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Agricultural policy

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Agricultural policy is a loose term that describes a government's set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets. The specific outcomes can range from guaranteed supply level, price stability, product quality, product selection, land use or employment.

Contents

Tools Available to Governments

Common tools of agricultural policy include subsidies, price controls, import barriers (quotas and tariffs) on agricultural imports, and product-specific regulations.

Subsidies

Governments frequently pay subsidies to domestic producers in order to encourage domestic production of the subsidized good. Such subsidies are necessary when a government wants to alter the natural, free-market outcome in product markets. The subsidies effectively transfer some costs of production from producers to the government, allowing production at above-market costs. Consumption subsidies can also be used to alter markets; a consumption subsidy offsets a portion of consumers' purchase price of a product.


Price Controls

A government can impose price controls on domestic agriculture markets. These most frequently take the form of price floors or ceilings, which set a minimum or maximum price for a product. In either case, the price controls distort the free-market equilibrium by encouraging excess production (in the case of a price floor) or excess demand (in the case of a price ceiling). The government must take additional action to deal with the supply/demand imbalance created by price controls in both domestic and international markets.

Import Barriers

A government can erect trade barriers to limit the quantity of goods imported (in the case of a quota) or enact tariffs to raise the domestic price of imported products. In either case, these barriers give preference to domestic producers but in todays since quotas are not applicable under WTO provisions tariffs are the only way to safe gaurd domestic producers.

Objectives of Agricultural Policies

Governments use agricultural policies to achieve a wide range of policy goals.

Strategic concerns regarding food supply security are a common reason for protectionist policies. Proponents of subsidies argue that nations have legitimate strategic interests in assuring there is sufficient domestic production capability to meet domestic needs in the event of a global supply disruption. The argument follows that significant dependence on foreign food producers makes a country strategically vulnerable in the event of war, blockade or embargo. Maintaining adequate domestic capability allows for food self-sufficiency that lessens the risk of supply shocks due to geopolitical events.

Agricultural policies may be used to support domestic producers as they gain domestic and international market share. This may be a short term way of encouraging an industry until it is large enough to thrive without aid. Or it may be an ongoing subsidy designed to allow a product to compete with or undercut foreign competition. This may produce a net gain for a government despite the cost of interventions because it allows a country to build up an export industry or reduce imports.

Environmental or quality-of-life considerations are another common reason cited by governments. Farming may be considered in the same way as any other business, but it may also be looked upon as land management. Farm land or undeveloped land normally makes up the majority of the land in any country. Policies may be adopted to encourage some land uses rather than others in the interests of maintaining the environment. Subsidies may be given for particular farming methods, forestation, land clearance, mimimising pollution or whatever change seems desireable.

An aim of agricultural policy may be to encourage rural employment. This may be particularly relevant where there is a large unemployed population. Subsidising farming may encourage people to remain on the land and obtain some income. This might be relevant to a third world country with many peasant farmers, but it may also be a consideration to more developed countries such as Poland. This has a very high unemployment rate, much farmland and retains a large rural population growing food for their own use. Or it may be relevant to a highly developed country such as France, which has a tradition of small family farmers who are able to apply politically pressure on their government.

Price controls may be used to assist poor citizens. Many countries have used this method of welfare support as it delivers cheap food to the poorest without the need to assess people to give them financial aid.

Some green economists argue that local protectionist measures ought to be strongly encouraged with the goal of furthering environmental concerns. They argue that small gardens and greenhouses should be favored, especially if produce is consumed locally. They argue for tax, tariff and trade rules to exempt such production for local use, especially family farm or farm co-op production, and strongly deny that agricultural and industrial policy should be linked, or should be subject to the same law. One rationale is that local production of organic produce by families in their own gardens for their own consumption is not taxed or regulated, and that little or no use of the energy-and-land-intensive transport system, or energy-and-labor intensive regulation system is required for these same people to sell the same product to neighbors.

  • Fair trade rules to ensure that poor farmers in underdeveloped nations that produce crops primarily for export are not exploited to put local farmers in developing nations out of work - which advocates consider a dangerous "race to the bottom" in agricultural labor and safety standards. Opponents point out that most agriculture in developed nations is produced by industrial corporations (or "agribusiness") which are hardly deserving of sympathy, and that the alternative to exploitation is poverty.

Arguments Against Market Intervention

Classical economic analysis and some farmers oppose subsidies because they distort markets by encouraging overproduction, leading to artificially low prices. These distortions can produce a self-sustaining outcome where producers are increasingly dependent on future subsidies.

Developing-world diplomats have expressed dismay for developed-world subsidies, because they produce worldwide price distortions in agricultural markets. When rich countries subsidize domestic production, the excess output is frequently given to the developing world as foreign aid. This process effectively eliminates the domestic market for agricultural products in the developing world, because the products can be obtained for free from western aid agencies. In developing nations where these effects are most severe, small farmers could no longer afford basic inputs and were forced to sell their land to Western corporations.

Lyle Vanclief, Canada's Minister of Agriculture, recently asked Harvard University's Institute of Politics to:

"consider a farmer in Ghana who used to be able to make a living growing rice. Several years ago, Ghana was able to feed its people and export their surplus. Now, it imports rice. From where? Developed countries. Why? Because it's cheaper. Even if it costs the rice producer in the developed world much more to produce the rice, he doesn't have to make a profit from his crop. The government pays him to grow it, so he can sell it more cheaply to Ghana than the farmer in Ghana can. And that farmer in Ghana? He can't feed his family anymore."

The Institute for Agriculture and Trade Policy (IATP) on February 11, 2003 reported on the cost of production of corn, soybeans, cotton, wheat and rice, then used USDA and OECD data to compare the production cost to the international market price. In all cases, the commodities were sold below the cost of production. Levels of dumping hover around 40% for wheat, between 25% and 30% for corn (maize), and nearly 30% for soybeans. These percentages means that wheat, for example, is selling for 40% less than it costs to produce. For cotton, the level of dumping in 2001 rose to 57%, and for rice it has stabilized at around 20%. IATP Trade Director Sophia Murphy said, "Dumping is a gross distortion of commodity markets. It undermines the livelihoods of 70% of the world's poorest people. Trade rules provide the tools needed to address agricultural dumping. Now is the time for governments to act".


According to figures published by the United States Department of Agriculture (USDA), "If developed nations eliminated subsidy programs, the export value of agriculture in lesser developed nations would increase by 24 percent, plus a further 5.5 percent from tariff equilibrium."


According to the Organisation for Economic Co-operation and Development (OECD), each United States farmer receives a subsidy of about $29,000 dollars (USD). This is roughly 120 times the average income of maize farmers in the Philippines. Oxfam describes this situation as "... exporters can offer US surpluses for sale at prices around half the cost of production—destroying local agriculture and creating a captive market in the process". The OECD as a whole pays more in agricultural subsidies than the GDP of the continent of Africa.


Free trade advocates desire the elimination of all market distorting mechanisms (subsidies, tariffs, regulations) and argue that, as with free trade in all areas, this will result in aggregate benefit for all. This position is particularly popular in competitive agricultural exporting nations in both the developed and developing world, some of whom have banded together in the Cairns Group lobby. Canada's Department of Agriculture estimates that developing nations would benefit by about $4 billion dollars (USD) annually if subsidies in the developed world were just halved. If abolished, this would be $8 billion dollars (USD), which considering interest on a net present value basis over 10 or 20 years gives about $300 billion dollars (USD).

United States Representative Barney Frank said "These free market fakers act like there is some footnote in the economics textbooks that says free markets don't apply to agriculture. The Farm Act is the worst example of congressional suspension of free markets".

Only a small percentage of the population actually works in agriculture in the West (about 5% in the European Union in 1997 and 1.7% in the United States in 1990). The subsidies that benefit this minority indirectly drive up food prices for the majority (for example, a carton of milk bought in a store actually costs more to produce than the price tag indicates, about 40% of the cost comes from tax money used is subsidies).


Examples of Agricultural Policies in Developed Countries

The United States, the European Union and Japan are developed countries that rely most heavily on agricultural subsidies.

In Europe 1998 total value of agricultural products amounted to 128 billion euro. About 49% of this total was accounted for by political measures, €37 billion due to direct subsidy payments and €43 billion from consumers due to the artificially maintained high price. By comparison, the GDP of Spain is around $800 billion. 80% of European farmers receive a subsidy payment of €5000 or less, while 2.2% receive payments in excess of €50,000 totalling 40% of direct subsidies paid.

Economic studies show that the average US farmer receives $16,000 USD in subsidies annually. 2/3 of all US farmers recieve no direct subsidy payment. Of those that do, the average amount amongst the lowest paid 80% was $7000 over the period 1995-2003. (http://www.ewg.org/farm/findings.php) Subsidies are a mix of tax reductions, direct cash payments and below-market prices on water and other inputs. Some claim that these aggregate figures are misleading because large agribusinesses, rather than individual farmers, receive a significant share of total subsidy spending.

As an example, the average rice farmer in the US received subsidies from the US government in order to offset the effects of cheaper rice from Malaysia and other foreign countries. In comparison, the average Malaysian farmer's annual income is less than $1000 per year. In another interesting statistic, the average Canadian cow receives more funding from the government than is earned by the average human worker in sub-Saharan Africa.

The United States has feinted with the ending of farm subsidies several times, most recently with the enactment of the "Freedom to Farm" act, which was intended to provide diminishing payments to farmers over a period of years in lieu of price supports and production subsidies. It was supplanted in 2002 by new legislation that contained direct subsidies and countercyclical payments designed to limit the effects of poor prices and yields in bad years. Grain crops are most heavily subsidized.

Another major U.S. subsidy program is the "conservation reserve program" (CRP) which leases land from producers who take marginal land out of production and convert it back to as near its natural state as possible, by planting native grasses and other plants. In addition, there are major regulatory frameworks that have environmental, safety, and food quality goals.

Another program is the "environmental quality incentives program" (EQIP) which subsidizes improvements which promote water conservation and other measures. This program is conducted under a bidding process using a formula where farmers request a certain percentage of cost share for an improvement such as drip irrigation or a LEPA center pivot conversion (Low energy precision application). The producers which offer the most environmental improvement (based on a point system) for the least amount of government money are funded first. The process continues until that year's allocated funds are expended.

Legal decisions regarding subsidies

In April 2004 the WTO ruled that 3-billion dollars in US cotton subsidies violate trade agreements and that almost 50% of EU sugar exports are illegal. In 1997-2003, US cotton exports were subsidised by an average of 48%.[1] (http://www.iatp.org/iatp/library/admin/uploadedfiles/Agriculture_Export_Dumping_Booms_During_WTOs_F.pdf)

The World Trade Organisation (WTO) has extracted commitments from the Philippines government, making it lower import barriers to half their present levels over a span of six years, and allowing in drastically increased competition from the industrialised and heavily subsidised farming systems of North America and Europe. A recent Oxfam report estimated that average household incomes of maize farmers will be reduced by as much as 30% over the six years as cheap imports from the US drive down prices in the local markets. The report estimates that in the absence of trade restrictions, US subsidised maize could be marketed at less than half the price of maize grown on the Philippine island of Mindanao; and that the livelihoods of up to half a million Filipino maize farmers (out of the total 1.2 million) are under immediate threat.

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