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The changing landscape of agricultural support

Discussions on reducing agricultural support in the Uruguay Round and, especially, the WTO Doha Round have been framed increasingly in North-South terms. Developing countries have sought reductions in OECD country agricultural support while developed countries have sought increased access to their manufacturing and services markets in exchange.

However, the landscape of agricultural support is changing. While levels of agricultural support and protection have been falling in OECD countries (helped by high world market prices), agricultural support in a number of (but not all) emerging economies has been increasing (despite the increase in world market prices).

These changes in the global distribution of agricultural support have two main consequences. First, the pattern of global agricultural trade is increasingly influenced by agricultural policy interventions in non-OECD countries, even if OECD countries still have a predominant weight in global agricultural production and trade.

For example, world cotton prices which are a concern for the West African C-4 countries in the WTO are now more distorted by subsidies in China and Turkey than by subsidies in the US and the EU.

Second, rising agricultural support in emerging economies may lead to these countries breaching their WTO commitments. While the purpose of WTO disciplines is to limit the extent to which countries can make use of trade-distorting support, the trend will raise difficult questions about the reasonableness and fairness of these commitments. These concerns have yet to surface in multilateral discussions, but could lead to further alienation of some of the countries from the WTO system.

Producer Support Estimates

The OECD started to monitor trends in agricultural support in a number of emerging economies some years ago (in addition, some more advanced developing countries, such as Mexico, Turkey, Chile and South Korea, are already OECD members).

Two indicators are particularly relevant. The Producer Support Estimate measures the contribution of government policies to farm revenues, whether through market price support or budgetary transfers. It expresses the monetary value of policy transfers from consumers and taxpayers to producers as a percentage of gross farm receipts.

The average %PSE was 20% in 2008-10 for the OECD area, indicating that about a fifth of gross farm receipts was due to support in these countries. The development of support to agriculture in the longer term indicates a continuous decline of the %PSE from 37% in 1986-88 to 30% in 1995-97 and to 20% in 2008-10 (Figure 1).

Percentage PSEs in emerging economies Source: OECD Agricultural Policies Monitoring and Evaluation 2011

However, during the period from 1995-97 to 2008-10 farm support has increased in all emerging economies except in South Africa and (over a longer period) Mexico. Indeed, in Turkey agricultural support now exceeds the EU level as it does in South Korea (not shown) with a %PSE of 47% in 2008-10, while support in Russia has reached the EU level.

On the other hand, agricultural support levels in Brazil (5% in 2008-10) and South Africa (3% in 2008-10) (as well as Chile) remain extremely modest. China’s level of support, at 11% in 2008-10, is comparable to the United States. OECD indicators of agricultural support are not calculated for India due to a lack of participation in the agricultural policy review process by the government of India.

Nominal Protection Coefficients

While the level of support in the emerging economies is lower than the OECD average, most of the support takes the form of market price support and input subsidies, which are generally seen as the most distorting forms of support. The Producer Nominal Protection Coefficient (NPC) focuses more specifically on price distortions: it is the ratio between the producer price (including payments per unit of output) and the border price and shows the extent to which prices are higher due to border measures.

The producer NPC for the OECD area was 1.10 in 2010, indicating that OECD farmers received prices that were on average 10% above international levels (Figure 2).

Percentage NPCs in emerging economies Source: OECD Agricultural Policies Monitoring and Evaluation 2011

In the emerging economies the average NPC in 2008-10 was close to 1.0, signalling a relatively close alignment to world market prices for the commodity basket as a whole. This was particularly the case for Brazil, Ukraine and South Africa, although in some countries (Russia, Ukraine and to some extent China) there are big variations across commodities such that some commodity producers are taxed while others are supported.

In China and Russia the increased NPC indicates that prices received by domestic producers are on average respectively 6% and 16% above world market prices (the EU figure is 7%). Again, what is striking is that, with the exceptions of South Africa and Mexico (over the longer period), NPCs have been rising in a number of important developing countries even though so have world prices.

US commodity groups point the finger

Representatives from the U.S. wheat, feed grains, rice and pork sectors have been highlighting the results of a study, Domestic Support & WTO Obligations in Key Developing Countries which purports to show that this rising government support to grains and other commodities in four emerging economies Brazil, India, Thailand and Turkey, means that they now exceed their WTO domestic support commitments.

The domestic support notifications of these countries to the WTO do not support this conclusion, but the report’s authors argue that this is because (a) the notifications are much delayed and the support increases have occurred relatively recently and (b) that the countries use an incorrect methodology to measure their support.

While these criticisms would no doubt be rejected by the countries concerned, there are also good reasons for believing that, even if these countries have not yet breached their ceilings, they could do so in the very near future.

Calculating WTO Amber Box support

The first reason is that these countries have either a zero or very low limit for their allowed trade-distorting support (known as Amber Box support in popular jargon). These ceilings were based on the amount of trade-distorting support in the Uruguay Round base period, so the bigger the sinner then, the more a country can continue to sin. Most developing countries, because they had little trade-distorting support to begin with, now find they have limited leeway to increase their Amber Box support.

WTO rules do permit developing countries even with a zero Amber Box ceiling (such as India and Turkey) to grant trade-distorting support up to de minimis limits (10% of the value of production for product-specific support, and 10% of the total value of agricultural production for non-product-specific support). Developing countries can also exempt generally available investment subsidies (e.g. subsidised credit) and input subsidies that are generally available to low-income or resource-poor producers from counting towards their Amber Box ceiling.

The difficulty is that most Amber Box support in developing countries takes the form of market price support. WTO rules require this to be calculated in a very specific way. Unlike the OECD PSE measure which compares domestic market prices to current world market prices to calculate the level of support, the WTO rules require countries to use a fixed external reference price based on (the very low) world market prices in 1986-88.

This has crucial implications for the calculation of the market price support component of a country’s Amber Box support. World market prices are now much higher. Let us suppose that a developing country offers a minimum guaranteed price to its farmers for a particular crop which is lower than the current world market price but higher than the 1986-88 reference price.

Because of the higher world market prices, the government has no need to intervene to support the domestic market price and the minimum guaranteed price does not kick in. There are no government purchases at the minimum price, and most developing countries have reported zero Amber Box support in their WTO notifications in this situation.

However, WTO rules (confirmed in the US-Korea Beef dispute) require that the level of Amber Box support should be measured as the difference between the support price and the 1986-88 reference price, multiplied by the quantity eligible for support, not the quantity actually purchased at the minimum price. In most cases, the quantity eligible for support is total national production.

When the calculation is done in this way (as in the US report) the calculated amounts of Amber Box support can become very large, even if no government purchases have taken place at the support price.

Can WTO rules be justified?

This analysis underlines two potentially explosive features of the WTO Amber Box disciplines. First, developing countries that use market price support are particularly disadvantaged by the use of the fixed 1986-88 external reference price as compared to countries that use budget payments to provide farmers with an equivalent level of support.

And second, in spite of the more generous exemptions that developing countries can use in calculating their Amber Box support, the underlying distribution of ‘rights’ to use trade-distorting support is inherently unfair and without a legitimate justification.

That WTO rules allow a country a greater right to use trade-distorting support if it was a bigger sinner in the past understandably contributes to the sense of grievance among developing countries that the rules are skewed against them.

This post is written by Alan Matthews

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3 Replies to “The changing landscape of agricultural support”

  1. Hello

    yet again we are treated to a partial treatment of agri economic issues. This applies right across the board of the permitted posts on this site (with few exceptions – the condition of laying hens being the exception).

    Not one post for example directly considers the variables which exist in different states. An excellent example of one of these variables in Britain is Animal Welfare and the overheads which are incurred by farmers in this country as a result. Animal Welfare is absolutely important and must be costed into any discussion where farming in this country is considered.

    Secondly, continuing on the theme of Animal Welfare recent EU treaties which are intended to allegegdly cut green house emissions, have led directly to Animal Welfare concerns and anaerobic digesters leaking 50% of stored methane into the atmosphere.

    It is environmental treaties, schemes, public money involved and bizarre application that needs further scutiny by agri economists and other campaigners.

    Meanwhile the picture is one of confusion with British farmers sharing an increasingly unequal playing field with its European neighbours and other large agri economies whose approach to Animal Welfare is not even to place it on their agenda.

    Meanwhile in Britain Hill farmers are been pushed out by so called environmentalists concern for the plants, insects and birds. Absence of food producing grazers has a two fold effect. One is that woody plants take over and stop the growth of other plants completely ridiculing environmental theorists and two the people who know how to manage hillside environments are pushed into poverty.

    This is a difficult environment to farm but without the expertise of the Hill farmer and food producing livestock on these areas, food prices will rise beyond the means of city dwellers, potentially triggering more social unrest.

    Perhaps the real problem is that environmentalists live and work primarily in offices usually in cities. They have no responsibilities for food production. That presumably is the job of farmers, who should be assisted by agri economists. It is high time that food production was put firmly back at the top of the agenda by them.

    We have already seen with the effect of anaerobic digesters the failure of renewables to deliver on a number of fronts. Far more scrutiny is required on all aspects of the environmental argument and how it has failed the environment and particularly the indigenous Hill people who depend on it.

    It really is not satisfactory to argue that these people should simply be pushed into the towns. This argument of all arguments, which now comes in pseudo environmental wrapping, comes from a past era best consigned to the dustbin of Capitalist history.

  2. @D

    Many thanks for this comment. The point you make that animal welfare and environmental regulations are adding to farmers’ costs and could lead to the abandonment of food production in more marginal farming areas in the EU is an important one and certainly worthy of discussion. On the other hand, farming in general receives very significant EU and national support, and one of the questions discussed frequently by contributors to this blog is whether this support is sufficiently well targeted to address some of the problems you raise.

    The topics selected for comment by the blog contributors reflect their own interests and I understand that you would like to see more emphasis on the costs of regulation. But while this may be the most important issue for you, the CAP reform debate raises many other issues which are also important to cover and discuss. Even if you feel the emphasis is not quite right, I hope you will continue reading in 2012!

  3. Firstly it is food and food stability that rightly deserves support from any government.

    Secondly where did my post go concerning the democratic deficit of the executive, which also rightly points to the power of lobbying groups who support the likes of Monsanto and Leavesley International? Perhaps this is the real problem of certain agri econmomists that they are not going to bite the hand that feeds them. This then leads on to another deficit of objective analysis.

    Please explain where that detailed post about Monsanto and Leavsley International went. That really is the case of who is trying to manipulate independent food production.

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