Stefan Tangermann “Is the Concept of the Producer Support Estimate in Need of Revision?” (2005)

The Producer Support Estimate PSE is the only available source of internationally comparable information on support levels in agriculture “The monetary value that would be required to compensate (monetary transfer) farmers or consumers for the loss of income resulting from the removal of a given policy” Market Price Support, Direct Income Support, Indirect Income Support, Other Support PSE expressed as: Total PSE, %PSE, Unit PSE, PSE per Farm or per labour unit

The Three PSE Issues Does the PSE properly reflect changes in agricultural policies and reform efforts? Do World Market conditions distort the PSE Are actual World Market prices a proper reference point for the PSE?

Changes in Agricultural Policies and Reform Efforts E.g. A move from price support to budgetary payments will keep overall support to farmers constant, yet not give the country credit for reducing trade distortion impact in its reform efforts Wheat example: Support price has declined significantly since 1992, but EU’s PSE for wheat remains roughly constant over that period. Change from price support to budgetary payments has reduced distorting trade effects. Same with the Switzerland milk example. We should possibly use a “weighted PSE”? Use ratio? Eg nominal assistance coefficient (farm receipt values at domestic and border prices) Haniotis and Bascou (2003) “The most serious weakness of the PSE is its classification of policies without weighting their trade distorting impact”

Do World Market Conditions Distort the PSE? The Market Price Support makes 2/3 of total PSE in OECD area. If Exchange Rate varies this creates a problem for the PSE, as the PSE can not properly track policy changes to support, because it also picks up the variability of world market prices and exchange rate fluctuations. E.G. If a country keeps the support price for a given commodity constant between two years, while the border price in domestic currency has declined. The OECD’s MPS and PSE then shows an increasing level of support between these years

Are actual World Prices a proper reference point for the PSE? Market Price Support (MPS) is provided through tariffs, export subsidies and domestic intervention buying. MPS is estimated by the gap between domestic producer price and actual world market price at the border of country concerned. It is thought that this can be misleading as world prices themselves are distorted through policies and therefore could be said to not be a “true world price” (an undistorted world price). It is thought that the MPS component of OECD’s PSE overestimates the support provided to farmers. Numerical example….

Conclusion PSE needs to communicate its results more clearly and effectively, in order to avoid misinterpretation. Possibly individualise each country having different weights, so not to use the one-size fits all measure which can lead to unreliable results