Weekend Special: The Hidden Costs of CAFOs

by Bill Powers

An unfortunately old report (http://www.ucsusa.org/sites/default/files/legacy/assets/documents/food_and_agriculture/cafos-uncovered.pdf, 2008) by the Union of Concerned Scientists (UCS) asks why is it that CAFO numbers are increasing dramatically. They argue studies by the USDA indicate that CAFOs are no more efficient than medium sized operations. Instead they suggest that the benefit CAFOs accrue are due to farm policy, among these including processing contracts. Most CAFOs rely almost exclusively upon purchased feed. Alternative livestock operations will rely much more upon their own pasture and crop production. As such, the significant Federal subsidy for grain production indirectly favors CAFO operations.

UCS (2008) estimates are that there is a $3.86 billion/year grain subsidy to the livestock industry by crop subsidies. Other indirect costs that they consider are reductions in property values ($26 billion), and manure remediation costs $4.1 billion totals as of 2008. These external costs are paid for by the US taxpayer.

Optimum efficiency (cost/unit of production) is reached well below CAFO (2008 measures) size. They argue that studies have shown that economies of scale is not a signifcant factor favoring larger livestock operations. Fro example, one study showed that the optimal size for hogs was about 120 sows, producing about 2400 hogs/year. CAFOs do benefit from the more efficient use of fodder for weight gain since it is not expended in moving around pastures or adjusting to changes in climate. These gains, however, have to be offset by considerable increases in other costs. After all, the much higher cost of creating and maintaining CAFO environmentally controlled buildings, in addition to the added cost associated with animal health and manure management have to be offset somehow. The UCS argues that this is primarily offset by low grain costs. They note:

Low-cost inputs spread the high fixed costs of confinement infrastructure
(such as the buildings that contain the animals) over many units of production. CAFOs can compensate for low profit margins per animal by producing large numbers of animals. By contrast, small and diversified producers often have relatively lower fixed costs and higher variable costs, and may attempt to lower their costs by reducing production when prices are low. In this way, CAFOs may expand at the expense of smaller operations.

In effect, then, it is the US taxpayer who is indirectly subsidizing CAFOs. The UCS argue that there are alternative livestock operations that may be more efficient than either CAFOs or medium sized farms. Because of the significant external costs to CAFOs, it would seem that seeking such alternatives are well worth pursuing by publicly funded institutions.

The UCS consider, too, the affect of anti-competitive processing practices, a violation of the Packers and Stockyard Act (PSA). Processing facilities require governmental inspections. It may be that this requirement favors larger processing facilities. With the concentration of processing in the hands of a few, and contract relationships between larger producers and processing facilities favored, access of medium sized livestock operations to consumers is hampered, even when their production costs are competitive. This situation favors both the concentration of processing facilities and livestock operations.

What needs to be asked is why processing operations favor contract relationships with larger livestock operations. We could imagine that there might be vertical integration gains if the processing facilities owned their own livestock operations. While this is the case for some, it is not generally true. One possible problem is that while the cost/unit of production is the same (or even better) for smaller operations, they may require a higher marginal profit to remain in business than a CAFO. A small farmer might be able to competitively produce a profit of $10,000, but could not remain in business long because of external costs, viz., himself and family. A larger operation, employing more people, can simply lay off a whole person. I’m not being overly clear here, but it does seem that large facilities may be able to survive at a lower margin of profit than a smaller unit.

In any case, it appears that for the most part it is only the largest producers than sell their produce under contract.

Since feed costs represent something like 50% of the cost for CAFOs, they are sensitive to feed costs. To determine the subsidy to CAFOs through crop support programs, one would have to be able to determine what the cost of grains would have been without such supports. Starmer and Wise (http://www.ase.tufts.edu/gdae/Pubs/wp/07-04LivingHighOnHog.pdf, 2007) examine the cost of production of beans and corn and the market price of both. Because of Federal supports make up the difference to keep farmers solvent, the Federal subsidy enables CAFOs to purchase grain at a cost below the cost of production, an advantage that a livestock producer who grows his own grain and pastures his livestock cannot take advantage of. Starmer and Wise estimate that between 1998 and 2005 this translated into about a 15% savings in costs for hog CAFOs. Smaller sized livestock operations that produced their own grains after 1990 can also take advantage of these subsidies even if they do not sell the grain. However, studies have shown that the subsidies do not fully compensate farmers for the difference between production costs and market prices. As a result, there is a “subsidy gap,” one that benefits the CAFO and disadvantages the smaller livestock producer.

There are a number of issues that are worth investigating with regard to commodity prices and CAFOs. It would be interesting to find out what has happened to this “subsidy gap” since 2007. Farmers who rely upon these supports might simply argue for higher supports. By reducing this gap, it would help the smaller livestock producer. The recent bump in corn prices due to increased ethanol production dramatically increased corn prices. It would be worthwhile to consider at what commodity price the operation of CAFO style production would be less profitable than a livestock operation that grows its own feed.

Well enough said and researched for now.

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Comments

  1. Good points. The full costs to taxpayers need to be integrated into economic analyses. There are also environmental and community costs from the shift to industrial agriculture and away from small farms. For example, Stofferahn 2006 (http://www.und.edu/org/ndrural/Lobao%20&%20Stofferahn.pdf) found that there are negative effects on communities’ economy and social structure including increased requirements for social welfare programs, increased income inequality, decreased community participation and local shopping, and decreased impact of local citizens on community and government decisions along with greater influence of business owners who live outside the area; plus adverse effects on the environment and health.

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