Aug 13, 2010

Farm subsidies on an upswing in OECD countries

Last week, the IPS put out a story on the increasing farm subsidies in Europe. The report was based on an OECD report "Agricultural Policies in OECD Countries at a Glance: 2010," which said that agricultural subsidies rose by 22 in 2009, up from 21 per cent in 2008.

Not all these subsidies benefit the European farmers. The news report quotes Rainer Falk, publisher of the " World Economy and Development", as saying: "The main beneficiary of the EU subsidies in Germany for instance is Suedzucker, a large sugar producer, which received in 2008 more than $ 50 million in subsidies." My friend Marita Wiggerthale from Oxfam says: "EU subsidies for agriculture are a sham." She cites the example of milk subsidies to drive home the point.

"Due mostly to over-production, the European milk prices prices for farmers in early 2009 were extremely low at less than 0.20 cents per litre. instead of reducing the production to stabilise prices, the EU reintroduced subsidies for milk in 2009 to support producers." Needless to say, the EU is again resorting to dumping milk globally, mainly in Africa, but in the days to come will also aim at India (if the EU-India FTA comes through).

I found this news report very useful. More interesting are the comments provided by Jacques Berthelot of the French group, Solidarite. I am providing his comments in brackets and in blue. I think this is an excellent analysis for all those who have a discerning eye for details. At the same time, the news report is very useful in the ongoing debate on farm subsidies, international trade and dumping.

Farm subsidies on increase

Paris, 6 Aug (IPS/Julio Godoy) -- Subsidies for agriculture in the industrialized countries of the world grew again in 2009, benefiting the largest companies an landowners, such as Prince Albert of Monaco and Queen Elizabeth of Britain.

The latest increase came despite repeated and consistent evidence that such subsidies contribute to the destruction of the livelihoods of poor farmers in developing countries, especially in Africa, and that they distort international trade.

According to a new study by the Organisation for Economic Cooperation and Development (OECD), subsidies for agriculture in industrialised countries rose to around $252.5 billion, or 22 percent of total farmers' receipts in 2009 -- up from 21 percent in 2008.

[This is simply not true: $252.5 billion is not a figure of "agricultural subsidies" but of "agricultural supports". To demystify this figure, we must distinguish the concepts of support and subsidy, although OECD and free-traders prefer to blur it. If a subsidy – a public expense financed by taxpayers – is a support, the reverse is not true: support is a broader concept encompassing 'market price supports' through import protection which increases the gap between domestic and world prices. For OECD, free traders and the WTO for which "market access" is the first objective of the Doha Round, import protection deprives consumers to buy their food (and other goods) at world prices to which they consider to be entitled so that they suffer a negative consumer's surplus, the gap between the domestic and world prices considered as a distortion. OECD considers this gap as a 'transfer from consumers to producers', translated as a consumers’ subsidy to farmers.

However as the world agricultural prices are dumped prices for most products exported by the OECD countries, to consider the gap between the domestic and world prices as a support to agriculture, and what is more, as a consumers’ subsidy to farmers, is quite bold. In that context of world dumped prices import protection is quite justified. The OECD consumers are all the less justified to claim they are subsidizing their farmers that they are themselves at the origin of these low world prices since, in their position of taxpayers, they have subsidized not only the agricultural exports at these dumped prices but also the direct payments given to farmers to their products sold on the domestic market and abroad to compensate them after reduction of their domestic prices! Furthermore it is absurd to consider that the consumers should pay the world price for their whole food basket when the share of the imported food represents at most 10% of their food staples consumption.

Another reason why the MPS concept is irrelevant is that those 'consumers' to whom the farmers are selling their products are not the households but, as OECD recognizes it, they are 'the first consumers (measured at the farm gate)', that is to say the agri-food industries which today collect at least 90% of the products to process them before selling them to supermarkets, the consumers being only at the end of the chain. And everybody knows that even if the agri-food industries and supermarkets import about 10% of their agricultural products before selling the end-products to Western consumers, the profits made on these cheap imported products are rarely shared with the end consumers and are to the contrary an argument to pay less the domestic farmers.

In the $252.5 billion – which corresponds to the PSE (producer support estimate) OECD indicator – the market price support (MPS) component was of $116.2 billion in 2009 so that the actual subsidies in cash to individual OECD farmers was of $136.3 billion, which is clearly still huge.

However the author has forgotten the collective subsidies given in kind to farmers for $95.3 billion in 2009 – corresponding to the General Services Support Estimate (GSSE) made of subsidies to Research and development, Agricultural schools, Inspection services, Infrastructure, Marketing and promotion, public stockholding – which, clearly contribute to a large extent to the high competitiveness of Western agricultural products. So that, at the end of the day, the total agricultural subsidies to Western farmers have been in 2009 of $231.6 billion.

The reason why the OECD is not including these general services subsidies in the PSE (producer support estimate) is that they are generally notified in the WTO green box as considered not to be "trade-distorting". Don't forget indeed that OECD is the main think-tank of the WTO and of all neo-liberal economists. Yet Professor Daryll Ray has demystified this idea that these general services subsidies are not trade-distorting: "WTO has declared that such research and education related expenditures have a minimal effect on trade... In practice, these activities have a direct impact on price and trade, whether that be a set-aside program or yield enhancing research" [Daryll Ray, Is food too important to be left to WTO? Agricultural Analysis Policy Center, University of Tennessee, November 29, 2002 (http://www.agpolicy.org).], and he has added: "Clearly, neither the US nor the rest of the world would be facing today's low prices and failing small farms if the cumulative growth in agricultural productivity had not taken place" [Daryll Ray, Daniel de la Torre Ugarte, Kelly J. Tiller, US Agricultural Policy: Changing course to secure farmers livelihoods worldwide, Agricultural Policy Analysis Center, University of Tennessee, September 2003.]. And he enlarges his assessment in saying: "Little attention has been paid to legacy investments in the infrastructure of agricultural areas. These legacy investments… all influence production decisions in one way or another and that influence continues year after year while the influence of direct payments are limited to a given year" [Daryll Ray, What is an agricultural subsidy?, Agricultural Policy Analysis Center, University of Tennessee, 26 mars 2004]

The study, "Agricultural Policies in OECD Countries at a Glance 2010", found that the European Union's subsidies for farmers rose from 22 to 24 percent.

[Again this is the figure for the EU PSE which is not made of subsidies only and which on the other hand fails to incorporate the collective subsidies given in kind to farmers.]

In the period between 2007 and 2009, EU farmers received an average of 23 percent of their gross receipts in the form of direct financial support from the state.

[Again these figures concern the PSE but the actual EU agricultural budget in 2009 has represented 16.9% of the agricultural production value, or 20.5% if we include the Member states agricultural subsidies.]

The OECD represents the 30 most industrialised countries of the world, including the US and most members of the EU.

The subsidies for farmers in OECD countries have been at the centre of a heated dispute for years, both at the level of the EU and US and within the larger framework of the World Trade Organisation and its deadlocked Doha Development Round.

The EU spends about $75 billion on subsidies for agriculture, even though the sector represents only about two percent of the total gross domestic product of the union.

[The EU actual agricultural budget has been of €54.858 billion or $76.516 billion in 2009 (the € average exchange rate was of $1.3948). However this fails to take into account the agricultural subsidies of the Member States not paid from the EU budget, for €11.785 or $16.438 billion so that the EU whole agricultural subsidies have been of €66.643 billion or $92.954 billion. 

This subsidies regime will only change in 2014.

The new OECD data inflamed these complaints, the more so since it has been shown that the largest agro-businesses and even some royal houses in European monarchies benefit the most from the subsidies.

"EU subsidies for agriculture are a shame," Marita Wiggerthale from the German office of the humanitarian organisation Oxfam told IPS. She cited the example of subsidies for milk, which form part of the EU agricultural policy.

Due mostly to over-production, the European milk prices for farmers were in early 2009 extremely low at less than 0.20 euro per litre. Instead of reducing the production to stabilise prices, the EU reintroduced subsidies for milk in 2009 to support producers. [However this fails to incorporate the much larger hidden feed subsidies consumed by the dairy cows as a consequence of the large subsidies given to cereals, oilseeds and pulses since the CAP reforms of 1992 and 1999 and now integrated in the single farm payments.]

"As [a] consequence, the EU is again exporting milk to the whole developing world, especially towards Africa, at dumping' prices," Wiggerthale said. "By so doing, the EU is destroying the livelihoods of farmers in the poorest countries of the world while artificially maintaining a too high level of production."

To add insult to injury, the EU is simultaneously forcing developing countries in Africa, the Caribbean and the Pacific to further open their markets through the trade deals called economic partnership agreements.

Rainer Falk, a leading German critic of neoliberal globalization and publisher of "World Economy and Development", a specialised newsletter on international cooperation and trade, told IPS that the OECD subsidies for agriculture only benefit the largest companies in the sector. "The data for 2008 illustrates this point," Falk said. "The main beneficiary of the EU subsidies in Germany was Suedzucker, a large sugar producer, which that year received more than 50 million US dollars in subsidies," Falk pointed out. Data from other countries confirms Falk's complaints. In France, one of the main beneficiaries of the EU subsidies for agriculture in the recent past has been Prince Albert of Monaco. Queen Elizabeth of Britain has also received large subsidies from the EU.

Carmel Cahill, head of the policies, trade and adjustment division of the OECD's directorate for agriculture, food and fisheries, subscribed to this criticism. "European subsidies for agriculture continue to benefit the largest land owners," Cahill told IPS.

According to the most recent data, 11 percent of farms get 75 percent of the payments. "Take care though," Cahill warned, "it is the share of the payments, not of the entire budget, some of which goes to programmes and purposes that are not payments."

[Indeed, as explained above, part of the EU budget goes to collective subsidies in kind such as for rural development and it is also the case of the largest part of the State aids.]

Cahill also called attention to positive changes in the agricultural subsidy policies, especially in the EU.

"Despite still spending a large chunk of its budget on supporting a relatively small sector of its economy, the EU has reformed its subsidies criteria to move away from supporting exports and towards supporting producers, thus decoupling aid from production," Cahill said. "Such subsidies," Cahill argued, "are far less distorting in terms of trade than the aid directly linked to production volumes."

[Not at all, to the contrary: the Single Payment Scheme which accounted in 2009 for 60% of the common EU agricultural budget and 72% of the domestic direct payments (excluding export refunds and rural development, see table above) is the most trade-distorting type of subsidy for 7 reasons which cannot be explained here. See: J. Berthelot, The CAP subsidies are incompatible with the WTO Agreement on agriculture, 1st April 2010, http://www.solidarite.asso.fr/Papers-2010.html]

However, Cahill lamented that the EU and the member countries do not link the subsidies to specific targets. "The EU could connect its aid to better environmental protection measures of agriculture, or to an increased concern for biodiversity," Cahill told IPS. She explained that the increase in agricultural subsidies was mainly provoked by fluctuations in international commodity prices during the last four years. "Higher commodity prices in 2007 and 2008 were behind drops in the measured support in those years and the return to 2007 level prices reversed this trend for 2009", automatically leading to relatively higher subsidies. The OECD report also says that lower or negative economic growth in OECD countries, caused by the recent global recession, moderated demand pressures in particularly higher value-added products, such as dairy and meats. A positive supply response to higher prices in 2008 came at the same time as growth for food demand was easing. These factors all contributed to the rise in subsidies.

[This first appeared on WTO-INTL list]

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