TWN Info Service on Finance and Development (Oct11/02)
12 October 2011
Third World Network

High commodity prices drive OECD farm support to new lows
Published in SUNS #7224 dated 23 September 2011

Geneva, 22 Sep (Kanaga Raja) -- Members of the Organization for Economic Cooperation and Development (OECD) gave $227 billion of support to agricultural producers in 2010, the OECD said on Wednesday.

This fall in support, to a record low of 18% of total farm receipts, was on account of high commodity prices, the OECD added in its Agricultural Policy Monitoring and Evaluation 2011 report.

The report underlined that most government support is still given in ways that distort production and trade while doing relatively little to improve productivity and competitiveness, ensure sustainable resource use or help farmers cope with risk.

"With tighter government budgets and farmers getting top prices for their crops, governments should begin to shift from payments that further support farm incomes and move to policies that have long-term benefits for the global food economy," said OECD Director for Trade and Agriculture Ken Ash. "The time is ripe for reforming farm support."

According to the OECD, support levels vary enormously among OECD countries. Over the 2008-10 period, New Zealand had the lowest level of support to farm receipts (% Producer Support Estimate), at just 1% of farm income, followed by Australia (3%), and Chile (4%). The US (9%), Israel and Mexico (12%), and Canada (16%) were also below the OECD average.

While the European Union has reduced its level of support to 22% of farm income, it remains above the OECD average. At the other end of the scale, said the OECD, support to farmers remains relatively high in Korea (47%), Iceland (48%), Japan (49%), Switzerland (56%) and Norway (60%).

The OECD said that for the first time, it has reviewed policy developments in emerging economies that are key players in world agricultural markets. It found that farm support in these countries is generally well below OECD levels, but that this varies over time and across countries.

Brazil, South Africa and Ukraine generally support agriculture at levels well below the OECD average, while support in China is approaching the OECD average. In Russia, farm support now exceeds the OECD average, the OECD added.

Producer Support Estimate (PSE) in 2010 for the European Union stood at $101 billion (-11% change, 2009 to 2010), Japan at $52.9 billion (10.8%), Korea at $17.5 billion (-10.2%), the United States at $25.5 billion (-18.7%), China at $147 billion (40.4%) and Russia at $15.5 billion (-8.6%).

The report says that the importance of the potentially most production- and trade-distorting forms of support has been falling over time as countries have shifted towards more decoupled payments to farmers. Most distorting support, based on market prices, output, and unconstrained variable input use continues to make up 51% of total producer support, but this is down from 82% in 1986-88 and 70% in 1995-97. Payments not linked to current production, have grown in recent years to 23% of total transfers in 2008-10.

The OECD report finds that the increased burden on public finances in OECD countries in the wake of the financial and economic crisis has not led to a significant reduction or increase in budgetary expenditures on the agriculture sector. "Where budget payments have been reduced, it typically resulted from counter-cyclical payments declining as a consequence of high world prices or from shrinking disaster payments. Such expenditure reductions follow built-in mechanisms and do not reflect a re-orientation of policies."

In the emerging economies, budget transfers are relatively low but in some cases are increasing. Direct payments to farmers play a less prominent role than in OECD countries, while investments in general services, such as infrastructure, account for a relatively larger share of budget transfers.

In 2010, says the report, support to producers across the OECD area amounted to $227 billion or 172 billion euros as measured by the Producer Support Estimate (PSE, a -5.8% change from 2009). This represents 18% of aggregated gross farm receipts, down from 22% in 2009 and 20% in 2008. This is the lowest level observed since the mid-1980s and confirms a long-term declining trend.

Total support to the agricultural sector across the OECD area - an indicator that combines producer support (PSE), support for general services to agriculture such as research, infrastructure, inspection, marketing and promotion, as well as subsidies to consumers - stood at $374 billion (269 billion euros) in 2008-10. This is equivalent to 0.9% of OECD GDP, down from 2.2% in 1986-88 and 1.4% in 1995-97.

In emerging economies, agriculture support as a share of GDP is below the OECD average, except in China (2.3%). The share increased in Brazil to 0.6% in 2008-10 from 0.2% in 1995-97, while in Russia, it declined from 2.6% in 1995-97 to 1.6% in 2008-10, and in South Africa from 1% to 0.3% over the same period.

The report says that the level of support provided to agriculture in the OECD has been declining; the relative importance of the most distorting forms of support fell as countries introduced more decoupled forms of payments to farmers. This progress has been achieved to different degrees and at different speeds, but overall, the OECD reform principle of decoupling support from production appears to have become increasingly recognized in countries' policy-making.

The report provides an overview of developments in agricultural support in the OECD.

The percentage Producer Support Estimate (%PSE) is the key relative indicator used to measure the level of support to producers. 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. Within this period, the %PSE increased from 20% in 2008 to 22% in 2009 (the first increase after six consecutive years of decline since 2002); however, in 2010, the %PSE declined again to 18%, a record low since the start of the series in 1986.

In examining the PSE and the Producer Nominal Assistance Coefficient (NAC), which is the ratio of gross farm receipts including support, to farm receipts measured at border prices, the report says that taken together, these indicators show that the most important element in reducing overall levels of support to the farm sector in the OECD area was the reduction in transfers realized through policies that support producer prices.

In general, the level of support in emerging economies is below the OECD average, but there are wide variations across countries, just as support levels differ within the OECD area.

In Brazil, the support first increased and then remained rather flat in most recent years with the %PSE at a very low level, around 5%. In China, the support has been increasing and is getting closer to the OECD average. In Russia, the level of support has also been increasing and reached the OECD average in the most recent years. In South Africa, the level of support is declining with a marked acceleration towards the end of the period and with current levels of support very low, below 5%.

The changes in levels of support in 2010, both in terms of nominal values of PSE, and in relative terms (the %PSE) was mainly due to changes in market price support. Market price support (MPS) measures in monetary terms the transfers to farmers provided through misalignment of domestic producer prices with border reference prices.

Reduced MPS was the main driver of decreases in overall support in Chile, the European Union, Iceland, Israel, Korea and Switzerland. In Canada, an increase in the MPS was offset by a fall in budgetary payments, leaving only a small net reduction in total support, and in the United States both elements contributed to declining support.

Conversely, says the report, rising MPS in addition to more budgetary payments increased the PSE in Japan, Mexico, Norway and Turkey. Another case is Australia where the fall in the PSE was almost entirely due to a reduction of payments as some major disaster payments were terminated. Finally, New Zealand witnessed rising MPS, but from a very low level and almost entirely due to falling poultry world prices in combination with an appreciation of the currency relative to the US dollar.

For the emerging economies, the changes in support were mostly driven by changes in MPS both for countries where the total support was reduced (South Africa, Ukraine, Brazil and Russia), and for China where the change in MPS contributed largely to a sharp increase in support, illustrating the partial isolation of domestic prices from world markets and a continuing appreciation of the Chinese Yuan.

In all cases, the contribution of budgetary payments, whether offsetting or amplifying the change in support was minor, except for South Africa where increased spending, mainly on programmes related to land reform, partly offset the reduced MPS.

Further breakdowns of the changes in market price support confirm that fluctuations in the US dollar denominated border prices were the main drivers of change in most analysed countries.

Recalling that after the dramatic run-up in 2007 and early 2008, prices dropped sharply as a consequence of the global economic contraction during early 2009 and started to increase again in the second half of 2009 and beginning 2010, the report says that these price developments were influential in increasing support levels in 2009 and their subsequent reduction in 2010 as domestic prices did not fully reflect those changes.

In the context of the post-crisis recovery, a number of countries also saw their currencies appreciate against the US Dollar (USD) in 2009 and 2010. All else equal, this appreciation lowers the reference prices measured in domestic currency and thus works in the opposite direction to increased border prices (expressed in national currencies) as far as estimating MPS is concerned.

The effect of higher world commodity prices was most strongly felt in Chile, Korea and the United States where sharply higher border prices in 2010 were the major factor behind a significant fall in support. However, in Chile and Korea, this fall was partly dampened by appreciation of local currencies against the USD. In the European Union, the devaluation of the Euro against the USD and lower domestic prices in 2009 accentuated the fall in measured support driven by increased border prices.

The effect of higher world prices was even more marked in the Brazil and South Africa, where the increase of the border prices was the main driver for the fall in support A relatively strong appreciation of local currencies in Brazil, China and South Africa partly offset the effect of higher border prices.

The way support is delivered to farmers is evolving, and this is captured by the composition of the PSE among the various categories. Over the long term the main movement across the OECD has been a gradual reduction of support based on commodity output.

Support based on commodity output, comprising market price support and payments based on output, is considered as one of the most production and trade distorting forms of support, together with unconstrained payments based on variable input use. It has long formed the dominant part of support, representing 82% in 1986-88 and 70% in 1995-97. In 2008, this type of support made up less than half (46%) and in 2010, this downward trend continued.

At the other end of the spectrum, says the report, there are payments based on parameters that are not linked to current production. Such payments can be based on non-current area, animal numbers, receipts or income and do not require production in order to receive the payment. Those have grown in recent years from a 1% share of the PSE in 1986-88 and 3% in 1995-97 to the second largest category of support with 23% in 2008-10.

The share of support provided to general services (GSSE) has increased from 12% of the total support to agriculture in 1986-88 to 19% in 1995-97 and 24% in 2008-10. The growing share of support that is provided to the agricultural sector as a whole rather than to individual producers, represents an important positive reform of agricultural support policies.

Total support provided to the agricultural sector (Total Support Estimate, TSE) is the broadest indicator of support, being the sum of the PSE, GSSE, and direct budgetary transfers to consumers. The trend in the TSE can be more clearly evaluated over time and compared across countries when expressed as a share of total Gross Domestic Product, GDP (%TSE).

In the OECD area, the average percentage TSE has fallen from 2.2% of GDP in 1986-88 to 1.4% in 1995-97 and 0.9% in 2008-10. This share has been consistently falling in all OECD countries, reflecting not only policy reform, but also the shrinking importance of the agricultural sector in the overall economy.

In emerging economies, the %TSE is below the OECD average in all countries except in China, where the share of TSE in GDP increased from 1.55% in 1995-97 to 2.3% in 2008-10. This share has also increased in Brazil, although from a low base of 0.2% in 1995-97 to 0.55% in 2008-10. In Russia, the %TSE declined from 2.6% in 1995-97 to 1.6% in 2008-10, and in South Africa from 1% to 0.3% over the same period.

The report stresses that high prices of agricultural commodities and increased volatility are currently important global policy concerns, in particular in the context of improving food security for vulnerable people in developing countries.

High output prices do not necessarily translate into higher farm incomes in all sub-sectors if input prices increase as well, especially energy and feed prices, and if these costs cannot be passed on to consumers. It is widely expected that higher prices and more volatility will continue to characterize agricultural markets, at least in the medium term.

Government policies impact on both the demand and the supply side, and well-designed policies can contribute to meeting the challenges confronting the global agriculture and food system. The starting point is the desirability of shifting policy emphasis from supporting farm incomes to investing in improving farm productivity, profitability, and long-term competitiveness, in a sustainable way.

According to the OECD, this report shows that governments continue to provide support to the agriculture sector, albeit at very different levels, but much of the current policy set documented in this report is not targeted to the current policy issues and is provided in market distorting ways that hamper rather than foster the global agriculture and food system.

High prices benefit large parts of the farm sector. Eliminating market price support measures now would give the clear message that price signals will not be distorted in the future; at the same time, farmers have the time needed to adjust. Policy effort can then shift to focus on ensuring that markets work efficiently and on developing comprehensive risk management policies that provide producers with a menu of instruments from which they can choose those that best respond to their specific needs.

The report also examines more closely the agricultural policies of individual countries in the OECD, as well as in the selected emerging economies.

With respect to the EU, it says that the Union has gradually reduced its support to agriculture in the long term, in particular the most production and trade distorting forms of support, which now represent less than 30% of support to producers. The level of price distortions has been significantly reduced as illustrated by changes in the NPC. The share of payments granted with no requirement to produce has increased to 47% of total support, as well as the share of payments targeted to environmentally and animal friendly practices.

In the EU, support to producers (%PSE) has decreased gradually and consistently over the long term, in particular since the mid-90s, and remains slightly above the OECD average. At 20%, it reached its lowest level ever in 2010, compared to 22% in 2008 and 24% in 2009. Total support was about 0.8% of GDP in 2008-10 and expenditure on general services represented around 11% of total support.

In the US, the levels of producer support and border protection overall have substantially decreased since 1986-88 and the level of producer support is now the third-lowest in the OECD area. However, since 2002, the decline has been primarily due to higher world commodity prices. The dairy and sugar sectors continue to receive high price support, which perpetuates market distortions in these sectors, although dairy price support has been lower in some recent years due to high market prices.

Support to farmers in the US is relatively low, in comparison with other OECD countries. Over the 2007-10 period, producer support in the US was the third-lowest in the OECD area, and less than half the OECD average. The reform process has been characterized by a shift towards less production- and trade-distorting forms of support. However, more scope remains for further reform towards the market orientation of the agricultural sector in the preparation of the next Farm Bill.

In the US, in 2010, support to producers (%PSE) decreased from 10% in 2009 to 7%, triggered primarily by sharp decrease in output-based support for milk. The %PSE fell from 22% in 1986-88 to 9% in 2008-10, which is less than half the OECD average. The share of most distorting policies (support based on commodity output and variable input use - without constraints) in the PSE decreased from 53% in 1986-88 to 22% in 2008-10. Total support to agriculture represents 0.8% of GDP in 2008-10. Support for general services provided to agriculture increased from 23% of total support in 1986-88 to 37% in 2008-10.

With respect to China, the report says that the country has been increasing its support to agriculture. While the share of the most distorting forms of support remains high, an increase in the importance of flat rate payments per unit of land is a positive phenomenon. The level of support strongly fluctuates as domestic prices for selected commodities remain subject to government interventions such as export restrictions and minimum prices.

After a significant fall in 2008, the %PSE increased by 10 percentage points in 2009 and again by four percentage points in 2010. Total support was relatively high at 2.3% of GDP in 2008-10 compared to the OECD average of 0.9% and the expenditure on general services represented 23% of the total support.

The number and scope of programmes providing budgetary support to agriculture has been increasing. To an increasing extent, they take the form of direct income support payments. This evolution should help decrease the production distortion associated with agricultural support policies and should enhance farmers' incomes more effectively, says the report.

It notes that a significant part of budgetary transfers (in China) is still allocated to lower prices of agricultural inputs, including chemical fertilisers.

Market price support provided through tariffs, tariff rate quotas (TRQ) and state trading, combined with minimum guaranteed prices for rice and wheat and as with ad hoc interventions on a growing number of agricultural commodity markets, is the main channel for providing support to Chinese farmers, says the report. +