April 12, 2011
If governments pay subsidies on or protect a productive process then it is inevitable that the price of the factors involved in that production will rise. In the case of agriculture the most obvious example is the effect of subsidies on the price of land. In their most extreme form, subsidy systems have the effect of putting a value on even the legal right to produce a commodity – the EU milk quota being the most outrageous example. This phenomenon was identified long ago by such economic luminaries as David Ricardo and Adam Smith. Incredibly, however modern governments still appear to be incapable of grasping the inevitable consequences of such interference with the market.
This fact has however at last been officially recognised by the European Commission’s leading agricultural analyst, Tassos Haniotis. In a recent conference paper the head of economic analysis at the Commission’s agriculture department, admitted “Farmland prices are partially based on the level of subsidies that they generate, as well as other factors such as commodity prices.”
The Commission has long since denied that an income subsidy paid direct to land holders would have any effect ion the profitability of farming and therefore on levels of output. It has steadfastly maintained that the income function and the profitability or otherwise of commercial farming would be entirely separate. The reality is that if a government department pays a land holder €250 a hectare for merely occupying land (he does not have to actively farm it to draw the subsidy) it is clear that the value of that land will increase to take account of the subsidy entitlement. Its value can be seen by considering someone occupying 100 hectares of land for example, who can sit and do nothing all day and still draw a substantial €25,000 a year from the EU subsidy pot.
The important point that Haniotis was making is that once a subsidy and protection policy has jacked up the price of agricultural inputs – most importantly of land – it is extremely difficult to wind such policies down. In such a situation it is not the sit and do nothing lotus eaters who would be seriously damaged, but the commercial farmers who finance their operations on the basis of mortgages on their over-valued land. The security of such expensive land is their main asset. Remove the subsidy and the whole financing structure of the the industry would collapse0.Warns Haniotis: “Redistributing direct payments among member states and within member states will affect asset values, and we’re going to see it start touching some of the most competitive member states.”Quite.Brian Gardner