Economics: Price program a page from the past
The guaranteed price program President López Obrador launched last week for basic grains and fresh milk is one of this administration’s four signature agricultural programs along with others on fertilizer subsidies, non collateralized loans for livestock farmers and one on “production for wellbeing” that seeks to provide producers with technical assistance.
Initially, the government’s purchases of these products at minimum prices will be confined to maize and beans (rice and common wheat will be added later) grown on relatively small extensions of cropland, and will be restricted based on geographic considerations. Officials have yet to make known the exact rules being applied to the milk pilot program that was launched January 1, but we can assume they will include similar filters.
While this type of policy persists in some parts of the world, the global trend is toward replacing it with agricultural producer support mechanisms (subsidies) that include cash payments, input subsidies and support for job training and technology transfers. Historically, agricultural price support programs tend to generate market distortions and adverse effects on the investment decisions of producers. Consumers and taxpayers generally pick up most of the cost for such programs.
The principal implications of the new guaranteed price scheme could mean major budgetary effects, market distortions, and operational difficulties. We estimate these price programs will cost the government more than 12 billion pesos this year (almost 30% more than was budgeted), net any regional restrictions on such purchases, and excluding the substantial logistical investments and operating costs they entail or the subsidies that would have to be paid if the products are sold below the government’s purchase price.
Market distortions may include the “transfer” of crops from larger scale producers to small ones, product triangulation across regions and between producers, excess supply, and “unfair” competition against the most efficient of producers. And its operational complexity looks daunting, while the distribution of such support is highly susceptible to multiple acts of corruption. Ultimately, this approach makes producers more dependent on the federal budget, and diminishes both economies of scale and productivity.
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