Apr 11 2008

“Agflation”, conservation, and the loss of wildlands in America

How does a growing Chinese middle class threaten duck populations in the American Midwest? Here’s the story:

As Prices Rise, Farmers Spurn Conservation Program – New York Times

“You can’t pay me NOT to farm this land!”

This is the view being expressed by more and more American farmers today. Since 1985 the US government has paid hundreds of thousands of farmers around $50 per acre of land per year to NOT grow food. In other words, if you were a farmer with 1,000 acres, you could earn $50,000 a year for not doing anything with it at all, just letting it sit idle.

What is the logic of such a program? In the mid-80’s food prices were so low that farmers working their tails off to cultivate and harvest their lands often found themselves losing money when they went to sell their crops. The traditional farming lifestyle was in jeopardy as farmers experienced year after year of economic losses. Improvements in farm equipment, along with the widespread use of chemical fertilizers, pesticides and herbicides had increased farm yields to levels never before achievable in human history. What increases productivity for all farmers, however, also increases total supply of crops, driving prices to historic lows. All this meant farmers could barely get by in the American heartland.

Enter the government:

…the Conservation Reserve was conceived as part of the 1985 Farm Bill. Participants bid to put their land in the program during special sign-ups, with the government selecting the acres most at risk environmentally. Average annual payments are $51 an acre. Contracts run for at least a decade and are nearly impossible to break — not that anyone wanted to until recently.

Things were great for the farmers. Output fell as millions of acres went into disuse, while farm incomes rose due to rising prices for their outputs and transfer payments from the American taxpayers. Farmers now had to work less to earn more money.

Today, however, farmers are putting millions of idle acres back into cultivation. They are choosing to work harder and farm more land in order to take advantage of the rising world food prices caused by the increasing demand for meat among the world’s emerging middle class and the rising price of grains due to the push to promote ethanol as a renewable energy.

The farmers’ behavior today is a perfect demonstration of the law of supply, which acknowledges the direct relationship between a product’s price and the quantity that producers will bring to market. There are actually two markets at work here: the market for cropland, and the market for wildlands. Farmers face a tradeoff in their decision of whether to farm their land or let it lay fallow. In 1985, the government made the decision that not enough land was lain fallow, so it subsidized farmers who set lands aside for conservation. Since subsidies are a determinant of supply, the supply of idle land increased while the supply of cultivated land decreased, driving up food prices.

In addition to the law of supply, this article also encompasses the concept of market failure. The Farm Bill of 1985 inadvertently corrected a market failure relating to “merit goods”, or those that create positive externalities or spillover benefits for society. In the case of farmland, the less land was used for farming, the healthier the wildlife populations on the now idle lands of the American Midwest. Hunters, environmentalists, and conservation groups had much to cheer about:

,,,hunters had more land to roam and more wildlife to seek out, with the Agriculture Department estimating that the duck population alone rose by two million; and environmentalists were pleased, too. No one disputes that there are real environmental benefits from the program, especially on land most prone to erosion.

At its peak the “Conservation Reserve”, as it was known, saw more than 36 million acres set aside for wildlife. Today, however, farmers are choosing to put this land back into cultivation.

Markets are complicated things. Markets do a fantastic job of assigning values to easily tradeable commodities like corn, soybeans, sunflower seed oil, and wheat, which happen to be some of the crops most commonly grown on the millions of acres set aside for conservation since 1985. What market fail to do, however, is to assign adequate values to the non-tradeable goods in our society. The biodiversity of a wild grassland, the health of a water fowl population, the carbon-sequestration capacity of a standing forest, and the joy a hunter gets from roaming a fenceless wild land.

As food prices continue to rise in response to the shift towards bio-fuels and the growing demand for meat among developing countries’ consumers, there will be more and more pressure for farmers in the industrialized world to take their lands out of conservation and put them into cultivation. This is not only a rich world phenomenon either. In Brazil, farmers are responding to rising sugar prices by cutting down ever growing chunks of the Amazon, one of the world’s last great rainforests, sometimes called “earth’s lungs” because of its ability to trap carbon from the atmosphere.

If balance between conservation and cultivation is to be achieved, it requires a market system that puts a tangible, tradeable value on the sometimes intangible “goods” relating to the environment. For now, a short-term solution might be a new Farm Bill that offers farmers a more substantial payment for keeping lands idle. Such an interventionist approach may stem the loss of wild lands, but does little to address the bigger problem of market failure underlying the degradation of the world’s remaining natural environments.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

10 responses so far

10 Responses to ““Agflation”, conservation, and the loss of wildlands in America”

  1. Chris Seahon 11 Apr 2008 at 11:59 pm

    It is interesting to note that the US government drove crop prices up through scarcity. The problem of affixing a quantitative "value" to ideas like the environment, as Mr. Welker has said, is difficult. As a matter of fact, I would go one step further and call it impossible, because no one entity controls all the land on the planet and people would find faults with a pricing system (some people think the environment is priceless). At the same time there is the ethical concern of depriving people food food and jobs for the sake of the environment, which is in this case the rather vaporous "greater good".

    Perhaps governments should consider investing in alternative, non-invasive means to provide food and energy for their people like vertical farms or something. In the meantime however, it is essential that governments increase their paid rates to farmers in keeping their land fellow, lest we suffer unseen repercussions that will kick us in the behind in the next few decades because, as of yet, we cannot possibly estimate the magnitude of those costs.

  2. Jason Welkeron 12 Apr 2008 at 4:01 am

    Good insight Chris, thanks for sharing!

  3. andyxuon 12 Apr 2008 at 1:41 pm

    Wow, this is a very interesting topic. The concept of giving farmers an opportunity cost for farming, annual payments of $51 per acre for letting their farmlands sit idle, is one that I would like to see applied in future China. When China adopts this measure, it will mean that 1) food scarcity is no longer a top concern in China and 2) the government is aware of the need to intervene the market economy in order conserve the country's wild lands.

    The effect of this monetary subsidy is, of course, conserving land and hence the ecosystem. In market terms, the incentive to not farm takes away the segment of the supply curve in which the revenue generated from farming an acre is less than $51, as farmers find the marginal benefit of $51 per acre subsidies from the government greater than the cost of working full-time and yet receiving less than $51 for their work.

  4. Jo Loon 12 Apr 2008 at 2:17 pm

    Its common nowadays to see how one thing happening in China will affect something else in America. This article is no different. Taking back thousands of acres of land has both positive and negative effects. The positive effect would be that if farmers cultivate more land, thus increasing output of food, the prices would decrease and decrease the burden of insanely expensive food prices on many of the world's poor. The negative would be as Mr. Welker wrote would be what some people are doing to try to cash in on the high food prices. Cutters in Brazil are cutting down more and more of the forest to create land to grow sugar cane. This is a environmental problem that

    will further escalate global warming as the 'lungs' of the earth are slowly being taken away by people who risk the future by thinking about now.

  5. Rebecca Sungon 12 Apr 2008 at 8:57 pm

    Following up on the negative effects, loss of forestry can also mean a loss of potential medicinal plants that can only be found in those forests. Maybe a cure can be found for diseases like AIDs is located in those forests, but with them diminishing everyday, we would never know?

    Also, there's also the destruction of many animals' natural habitat which endangers many species.

  6. Christina Huon 13 Apr 2008 at 3:12 am

    This is such a huge topic, I won't even attempt to cover it all. But the bottom line is, if we don't do something NOW to save the environment, we're all doomed in the decades to come. This reminds me slightly of the capital vs. consumer goods curve, except that if we choose to invest in consumer goods rather than capital [the environment] now, there won't be any captial left to speak of in a little while. As for helping alleviate the hardships of rising food prices on poor people, the government should start handing out food packages or redistributing wealth in some way; that's what it's there for, right? To keep the country running smoothly and make sure nobody goes to bed hungry and look out for the future [though it seems like the gov't only cares about now, what with the destruction of Earth's lungs].

  7. Hansenon 13 Apr 2008 at 5:20 pm

    As the market has changed, so should the government payments to keep the lands idle and for the wildlife. While before, the Farm Bill was a reaction to farmers losing money, now it should be brought back, stronger than ever, in a response to growing environmental issues. Unfortunately for many developing countries such as Brazil and China, the problem of rising food costs has caught up with much of their citizens. In many countries around the world, feeding their citizens is still the first item on the agenda. When that is done, perhaps then they may look at the environment. So this may not be a case of whether or not farmers want to farm the land or not, but a case in which the government wants the land to be farmed simply for the sake of having food to give to its people.

  8. Howard Jingon 14 Apr 2008 at 1:02 am

    There are many things that the government can do to get more farmers to stop using their land. As Mr. Welker said, the gov't can always increase the payout of having a farmer agree to not farm certain parts of their land. As the benefits of farming continues to rise, it only makes sense to increase the benefits of not farming.

    Another method might be to guilt farmers into stop farming certain areas of land. This can be achieved through public service announcements on television and other commercial campaigns. The government can raise awareness of what exactly a farmer is doing by allowing wildlife to grow on their land. Once a farmer knows that by refraining from plowing parts of their field, they would not only be getting money for no work, but also saving the lives of endangered animals, I would expect them to be more receptive to the idea of not having to work as hard.

  9. Phil Wasteon 23 Jun 2008 at 2:23 am

    Southern Resurgence

    Here is an idea that the Republicans, oil, tobacco companies will hate.

    How about we plant sugar cane or sugar beets in the states of Florida, Georgia, Mississippi, Alabama and Louisiana. We encourage them to stop planting tobacco which is killing millions. Sugar cane or sugar beets are 7 times more efficient than corn in making ethanol.

    You want proof that it works? Just google Brazil and find out for yourself. Now, you won’t be using a food product or even displacing a food product……

    In 1798, Thomas Malthus predicted that population growth would be perennially held in “check” by inherent limits to food production. … Energy can substitute for food in his theory but when the energy is the food……catastrophe will result.

    Completely renewable and no one is hurt except for those purveyors of death the tobacco companies.

    I would sure like to know the idiot who decided to use corn (a food product) and doomed ethanol to failure. Had to be an oilman!

    Stop the tax subsidies to corn farmers and give them to sugar cane and sugar beet farmers, in the mean time eliminate import tariffs for ethanol. Allow the import of flex-cars made by our very own car company Chevy….

    Come on all you Democrats in Congress are you going to give us more of the same or are you going to make a difference? Do something now to prove you are not just more of the same…… and I mean minions of the oil companies….

    OH! This could all be done in one year……….No more dependence on foreign oil. What ever happened to common sense in America? You know, if we can’t straighten out a simple mess like this we deserve to fade away as a has been leading nation……

    It is real simple folks; America has been sabotaged by special interests namely the oil companies including those from the Middle East who want to sell oil, oil, oil.

    Cars are already to go, made by Chevy! They are called flex-cars and burn any combination of oil and ethanol.

  10. Emma & Philipon 25 Feb 2011 at 10:24 am

    The government is at a dilemma as to where to put their money: either subsidizing farmers for fallow land and thusly saving enviroment, or to stop subsidizing farmers and allow them to produce more goods in response to global food prices increasing at the cost of the enviroment. This is especially difficult, as the enviroment is the ultimate public good: the free market would not be able to charge you for breathing air, walking through forests and enjoying other perks to the enviroment, and hence would not take the initiate of planting forests, let alone conserving resources such as land and raw materials. Therefore, it is impossible to place a price on the enviroment, and hence means that it is the government's responsibility to provide. Farmer's goods, however, are highly competitive goods, with a clear price of which the rising of has caused farmers to want to farm more. So while the benefit to farmers is more than obvious, the harm to the environment is immeasurable.

    The only solution seems to be to increase subsidides on fallow land, which would increase the benefit to farmers without them harming the enviroment, and thusly preserving the positive externalities of production, in which an underpoduction of farmland causes the environment, and those associated with it, to thrive.