Agricultural policies in OECD countries Václav Vojtĕch OECD, Trade and Agriculture Directorate Department of Economic and Social Policies Prague University of Economics 27 March 2017

Outline The context Analysis of agricultural policies by the OECD Secretariat Measurement of support to agriculture Main characteristics of agricultural policy reforms in selected OECD countries Focus on EU Common agricultural policy (CAP) Work on emerging economies OECD Trade and Agriculture Directorate

1. The context The contextual framework The policy framework Agriculture in the economy Economic, social issues Agriculture and environment The policy framework Internal issues (food security, social issues, rural development, environment) International issues (food security, trade conflicts, WTO, URAA) Importance of the international policy debate on agricultural policies – countries with comparative advantage vs. countries with comparative disadvantage OECD Trade and Agriculture Directorate

2. Agricultural policies in OECD WHY the OECD secretariat monitors and evaluates agricultural policies? HOW is the OECD secretariat doing this? Agricultural policy developments Measurement of support to agriculture Publishing annual reports Discussion among OECD countries (peer reviewing, peer pressure) OECD Trade and Agriculture Directorate

History and country coverage Started in the mid 1980s with an OECD mandate to monitor agricultural policies and measure support to agriculture on annual basis. Focused on OECD countries. EU covered in the report as a single entity (but detailed information on member countries). 1990s focus extended to countries from Central and Eastern Europe (most of these countries became at a later stage OECD or EU members + Russia and Ukraine). 2000s – Going global (Brazil, India, China, South Africa). 2010s – More global players added (Indonesia, Kazakhstan, Colombia). Forthcoming – Viet-Nam, Philippines. OECD Trade and Agriculture Directorate

Estimation of Support to Agriculture A method developed by the OECD secretariat and approved by member countries – Producer Support Estimate (PSE). The secretariat guarantees the transparency and consistency of the methodology as applied to countries. Various nominal and relative indicators use in the analysis of development of agricultural policies. Relative indicators enable comparability across countries and in time. Detailed information on the results and the methodology used to estimate support is available on the public website www.oecd.org/agriculture/PSE . OECD Trade and Agriculture Directorate

3. How OECD measures support to agriculture Components of the support Direct budgetary payments (transfers from taxpayers to agricultural producers); Market price support (Transfers from consumers to agricultural producers – opportunity cost to consumers). What policies are considered in the calculations? only those policies that are specific to agriculture; general policies not considered; policy objectives are not considered; policy implementation criteria determines the classification of policies in pre-define categories. OECD Trade and Agriculture Directorate

Measuring support to agriculture: Building blocks Agricultural sector Agricultural producers Consumers Taxpayers BT BT incl. revenue foregone MPS MPS: Market Price Support BT: Budgetary Transfers TSE PSE Producer Support Estimate: transfers from consumers and taxpayers to producers: PSE = MPS + payments + revenue foregone Market Price Support: MPS = QP*(PP-BP) Consumer Support Estimate: all transfers from consumers and from taxpayers to consumers. In the situation of supported ag prices, these transfers enter into the CSE with negative sign, to indicate implicit taxation. Consumers may be other agricultural producers (livestock producers paying mps to crop producers) CSE = QC*(PP-BP) + consumer subsidies General Services Support Estimate: measures are grouped according to the nature of the service. Seven categories R&D, agricultural sholls, inspection services, infrastructure, marketing and promotion, public stockholding and miscellaneous. GSSE = budgetary transfers to general services Total support Estimate: transfers to agriculture TSE = PSE + GSSE + consumer subsidies

Market Price Support – the concept BP D S S1 S0 D0 D1 MPD Exported commodity From Consumers to Producers From Taxpayers to Producers MPS arises from policy measures that create a gap between the domestic market price and the border price of a commodity (Market Price Differential). These include trade policies - both import (tariffs, tariff quotas and licencing requirements) and export measures (export subsidies, export credits and quantitative restrictions.) and domestic price support measures (production quotas, administered prices and intervention purchases) The diagram illustrates a positive Market price differential in the case of an export commodity: The introduction of a border measure raises the price from BP to PP, the demand shrinks while production respond positively to the price increase. The ‘value’ of what is consumed domestically is shown in blue, it represents the transfer to producers from consumers, while the pink box is the value of price support borne by taxpayers in the form of budgetary outlays on export subsidisation, food aid or public stockholding. PP: producer price BP: Border price MPD: market price differential

Key support indicators – nominal values Producer Support Estimate (PSE): transfers from consumers and taxpayers to producers; PSE = Market Price Support + Budgetary payments + Budgetary revenue foregone Market Price Support (MPS): transfers from (primary) consumers to agricultural producers: MPS = Quantity of domestic production*Price gap (domestic – world pr.) Consumer Support Estimate (CSE): transfers from (to) consumers: CSE = (Quantity of domestic consumption*price gap) + consumer subsidies; General Services Support Estimate (GSSE): budgetary transfers to general services for the farming sector; Total support Estimate (TSE): transfers to agriculture TSE = PSE + GSSE + consumer subsidies (transfers from taxpayers). OECD Trade and Agriculture Directorate

Relative indicators Percentage PSE (%PSE): Transfers to individual producers as a share of gross farm receipts; Percentage CSE (%CSE): Transfers to (from) consumers as a share of consumption expenditure; Nominal Protection Coefficient (NPC): ratio between producer price and border (world) price; Nominal Assistance Coefficient (NAC): ratio between gross farm receipts incl. support and gross farm receipts valued at border prices (without any support); Percentage GSSE (%GSSE): Nominal GSSE as a share of Total Support Estimate; Percentage TSE (%TSE): Nominal TSE as a share of GDP. OECD Trade and Agriculture Directorate

Structure of support: decoupling from production A. Support based on commodity output Output Inputs B. Payments based on input use Production: C. Payments based on A/An/R/I required Current A/An/R/I Factors and income Area (A) Animals (An) Receipts (R) Income (I) D. Payments based on A/An/R/I required Non-current A/An/R/I E. Payments based on A/An/R/I not-required Non-current A/An/R/I The results of the Policy Evaluation Model on decoupling have shown that payments based on input use (category B) have the strongest influence on production incentives. F. Payments based on non-commodity criteria Non-commodity criteria G. Miscellaneous payments

4. Main characteristics of agricultural policies in selected OECD countries OECD area Japan Switzerland New Zealand United States European Union OECD Trade and Agriculture Directorate

Support in OECD area – Downward trend of the level and change in the structure of support OECD Trade and Agriculture Directorate

OECD average hides large variations of support among countries Producer support as a share of gross farm receipts

Japan Developed and relatively rich country; net food importer High levels of support despite some reduction High tariff barriers and resulting high level of Market price support (dominant part of support) No important changes in the structure of support; lack of reforms More transfers to farmers from consumers than from taxpayers OECD Trade and Agriculture Directorate

Japan: Level and structure of support OECD Trade and Agriculture Directorate

Switzerland Country with one of the highest GDP per capita, consistently net agro-food importer. One of the highest level of support in OECD, the reduction of level of support only moderate, but important change in the structure. Reforms started in the early 1990s. Market deregulation (reduction of market price support) was compensated with increased direct payments to farms: General payments (decoupled general area payment, coupled headage payments); Ecological payments (to meat societal demand – i.e. biodiversity, cultural landscape, animal welfare, …). This policy shift increased transfer efficiency. On the other side the high level of general payments reduces the incentive to produce high quality products for the market. OECD Trade and Agriculture Directorate

Switzerland: Level and structure of support OECD Trade and Agriculture Directorate

New Zealand Country with comparative advantages; Large agro-food exporter (agro-food exports represent more than a half of total NZL exports); Important policy reforms reducing support to farms were part of the general economy reform in the end of 1980s; Since NZL have consistently the lowest levels of support in OECD area; Little direct budgetary payments to farms; Most of the public expenditure goes to policies providing general services to the sector (Research & Development, Inspection & Control). OECD Trade and Agriculture Directorate

New Zealand: Level and structure of support OECD Trade and Agriculture Directorate

United States Farm Acts approved for a 4 – 5 year period provides the main regulatory and budgetary framework for agricultural policies in US. Relatively low levels of support. Large agro-food exporters and dominant player on world markets. Low level of market price support: Most commodities aligned to world market prices; Supported commodities: sugar. Programmes stabilising income in agriculture (countercyclical payments) + risk management. Important agro-environmental programmes. OECD Trade and Agriculture Directorate

United States: Level and structure of support OECD Trade and Agriculture Directorate

European Union EU treated as a single entity in the OECD reporting due to the single market and Common Agricultural policy (CAP); The national budget expenditures are available at the country level, but not published separately; EU level of support close to OECD average Reduction and change of structure in the EU support, related to the various reforms of the CAP OECD Trade and Agriculture Directorate

European Union: Level and structure of support OECD Trade and Agriculture Directorate

5. EU Common Agricultural Policy (1) 1960s – creation of CAP, main objective stimulate production – heavy intervention mechanisms 1980s – mounting surplus problems, export subsidies resulting in trade disputes, introduction of quota systems (milk, sugar) 1990s – agricultural policies and their interference with world markets disciplined under the WTO (Uruguay Round Agreement on Agriculture) Mid 1990 – CAP reform (Mc Sharry reform) Reduction of price support Compensated with product specific area and headage payments OECD Trade and Agriculture Directorate

EU Common Agricultural Policy (2) 2000s – Another CAP reform (Fischler) Commodity specific payments replaced with flat area payments (Single Area Payments) Introduction of Pillar 2 payments (agri-environment, rural development) The policy changes related to the new CAP budget (2014-2020) cannot be considered to be steps in the right direction: More complex and likely to deliver more distortive payments; Unclear whether expected benefits will be achieved (greening of the CAP); End of milk and subsequently sugar quota regimes are steps in right direction; The flexibility given to member-states to allocate part of the EU fund payments to product specific payments is likely to increase the share of support coupled with production. OECD Trade and Agriculture Directorate

6. OECD work on emerging economies OECD also monitors and evaluates agricultural policy development in some emerging economies. The 2017 M&E report will include 52 countries and covers a decisive part of global value added in agriculture. Emerging economies included in the 2017 report: Brazil, China, Colombia, Costa Rica, Indonesia, Kazakhstan, Philippines, Russia, South Africa, Ukraine and Viet Nam. Work is underway on India. In general these countries have lower level of support than OECD average, but the trend is different: Some countries are increasing their support: China, Indonesia, Kazakhstan; While other maintained low levels of support (Brazil, South Africa, Viet Nam) In Ukraine and Russia, relatively low levels of support are hiding an uneven distribution of support (taxation of crop producers and subsidising of the livestock sector) OECD Trade and Agriculture Directorate

Brazil: Level and structure of support OECD Trade and Agriculture Directorate

China: Level and structure of support OECD Trade and Agriculture Directorate

Conclusion: Main OECD policy messages Reduce price support and output-linked policies as well as support based in input use; Remove border policies that contribute to international price volatility, by trying to isolate domestic markets; Improve investments in public goods with long-term benefits: innovation, sustainable use of resources; Develop risk management tools for farmers that do not interfere with normal business risk and marketable risk tools. Production linked counter- cyclical payments have low transfer-efficiency; Improve policy coherence: agriculture, trade, (rural) development, macro-policies

For more information Trade and Agriculture Directorate Visit our websites: www.oecd.org/tad/agricultural-policies/ www.oecd.org/agriculture/PSE Contact us: tad.contact@oecd.org Follow us on Twitter: @OECDagriculture Trade and Agriculture Directorate