Obesity, farm subsidies, trade and market power: Salads v. Big Macs

Let me start by posting this graphic from the consumerist.  The information is based on US data, but a Canadian figure would look similar.

Most see this figure and believe that government farm subsidies play a large role in the obesity problem (that’s the conclusion at the consumerist).  They may have a point, a good point.  Meat and dairy products receive substantial government support relative to fruits and vegetables.  Contrasting the subsidy figure against the recommended nutrition requirements makes the obesity argument particularly strong.

Here’s an alternative perspective.  And, just so I’m clear, this is pure speculation. 

Agricultural trade.  Trade is a big deal to Canadian agriculture.  In 2008, Canada exported $38.8 billion in agricultural and food products and imported $24.9 billion.  Agricultural trade is a big deal for many other countries as well.  Because trade is so important to the agricultural sector, it is safe to say that prices are determined on a world market.  Canada is a small player in most commodity markets, wheat and canola being possible exceptions.  Any supply response, due to the removal of Canadian subsidies, would not have a noticeable influence on internationally-determined commodities prices.  This means that Canadian consumers would not see lower food prices if farm subsidies were eliminated.  More importantly, this implies any link between the obesity rate and Canadian farm subsidies is tenuous at best. 

Market power.  In the last two decades, Canada’s food processing and retailing sectors have become increasingly concentrated.  A concentration ratio (CR(n)) is a statistic that measures the share of total output produced by the “n” largest firms in the market.  So the CR(4) is the total market share controlled by the four largest companies.  These are the approximate CR(4) ratios for several food sectors (source):

Dairy – 0.75

Grain and oil seed milling – 0.60

Meat – 0.50

These are quite high.  In fact, they are high enough to indicate that the food processing industry may have oligopoly power.  As a consequence, I believe that the kinked demand curve model is a relevant description of the Canadian food processing and retailing sector.  This model predicts that even if we shocked commodity prices by removing farm-gate subsidies, equilibrium food prices and quantities would not change much.  Of course, this means that subsidy removal will not reduce the obesity rate. 

Based on trade and market power arguments, I conclude that eliminating subsidies to farmers is not an effective policy for reducing the obesity rate nor would it make food consumers significantly better off.  The impact on public policy and taxpayers however . . . that’s a question for another post.

As always, your comments are welcome.