The role of subsidies in determining the price of produce

First off, it is important to note that pricing of our products is probably third or fourth (or even further!) down the list of why most of our shoppers buy from us. Nevertheless, discussions about pricing tend to bring out the economists who are willing to provide us with a lesson in Economics 101.

Often we hear how the proper price to charge for produce can be calculated by adding up all the costs of production and adding profit. They give us this nice formula:

price = overhead cost + material expenses + labor + profit

In the entire list of expenses, rarely is there any attention given to the role of subsidies in the real-life determination of prices. Yet the effects of subsidies are hidden within the calculated costs of expenses, meaning that the expenses that are actually paid are lower than they would otherwise be without the subsidies. When attempting to determine how sustainable an operation is, it’s important to understand the effect its subsidies have on it, and to what extent the subsidies themselves are sustainable.

There are all kinds of subsidies, some quite apparent, while others are deliberately obfuscated. Take the price of produce at Walmart for example. There the subsidies begin when downward price pressures that are put on large farms to sell at the lowest price possible in return for getting into a very large market. These pressures result in lowering the farm workers’ wage to a point so low that only immigrant labor is willing to work for it. Then the food is transported thousands of miles over taxpayer-supported roads burning fuel at prices that are kept artificially low considering that the source of diesel fuel— crude oil—is in finite supply and is no longer being produced, only mined. When the truckloads of produce arrives at store, the workers in the store are paid wages so low that most of them are receiving SNAP benefits even when they work full time. These subsidies, and likely others, represent the reasons why produce prices at WalMart are so low. And these are the prices that all of our farmers’ market shoppers are enticed with as alternatives to shopping with us at the farmers’ market.

Do we small farmers use subsidies? Yes, many of us do. But unlike the big-dollar subsidies in the industrial economy, our subsidies tend to be smaller, more personal, and more customized to our situation. The purchase of our land or piece of capital equipment may have been financed by a no-interest loan (or even outright gift) from a parent or relative. We may have a friend or relative who spends time working at the farm helping us out at no or minimal cost to the farm. We may have taken part in the recent round of hoop-house  grants that were available for the purpose of stimulating small scale local food production. We may have an off-the-farm job, allowing the farm not to have to pay our entire living expenses, at least for the time being. We may be paying zero rent to landlord of farmers’ market location. All of these are factors which enable us to produce food for a lower price than we otherwise would be able to, if indeed we were even able to produce at all.

In the price-calculation formula noted above, the factor of the farmer’s own labor is one that often has the greatest flexibility. Most farmers cringe when they look at this formula because they realize that if they were required to pay themselves anywhere near “minimum wage,” their prices would go through the roof because there is not enough flexibility in the other factors to allow their prices to remain competitive. In other words, they would come to the same conclusion that the “experts” have been spouting for decades: “Farming at your scale cannot be done.” But this brings to mind the adage that “those who say something cannot be done should not get in the way of those doing it.”

The flexibility in labor cost primarily comes in not how much labor is required, but how much is being charged for it. When a lone farmer or farming couple is working on the farm doing something they love and that provides them with basic sustenance, any thoughts of a dollar-per-hour wage may seem beside the point. What they are looking for is to always have an end-of-year positive balance in the bank so they can keep on going for the coming year. If they have to pay themselves twenty-five cents an hour for their own labor in order for their pricing at market to remain in line with shopper price tolerances, then so be it. Over the years as they learn greater efficiencies and better farming and marketing practices, their farm profit will rise. Whether they invest this into raising their living standards (giving themselves better wages) or buying that new piece of equipment (capitalization of the farm) is up to them.

This freedom to charge whatever you want for your own labor, when seen from the vantage point of the small business owner, is a great source of subsidy that is almost completely under the your own control. This provides an advantage in the marketplace which works to counter the larger institutional subsidies that our big box competition requires. When one considers that most frequently this difference between the value of the labor and what is paid for the labor goes to the corporate employer, but is now going to the owner of the labor, one begins to understand the power of this labor-subsidy in both economic and psychological terms.

Which brings up an interesting point, one that economists usually want to ignore. Where does “me” stop and “my farm” begin? For clarity of economic calculations, the demarcation line needs to be drawn precisely; you need to treat yourself as just another farm employee. But when living your life on your farm, the line tends to be pretty blurry.  So if you decide to pay yourself $8 an hour and find at the end of the year this results in a pot of money, you may decide to go ahead and buy that new bush hog you’ve been wishing for. That means you’ve actually after-the-fact put that money from the “owners’ wages” category into the “farm capitalization” category for this year’s accounting. Such moveable category lines are quite typical of a farm but seem to gag economists.

A culture of economics that has for the past century become increasingly divorced from agricultural life will have difficulty understanding why the industrial model of rewarding work by the hours put in is just as irrelevant to the small farmer (and to many small business people as well) as it is to the activities of parenting or artistry. An economic calculus that can only see and measure money cannot see or measure the intangibles that make a farming life (or raising children, or producing art, etc.) desirable to so many. This is not the fault of the economics. It is a fault of applying a monetary economics to people’s real lives and expecting the results to be relevant and important. The results may be true as far as they go, but they are far from the complete story.

About Tom Roberts

When I started attending the Brewer Farmers’ Market back in August of 1983, my sole concern was being able to sell the produce my farm was growing at a good price. After attending market for a year or two, I began to realize that how the market was organized had a great impact on my sales. And how the market was organized also influenced how it made decisions about dues, new members, what could be sold at market, and how it promoted itself—and this, too, had an impact on my sales. So I got involved in the market’s steering committee and began to understand how various market members thought the market should operate. Some wanted a market czar, some wanted everyone to be allowed to do their own thing. But everyone seemed to agree that if the market as a whole did well, then so did they.