Factory Farming’s Secret Subsidy

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Promoters of large-scale factory livestock farming like to argue that their model of agriculture is a natural progression—an example of free market efficiency succeeding. What they don’t want the public to know is that factory-scale production of pork, beef, poultry and milk benefits greatly from a silent, but powerful, government subsidy. As a paper out of Tufts University shows, this subsidy may be indirect, but it has had a significantly negative impact on our farmers, our communities and even our landscape.

I got a hint at how big of a factor this hidden subsidy was a few years ago while meeting with a handful of farmers from Minnesota and Iowa. The conversation soon turned to how feeding their livestock the corn and soybeans they raised on their own acres put them at an economic disadvantage when it came to competing with large-scale factory livestock operations. Since then, I’ve heard that complaint more and more. As recently as this summer, I was on a Minnesota dairy operation where the farmer told me he didn’t see why he should raise corn and other feedstuffs to feed to his cows, when he could buy those inputs so cheaply on the open market.

As a result, throughout Minnesota and the rest of the Midwest we’re seeing the demise of a key type of agricultural producer: the “farmer-feeder.” These are farmers that raise livestock on a moderate scale, producing enough corn, forage and other feedstuffs to feed those animals. The manure from those animals is then spread on the same fields that produced that feed, creating a tight nutrient cycle—the kind that enriches soil while keeping runoff out of our water and odor to a minimum.

Historically, all these farmer-feeders kept local and regional businesses thriving, including trucking companies, feedmills, seed dealers, hog buying stations, stockyards and livestock supply firms. Implement dealers that supplied tractor-powered feed grinders, manure spreaders and forage handling equipment also benefited from the farmer-feeder phenomenon. Veterinarians, manure spreader manufacturers, fencing companies…the list of business beneficiaries goes on and on.

A lot of reasons have been given for the downfall of the farmer-feeder: they don’t have the economies of scale of the big boys, you can’t compete with specialization, etc. But I never could shake the idea that if a farm is raising its own feedstuffs, then it should be able to compete with specialized livestock operations that have to purchase everything.

But then I read Timothy Wise’s paper, “Identifying the Real Winners from U.S. Agricultural Policies.” Wise, who is Deputy Director of the Global Development and Environment Institute at Tufts University, lays out a clearcut reason why farmer-feeders indeed often cannot compete with factory farms. It has to do with the subsidies crop farmers receive for producing key feedstuffs like corn and soybeans—two of the most heavily subsidized crops in U.S. commodity programs. Corn and soybeans are key ingredients in livestock feed, making up 83 percent to 91 percent of most feedstuffs.

The fact that corn and soybeans are so heavily subsidized means there is always an oversupply of these commodities on the market. That means low feed prices—prices that are often much lower than what it cost the farmer to produce those crops in the first place. That’s very good news for large-scale livestock operations. Feed costs account for 60 percent to 64 percent of raising a chicken or producing an egg. About 47 percent to 65 percent of a pork operation’s costs are gobbled up by the feed bill. So any force—whether it be rooted in the market or the government—that keeps the price of corn and soybeans low means bigger profits for factory livestock firms like Cargill, ConAgra, Tyson and Smithfield.

How much of a factor are these crop subsidies in the factory farm business? Wise reports that right out of the gate factory livestock operations are getting a discount of about 15 percent on a key operating cost. So if the total feed expense for poultry and hog operations is between 50 percent and 65 percent, that means their overall costs would be 7 percent to 10 percent higher if they had to buy feedgrain at a price that’s close to its cost of production. This factory farm subsidy, discount, gift, whatever you want to call it, comes courtesy of the U.S. taxpayer.

But if you are a farmer-feeder who is raising feedgrains right next to your livestock, how does all this affect you? Well, as farmers have been trying to tell me for years, and as Wise makes clear in his paper, when you feed homegrown grains to your own livestock, you are in effect paying full cost for that feed (the price of raising it), while the specialized factory farm down the road is getting it at below cost. That means they can send hogs or cattle to the market at a lower cost than the diversified family farmer, giving factory farms a huge competitive advantage. Packers and dairy processors will always choose to buy from the low-cost producer, and thanks to sudsidized feedgrains, factory farms are the kings of the bargain basement.

Are farmer-feeders leaving the land altogether? Not necessarily. Often they shutter their barns, plow up their pastures, pull out the fences and specialize in raising corn and soybeans. This results in even more commodity crops on the market, further depressing market prices for feedgrains and contributing to a perverse economic environment where feeding your own crops to your own livestock truly is a bad financial decision.

This results in a proliferation of the environmentally-risky large-scale manure storage systems that factory livestock operations rely on. It also brings with it another significant environmental problem: less diversity on the landscape. Farmer-feeders tend to raise a variety of crops, and often include forages, grasses and other perennials in their systems. This is good for the soil and the water. Farmer-feeders also tend to try to balance the amount of livestock they have with the amount of feed they can raise. Transporting manure more than a mile from a livestock facility is not economically feasible. By default, this can help ensure that a farm won’t produce more manure than the operation’s land can handle. Thus a tight nutrient cycle is maintained.

Researchers working on the Minnesota Generic Environmental Impact Statement on Animal Agriculture found that such a balance between livestock numbers and crop acres on the same farm can be an important factor in keeping phosphorus pollution to a minimum. (To read the GEIS paper that addresses this issue, see page 80 of the report called “Phosphorus Balance in Minnesota Feedlot Permitting.”)

To top it off, farmers who try to diversify out of commodity crops like corn and soybeans are penalized financially by the USDA. No wonder corn and soybeans cover up to 95 percent of farmland in some parts of Minnesota. And no wonder that on large-scale factory farms manure is no longer seen as a valuable crop nutrient, but a waste product to be disposed of.

Ironically, the factory farm industry likes to crow about how it’s not dependent upon taxpayer-funded subsidies. I’m sorry, but getting a 10 percent discount on your feed bill is nothing to sneeze at. Even more ironic is the fact that most American taxpayers think their money is helping keep family-sized farms in business. “There is little evidence that farmers as a group are reaping significant gains from current U.S. agricultural subsidy programs, even though they are the direct recipients,” writes Wise.

Here’s another kick in the pants: factory livestock farms, including some right here in Minnesota, are getting cost-share funds from the federal government to help them deal with all that liquid manure they produce. So taxpayers foot the bill for cheap feed, and then they pay again to deal with the problems resulting from all that cheap feed. Talk about double-dipping.

Wise concludes in his paper that factory livestock farming’s indirect subsidy deserves much closer examination. It has impacts on everything from rural economies and the environment, to consumer prices and world trade. And yet virtually no academic research has been done in this area.

More research is needed. However, farmers, the environment, our communities and taxpayers can’t afford to wait for the rest of the research community to latch onto this issue. The 2007 Farm Bill—a piece of legislation that will define federal ag policy for the next five years or so—will be hammered out this winter. Some real commodity subsidy reforms are needed in that Farm Bill. If Congressional policy makers are looking for a place to start, they should give Professor Wise’s “Real Winners” paper a close read.

One Response to “Factory Farming’s Secret Subsidy”

  1. Timothy A. Wise

    Academic policy researchers are always glad when their papers find their way out of the ivory tower and into the hands of those who might find them useful, and even happier when the analysis seems to resonate with those living the reality of what we only study. So I am much gratified that my recent paper made sense and was of interest. I wanted to contribute two further thoughts to your already-thoughtful observations.

    First, while it is tempting to attribute the overproduction of feed components to the current US subsidy regime, we try to avoid assuming such direct causality. We prefer to focus on US farm policy as a whole rather than subsidies in themselves. Why? Because most economic models show that eliminating farm subsidies would not, in fact, reduce overproduction or raise prices very much. All that land planted in corn and soybeans really has only limited other productive use under our current agricultural economy. So while it is safe to say that subsidies keep the current regime going, they do not by themselves cause the overproduction. What does is the policy shift away from the government’s role in regulating the market, balancing supply with demand, and ensuring that prices are high enough to cover farmers’ costs of production. This is a complicated argument, and a counterintuitive one for many people. An excellent report on the subject comes from Daryll Ray and others at the University of Tennessee, “Rethinking US Agricultural Policy”:
    http://apacweb.ag.utk.edu/blueprint.html

    Second, I wanted to point out that here at Tufts University we have begun to carry out some of the research I called for in my paper. In particular, colleagues Elanor Starmer, Aimee Witteman and I published a more thorough analysis of the “implicit subsidies” to the US broiler chicken industry from below-cost feed, “Feeding the Factory Farm”:
    http://www.ase.tufts.edu/gdae/policy_research/BroilerGains.htm

    Among our findings:

    • In the post-1996 Farm Bill period of 1997 to 2005, the market price of corn averaged 23% below production cost, compared to an already high 17% between 1986 and 1996.
    • For soybeans, the margin between production cost and market price tripled between the two periods, from 5% to 15%.
    • If the broiler industry had paid full cost for the corn and soybean meal in its feed, industry feed costs in the post-Farm Bill period would have been 21% higher on average than they were.
    • Because feed costs account for 60% of broiler production costs, the implicit subsidy kept total costs 13% lower than they would have been if corn and soybean meal had been priced at full costs of production.
    • In dollar terms, the discount, or ‘implicit subsidy,’ to the corporate broiler industry from U.S. agricultural policy averaged $1.25 billion a year between 1997 and 2005, up nearly $1 billion from the period before the 1996 Farm Bill.
    • Initial calculations suggest similar gains to industrial hog operations. With some diversified family farmers still trying to compete with factory hog farms, the estimated 13% reduction in operating costs that factory farms receive from purchased feed is an incentive to industrialization, and gives these operations the appearance of greater economic efficiency than farms that grow their own feed crops.
    • While demand for ethanol may raise corn prices somewhat in coming years, reducing the implicit subsidy to factory farms, future gains to the broiler industry are still projected to exceed $400 million per year.

    We are now extending this analysis to the hog industry, incorporating implicit environmental subsidies to CAFOs (free rights to pollute) in addition to feed costs reductions.

    I am pleased that the research is finding its way into the debate over the 2007 Farm Bill, and I hope we can continue to rely on feedback from those in the field — literally — to improve our analysis.

    Timothy Wise

    Reply

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