Why Government Subsidies Lead To Factory Farming
by Vince Daliessio
Why Government Subsidies Lead to Factory Farming
I was asked by a young person, �How can an injustice, such as factory farming, be redressed in a free-market society?� My answer to her was that a truly free market would not have factory farming as we have come to understand the term.
She was unconvinced. I can appreciate that it is hard to grasp. I think the key here is that "farmers", as we understand them, are relatively simple economic beings. They plant and plan to make a profit. They have a finite amount of land, and a finite amount of stock, and they use the two as best they can to bring in a crop and produce a profit. And, just as certainly, government eventually comes along and tries to �help�.
THE MARKET
In a normal, undistorted market, there are basically three strategies, lowest price, highest quality, or best value.
Lowest price means just that. The low price farmers don't really care about quality, and sell to buyers who want to buy large numbers of chickens, or hogs, or beeves, whatever (this also applies to vegetable production). They make their profit based on volume, a few cents on every chicken, for example. This is also called commodity production.
High-quality producers strive for quality because they want the highest price per unit output. Instead of producing mass amounts to sell at low prices, they bet on producing fewer, better quality units, hoping to make more money per unit output by pleasing the relatively few customers who will pay more for that. This is premium production. �Free-range� chickens sell for some multiple of what commodity chickens sell for, the farmer hopefully making the same or better total profit while raising fewer chickens.
Thirdly, the value seller will try to chart a strategy between these two strategies, in order to maximize his profit per unit input.
So now we have a nice profitable and stable market. As long as other sectors of agriculture operate well, and no weather or economic calamity occurs, prices will tend to move up and down a little, but all the customers are happy, and all the farmers are making money. The farmers that can't make money get out of the business, and others move in, or existing operations take a bigger share. This is capitalism.
THE PROBLEM:
Since the Federal government began subsidizing agriculture (as long as it has existed, basically, but it really got going with the creation of the USDA), at least two bad things have happened to this happy little market scheme, and they are both the fault of governments. Protectionism (tariffs and quotas against imported products), and agriculture Subsidies (support payments, deficiency payments, and payments for NOT farming) are instituted by government at the behest of lobbyists who are working for farmers. These have multiplicative effects. Let�s look at them.
Tariffs and Quotas as found in the 21st century US, are essentially taxes imposed on goods coming from foreign countries that, according to somebody, are not priced "fairly". In the case of our chicken farmers, Mexican farms can produce chickens cheaper because their workers expect to be paid less. Additionally, land, eggs, electric power, feed (well, maybe not, more on this later), transportation, capital equipment, and capital (money) itself are all cheaper. Less-stringent regulations often make the Mexican chicken cheaper still.
So, the US farmers try to raise productivity, seek cheaper feed, equipment, land, money, and labor, and compete, right? After all, they have an advantage in that their chickens are already in their market, right? Wrong. The biggest chicken farmer sees his profits going south, and he promptly lobbies for tariffs and quotas. This eventually eliminates foreign competition � that�s good, right?
Wrong again. Here�s why.
Tariffs are nothing more than a discriminatory tax that is paid by consumers, while quotas also add up to a tax equivalent to the amount of difference in cost between the US and Mexican chickens. Either way, the consumer pays.
Subsidies are really another set of tariffs, but they are actually at least double the cost of an equivalent tariff. Here�s what happens. The US farmer, not satisfied with the pricing power he gained by tariffs, goes back to lobby congress again. It seems that to scoop up the extra profits he earned due to the blocking out of foreign competition, he borrowed a lot of money to add capacity, as did every other farmer in the US, with the result that overcapacity in the market has lowered the price drastically. In fact, the price of his chickens is below his cost to produce them!
Because the market is saturated with premium, value-priced, and bargain chickens, it�s either lobby congress again, or go out of business, so lobbying commences apace. Subsidies are always a harder sell than tariffs, so there are congressional hearings where tearful chicken farmers cry about how they are going to lose their family farm (which they hocked to increase production to take advantage of the tariff, remember). So congress enacts a subsidy, also called �price supports�, which are another tax on consumers, except that this one can cost twice as much, or more, as the tariff alone.
How can this be? Because the subsidy comes directly from the taxpayers, and is paid on a unit basis. It is ALWAYS combined with tariffs, which has already raised the price consumers pay for chickens, so that they are now paying once to give an advantage to domestic farmers over foreign farmers in the market, then pay again when the government acts to subsidize them with tax money.
Subsidies are also is probably the single worst incentive for factory farming, because, remember, the farmer gets paid for each unit produced, so what does he do? Produce even more chickens, more than the market price can support, because even though he isn�t making any market money on the chickens he produces, he will now get a guaranteed government-provided profit on each unit, up to the maximum number he can produce. So what does he do then? Why, find even more ways to increase production, even though he has run out of room to do so. He starts to modify his henhouses to accommodate more production.
This is where McDonald�s Corporation and Purdue and Tyson and Con-Agra come in. They are all businesses that specialize in the conversion of chickens into chicken products. They get irritated by the higher prices they have to pay, and jealous of the guaranteed profits the farmers make, so what do they do? They get into the farming business, of course! And because they can save more, and make more profit per unit produced, what do they do? Why, mass-produce, of course! This pushes the cost of producing chickens, as well as the �farmer�s� treatment of his chickens to new lows.
Because more uses for all these mass-produced chickens need to be found, the big chicken-sellers mount campaigns (commercial and otherwise) to increase public consumption. Did you ever stop to think who was behind the campaigns to make people aware that chicken is �healthier� than beef? And do you know who pays for those campaigns? Uh huh, you and I do, again through taxpayer subsidies.
The big farms also drive the little farms out of business. This raises the price yet again, in the long run. But that�s not the only damage subsidies do. Because the Feds are subsidizing grain production now too, feed is a lot cheaper. And so the big industrial �farmers� get into the feed business too � more subsidies, more profits. And we haven�t even gotten to price supports yet, or payments to people to refrain from farming, again, all paid on a per-unit-output basis. Full-scale factory farming becomes the norm of the industry.
But it�s worse than that. Think anybody with a dream of chicken farming, with a grubstake and boundless determination, can enter the market now to compete with these giant industrial-farming welfare queens? Ha! It�s a big joke. The market is effectively closed to competition, courtesy of the federal government, funded by the taxpayers.
The tariffs can now even be stripped away now by an alleged �free-market� President � no producer inside, let alone outside the country can hope to compete with them, so there is no competition. They do as they please, continuing to add capacity by holding their animals in ever-more-mechanized conditions, where they have zero hope of being treated humanely.
Now the pressure comes from lobbyists to raise the price of chickens (because, remember, the price of all kinds of chickens is now below the cost of production) to start paying �farmers� for each chicken they don�t produce. This �reverse subsidy� is an even bigger perversion of the market. Many of the �farmers� receiving these payments don�t even a farm; they simply own the right to be paid by you and me not to produce chickens, which they had exactly zero intention of doing anyway.
THE DAMAGE;
1. Shutting out foreign producers raises prices and shuts developing countries out of our markets. This is doubly evil because it prevents them from supporting themselves economically by using their comparative advantage competing in our markets. Farmers of these countries have no hope of selling profitably in a protected market, so they don�t even try. This also means even more tax money will be spent on foreign aid, to be stolen by third-world kleptocrats.
2. Subsidizing farmers causes all kinds of evils, including keeping inefficient producers in business, artificially stimulating production, creating incentives for producers to produce as much as possible, regardless of what the market wants in terms of quality or quantity, all of which results in factory farming.
3. Subsidies cost the consumer more still, because the subsidies come straight out of the taxpayer�s wallet, and because the profits from those subsidies enable the industrial farmers to drive their competition out of business, raising the prices of chickens yet again, leading to more factory farming.
The solution is clear. Get the federal and state governments out of the regulation of agriculture (and all other trade as well), and allow developing nations to simply compete freely in our markets. Factory farms will eventually cease to exist.
Additional benefits will include the elimination of the need for most foreign aid, and many more countries will be less willing to alienate their biggest markets with militant rhetoric or force.
Copyright 2003 Vince Daliessio. Don't be a cheap, lazy prick. Ask my permission before you use this.