The Obama administration’s recently announced plan to aid livestock producers suffering from the drought by having the U.S. Department of Agriculture buy up some $170 million of meat is election-year window-dressing that will do little to help farmers. But neither will it hurt the general public.
More broadly, it illustrates the problems that occur when governments try to raise prices for producers by purchasing some of their output. Purchase a small amount, as in this case, and you really do little to the price. Purchase enough to raise the price, and you end up with warehouses full of the commodity that you can’t sell again without defeating your original purpose. Economic theory and much economic history illustrates such programs are a bad idea.
The newly announced program really will be minuscule relative to the overall market. It amounts to about 0.1 percent of annual pork sales, for example.
In theory, such purchases should raise prices to some degree. Early in introductory microeconomics courses, students learn what happens to price when some external factor causes a greater overall willingness to buy at any given price.
The problem with foodstuff purchases is ensuring that any increase in demand is a net one. If the food purchased by the government ends up satisfying the needs of someone who otherwise would have purchased the product with their own funds, the program spins its wheels.
That makes program administrators have to go through all sorts of contortions. The USDA says meat purchases under the new program will go to the school lunch program and food shelves. But if pork or chicken given to schools simply leads schools to reduce their own purchases, there will be no effect on prices. Only if children actually eat more meat at school than they would otherwise will the effort accomplish anything.
That happened 50 years ago when I was in grade school. The school got “surplus commodities” like butter, peanut butter and frozen turkeys. The first two went into peanut butter cookies, which were distributed, two to each of us, at a midmorning recess. And creamed turkey on buns was a perennial noon entree.
However, we kids probably didn’t eat more than we would have without the food “donation” program. The butter and peanut butter reduced the school’s purchases of the same items at the grocery store. The turkey probably reduced purchases of ground beef, thus slightly tilting the board in favor of turkey producers at the expense of beef. But most of this “surplus disposal” was simple wheel-spinning, the government buying up goods with one hand to raise farm prices while handing out the same goods with another hand and thus reducing commercial sales.
In the 1970s, my in-laws would occasionally give us a big block of cheese. The government was buying up cheese to support milk prices. It had to get rid of it somehow and started giving it away at senior citizens’ centers. My wife’s parents were given more than they wanted to eat and so they passed some on to their kids. We didn’t increase our total cheese consumption by that amount; we mostly just bought less at the grocery store.
Why did the USDA do this? Because Congress passed laws saying it must. Why did Congress pass such laws? Because producer groups had the political power to convince it to, and their voices outweighed any muted protests of those hurt by such price-support programs, namely consumers and taxpayers.
That is not the case right now. There was no campaign by livestock producer groups for this one-shot program. These groups did ask for a temporary waiver of the ethanol mandate, which would reduce feed costs, and, so far at least, the administration is not willing to grant such a waiver. So it threw down this token meat purchase effort as a sop.
Should consumers and voters be concerned?
If the program really increased prices, consumers would be hurt because they would have to pay more for pork, beef, chicken or catfish at the grocery store. But it will do little, and few consumers will note any price effects. Citizens should be concerned about wasted resources, but few will pay much attention.
In some cases, voters and consumers are happy with such programs, even when the effects are large. Europeans who nearly starved in the winters of 1944-45 and 1945-46 willingly paid higher prices for food for decades because they were told that the European Union’s Common Agricultural Policy would prevent such hunger ever happening again. The EU bought up massive quantities of farm commodities to raise prices, and voters did not bat an eye.