Thursday, January 31, 2008

EQIP in the News

This article recently appeared in the NY Times. Often we see critics of commodity programs and the payments made to what some believe are otherwise profitable individuals and corporations who don't need them. But I've not often seen critics of payments geared at garnering environmental compliance. The matter is, I think, more complicated.

On the one hand, I have not heard of an EQIP program for coal-fired power plants. That is, the costs of environmental regulation are generally not offset by an infusion of funds from the regulating body. But that statement oversimplifies matters somewhat. Stormwater programs that are currently being undertaken under the command of the Clean Water Act are the subject of some level of government expenditure from the regulating level and nonpoint source pollution has long been the subject of state-level planning with the consequences of failing to plan existing only in the loss of federal funding (whether that is a carrot or a stick is an interesting question). So how, exactly, do EQIP funds for livestock production facilities differ from expenditures geared at municipalities or nonpoint source polluters? Or do they? That is, more broadly, is there any good argument for governmental funding when it comes to command-and-control approaches to environmental harms.

Read the rest of this post . . . .One argument concerning the difference between stormwater regulation and livestock producers of the concentrated sort would run something like this: The costs imposed by the federal regulation of stromwater is hoisted upon lower levels of government--political subdivisions and the states. Thus, in order to protect the individuals in those governments from increasing tax burdens, the costs should be shared by the regulating government, redistributing the tax burden to a broader swath of people. But it seems difficult to muster much from this argument. Should the concentration of an economic burden have an impact on how we choose to offer cost-sharing with regulation? If so, it would seem to me that the more concentrated the regulatory cost becomes, the more important it would be to accompany that regulation with funding.

Another argument would run something like this: these regulations are meant to internalize the external costs of production agriculture's land uses. If we compensate by taking money from taxpayers (the very folks who are harmed by the land use) and giving it to environmental offenders to stop their conduct, then all we are doing is changing the form of the taxpayer burden from an environmental one to a monetary one (though the monetary cost may be less than the environmental costs).

This argument makes one necessary assumption. That is, it assumes that the external effects of polluting land uses are negative. Some would argue that when a landowner changes his land use to avoid these problems, he is providing a positive benefit to outsiders for which he should be compensated. This question, of course, relies upon the initial allocation of rights. That is, if the property owner was, as a baseline, privileged to do what he has been doing, then the forced change is a positive externality. If not, then it is negative. As Mr. Ruhl recently put it, farmers tend to look at the benefits from changing their land use patterns as positive externalities for which they should be compensated. And, even though they are willing to make these changes, the costs associated with them make their adoption impossible.

It is somewhat easier to think of better management practices for crop production and stormwater programs as positive externalities, but it is difficult to figure out why. One factor would seem to be how long the old practices giving rise to these harms have been in place. However, mandating change based on new information about environmental consequences does not necessarily equate with providing benefits to the public that the public should pay for. On the other hand, time would account for the distain some attribute to paying large livestock facilities not to pollute. These facilities are relatively new. They are "industrial." They are therefore harmful and their external costs need to be contained.

None of these arguments strongly suggest that livestock facilities should or should not be compensated for the regulatory costs imposed through environmental regulation. At bottom, if pollution is a negative externality (and I think there are fine arguments that it is), then it would seem difficult (if not antithetical) to provide compensation. If engaging in more environmentally sound land uses is the provision of a service to the public, then compensation may be justified. And this dichotomy would seem to be true for coal-fired powerplants, livestock facilities, stormwater programs, and nonpoint sources.

Let's run with the negative externality view of environmentally harmful land uses. Why do we pay some people to stop harming us, but not others? I think there is one important practical piece of the puzzle that is often overlooked. That argument goes something like this: regulation as internalization is fine, as far as it goes. Implementation is another matter. And with some sorts of polluting conduct, regulation just won't achieve the environmental benefits that the regulations have in mind, unless accompanied by cost-sharing. So with the many folks who contribute to stormwater pollution, implementation is feasible only with cost sharing to local governments who are charged with implementation. With production agriculture, the dispersed nature of the industry and the large number of actors to regulate, the matter is somewhat the same: you won't get effective implementation unless you provide funding when it comes to dealing with the widely dispersed (but harmful) land uses. Otherwise noncompliance will be the norm and, given the dispersion, detection will be difficult.

But that is not to say that the article does not make a good point. Its main thesis is that large confined production facilities should not be paid. This resonates in the same sense that the power plant resonates. And the confinement, like the power plant, may not raise the same sort of detection and monitoring difficulties. That is, as animal production becomes more concentrated, enforcement and monitoring become more feasible and, thus, the need for cost-sharing to garner compliance diminishes. If this line of reasoning is correct, then I suppose there should be a size limitation on cost sharing. That is, the smaller producers who are more widely dispersed and harder to regulate should be given a carrot. Not because we think they should be paid to stop their harmful conduct, but rather because it is necessary for implementation. And if we start to look more at nonpoint source pollution, as opposed to the confined livestock sector, maybe that is a justification for cost-sharing for those offenders (if, of course, they are offenders and not unwilling benefit providers).


Blogger Tom said...

You brought up some very interesting points, Anthony. Equip loans are a way of the government providing financial help to the cost of new regulation. The new regulation of agricultural environmental problems is a result of new information of the problems that new and growing forms of agriculture production created. Phosphorus runoff from industrial agriculture became a concern well after the costs of those environmental concerns were seen and then studied in the environment. In the past, these problems did not exist because the concentration of animals and the manure of less concentrated feeding operations didn't reach the levels it is today.

When environmental concerns of manure handling procedures became a more researched problem and the cost to the environment of this economic externality were known, it became more acceptable as a public policy to fund systems that transferred technological and handling procedure and equipment to farmers to address the problem. Environmental regulations created the need have Equip funded facilities. The environmental regulations addressed the costs of the externalities and Equip loans addressed the environmental costs that were introduced by the regulations.

Should this have been financed out of public funds (regular taxpayer) via equip funds to build these structures?

As a farmer who has used "equip" assets (I bought the farm with them) I have a few personal thoughts on the matter. In my opinion, the Equip funds were needed or the problem would not have been fixed. One of the problems with current agriculture contracts is that costs can not be passed on through any kind of bargaining, but must be passed on in other ways. Because of the lack of bargaining power, the farmers are not able to pass these costs on. In a normal market environment, these costs would become part of the costs that new entrants (new farmers) have to pay upon entry, knowing that these were cost factors that were required to be addressed in order to be in the business. Under the current contract system and lack of enforcement of the Packers and Stockyards Act (PSA), factory farming companies are able to get a free ride off this funding. It is nothing more than a subsidy to them. New entrants can be paid more than existing farmers so the supply of new farmers can be manipulated by factors other than national supply and demand for farmers (and their assets) used in production for integrators.

My personal opinion is that markets should be made to work. Costs of acquiring new farmers and their capital investments should go to the industry, not to the average taxpayer. Taxpayers will eventually pay for these improvements because the costs of production will be higher and in order to get new producers. The balance between supply and demand is always (or should be) in a free market based on what consumers are willing to pay and suppliers are willing to supply. Given the lack of enforcement of the PSA and the consequent lack of bargaining power of poultry, and pig farmers, the cost of the externality should have been put on the poultry and pig companies (integrators) themselves with a tax at their level, possibly a cents per lb figure tax to fund the equip programs. It was, after all, the industrial agriculture that largely replaced the small family farmers who were so small that the problems of factory farming animal waste issues was not the problem it is today with these concentrated feeding operations (CAFOs).

In order keep from engaging in an esoteric argument relevant to academics only, I would like to bring up two prescient examples.

I was at a meeting some years ago sponsored by RAFI ( I was introduced to several farmers from across the nation. One was speaker was from Kansas, I believe, and a contract pig farmer with Tyson. Tyson induced him and other farmers to make huge capital investments so that they could supply Tyson with pigs while Tyson was trying to enter the pig business. Smithfield and others used their latent supply capacity to increase their production and flood the market with pigs. There was no real free market price for pigs because the big integrators just used their rail space (slaughtering capacity) to slaughter only their own contract supplier's pigs. Smithfield and others advantaged those with contracts with them to produce all the supply they wanted and that coupled with the independent producers who were used to producing hogs increased the supply relative to demand so much that the price of live hogs went to 5 cents per lb (most food products are very inelastic and have the additional constraint of storability). Smithfield and other integrators used their production and marketing assets to stiff Tyson from entering their markets but this came at the expense of the independent hog producers and their ability to get a real market price. Smithfield contracts, of course, were not part of any public pricing and Smithfield's control of rail space along with an inadequate regulatory agency, GIPSA (Grain Inspection Packers and Stockyards Administration) who didn't see anything wrong with Smithfield paying two different rates to suppliers (the former head of GIPSA disappeared after an investigation by the OIG-Office of Investigator General, Joann Waterfield was caught fixing Congressional reports on GIPSA’s regulatory functions). Of course this strategy worked, and Tyson decided they didn't want to be in the hog business any more. Tyson quickly backed out of the contracts entered into with the farmer from Kansas mentioned above, lost his contract income that he based his investment decisions on. The farmer had to sue Tyson and many years, and financial hardships later, finally got a judgment payment that by the court order could not be disclosed (thus Tyson used our poor legal system to create a barrier to economic contract enforcement) by big agriculture.

On the other side of room was another hog farmer from the Carolinas. He was as happy as could be with his contract. He was a Smithfield producer and he had enough money from his contract to make all kinds of investment in manure handling. He was very happy with his situation. I started to ask him some questions about his operation to find out why it was that his situation was so different than the independent hog producers and others in the industry. Come to find out, there was a moratorium on hog production facilities in the state he was in because some recent hurricanes and flooding caused huge environmental problems. This moratorium limited the supply of farmers available to the integrators. If one big hog farmer went out of business, the slaughtering facilities in his state would lose their suppliers. For this reason, Smithfield was required by economics to make sure that the farmers were making money and not going out of business. Again, it was supply and demand that allowed the Carolina hog farmer to stay in business. Big integrators paid farmers enough to pay for the manure handling and have a good profit.

The attorney general of Oklahoma, Drew Edmonson, has been in a protracted legal battle with big chicken integrators over the pollution problems integrators are dumping in their watershed. Drew is rightly skipping over the farmers who have little control over their environmental positions and the costs of remediation of those externalities. Big integrators put extra phosphorus into the feed because it is cheaper for them to add phosphorus to the feed rations than to use an enzyme that breaks down the strong bond of phosphorus in grains. Thus, more phosphorus is in the manure, which is the big problem with factory farming that leads to the biggest environmental problem that Edmonson is fighting. There is no incentive for poultry integrators to pay for the manure environmental externalities that help fuel their profits. Integrators can shift this problem onto farmers who do not have the bargaining power to require more money to pay for the damages. The answer from our political and legal system--- ---- throw Equip money at it from the taxpayer.

Economics is the basis for the problems of externalities. Until we can make our legal and political system pay for not addressing these problems, Big Ag will continue to throw costs onto taxpayers and blaming it on “support for farmers”. We are not properly framing the questions to get the market based solutions. Until we do, Big Ag will continue to milk farmers and the economy just as they do the animals they use for profit. Academicians need to get real and maybe even go out and speak to some of the farmers who see what is happening instead of framing the questions in terms that do nothing to solve the problems. They need to stop being used as pawns to frame the questions to the benefit of Big Ag. It won’t be easy. Just as Tyson and other companies use the money they steal from their suppliers (farmers) to basically bribe politicians into not acting, against Tyson interests, academics who understand these issues have been quieted by Big Ag money. Putting John Tyson on the board of regents of the University of Arkansas along with GIPSA misusing taxpayer money given to study the issues only hides the facts. It is truly amazing how these big lobbying interests have been able to frame the debates, stop regulatory agencies into doing their jobs, and even infiltrating our legal system to get their way. Hundred thousand dollar bribe by the industry interests in direct contributions to those on the Judicial Committee like John Cornyn (R- Senator from Texas), the same to the former House Ag. Chairman, Rep. Bonita of Texas and others buys this fraud. It is a cheap price to pay for the benefits they garnish. Just go look at John Tyson’s family’s house on St. Johns while his family run company cheats farmers out of the value of their production. All this is to keep the barrier of entry of cheap and controllable supply they enjoy against competito

The leaders of our country are all too willing to sell out the public interest for their own interests of receiving campaign contributions and the benefits of the revolving door. No farmer has the assets to buy the legal services of Austin Sibley (or whatever their name is), which is a law firm composed of many former clerks for the Supreme Court. The Pickett decision showed that a little grease in D.C. can buy off a multibillion dollar jury decision against Tyson for market manipulation the cattlemen won in an Alabama court.

These billionaires are getting even more rich off the corruption or incompetence in our government and blaming tax payer subsidies on family farmers. We are all to blame for letting it happen. We will end up with a country like Mexico if we don’t get a handle on it. Maybe we are already there.

Farmer 1.

4/18/2008 11:32 PM  
Blogger Tom said...

Anthony, I know you have had time to read this post. Dean Chen emailed it to you. What about a comment? Does the cat have your tongue?

5/04/2008 6:42 PM  

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