Price To Subsidy Link Cited With Supply Issues

Governmental support of agriculture rises when markets fall, and appears to diminish when prices rise. Given the intractability of developed country governments in their determination to support agriculture when reason dictates that such support should have long since been abandoned, this phenomenon is hardly surprising.

ptslcThe latest Organisation for Economic Cooperation and Development analysis of levels of support to agriculture [*] confirms this unsurprising relationship (see also article in European Policy News section this issue). With a 35% plus fall in world agricultural commodity prices between 1997 and 1999, the proportion of farm incomes in OECD countries coming from either taxpayer or consumer support (the ‘Producer Subsidy Estimate’ or PSE) has returned to a level as high as that of the mid-1980s.

“Overall, support to producers, as measured by the percentage PSE, was at about the same level in the 1997-99 period as in 1986-88,” the OECD concludes most damningly.

The cost of agriculture policies to consumers and taxpayers remains undiminished. The total subsidy to agriculture in the OECD member countries including consumer transfers amounted to US$361 billion ([epsilon]339 billion) in 1999, with growth since 1996 at a similar rate as GDP in the OECD area, so that the percentage share of total support in GDP (the %TSE) has been stable at 1.4%.

Farm support back at mid-1908s levels

“Support to producers has mounted steadily over the last three years: rising from 31% of total gross farm receipts in 1997 to 40% in 1999 — and is now, in percentage terms, back to where it was in the mid-1980s,” the OECD reports. “Falling world prices for the main agricultural commodities, which were only partially matched by reductions in domestic prices, explain most of the increase, although direct payments also increased somewhat. On average across the OECD, total farm gross receipts were 66% higher than they would have been had all producers sold their produce at world market prices and received no budgetary support.”

The form of agriculture policies in the European Union, the United States and most other developed countries may have changed as a result of the ‘reforms’ of the 1990s, but the effect has not. Farm incomes of the most advantaged agricultural households (the largest farms on the best land) are consistently maintained at levels above national average by government support and intervention in markets.

Consumers, or consumers qua taxpayers, this latest reports confirms, continue to carry as large a burden for supporting agriculture in the late 1990s as they did in the 1980s. The commodity slump of the last three years has clearly revealed that the generous safety-net to agricultural incomes is still very much in existence: as the returns to the market decline so the proportion of incomes resulting from market manipulation and subsidies from the taxpayer rises.

“The upward movement in support to agriculture, first evident in 1998, continued in 1999, with support reaching the high levels of a decade earlier,” says the report. But the situation has in fact been made worse by the inability of governments to resist the pressures from the agricultural interest for increased handouts from the public purse.

Policies “inconsistent with reform”

“Low world commodity prices, and the resulting pressure they put on farm incomes, led many OECD countries to introduce new measures or to provide additional support to farmers. The ways in which these measures were implemented were, in many cases, inconsistent with the longer-term principles of agricultural policy reform.”

As commodity prices continued to fall, the level of support to agriculture increased again in 1999: total support to agriculture in the OECD countries rose by almost 3% compared with the previous year, to an estimated US$361 billion in 1999 – equivalent to 1.4% of GDP on average over the OECD area. Of this total, 80% went to agricultural producers individually.

Most of the burden of support continues to be carried by consumers: “Despite consumer subsidies being provided in a few countries, OECD consumers of primary farm commodities were implicitly taxed, through the surcharge created by market price support policies. Two-thirds of total support to agriculture was financed by consumers, with taxpayers picking up the remainder of the bill.”

Traditional subsidies still dominate

tasmAccording to the OECD’s analysis the traditional agricultural support mechanisms are still the key forms of protection. “Market price support and output-related payments still dominated: around two-thirds of support to producers was provided via market price support in 1999; budgetary payments based on output provided another 6%. Together, these two forms of support, which are among the most production-and trade-distorting, accounted for almost three-quarters of producer support. Payments triggered by a farm income criterion increased in absolute terms, but still accounted for a small fraction of total support to producers.”

Despite the 1994 Uruguay Round Agreement, trade barriers have had to be modified to protect these still highly expensive and market distorting domestic policies. “Trade barriers are falling, but agricultural markets are still distorted,” says the OECD. “The URA, with its disciplines on market access, export subsidies and domestic support, provided a framework for opening up trade in agricultural products. Implementation of these commitments in 1999 — as in every year since the URAA went into effect in 1995 — has helped further integrate agriculture into the multilateral trading system. But many trade distortions remain. As well, some countries raised applied tariffs for some commodities in 1999, and several made greater use of export subsidies, export credits or other export-enhancing policies to encourage the disposal of domestic supplies on foreign markets, thereby further distorting trade.”

There has been little or no reduction in the distortionary impact of agriculture policies. “Production-linked support is not cost-effective or equitable as a means of maintaining or enhancing farm household income,” the Organisation points out. “In particular, the transfer efficiency of market price support with respect to income is relatively low, much of it being used to purchase inputs, or capitalised into asset values (thus raising production costs over time). Similar conclusions could be drawn for support that has a significant impact on production. In addition, providing support, the bulk of which goes to the largest farms, in order to limit the incidence of low incomes in the sector, is much more expensive than providing income supplements only to those households that do not attain a certain minimum income level.”

The OECD’s analysis show that in some cases income will be transferred from lower-income consumers and taxpayers to higher-income farm households. It argues that in order to reduce income disparities in the agricultural sector itself, measures targeting farms with low incomes would be more cost-effective. “Targeted social policies would be much more appropriate as a way of limiting the incidence of low incomes among farm households.”

EU PSE shoots up

As far as the European Union is concerned, support to producers, as measured by the % PSE, was at about the same level in 1997-99 as in 1986-88. The % PSE had fallen sharply in 1996 and 1997 not because of the effects of the 1992 CAP reforms — as claimed by the European Commission — but because of the reduction in actual market price support due to high world prices.

In 1999, according to provisional estimates, the EU’s total percentage PSE increased by 4 percentage points to 49%. This is some nine percentage points higher than the OECD average.

The EU’s support system is particularly demonstrative of the principle that in highly protectionist policies the proportion of consumer and taxpayer transfers in total income rises as world prices fall. In 1999 there was a sharp fall in both domestic producer prices and world prices. Market price support consequently continued to account for about 63 % of total support. Gross farm receipts (including support) were 95% greater than what they would have been without any support, the OECD calculates.

Some relief for consumers

At least the move towards area and headage payments, and away from market price support as a result of the 1992 CAP reform, has led to a significant decline over time in the effective tax on consumers, as measured by the consumer subsidy estimate (CSE). This has however been more than replaced by taxpayer transfers.

Nonetheless the consumer burden of the CAP remains high. According to the OECD’s figures consumers paid on average 57 % more than they would have in the absence of market price support to producers.

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