Agricultural policies in OECD countries Václav Vojtĕch Department of Economic and Social Policies Prague University of Economics 7 October 2013

Outline Introduction Analysis of agricultural policies by the OECD Secretariat Measurement of support to agriculture Main characteristics of agricultural policies and related support in OECD countries Focus on EU Common agricultural policy (CAP) Work on emerging economies Is there a difference between agricultural policies in OECD countries and emerging economies? Concluding remarks – where to go? OECD Trade and Agriculture Directorate

1. Introduction The policy framework What we mean by agricultural policies What are their objectives The contextual framework Agriculture in the economy Agriculture and environment The policy framework Internal issues (food security, social issues, rural development, environment) International issues (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 Which are basis for discussion among OECD countries (pear reviewing, pear 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) 2000s – Going global (Brazil, India, China, South Africa) 2010s – More global players added (Indonesia, Kazakhstan) 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 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 What policies are considered in the calculations? Policies that generate transfers to agricultural producers. Direct budgetary payments Market price support (opportunity cost to consumers) Several conventions: only those policies that are specific to agriculture are considered; general policies not considered; policy objectives are not considered; policy implementation criteria determines classification. 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

Key support indicators Market Price Support (MPS): transfers from (primary) consumers to producers: MPS = QP*(PP-BP) Producer Support Estimate (PSE): transfers from consumers and taxpayers to producers: PSE = MPS + B. payments + B. revenue foregone Consumer Support Estimate (CSE): transfers from (to) consumers: CSE = QC*(PP-BP) + 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 OECD Trade and Agriculture Directorate

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

Relative indicators Percentage PSE (%PSE): Nominal PSE as a share of gross farm receipts. Percentage CSE (%CSE): Nominal CSE as a share of consumption expenditure. Nominal Protection Coefficient (NPC): ratio between producer price and border price. Nominal Assistance Coefficient (NAC): ratio between gross farm receipts incl. support and gross farm receipts valued at border prices (without any support). Share of most distorting support: support based on output and variable input use without constraint as a share of PSE. 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 OECD countries OECD area North America (US, Canada, Mexico) Asia (Japan, Korea) Oceania (Australia, New Zealand) Europe (EU, Norway, Iceland, Switzerland) Also covered: Chile, Israel, Turkey 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 % of farm receipts

North America (US, Canada, Mexico) Relatively low levels of support US, Canada large agro-food exporters Support to some commodities still distort the markets and resource allocation and tax consumers Canada (Milk, Poultry) US (Sugar) US, Canada – programmes stabilising income in agriculture (countercyclical payments) US – important agro-environmental programmes Mexico – less developed agriculture, still handling issues of a developing country in agriculture OECD Trade and Agriculture Directorate

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

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

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

Asia: Japan, Korea Developed countries and net food importers High levels of support despite some reduction No important changes in the structure of support Most of support is price support 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

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

Oceania: Australia, New Zealand Countries with comparative advantages Large agro-food exporters (AUS 15%, NZL 56%) Important policy reforms reducing support to farms 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 (R&D, Inspection & control) In Australia disaster payments were in some years important element of transfers to farms OECD Trade and Agriculture Directorate

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

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

Europe: EU (27), Norway, Switzerland, Iceland EU treated as a single entity in the OECD reporting due to the single market and Common Agricultural policy (CAP) – a more detailed discussion of CAP reforms in the next part EU level of support close to OECD average Reduction and change of structure in the EU support Level of support in NOR, SWI, ISL at much higher level These countries are net food importers and have no comparative advantages Trends in the reduction of support and change in the structure (mainly in Switzerland) OECD Trade and Agriculture Directorate

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

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

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

Iceland: 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) Current negotiations of the new CAP budget (2014-2020) is not a reform 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 states to introduce product specific payments are not. OECD Trade and Agriculture Directorate

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

6. OECD work on emerging economies OECD also monitors and evaluates agricultural policy development in some emerging economies This year M&E report covered 47 countries that account nearly for 80% of global value added in agriculture Emerging economies included in the report: Brazil, China, Indonesia, Kazakhstan, Russia, South Africa and Ukraine. 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, SA) 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

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

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

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

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

South Africa: Level and structure of support OECD Trade and Agriculture Directorate

Most distorting forms of support still important in some of the countries Producer support estimate 2010-12 as % of farm receipts Most distorting: price- and output linked support and payments based on variable input use without input constraints

Conclusion: Main OECD policy messages Reduce price- and output-linked policies 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 ressources 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