Bridges Weekly Trade News Digest • Volume 12 • Number 24 • 2nd July 2008

High Food Prices Create Opportunity for Subsidy Reform, Report Says

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Developed countries should take advantage of the current spike in commodity prices to reduce their agricultural subsidies, according to a report issued last week by the Organisation for Economic Cooperation and Development (OECD).

“Not grasping the reform opportunities will prolong the life of policy measures that create imbalances,” the report said.

State aid to farm producers in the thirty developed countries that constitute the OECD area totalled US$ 258 billion in 2007, or roughly 23 percent of OECD farmers’ gross receipts for the year. That figure represents a drop from previous years; indeed, the percent of total farm output provided by subsidies is now at its lowest point since the OECD started tracking those numbers in 1986, having declined from 37 percent in 1986-1988 to last year’s 23 percent.

But the drop in subsidies has not been even throughout the OECD area. While payment levels have decreased in the EU, Japan, and the US, they have risen in drought-stricken Australia. In the US, direct subsidies to farmers now represent 10 percent of the value of farm output, down from 22 percent two decades ago. Meanwhile, EU subsidies account for 26 percent of total European farm output; Japan’s subsidies are worth 45 percent.

The report noted, however, that the recent drop in dollars spent on subsidies was not driven by domestic policy reforms but was instead an inadvertent result of the current spike in world food prices. That price jump, the report contended, is being caused by a confluence of several factors: a rise in demand from emerging economies, higher energy prices, and a shortened crop supply due to adverse weather conditions in critical production regions. Other contributing factors include a rise in speculative activity in commodities markets and an increasing use of critical crops for biofuels production.

In light of the price spike - coupled with the lack of policy reform in OECD countries - the current decline in state aid may not last long, the report said. Once food prices drop from their current highs, subsidies might very well return to the higher levels of the past.

Thus, the report recommended that policymakers in the 30 developed countries that comprise the OECD area jump on the opportunity presented by the current spike in prices to reduce the levels of state aid for farmers now, while their incomes are relatively high.

“Careful policy design granting farmers the greatest possible freedom to respond to market signals will allow them to become more innovative and competitive,” the report said.

But the report also noted that, while subsidies have not necessarily declined in number, there is some evidence that recent reforms have decreased the extent to which state agricultural aid is distorting trade. Specifically, a growing number of subsidies have been de-coupled from commodity output levels, andinstead linked to other parameters, such as land area, livestock numbers, farm receipts, or total income. The report also noted that farmers are increasingly being required to meet certain conditions - especially with regards to the environment - in order to qualify for government support.

A shift away from output-related payments is considered beneficial as it reduces the extent to which government policies influence the amount that farmers produce. In a completely distortion-free scenario, farmers’ production decisions would be based solely on market signals.

But despite some progress away from production-related payments, the report concluded that the use of highly trade-distorting support “still dominates,” and that “reform is uneven across countries.”

Whether developed countries follow the OECD’s advice is a different matter. In fact, significant subsidy reform seems unlikely at this stage, at least in the US and the EU. The US farm bill passed last month largely continues past levels of agricultural support (see BRIDGES Weekly, 28 May 2008, http://www.ictsd.org/weekly/08-05-28/story5.htm). Meanwhile, with France assuming the presidency of the EU as of the beginning of this month, Europe is unlikely to implement substantial cuts in its Common Agricultural Policy (CAP) any time soon. Indeed, French President Nicolas Sarkozy has indicated that defending the CAP - and protecting the interests of European farmers - will be one of his priorities.

The OECD report was announced as trade negotiators at the WTO are attempting to work their way through disagreements over market opening in both the agricultural and industrial sectors (see related story, this issue). While some of the gaps have narrowed in the agriculture negotiations, much work remains to be done. Ambassador Crawford Falconer (New Zealand), the chair of the negotiations on agriculture, told WTO Members last week that delegates will need to work very quickly in order to prepare for a ministerial conference that has been scheduled for the week of 21 July. To that end, Falconer said that he would meet with small groups of delegations early this week, and convene session open to all Member countries on 4 July.

ICTSD reporting; “Hoarding nations drive food costs even higher,” THE NEW YORK TIMES, 30 June 2008; “Ride high food prices to cut subsidies, boost production: OECD,” AGENCE FRANCE PRESSE, 29 June 2008; “Rush to secure world trade deal,” THE AGE, 27 June 2008; “French priorities at the EU,” THE WALL STREET JOURNAL, 1 July 2008.