OECD reports EU farm transfers at lowest level ever

The OECD produced the 2012 edition of its Agricultural Policy Monitoring and Evaluation report during the week. This is the publication that keeps tabs on the transfers to and from farmers and consumers as a result of government policy interventions. It also usually contains a chapter on a special theme, which this year is devoted to fostering innovation and productivity growth in agriculture.

General findings

The results are summarised in a series of indicators, of which the most well-known is the Producer Support Estimate (PSE) usually expressed in percentage terms. It measures the percentage of farm receipts in a country that is due to public policies.

Another useful indicator is the Nominal Protection Coefficient (NPC) which measures the ratio between the average price received by producers (at farm gate), including payments per tonne of current output, and the border price (measured at farm gate).

The report finds that in 2011 support to producers across the OECD area amounted to €182 billion as measured by the Producer Support Estimate (PSE). This is equivalent to 19% of farm gross receipts in OECD countries, down slightly from 20% in 2010. This is the lowest level observed since OECD began measuring support in the mid-1980s, when the PSE as a percentage of gross farm receipts was almost twice as high (37%).

The recent decline in producer support was in many countries driven by developments on international markets, rather than by explicit policy changes. With higher world prices, policies to support domestic prices generated smaller transfers. In some countries budgetary support increased, primarily as a result of payments to help farmers cope with exceptional circumstances, such as droughts or floods.

Although support slightly declined or remained unchanged in relation to gross farm receipts, its absolute monetary value expressed in national currencies increased in the majority of OECD countries in 2011. Here the EU was an exception, in that support fell not only in relative, but also in monetary terms (by 4%).

EU reform of market regimes for key agricultural commodities has moved domestic prices close to the border price levels, with the price differential (NPC) between internal EU prices and world prices falling from 33% in 1995-97 to 5% in 2009-11. In fact, in 2011 the NPC fell to just 3%, suggesting that for most commodities EU farmers are operating at world market prices.

Disaggregating the NPC

The implications of these EU figures can be further explored. The NPC is derived from the difference between domestic and world market prices at the farmgate level, i.e. adjusting the border price of the imported food for marketing margins as well as quality and quantity differences.

The following table shows how this market price support (including coupled payments) in the EU is distributed across the various commodities in the past three years. In value terms, most market price support is concentrated in poultrymeat, beef and veal, and potatoes.

The impact of the recent increase in world market prices is shown in the rapid decline in the NPC for some commodities. The NPC for poultrymeat in 2011 was 1.27, indicating that EU poultry producers on average received prices 27% above world market levels. This was a reduction from an NPC of 1.59 in 2009. Thus, import protection for poultrymeat was still effective last year.

The NPC reductions for other commodities were also dramatic. For sheepmeat, the NPC fell from 1.29 to 1.00 between 2009 and 2011 indicating that EU prices were the same as world market prices in that year. Between 2009 and 2011 the NPC for beef fell from 1.40 to 1.06.

In 2009, EU sugar prices were 19% above world market prices but this differential had disappeared in 2011 (although I find it puzzling as to how the NPC for this commodity can be exactly 1.00 in both of the last two years given the wild gyrations in both world and EU sugar prices during this period and the regulatory regime for sugar which greatly distorts price transmission between the world and EU markets). Only for potatoes did the NPC remain stable over the three years at 1.11.

Interpeting low NPCs

These low NPCs, suggesting very limited market price support from border protection (and some coupled payments), coexist uneasily with the much higher values for EU tariffs on imported foodstuffs. In earlier posts (here and here) I discussed the difficulties of measuring levels of agricultural protection.

Nonetheless, the WTO estimated simple average of applied tariffs on agricultural commodities of over 15% in 2011 suggests that this average is high. In addition, the EU can make use of Special Safeguard Duties although the most recent data from its last report to the WTO in February 2012 only goes up to 2009/10 when the price-based safeguard system was operationalized for poultrymeat, eggs and sugar.

How to square the existence of high import tariffs with the OECD estimate that, on average, EU farm prices were less than 3% above world market levels in 2011? (The caveat ‘less than’ comes from the fact that the NPC figure also includes coupled direct payments).

In some cases (e.g. cereals) applied tariffs were set to zero in 2011. But this would help to explain why applied tariffs were less than bound tariffs, not why applied tariffs were apparently ineffective in raising EU producer prices.

A more plausible answer is what economists call ‘water in the tariff’. This phrase was originally used to describe a situation where a tariff is so high that it makes international trade completely impossible. For example, suppose that the applied tariff is set at 50% but that even a rate of 30% would be sufficient to make importing unattractive. In this case, the difference (50% – 30% = 20%) is redundant and has no economic effect. One could ‘squeeze the water out of the tariff’ by reducing it from 50% to 30% without affecting trade flows or domestic producer prices. ‘Water in the tariff’ thus refers to redundancy in the tariff where raising the tariff further has no economic effect.

There is evidence of redundancy in existing EU applied tariffs. The EU is an exporter of dairy products, for example. Thus, the price paid to farmers for their milk is determined at the margin by the export price for dairy products. In the absence of export subsidies, this is the world market price. This suggests that lowering dairy tariffs to zero would have no effect on the milk price that EU farmers receive. Some indirect support for this is found in the fact that the fill rate for EU tariff rate quotas for dairy products (mainly opened for New Zealand exports) in 2008/09 was less than 5% for most of them except cheddar cheese, suggesting there was no incentive to export to the EU market.

The case of beef is more interesting, because here the EU is a net importer of beef and one would have thought that an import tariff would be binding. The beef NPC is based on a direct comparison of EU producer prices (for two categories, meat from male animals and meat from cows) with similar prices for Brazilian production, weighted by the respective shares of the different categories in total slaughterings.

If the evidence that EU beef prices are only 6% higher than Brazilian prices at the EU border is correct, it would suggest that much of the foreboding about the impact of a Mercosur free trade agreement on EU beef producers is not really justified.

However, it is hard to understand why EU producer prices are not bid up to the Brazilian border price plus the high EU specific tariff on beef which probably works out at more than a 20% ad valorem equivalent.

One possible explanation might be that processing margins (whether from genuinely higher costs or rent-seeking due to market power by processors) are higher in the EU than in Brazil. Competition takes place in the market for processed beef but the prices being compared are producer prices. Price differentials for beef cuts, and particularly the high quality cuts, might be much bigger. But I don’t have the figures to hand to show whether this is the case or not.

These questions and many more are stimulated by the publication of this OECD report. The full database of the background figures is available online for those who want to check it out for themselves.

This post was written by Alan Matthews.

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