28 March 2013

Self-destructive agricultural subsidies

I just bought some olive oil at my local market.

This photo is not very clear, but you should be able to see that "traditional" olive oil (left) is more expensive than the "extra virgin" kind that we know to be the most expensive to produce (it comes from the first press of the olives).

Is this an illusion or is extra virgin actually cheaper to produce? No and yes.

No, because it's actually more expensive to produce extra virgin olive oil. Yes, because the EU subsidizes extra virgin olive oil, so producers have an incentive to produce more of it. Excess supply means that it price is lower than "traditional" (cheaper) olive oil.*

How bad are those subsidies? I asked my students [PDF] to find the top exports from the Netherlands and Spain (by value), calculate how much "embedded" water was exported to the main buyers of those products, find the water stress in each trading partner, and then calculate the value per cubic meter of water exported.**

The students got lots of answers on this question (the lack of authoritative data is disturbing when the EU spends 45 percent of its budget on CAP subsidies to farmers), but I got the following numbers [XLSX spreadsheet]:
Dutch (water stress 0.10) tomato exports to Germany (0.19): $41/ton of water
Spanish (0.30) olive oil exports to Italy (0.25): $0.20/ton of water
These numbers highlight Spain's disastrous agricultural practices, first in the low value of Spanish water exports compared to Dutch water exports. Second, in the fact that the Netherlands is exporting water to a higher water stress region (lowering Germany's need to use water), while Spain is exacerbating its stress by sending water to a place that does not need it as much.

Bottom Line: EU subsidies encourage Spanish farmers to export scarce water in a crop that's not even profitable to a country that has more water and whose farmers are undercut by subsidized competition. Subsidies, in other words, waste money and water and distort behavior.*** Reform the CAP!

* Subsidies increase production of ALL olives, which makes it easier to produce extra virgin olive oil, which traditionally attracts higher profits. The flood of olive oil has, however, overwhelmed static demand, so the price falls faster for extra virgin than traditional, which can be mixed into other products.

** Note that this is gross value per cubic meter of embedded water, which is NOT the same as value added per cubic meter. That calculation would consider the relative contributions of land, labor, capital, etc. to value, but it's hard to do right. This number gives you an upper limit on value and an interesting point of comparison for the use/value of water.

*** How bad goes it get? How about a black market in which Chinese ship (subsidized) European milk powder home to parents who do not trust local milk? In the US, subsidies take money from the poor to give to the rich.


  1. Write on, David! Appreciate your work. U.N report circulating today showing how subsidies fatten the rich at the expense of the poor underscores same point you've made at times before, too. Hope the blog isn't ending with your move this summer.

  2. @Dan -- Yes, I saw that ($1.4 T on energy subsidies?), and I'll still be blogging for awhile :)

  3. I think that you have some contradiction, about virtual water use, are you in favour (last post) or against (previous post).

    The exercise with olive oil is an over-over simplification and miss the point that most olive trees are rain fed and grow where there is no economic viable alternative, therefore is green water with zero opportunity cost.We may discuss it if you are interested, I don't believe too much in virtual water computations.

  4. Especially this type of rainfed crops need water and ... a suitable climate: at least as important. Drawing economic and political conclusions on virtual water principle are not very useful for this reason. Check ´growing degree days´ on wikipedia.

  5. We are contributing to this discussion by trying to convince our water costumers to think about about virtual water content in those foreign goods from arid regions (e.g Spain, Cyprus, Africa etc), while they are slavisly saving water coming from the tap.
    You won't imangine what an exhausting job, however sometimes....
    Reamrks from the world champion in real water saving: Germany

  6. I'd add that government subsidies in water scarce countries are payed by tax payers-who do not benefit from cash crop rent

  7. @Anon -- rain fed STILL takes water from ecosystems

    @Joan -- My point was not about virtual water as much as subsidized water use...


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