and Farm Aid.

"Rice prices went up much faster than others because so little of it is traded on the world market and the biggest producing countries quickly moved to protect their local consumers."

This is exactly what I was talking about when I said that bad trade policies were having a big effect. A more open rice market may have prevented this problem.

"Corn ethanol has made corn prices go higher and made livestock farmers switch to sorghum for livestock,"

Exactly, but if meat production weren't increasing worldwide, how big would this effect be? Look, meat production uses about three times the grain that ethanol uses. Yet every article I've read either ignores that part of the demand or glosses over it in a single sentence. People simply assume that meat consumption MUST increase, that trade policies MUST be asinine, that currency policies MUST produce instability, and that the ONLY problem is ethanol. I see four issues here that all have solutions to them. Yes, we should eliminate the ethanol subsidies, but also we need to look at the rice market (and others) and find better trade policies. We need to stabilize the dollar. And we need to stop subsidizing the production of meat. My concern here is that we are unwilling to address important parts of the food crisis because we might actually have to change our behavior. So we pick the one aspect of the problem that we all agree on and assign the blame there. It feels good, but we need to look at the whole picture or we will never solve the problem.

And when you consider that rice isn't used for ethanol and isn't a substitutable crop for grains that are,

But rice is substitutable for grains used for ethanol. They may not grow well in the same places, but that doesn't really matter.

Rice substitutes for other grains as food, which does matter. That means that using other grains for ethanol drives up rice prices.

This is exactly what I was talking about when I said that bad trade policies were having a big effect. A more open rice market may have prevented this problem.

I don't know about prevented but in a more open market the rise would have been slower.
The problem with bad trade policies having a big effect is that most of the big rice producers are big rice consumers. So even when the price is low, a small portion is actually traded on the international market. And the restrictions that reduced that portion are reactions to the price hike rather than causes. They all came after the prices had gone up enough to cause a risk in those countries.

Exactly, but if meat production weren't increasing worldwide, how big would this effect be? Look, meat production uses about three times the grain that ethanol uses. Yet every article I've read either ignores that part of the demand or glosses over it in a single sentence. People simply assume that meat consumption MUST increase, that trade policies MUST be asinine, that currency policies MUST produce instability, and that the ONLY problem is ethanol.

I totally agree with you on ethanol not being the only problem.
Higher demand for meat is one, higher oil prices translating into higher transport and fertilizers prices is another, some droughts/conjectural issues in some places has been another.
I still think trade policies can't count since they're a reaction, and I think the currency thing is quite irrelevant.

However, the food prices are exploding, not rising merely rising fast. And the only large factor that could have such a sudden and large impact is corn-based ethanol (and the substitutions that follow). So it's not so much about ethanol subsidies being the only reason, it's about them being the biggest reason for the recent spike.

My concern here is that we are unwilling to address important parts of the food crisis because we might actually have to change our behavior. So we pick the one aspect of the problem that we all agree on and assign the blame there.

Yup. That's why there is an ethanol subsidy to start with. Because it was sold as a win/win solution to all the problems on earth.

But like I said before, while the blame is not only on corn ethanol, it was a major accelerator and one that is easier to control than wishing the Chinese would go vegan.

Places I have in mind as not suitable for row-cropping: (No-till reduces erosion some, but it still is more like plowing than like grazing). A lot of the roling hills in West Tennessee; a lot of low-lying fields in the Mississippi floodplain that aren't quite wetlands, but ought to be.

The program used to be called the CRP; I don't have time to google it.

I guess I'm the slow kid, but what's the difference between this year's farm bill and those of past years? Is it the rising food prices? Or is it something else?

I agree it's a bad bill, and I oppose subsidy economics. But what's the difference? What magically changed this year that has everyone up in arms about it?

I couldn't agree more, Publius.

"Feddie, how about it?"

Er, what? Apologies, that zoomed over my head.

"The other angle that Time focussed on, incidentally, was the increased devastation of the Amazon Rainforest due to ethanol subsidies."

Speaking of the rainforest, if you have 35 seconds for amusement, see the first link here, if you like. No Crystal Skull spoilers in any links in that post except to a mild degree in the Roger Ebert link.

The Farm Bill is a big problem to vote against, especially in rural areas. Because it has all the "Support your local farmers!" baggage, but none of the benefits. Most of it just goes to inflate the profits of big industrial farms and keep fresh vegetable prices high.

There was a chart I found like a week ago, that compared the food pyramid the government recommends to the food subsidies the government hands out. Don't remember where though.

However, the food prices are exploding, not rising merely rising fast. And the only large factor that could have such a sudden and large impact is corn-based ethanol (and the substitutions that follow).

Ethanol is not the only thing that could explain such a large and sudden impact. There is a major question floating around the finance world as to how much of a factor speculation has been on commodity prices, food and oil in particular. About the same time as the ethanol subsidies were increased, huge amounts of money flowed out of residential real estate investments, and into commodities. That this played a large role in the sudden spike in food prices is undeniable.

The question is whether speculation is, or even can be, responsible for sustained high prices. Agricultural futures have physical settlement. Eventually, someone has to actually take position of the goods. They can either store them, or they can sell them. (Closing out a futures position just before settlement has the same effect as selling after taking possession.) If they sell rather than store, prices should fall to the same extent that speculation drove them up in the first place.

So, the question no one really has a good answer to is whether we should be seeing price retreats due to speculators selling. There are a lot of unknown variables. One of the most important is how fast money is flowing into commodity purchases, and whether this increased demand could swamp the effect of selling.

Recent moves in wheat provide evidence that a significant part of what has been going on is a speculative bubble.

"and I think the currency thing is quite irrelevant."

It is hardly irrelevant. Look where most of the food rioting has occurred. You see riots in places like Indonesia, whose currency has kept pace with the dollar (dropped like a rock, in other words). But you don't see those riots in any country with a currency stronger than the dollar. Here in the US, roughly half of the price increase of corn can be attributed to the falling dollar (the same goes for oil). The price increases are what's causing the riots, not an actual shortage of food (there is no shortage). And that price is determined by two things: the value of the product (as determined by supply an demand) and the value of the currency. When the Indonesian Rupiah drops by 40% relative to the Thai Baht (which it has), Indonesians will pay much more for their rice even if the global rice price doesn't change (as measured in a weighted basket of currencies). Currency values are very relevant and probably the most relevant factor for those countries actually facing starvation and food riots. It's no accident that the countries with the worst currencies are facing the biggest problems.

My understanding of how future commodity markets function is quite crude but I have a few questions:

Shouldn't we have seen higher stocks if speculation was such an important part ? I thought the stocks were quite low these days.

When "huge amounts of money flows out of residential real estate investments, and into commodities about the same time as the ethanol subsidies were increased", is it speculation, or is it a normal market reaction ?

Are the recent moves in wheat really big enough to confirm the speculative bubble theory ?

I personally love the depressed Dollar. Living in Norway, ordering stuff online and having my dad collect and mail it to me, it's like the whole country is having a half-off sale. I just bought an ipod online for half of what it would cost me here (and 3 years ago the price difference was negligible.).

But you don't see those riots in any country with a currency stronger than the dollar.

Cameroon, Burkina Faso, Guinea..Those are just places where there actually were riots.

There are food price tensions all over the CFA zone. And the CFA Franc is tied to the Euro. Zambia and Nigeria too have currencies that have been doing well compared to the US$ and experienced hikes too (and local riots in Nigeria).

Obviously, countries with currencies aligned with the US$ experienced worse hikes but I still think it's quite irrelevant on the global scale.

Platosearwax: Go ahead. Gloat. See if we care...

There were big food problems in Pakistan.

Actually let me take that back.

Currency is not irrelevant. After all, Pakistan, Indonesia are huge countries and half of the world may be affected by the currency part of the food price hike.

However, just like with gas, there's a hike (and riots) even in places that have strong currencies which make me think that the crisis wouldn't go away if the US$ stabilized.

I find that the Farm Subsidies Database provides hours of educational fun. Find out who's getting the subsidies in your state, county, or congressional district! See how top-loaded it is! Simmering rage no extra charge.

There was a chart I found like a week ago, that compared the food pyramid the government recommends to the food subsidies the government hands out.

The Poor Man had it back on May 5. It's scrolled off of the front page, it's about four pages back now.

For convenience:

Here is the MSNBC article the poor man links to.

Here and here are the graphics.

Thanks -

"Shouldn't we have seen higher stocks if speculation was such an important part ? I thought the stocks were quite low these days."

If you google around, you can find articles on the mystery that is why is it that various food commodity futures prices have moved out of whack with what the actual prices wind up being. This isn't supposed to happen. See also developments such as this and this.

I hate, hate, hate this farm bill with a passion. It's a textbook example of how government tampering with the markets can bollix things up. If we hadn't been subsidizing farmers all along the market would have insured that neither corn-based biofuel nor excessive meat or sugar consumption in the American diet, both very bad trends as we can all agree, would have taken off.

Sebastian, look on the bright side - unintended consequences can be positive too. Perhaps passing universal healthcare, and the absurdly high taxes we'll have to pay to treat all those people with obesity, diabetes, heart disease, etc., will create an incentive for us to wean ourselves off our ridiculously wasteful and unhealthy national diet.

find that the Farm Subsidies Database provides hours of educational fun.

Oh, but it completely neglects some of the most important but insidious subsidies: government props on market price. If I go to Florida, the sugar plantations aren't even in the top 20, but they're raking in the bucks because the market price of sugar is artificially elevated.

But it's interesting. One farm, McDaniel Ranch Partnership, has gotten over a million dollars in government disaster relief from 1995 to 2006; heaviest relief (~$400k) of all was 2006. There were no hurricanes passing anywhere near their farm in 2006 or 2005, so I'm guessing possibly citrus canker? At the rate the rest of us citizenry got reimbursed for our destroyed citrus, that's over 5300 trees.

I've been meaning to write about this myself for about a week now. The estimates I have seen have attributed at least 25% of the increase in food prices to ethanol; the other factors are largely out of anyone's control. I read last fall that the food crisis could cause literally hundreds of millions of deaths over the next decade worldwide. Even using the low end of that estimate, it's likely that 25% of that number would still be in the tens of millions. Which means that ending ethanol subsidies (and Western agriculture subsidies more generally) could save tens of millions of lives.
Frankly, if ever there was an issue where the blogosphere actually could have a positive impact on a policy, it would be this. The interests causing the subsidies are small in number; they are successful only because: 1. (Most importantly) Almost no one cares about the farm bill other than the people who seek to benefit from it, meaning that there is no political risk in supporting the farm bill; 2. They are well organized; and 3. The size of the subsidies makes it rational for them to spend an unbelievable amount of money lobbying on the issue and making campaign donations. Without those factors, it would be irrational for politicians to support the subsidies, especially considering how tiny in number the subsidy advocates are. An organized internet campaign against subsidies would actually have a chance of success in a way that other organized internet campaigns can only dream of, because the main reason these subsidies exist is that there is no political risk in supporting them. An organized internet campaign would change that equation substantially by raising awareness of the issue. This is not like other issues where there is or would be a vocal and sizable constituency on both sides no matter what you do, thereby making an organized campaign highly unlikely to succeed.

Moreover, this is an issue that ought to have appeal to just about every part of the blogosphere: Liberals ought to be motivated by it because it is an actual opportunity to strike a blow against corporate interests. Conservatives ought to be motivated by it because it is such an egregious example of government waste. Libertarians ought to be motivated by it because it is the epitome of everything we view as being wrong with government. And most importantly all sides ought to be motivated by the fact that it has such devastating effects on people all over the world.

This is from the first article Gary linked to above at 7:26 AM.

Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.

When that happens, farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market.

This seems backwards to me. I must be missing something, and I hope I don't end up feeling too stupid for asking this question.

But what I thought would happen in the case of a future coming due at a higher price than the cash-market price would be the seller of the commodity making lots of money because he would have a party obligated to pay him more than the market price. I thought the buyer would be the one losing out in that case.

Isn't the farmer the seller here? Shouldn't he be making more money at the expense of the buyer? What am I missing?

Oh, and slightly related: has anyone heard about the recent revelations about the biodiesel subsidy permitting foreign biodiesel producers put their tankers into port, collect the subsidy, and then sail off to sell the fuel in foreign markets?

Sweet.

I think I have a fundamental misunderstanding about the nature of futures, thinking that they work nearly identically to a stock option. I'm going to do some more reading, but I'd still welcome and appreciate any informed response directly to my question - probably an easier read.

The farm bill makes obesity a noun. It is an obesity. It embodies the "we're from the government, and we are here to help you" mindset that conservatives such as President Reagan spent their whole political careers fighting. But what is astonishing to people like myself, who may not pay close attention to politics all the time, is the revelation of just how powerless President Bush has become, exemplified by the swift override of his veto by Congress, with scarcely any protest or negotiation. It make me feel like government has become a runaway train.

My dictionary already has obesity as a noun. Powerful, that Farm Bill. All the way back to 1983.

Regarding SamChevre's comment above, that the

"$5 billion in automatic payments" is one of the few reasonably-sane programs in the Farm Bill--a program to pay farmers a small amount to leave marginal land out of cultivation.

The $5 billion referred to are the "direct payments," which allow the land owner to do whatever they want with the land, including chemical-intensive farming or other destructive practices. Direct payments are popular because they don't violate WTO rules.

There is a totally different part of the Farm Bill called the "Conservation Title" that deals with paying farmers to protect marginal or ecologically important land. These programs are significantly different than the "direct payments," in that participants are subject to numerous rules about how they treat the land.

Thanks to leadership from lawmakers like Sen. Harkin (D-IA), the Conservation Title did pretty well in this Farm Bill.

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