Sunday, November 23, 2008

A Sweet Deal for US Agriculture

Right now, the fate of the American automobile industry is in the hands of Congress. The choice is between bailing the industry out with loans or forcing the companies to file for bankruptcy with the hope that they are not later forced into liquidation.

Then there is another way that some countries have resorted to saving their industries. And that is subsidizing their domestic industries while at the same time imposing tariffs on competing imports. Would anybody ever consider saving the Big Three by the US government subsidizing purchases of their products while imposing tariffs on competitors like Toyota and Honda?

The answer from most everybody would be a resounding ‘no’. After all, that’s protectionism! We’re the US and we believe in free trade! And besides, many of us like our Japanese cars and don’t want the government to tell us which cars to buy. But while few of us would ever want to resort to protectionism to save the US auto industry, why do we accept these same practices when it comes to US agricultural products like corn and sugar?

Corn in addition to feeding animals and humans is now being used for two other specific purposes, corn ethanol and high fructose corn syrup. Both of the latter two generate tremendous profits for the main player in the corn industry, Archer Daniels Midland (ADM). But ADM could not even participate in these areas if it weren’t for government subsidies and tariffs to make it possible.

The idea of replacing at least some of our imported oil with a renewable domestic agricultural product is certainly attractive. But the price of corn ethanol was not competitive with gasoline, so the US government gave this product a helping hand in the form of a $.51 per gallon subsidy. But a number of unintended results happened. With so much of our corn crop going into fuel, the price of corn tripled. And since corn is used to feed farm animals that produce some of our meat, the price of that went up too. In addition, the price of other farm staples like wheat went up aggravating world food shortages because farmers found it more profitable to raise corn instead.

But as it turns out, corn is a terribly inefficient way to make ethanol
compared to sugar cane which is widely grown around the world and has helped countries like Brazil to completely wean itself off foreign oil. How does the corn ethanol industry not only survive, but thrive? Simple. The US government slaps a stiff tariff on imported sugar so that the domestic US price of sugar is double the world price. And just to make sure we don’t work around the sugar tariff by importing sugar cane ethanol from Brazil Congress has imposed a tariff of $.54 per gallon on imported sugar-based ethanol in order to protect corn producers from competition.

But wait, there’s more! What does this do for all the US manufacturers who use sugar in their products? Some like candy makers have been
moving to locations outside the US to avoid the sugar tariffs. While some manufacturers like Hershey who have moved facilities to Mexico claim labor costs are the reason, much lower costs for a crucial raw material undoubtedly make the move even more attractive.

So with the price of sugar being kept artificially high through tariffs to protect the corn industry, the corn industry can then take advantage of this situation to offer its own solution to the food industry in the way of high fructose corn syrup (HFCS). Because of the resulting cost advantage, this product has now been substituted for sugar in most of the processed products we consume.

HFCS has come under increasing
scrutiny as a possible contributing cause of obesity or even type 2 diabetes. However, the evidence is not conclusive and The Corn Refiners Association is mounting a media campaign to refute these claims. But whether the claims are true or not, HFCS would be a moot point if it weren’t for the subsidies and tariffs supporting it to begin with. For more, please check out this link Tariffs and Subsidies - The Literal Cost of High Fructose Corn Syrup.

The Archer Daniels Midland Corporation (ADM) has been the most prominent recipient of corporate welfare in recent U.S. history. ADM and its chairman Dwayne Andreas have lavishly fertilized both political parties with millions of dollars in handouts and in return have reaped billion-dollar windfalls from taxpayers and consumers. Thanks to federal protection of the domestic sugar industry, ethanol subsidies, subsidized grain exports, and various other programs, ADM has cost the American economy billions of dollars since 1980 and has indirectly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period. At least 43 percent of ADM's annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM's corn sweetener operation costs onsumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.
So while many in Congress are saying “drop dead” to the US auto industry because they are supposedly against corporate welfare, some of the same people apparently choose to look the other way when agricultural companies like ADM feed at the public trough. Other than contributions, how has the corn industry amassed so much political clout? Much of it can be explained by the Iowa caucuses held each presidential election year. With this contest at the crucial beginning of the primary election cycle, some presidential candidates have spent a considerable amount of time and resources to pander to Iowa voters. And with corn being a major industry in Iowa, you can bet that most candidates are not going to raise much of a stink about corn subsidies even though they mostly benefit large corporations instead of the typical small farmer there.

And what about President-elect Obama? He has come out in support of sugar subsidies as detailed in this link
Obama Sends Strong Sugar Policy Signal.

While this political stance is somewhat understandable since Obama represented an agricultural state, our protectionist policies for agriculture need another look to determine where to go forward from here. In a
letter to farmers supporting the 2008 Farm Bill, he admitted, “With respect to the sugar program specifically…it’s true I have had concerns about the program…”

One of the major ways to try and improve the plight of US industry should be to revisit and if necessary renegotiate many of the trade agreements we have with other nations to make sure that we have the same access to their markets as they have to ours. Many other countries resort to protectionist policies to the detriment of US workers. The choice of Bill Richardson for Secretary of Commerce who is an experienced international negotiator is an encouraging first step in the right direction.

But having said that, it is most difficult to persuade other nations to change their protectionist policies when they have the ready argument that we also have protectionist policies of our own. So if we really want to promote ‘free trade’ to the world, we have to stop talking the talk and start walking the walk!

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