Addendum from Daryll Ray
October 13, 2010A couple years ago I saw a panel on which Daryll Ray, one of the co-authors of the report I cited in my last post, elaborated on his thoughts on ag subsidies. These are among the most interesting points in my notes, and in Econ 101 lingo to boot:
We have been subsidizing agriculture since the very beginning, as a society. We’ve always had specific agriculture programs – land distribution, land grant universities, extension services, all designed for agriculture to shift the supply curve to the right. Generally we shift it faster than the demand curve, and prices go down. In other industries, consumers buy more or producers produce less and prices go back up. In agriculture it doesn’t work that way. Consumers buy the same, prices stay low, producers produce more (farmers don’t produce enough to have an influence on the market; the only thing they can do is produce more), and prices get lower. We “fix” by direct payment to producers. This is not a real adjustment.
He concluded: “It is unrealistic to assume that just because we don’t like the program we have right now, that we don’t need a program. We need a program that keeps prices more consistent and at higher levels… if we don’t do that, it’s naive to think our farmers will reduce production and prices will rise globally. It doesn’t work that way.”
Echolocation 
‘Flying Whale’– I don’t have time now to read the paper about alternatives to the current farm subsidies system, and if you tell me that’s the best way forward I can make time later– but perhaps instead you could just do a post on your favorite alternative policy interventions to keep prices for farm commodities predictable and high enough? Accounting for the costs of environmental externalities, what’s wrong with us ending up with fewer farmers producing less food (in line with demand, and perhaps with some measures of insurance for fluctuations in the market), as (it seems to me) would happen eventually in an unsubsidized environment?
Since this isn’t my area of expertise I’ll completely defer to the APAC study cited in the last post. Daryll Ray et al list three alternative, non-direct-payment subsidies that could lead to lower production: acreage set-asides, inventory reserves and price supports. Set-asides are basically financial incentives for farmers to idle their land, which obviously has positive environmental effects as well. Inventory reserve subsidies would offer storage payments for farmers to put a share of production into on-farm reserves, offering some security against price shocks. Price supports are basically government assurances that they will purchase stock if prices drop below a certain threshold level.
I just yanked these policy options from the report, there’s a summary on pp5-6 and more detail in pp43-50.
To address your larger question, I’m not sure there’s anything wrong with us ending up with fewer farmers producing less food (although a less painful outcome might be to end up with the SAME number of farmers producing less food). But I think getting there by eliminating subsidies would cause a ton of farmers to lose their livelihoods in an unnecessarily painful way. More broadly, I think there’s a point to be made that subsidies should be seen as a useful policy tool, rather than as the horrible market-distorting, poor-country-killing abominations that many economists (and some development activists) see them now.