Support for agriculture, a coveted windfall (1) A contrasting global landscape

In rich countries and emerging economies, agricultural support absorbs on average around 0.6 billion pounds of gross domestic product. The level and composition of aid, accused of distorting market competition, have long been a stumbling block in negotiations at the World Trade Organization (WTO). These criticisms are now compounded by criticisms related to the negative impact of agricultural activity on biodiversity and the climate, in a context also marked by concerns for greater resilience of food systems. It is therefore not surprising that many voices are being raised, in various forums, to radically reform public intervention in agriculture. This article on the FARM blog briefly takes stock of support to the agricultural sector and highlights the difficulties of its evaluation; a second article will address the political issues.

The most commonly used indicator for quantifying agricultural support is the Producer Support Estimate (PSE), calculated by the OECD (Organisation for Economic Co-operation and Development). Over the period 2017-19, in the 54 high-income or emerging economy countries surveyed by the OECD, which account for most of the gross value added in global agriculture, the PSE totalled US$446 billion per year, or 12% of producers' gross receipts.[1].

The share of agricultural revenues derived from support varies greatly between countries and products: it ranges from less than 5 % (Australia, New Zealand, Brazil, Chile, South Africa) to more than 40 % (Japan, South Korea, Norway, Switzerland, Iceland). For the European Union, it averages 19 %, about double that of the United States, but reaches 20-30 % for producers of beef and poultry, rice and sugar.

Taxpayer and consumer transfers  

The total amount of the PSE is equivalent on average to 0.6 % of the gross domestic product of the countries studied. It should also be noted that this amount does not consist entirely, far from it, of budgetary expenditures that could be diverted to other uses. Overall, in fact, 43 % of the PSE comes from market price support, that is to say from the gap existing, in each country, between the domestic price and the world price of agricultural products, due to customs tariffs and non-tariff measures possibly in force.[2]This gap essentially corresponds to transfers from consumers to producers.[3], via an additional cost of food products. The remainder (57 %) of the PSE includes aid paid by taxpayers, in the form of direct payments, input subsidies or other monetary support directly targeting producers.

The relative proportion of transfers provided by taxpayers and consumers is, again, highly variable across countries and products. In the European Union, budgetary payments represent more than 80% of the PSE. In some emerging countries, price support is negative: farmers receive prices below world prices, due to restrictions on the marketing of agricultural products on the domestic market (India) or for export (Argentina). When budgetary support expenditures do not compensate for the drain on producers' income, the PSE is negative.[4].

But from an international perspective, the level of agricultural support is only one element. WTO negotiations focus primarily on the composition of support, because different types of support have different effects on markets and distort competition between countries to varying degrees: hence the need to analyze the extent of support more deeply, to understand its significance.

Methodological problems

The PSE does not cover all public support to the agricultural sector. It does not include all aid granted to food consumers, which constitutes indirect support to producers, nor does it include services of general interest, some of which, such as research and extension, can have a significant impact on farmers' income. These elements are included in another indicator, the Total Support Estimate (TSE), also calculated by the OECD.

But this does not resolve the methodological problems that make it difficult to objectively assess support and can have consequences for the evaluation and direction of agricultural policies. These problems are multiple[5]. Thus, the PSE does not include, or does not include completely, the support generated by the biofuel use obligations, in force in particular in the United States and Europe, which increase the prices of cereals and oilseeds processed for this purpose. Even more seriously, the decrease or increase in support measured by the PSE may very well result mechanically – due to the very construction of this indicator – from the increase or decrease in world agricultural prices, without agricultural policies being modified. This shows the extent to which the interpretation of the PSE must be very cautious, knowing also that, as shown below, the quantification of market distortions and externalities of agricultural production attributable to support is delicate.

Market distortions

The PSE provides a simple snapshot of agricultural support. It identifies market distortions (via the impacts of aid on the supply and demand of agricultural products) potentially caused by support, but says nothing about the extent or actual cost of the distortions.[6]This point is all the more crucial because, far from having only negative effects on the markets, support can correct their failures and contribute to improving collective well-being.

Thus, the elimination of subsidies for turnover insurance in the United States could, under certain conditions, lead to a sharp reduction in grain production in that country. It would be detrimental not only to grain producers, whose income would decrease, but to society as a whole, in the United States as in other countries, particularly because of the rise in food prices.[7]. Therefore, the cost of support associated with insurance subsidies must be put into perspective.

With regard to market price support, economic models generally show that a complete dismantling of import protection would increase the world price of most agricultural products, due to the decline in production in the least competitive countries. Consumer gains would then be lower than what the gap between domestic and world prices observed before liberalization suggests. In this case, the amount of support to agriculture due to import protection is actually less than the amount of market price support used to calculate the PSE.[8].

The growing importance of externalities

Agricultural production generates multiple externalities, both negative and positive, that are not valued by the market. Indeed, food prices paid by households do not include the cost of water pollution, biodiversity loss, or climate change caused by greenhouse gas emissions from crops and livestock. Nor do they include the value of amenities related to the quality of landscapes, the maintenance of economic activity in mountainous areas, or other factors.

Since agricultural support generally tends to increase agricultural production, it also accentuates these externalities, in ways that may be unfavorable or favorable to the community. The impact is, of course, favorable if the support consists of agri-environmental aid, aimed, for example, at encouraging farmers to use fewer inputs or adopt practices that reduce soil erosion. But this can also be the case if, whatever its form, the support granted increases crop yields, thereby limiting deforestation.

Due to the biodiversity crisis and climate change, the environmental externalities of agriculture are receiving increasing attention today. Due to their link to agricultural production, they cannot be completely dissociated from the nutritional function of agriculture and its ability to ensure food security for populations, which is the traditional foundation of agricultural policies. The benefits and costs of supporting agriculture are therefore difficult to grasp in a comprehensive manner.[9], especially since they are the subject of nuanced and even divergent assessments depending on the actors concerned. These differences reflect struggles of interests and conflicts of values, including ethical ones, concerning the multiple objectives assigned to agriculture: food production, environmental services, animal welfare, etc. It is in this abundant context, combining a great diversity of stakeholders, often antagonistic, and a strong geopolitical dimension of support for agriculture, that public intervention takes place. The implications will be examined in the next article.

[1] Gross revenues are equal to the value of agricultural production and budgetary support granted to producers. Unless otherwise stated, the figures in this article are taken from the OECD (2020) publication “Agricultural Policies: Monitoring and Evaluation 2020 (Abridged Version)”.

[2] Non-tariff measures mainly include sanitary and phytosanitary standards and technical regulations (packaging, labels, etc.) applicable to imported products.

[3] In countries exporting agricultural products, however, part of the price support, corresponding to the quantities exported, is recorded as transfers from taxpayers, in the form of (explicit or implicit) export subsidies.

[4] In these countries, the average negative value of the PSE (-5 % of producers' gross receipts in India, –24 % in Argentina) masks the fact that producers of certain productions are penalized, while others receive overall positive support.

[5] See in particular: Gohin, A. and F. Levert (2006). “Comparing American and European agricultural policies: are ESP indicators really useful?” Rural economy 294-295, July-October 2006; Doyon, M., D.-M. Gouin and N. Paillat (2002). “Critical analysis of the concept of PSE, estimation of producer support. Application to the dairy sector”. Rural economy 272, November-December 2002; Courleux, F. (2012). “The OECD and agricultural policies: a critical analysis”. Centre for Studies and Foresight of the Ministry of Agriculture, Agri-Food and Forestry, December 2012.

[6] The OECD classifies the different categories of support included in the calculation of the PSE in descending order of potential distortion. According to this classification, the instruments most likely to distort markets are market price support and “subsidies linked to the production and use of variable inputs without constraints”Conversely, the more aid is decoupled from production and prices, the less market distortion it is expected to create. These differentiations, sometimes contested, serve as the basis for the rules of the WTO Agreement on Agriculture.

[7] Gohin, A. (2019). “General Equilibrium Modeling of the Insurance Industry: US Crop Insurance”. Journal of Global Economic Analysis, 4(2): 108-145.

[8] For example, if before the removal of import protection, the market price is 100 on the domestic market and 50 on the world market, the market price support, in other words the additional cost for the consumer, is equal to 100 – 50 = 50. If liberalization increases the world price to 70, the consumer will pay 70. Under these conditions, the real additional cost compared to a situation of complete liberalization is equal to 100 – 70 = 30.

[9] In theory, the total cost of support is equal to the amount of aid (budgetary payment or market price support), adjusted for the positive or negative effect of this aid on markets and on the externalities of agricultural production. In practice, the amount of this cost is very difficult to quantify in monetary equivalent.