Tietenberg Tom, Lewis Lynne. Environmental & Natural Resource Economics
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271Testing the Hypotheses
In late 2007, Congress passed a new energy bill that requires, among other
things, a mandate for renewable fuels, including 5 billion gallons of ethanol made
from grains, primarily corn, by 2022. Corn ethanol production in 2006 was only
five billion gallons. Ethanol currently carries a sizable subsidy, inducing more
farmers to grow corn for ethanol rather than for food or livestock feed.
In the 2005–2006 crop year, 14 percent of corn use went to ethanol production.
USDA’s 2007 long-term projections expect this amount to rise to more than 30 percent
of the corn crop by 2009–2010. Even though ethanol represents a very small share of
the overall gasoline market, its impacts on the agricultural sector are large.
As the use of corn for ethanol production continues to grow, corn prices have
responded with rapid increases. Corn prices have risen from about $1.80 per
bushel in 2000–2001 to more than $3 per bushel in 2006–2007. In 2008, corn
prices hit $6 per bushel! Rising corn prices due to this expansion have caused land
previously used to grow soybeans to be converted to corn production, and land
previously used to grow corn for feed grains is now being used to grow corn for
ethanol. The resulting price increases for corn and soybeans, as well as for meats
and other foods using corn or soybeans, have been dramatic. While higher prices
bring higher farm incomes, it also means higher food prices for consumers.
Livestock feed is the largest use of U.S. corn. Higher corn prices require
livestock producers to find alternative feed or absorb the higher prices or reduce
production.
At the international level, rising corn prices have large impacts as well. Historically,
60–70 percent of world corn exports have come from the United States. Not only will
the share of exports drop, but carryover corn stocks are also reduced. Lower carryover
stocks reduce the market’s ability to absorb price shocks.
Energy Costs. Agricultural production in the industrial nations is very energy
intensive. Some major portion of the productivity gains resulted from energy-using
mechanization and the increased use of pesticides and fertilizers, which are derived
from petroleum, feedstocks, and natural gas. As we saw in Chapter 7, the costs of
petroleum and natural gas have risen substantially and probably can be expected to
continue to rise in real terms as the available supplies of fossil fuels are exhausted or
global warming concerns diminish their use. To the extent that energy-intensive
producers cannot develop cheaper substitutes, the supply curve must shift to the
left to reflect the increasing costs of doing business.
As suggested by Table 11.1, energy and capital have become complements in
industrialized-country agriculture. Due to this complementary relationship, energy
price increases could be expected to trigger some reduction in capital, as well as
some reduction in energy on the typical energy-intensive farm, reducing the yield
per acre.
Environmental Costs. Part of the past improvements in agricultural productivity
has come at the cost of intensifying the environmental problems caused by
agriculture. Not only has the use of land intensified (with a resulting increase in the
use of chemicals and fertilizers), but also grasslands and forests have been converted
to farming.
272 Chapter 11 Reproducible Private Property Resources: Agriculture and Food Security
3
USDA, Farm Service Agency. http://www.fsa.usda.gov/FSA/webapp?area=home&subject=copr&
topic=crp
Another source of environmental problems, soil erosion, has a different origin.
Some soil erosion is natural, of course, and within certain tolerance limits does not
harm productivity. Concern arises because some farm practices partially responsible
for increasing productivity (continuous cropping rather than rotations with pasture
or other soil-retaining crops) have tended to exacerbate soil erosion. The fears
are further intensified by the belief that these losses are irreversible within one
generation.
If increased soil erosion is taking place, why would a private proprety owner allow
this depletion? In the past, soil conservation simply did not pay. The techniques to
avoid it were expensive and the ready availability of cheap fertilizer to replace lost
nutrients meant that the cost of replacing them with fertilizer was low.
The barriers to soil conservation are now also disappearing. As the level of
topsoil reaches lower tolerance limits, the fertility of the land is affected. Rising
cost and pollution concerns are making fertilizers a less desirable substitute for
soil conservation, and public policy moved toward providing subsidies for soil
erosion control techniques.
In 1985, the U.S. Congress authorized the Conservation Reserve Program,
which was designed to reduce soil erosion and to stimulate tree planting by providing
financial and technical assistance to eligible farmers. Average enrollment in the
program peaked at 36.4 million acres in 1996. As of 2010, total Conservation
Reserve Program enrollment stood at 31.3 million acres.
What are the benefits? Since its inception, the program has reportedly helped
reduce soil erosion by 622 million tons and helped restore more than 2 million
acres of wetlands. Additionally, more land is available for wildlife habitat and
millions of tons of carbon dioxide have been removed from the air.
3
The Conservation Stewardship Program in the 2008 Farm Bill is one of the first
attempts in the United States to integrate growing crops and livestock in a way that
does not rely on leaving the land fallow after intensive farming. While voluntary,
the Conservation Stewardship Program encourages the adoption of conservation
activities and resource-conserving crop rotations. Farmers receive payments (up to
$200,000) based on approved five-year contracts.
Some past agricultural practices have caused environmental damage, and the
continuation of these would cause rising environmental costs. In recent years the
frequency and quantity of agricultural chemicals have triggered new concerns.
Rising levels of nitrates in drinking water have raised public health concerns.
In addition, some of the nutrients from fertilizers leak into lakes and stimulate the
excessive growth of algae. Aside from the aesthetic cost to a body of water choked
with plant life, this nutrient excess can deprive other aquatic life-forms of the
oxygen they need to survive.
Pesticide use has been on the decline in many developed countries, but is rising in
developing countries (see Table 11.2). Many of these persist in the environment, and
some toxicity extends to species other than the target population. The herbicides and
273Testing the Hypotheses
TABLE 11.2 Pesticide Consumption per Hectare of Agricultural Land (Kg/Ha)
1989–1991 1994–1996 1998–2000
Developed Countries
.64 .54 .52
Developing Countries .18 .25 .28
World .40 .38 .39
Source
: USDA, National Agricultural Statistics Service on Web at http://www.nass.usda.gov/Publications/
Trends_in_U.S._Agriculture/time_capsule.asp/.
pesticides can contaminate water supplies, rendering them unfit for drinking and for
supporting normal populations of fish. These negative externalities have produced
efforts to reduce toxicities and pursue new technologies such as genetically modified
organisms (GMOs) that are resistant to pests. GMOs, however, come with their own
host of concerns. (GMOs are explored later in this chapter in Debate 11.2.)
Throughout all Organization for Economic Co-operation and Development
(OECD) countries, “sustainable agriculture” is being increasingly associated with
the reduced use of pesticides and mineral fertilizers. And policies have been
established to facilitate the transition. Denmark and Sweden are pursuing ambi-
tious agricultural chemical reduction targets. In Austria, Finland, the Netherlands,
and Sweden, a variety of input taxes and input levies have been introduced. The
charges provide an incentive to use smaller amounts of agricultural chemicals while
the revenue is used to ease the transition by funding both research on alternative
approaches and the dissemination of information.
While most European countries are focusing on eliminating input subsidies
(e.g., on pesticides or fertilizers), taxing inputs or directly limiting their use,
New Zealand took a more radical step by scrapping most of its agricultural
supports. The initial results were impressive. According to an early study
conducted for the New Zealand Ministry of Agriculture (Reynolds et al., 1993), the
initial environmental consequences were rather profound. Fertilizer use declined,
farms became more diversified, most marginal land was grazed less intensively, and
the excessive conversion of land stopped.
However, as pointed out in a 2004 report to the Ministry of the Environment,
more recent evidence suggests that some backsliding has occurred. Between 1999
and 2003 the volume of pesticide imports increased by 17 percent. In terms of types
of pesticides, herbicide imports increased by 42 percent and fungicide imports
increased by 10 percent. Only the imports of insecticides decreased (by 41 percent).
While pest control changes in the fruit sector (in particular kiwis and apples) led to
declines in the mid-1990s, offsetting increases in other sectors meant that total use
actually increased some 27 percent (Manktelow et al., 2005). Breaking free from
pesticide use, it seems, is not easy.
Trade issues may also play a role. Sexton et al. (2007) point out that many times
pesticide policies are used as barriers to trade in order to protect domestic farmers.
The European Union’s (EU) objection to some imports produced with new
biotechnology, GMOs for example, may stem from a desire to protect domestic
274 Chapter 11 Reproducible Private Property Resources: Agriculture and Food Security
4
http://www.ota.com/pics/documents/01a_OTAExecutiveSummary.pdf
5
USDA and Organic Trade Association’s 2004 and 2006–2009 Manufacturer Surveys.
firms. If U.S. firms hold the patents (property rights) and this technology allows
lower production costs, European firms will be less competitive. Another study by
Gruère et al. (2009) also finds that countries producing GM crops are less likely to
have stringent domestic labeling policies. Clearly “one size fits all” solutions are
not likely to be efficient.
What about irrigation? Irrigation can increase yields of most crops by 100–400
percent. The FAO estimates that over the next 30 years, 70 percent of the gains in
cereal production will come from irrigated land, and by 2030 irrigated land in the
developing countries will increase by 27 percent.
However, irrigation, a traditional source of productivity growth, is also running
into limits, particularly in the western United States. Some traditionally important
underground sources used to supply water are not being replenished at a rate
sufficient to offset the withdrawals. Encouraged by enormous subsidies that
transfer the cost to the taxpayers, consumption levels are sufficiently high that
these water supplies are being exhausted.
Contamination of the remaining water is also an issue. Irrigation of soils with
water containing naturally occurring salts causes the salts to concentrate near the
surface. This salty soil is less productive and, in extreme cases, kills the crops.
Growth in Organic Foods. The organic foods industry is the fastest-growing
U.S. food segment. Acreage of certified organic cropland in the United States
more than doubled between 1992 and 1997 alone. Projections of organic
product sales anticipate that they will triple over a four-year period. The growth
in the organic foods industry has been about 20 percent annually from 1990
(when the USDA National Organic Program was established) through 2005.
In 2008, the growth rate of sales for all organic products was 17.1 percent. In
that year the growth rate in organic food sales was 15.8 percent while the growth
rate of nonfood organic products (including personal-care products, clothing,
and pet food) was 39.4 percent.
4
Despite the large rise in annual sales, organic food sales still represent only
approximately 3.47 percent of total U.S. food sales, up from the slightly more
than 1 percent in 2000. Fresh fruits and vegetables make up 37 percent, breads
and grains, 10 percent, and beverage and dairy products, 14 percent each of
total organic food sales. The remainder is made up of packaged and prepared
foods, beverages, soy products, and meat and poultry. Although meat and
poultry represent less than 3 percent of organic sales, they are a fast-growing
portion of this market (29 percent in 2006). Sales of breads and grains grew
37 percent in 2008.
5
A recent source of encouragement for organic farms has been the demonstrated
willingness of consumers to pay a premium for organically grown fruits and
vegetables.
6
Since it would be relatively easy for producers to claim their produce was
6
Thompson and Kidwell (1998) found premiums ranged from 40 percent to 175 percent for fresh
organic fruits and vegetables.
275Testing the Hypotheses
organically grown even if it were not, organic growers need a reliable certification
process to assure consumers that they are indeed getting what they pay for.
Additionally, fear of lost access to important foreign markets, such as the European
Union, led to an industry-wide push for mandatory labeling standards. Since the
value of labeling depends in large degree on the credibility of the labeling service, a
nationally uniform seal was sought. Voluntary U.S. certification programs had not
ensured access to European markets, since they were highly variable by state.
In response to these pressures, the Organic Foods Production Act (OFPA) was
enacted in the 1990 Farm Bill. Title 21 of that law states the following objectives:
(1) to establish national standards governing the marketing of certain agricultural
products as organically produced; (2) to assure consumers that organically produced
products meet a consistent standard; and (3) to facilitate interstate commerce in fresh
and processed food that is organically produced.
7
The USDA National Organic Program, established as part of this Act, is
responsible for a mandatory certification program for organic production. The Act
also established the National Organic Standards Board (NOSB) and charged it with
defining the “organic” standards. The new rules, which took effect in October 2002,
require certification by the USDA for labeling. Foods labeled as “100 percent
organic” must contain only organic ingredients. Foods labeled as “organic” must
contain at least 95 percent organic agricultural ingredients, excluding water and salt.
Products labeled as “Made with Organic Ingredients” must contain at least
70 percent organic agricultural ingredients. Only half of all producers use the
“USDA organic” label. For large producers, those whose sales are over $5 million
per year, this figure rises to 83 percent. Lack of a dependable supply of organic
ingredients—in particular, grains and sugars—has been an issue for producers.
8
The European Union has followed a similar, but by no means identical, policy.
Table 11.3 compares the U.S. and EU programs. With the U.S. standards now in
place, U.S. and EU officials are working on developing an equivalency agreement
to expedite and facilitate trade between the two regions.
Is mandatory labeling the best policy approach? Does it create efficient
incentives? Economic theory suggests that labeling will be a sufficient policy tool
only if all costs and benefits of consumption choices are borne by the consumer.
However, if the consumption of a food involves an externality, then information-
based policy will not result in efficient choices.
Are externalities involved? They clearly are. Consider, for example, the potential
effects of choosing to purchase organic foods on the quality of drinking water.
If conventional agriculture affects local drinking water by its application of fertiliz-
ers and pesticides, switching production to organically grown food will diminish
the environmental damage. Do consumers of organic products reap all the bene-
fits? In general, they do not. All users of that drinking water benefit, whether or not
7
Golan et al. (2001).
8
Organic Trade Association Manufacturer’s Survey, 2008. http://www.ota.com/pics/documents/
01a_OTAExecutiveSummary.pdf
276 Chapter 11 Reproducible Private Property Resources: Agriculture and Food Security
TABLE 11.3 Comparison of EU and U.S. Standards
I.
The systems share the following:
1. Third-Party Certification
2. Audit Trails
3. Annual Inspections
4. Accreditation
5. Materials Lists
6. Defined Conversion Periods
7. Sustainable Farm Plan
II. Agriculture Conversion Period
1. The United States—requires a three-year conversion period with no exceptions
2. The EU—generally requires two years for annuals and three years for perennials, with
some exceptions.
III. Manure Restrictions—The EU has load limits on manure applications for livestock and
other organic cropping operations, while the United States requires minimum periods prior
to harvest.
IV. Buffer Zones—The United States requires buffer zones; the EU does not
require buffer zones.
V. Milk Production—May be certified as organic in the United States after 12 months on
100 percent organic program, whereas the EU rules allow for organic production at 6 months.
VI. Organic Feedstuffs—In-conversion allowances (30–60 percent) of transitional and
conventional feedstuffs for organic livestock production in the EU are not found in the United
States (requiring 100 percent).
VII. Health Care—No antibiotics or hormones are allowed in the United States, however, the EU
does include exemptions for synthetic veterinary medicines and allows for treatments up to
three times per year.
VIII. Labeling requirements are similar.
1. “Organic”—Both agree that at least 95 percent of the ingredients must be organic.
2. “Made With”—Both agree that 70 percent of the ingredients must be
organic. In the EU the remaining 30 percent must be on published lists of “not commer-
cially available ingredients.” This list is subject to interpretation by the certifier or Member
State.
3. “Below 70 percent”—the EU does not allow “organic” to appear anywhere on the label.
The United States allows identification of organic ingredients on the information panel in
products containing 50 percent or more organic ingredients.
4. Percent organic declarations in the United States are not mandatory, but in some EU
situations declaration may be required.
5. Under EU regulations, “transition to organic” labeling is allowed. In the United States,
such labeling is not allowed.
Source
: Organic Trade Association, 2003.
277Testing the Hypotheses
Can Eco-Certification Make a Difference? Organic
Costa Rican Coffee
Environmental problems associated with agricultural production for export in devel-
oping countries can be difficult to tackle using conventional regulation because
producers are typically so numerous and dispersed, while regulatory agencies are
commonly inadequately funded and staffed. In principle, eco-certification of produc-
tion could circumvent these problems by providing a means for the socially
conscious consumer to identify environmentally superior products, thereby
providing a basis for paying a price premium for them. These premiums, in turn,
would create financial incentives for producers to meet the certification standards.
Do socially conscious buyers care enough to actually pay a price premium that
is high enough to motivate changes in the way the products are produced?
Apparently, for Costa Rican coffee at least, they are.
One study examined this question for certified organic coffee grown in Turrialba,
Costa Rica, an agricultural region in the country’s central valley, about 40 miles east
of San José, the capital city. This is an interesting case because Costa Rican farm-
ers face significant pressure from the noncertified market to lower their costs, a
strategy that can have severe environmental consequences. The alternative,
organic production, typically not only increases labor costs, but the conversion
from chemically based production can also reduce yields. In addition, the costs of
initial certification and subsequent annual monitoring and reporting are significant.
The authors found that organic certification did improve coffee growers’ envi-
ronmental performance. Specifically, they found that certification significantly
reduced use of pesticides, chemical fertilizers, and herbicides and increased the
use of organic fertilizer. In general, their results suggest that organic certification
has a stronger causal effect on preventing negative practices than on encouraging
positive ones. The study notes that this finding comports with anecdotal evidence
that local inspectors tend to enforce the certification standards prohibiting
negative practices more vigorously than the standards requiring positive ones.
Source
: Allen Blackman and Maria A. Naranjo. “Does Eco-Certification Have Environmental Benefits?:
Organic Coffee in Costa Rica.” Resources for the Future Discussion Paper No. 10-58 November 2010.
EXAMPLE
11.1
they purchase organic foods. Consumers of organic food confer an external benefit
on the others (Golan, 2001). Golan suggests that labeling is rarely effective in
addressing problems related to environmental externalities or other spillover
effects associated with food production or consumption.
The fact that it is not likely to be efficient, however, does not mean that socially
conscious consumers cannot make a difference. As Example 11.1 demonstrates,
eco-certification for coffee seems to be one area where socially conscious consump-
tion matters.
Recently, organic farming has moved from the smaller local farms that most
people think of as emblematic of the movement to very large, industrial farms.
Debate 11.1 explores the controversy that has arisen when organic goes mainstream.
278 Chapter 11 Reproducible Private Property Resources: Agriculture and Food Security
The Role of Agricultural Policies
Past gains in agricultural productivity have come at a large environmental cost. Why?
Part of the answer, of course, can be found in an examination of the externalities asso-
ciated with agriculture. Many of the costs of farming are not borne by the farmers, but
by others subjected to contaminated groundwater and polluted streams. But that is not
the whole story. Government policies must bear some of the responsibility as well.
When Organic Goes Mainstream: Do You Get
What You Pay For?
Organic foods typically cost more than conventionally grown foods. As the fastest-
growing agricultural sector, consumers have shown their willingness to pay a
price premium for organically grown food. Recognizing the potential for profits,
however, larger agribusinesses and retail stores are jumping on the organic
bandwagon.
The words
organic, free-range,
and
antibiotic-free
used to be associated with
small farms and local foods. Not anymore, says Michael Pollan, author of
The Omnivore’s Dilemma,
and a frequent contributor to the
New York Times.
With
plans to roll out organic food offerings in 4,000 stores, Walmart says the prices will
not be much higher than its other food products. How can this be? The price pre-
mium that organic products typically carry represents a willingness to pay not only for
pesticide-free products for consumption, but also a willingness to pay to keep those
same toxins out of the environment. Responsibly grown products cost more, right?
As larger farms start producing organic foods for larger market areas, the
distinction between sustainable agriculture and cheaper industrial food gets
blurred. For example, is organic milk from cows that eat organic grain but are
never allowed outside better for society? Does this industrial style of large-
scale production get rid of the externalities of conventional farming or does it
replace them with others (such as greenhouse gases from transporting
commodities long distances) that are just as harmful?
Pollan reminds us that the organic movement used to symbolize sustainability,
but he questions whether buying organic milk from New Zealand or organic
asparagus from Argentina makes sense from a global perspective in an era of
energy scarcity and climate change. Have we simply replaced drenching our food
in pesticides with drenching it in petroleum?
Joining in on this debate, Whole Foods, the nation’s largest natural foods
supermarket, posted an open letter to Michael Pollan on their Web site in
response to his criticisms of how their company is helping to support the
industrialization, globalization, and dilution of organic agriculture. Their on-going
debate became a feature subject in the Whole Foods’ blog during 2006.
http://www2.wholefoodsmarket.com/blogs/.
Source
: Michael Pollan. “The Way We Live Now: Mass Natural.” THE NEW YORK TIMES MAGAZINE,
June 4, 2006.
DEBATE
11.1
279The Role of Agricultural Policies
Some government policies have completely subverted the normal functioning
of the price system. Four types of agricultural policies are involved: (1) subsidies
for specific farming inputs such as equipment, fertilizers, or pesticides;
(2) guaranteed prices for outputs; (3) marketing loans based on crop prices; and
(4) trade barriers to protect against competition from imports. The U.S. Farm
Bill supports three types of these commodity production incentives. The
marketing loan program provides farmers who grow certain crops with financial
assistance at harvest time, when prices are usually lower than at other times of
the year. The marketing loan program pays the farmer the difference between
the actual loan rate for a particular crop and the loan repayment rate, the rate at
which farmers are allowed to repay their loans when market prices are below the
commodity loan rate. This lower repayment rate is based on the local prices and
any accrued interest on the loan is waived. Countercyclical program payments are
based on historical production of the crop. Payments equal the difference
between target prices (guaranteed prices) and the national average market price
for eligible acreage planted with the program crop. Direct payments are based on
historical production, but land can be shifted to other uses. Between 2002 and
2006, marketing loans ranged from $2 billion to $11 billion; countercyclical
program payments ranged from $1 billion to $4 billion; and direct payments
were set at $5 billion. Corn received $9 billion in subsidies in 2006. Based
on share of production, however, cotton and rice received the highest subsidies
(see Figure 11.3) (Sumner and Buck, 2007).
Percent
70
60
50
40
30
20
10
0
Soybeans Wheat Corn Upland Cotton Rice
Payments = Marketing Loan Benefits and
Direct and Counter cyclical Payments
FIGURE 11.3 Farm Program Payments as a Share of Production Value, 2002–2005
Crop Years.
Source:
USDA 2007.
280 Chapter 11 Reproducible Private Property Resources: Agriculture and Food Security
Subsidies have become an important component of farm income, making them
difficult to eliminate.
9
Agricultural subsidies in the United States and the European
Union are responsible for about one-third and one-half of all farm income,
respectively. In Japan, farmers earn twice as much income from subsidies as from
the practice of agriculture. In Switzerland, the comparable figure is four times that
of the agricultural income.
Recently, however, governments have begun to encourage sustainable agriculture,
not only by discouraging the harmful side effects of traditional agriculture, but also
by learning more about sustainable practices and disseminating the information
derived from this research. In addition, both the United States and the European
Union offer financial assistance for the transition to sustainable agriculture.
Farmers are not the only ones affected by subsidies, however. The demand
side of the food market is also important to consider. Agricultural subsidies
translate into cheaper calories for some foods. Consumers also receive subsidies.
Food assistance programs, such as school lunch programs and WIC (Women,
Infants and Children), are other forms of food subsidies. WIC provides aid to
states for food and nutrition education for low-income, pregnant women or
women with infants and children up to age five who are found to be at nutritional
risk. Through WIC, a farmer’s market nutrition program (FNMP) also provides
coupons for women and children to purchase fresh, local fruits and vegetables to
use at local farmers’ markets.
Summing Up: Agriculture
in the Industrialized Nations
Agricultural productivity in the industrialized countries can be expected to rise in
the future, but at lower rates. Part of the large historic increases in agricultural
productivity was based upon unsustainable, inefficient, and environmentally
destructive agricultural practices, which were supported and encouraged by
agricultural subsidies. In the future, we can expect that as farmers become less
insulated from the energy and environmental costs as subsidies are removed, some
of the expected gains from technological progress will be offset.
In addition to changes in the productivity of agriculture in the future, we can
also expect changes in agricultural practices. A transition to alternative agriculture
appears to be under way. While the growth of the organic foods industry provides
one example, new technology in the form of genetically modified organisms is
another. Genetically modified foods have sparked a great debate (see Debate 11.2).
Since the socio-economic costs and benefits of GMOs are multifaceted and
uncertain, it remains to be seen whether consumers will support or reject this new
technology (Example 11.2).
9
It has also been argued that these production subsidies have been designed to help poor farmers, but
this argument is not persuasive. Because they produce only one-tenth of the output, poor farmers
receive only $1 from every $10 of subsidies paid. See “The Economist Survey of Agriculture” (1993): 7.