Agricultural Subsidies Remain a Staple in the Industrial World Grant Potter February 28, 2014

Transcription

1 $ (in Millions) % of total Agriculture Agricultural Subsidies Remain a Staple in the Industrial World Grant Potter February 28, 2014 I n 2012, the most recent year with data, agricultural subsidies totaled an estimated $486 billion in the top 21 food-producing countries in the world. 1 These countries the members of the Organisation for Economic Co-operation and Development (OECD) and seven other countries (Brazil, China, Indonesia, Kazakhstan, Russia, South Africa, and Ukraine) are responsible for almost 80 percent of global agricultural value added in the world. 2 OECD countries alone spent $258.6 billion in subsidies to support farming in their respective countries in OECD subsidies grew rapidly between 2001 and 2004, rising from $216 billion to over $280 billion. 4 Since then, the dollar amount received by OECD farmers has stayed roughly static at between $240 billion and $280 billion. 5 (See Figure 1.) But from 2001 to 2012 the amount spent on these subsidies as a percentage of the total value of agriculture produced in the OECD declined steadily from 32 percent to 19 percent. 6 This means that for every dollar s worth of agriculture earned by OECD farms in 2012, 19 came from some kind of government subsidy policy. 7 Figure 1. OECD Agricultural Subsidies vs. Percent of Agriculture Produced Producer Support Estimates Percentage Worldwatch Source: OECD vitalsigns.worldwatch.org 1

2 Agricultural subsidies are not equally distributed around the globe. In fact, Asia spends more than the rest of the world combined. 8 (See Figure 2.) China pays farmers an unparalleled $165 billion. 9 Significant subsidies are also provided by Japan ($65 billion), Indonesia ($28 billion), and South Korea ($20 billion). 10 Europe also contributes a great deal to agricultural subsidies due in large part to the Common Agricultural Policy (CAP) of the European Union (EU). At over $50 billion, CAP subsidies accounted for roughly 44 percent of the entire budget of the EU in And this figure does not even include EU price supports, in which governments keep domestic crop prices artificially high to give farmers a further incentive at the expense of the consumer. Including these price supports, the EU spent over $106 billion on agricultural subsidies in total. 12 North America provides almost $45 billion in subsidies, with the United States spending just over $30 billion and Canada and Mexico spending $7.5 billion and $7 billion respectively. 13 Of the countries studied by the OECD, 94 percent of subsidies were spent by Asia, Europe, and North America leaving only 6 percent for the rest of the world. 14 The term "subsidies" covers a vast number of different policy options, but at the heart of all of them is government intervention in agricultural markets. A common type of subsidy is called direct payments. These are regularly paid to farmers who produce a designated crop (in the United States, until recently the crops were wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts), and the payments are decoupled from production which means that farmers can produce as much or as little as they want and still receive this subsidy. 15 Direct payments are the cornerstone of the EU CAP and account for $40 billion of its $50 billion budget. 16 China pays its farmers $165 billion year a Figure 2. Regional Distribution of Agricultural Subsidies (in millions) Asia Europe North America CIS South America Oceania Middle East Africa Worldwatch Source: OECD vitalsigns.worldwatch.org 2

3 In the United Kingdom, 47 landowners were given more than 1m in subsidy Direct payments were a staple of U.S. farm policy from 1996 to 2013, but the $5 billion spent on direct payments was struck from the U.S. Farm Bill recently signed by President Obama. 17 In lieu of these payments, the United States expanded the federally subsidized crop insurance program to $9 billion a year. 18 This allows farmers to buy crop insurance premiums, 60 percent of which is subsidized by the government; private insurance companies compensate farmers for lost revenue if crop prices drop too low or if the farmers have low yields in a given year. 19 During the drought of 2012, insured American farmers received $16 billion. 20 Many people have criticized crop insurance as wasteful because farmers can often earn more money from insurance in a bad year than they can from selling their crops in a good year. A prime example of this is corn and soybean farmers, who in 2012 earned $12.7 billion when their actual economic losses only amounted to around $6 billion. 21 Bruce Babcock, a professor of economics at Iowa State University, predicts that insurance will cause overproduction as farmers will overplant and manage crops less carefully in order to reap more insurance payouts in bad years. 22 Subsidies like direct payments and crop insurance are criticized as not being safety nets for poor farmers, as is their stated purpose, but rather a way for wealthy farmers to get richer. The direct payment policy of the EU CAP, called the Single Farm Payment, is distributed by the hectare so that farmers who own or rent more land receive greater financial benefits. 23 The BBC reported that in the United Kingdom in 2012, 889 landowners received more than 250,000. Of those, 133 were given more than 500,000 and 47 of those were given more than 1m in subsidy. 24 In the United States, the newly expanded crop insurance program receives similar criticism. The Environmental Working Group estimates that in 2011, more than 10,000 farms received between $100,000 and $1 million in federal crop insurance subsidies, and 26 farms received more than $1 million. 25 In contrast, the bottom 80 percent of farms (389,494 holdings) individually received only $5,000 that year. 26 By predominantly funding a few staple crops for the largest farms, subsidies support industrial-scale operations. These factory farms tend to lack crop diversity, which over time saps the soil of nutrients and in turn requires substantial use of artificial chemical inputs like fertilizers and pesticides. 27 One example of this is in the U.S. Midwest, where farms rotate between corn and soy, which requires a significant use of synthetic nitrogen fertilizer to achieve adequate yields. One side effect of this is that fertilizer runoff into the Gulf of Mexico is responsible for a massive algae bloom. This area, which grew alarmingly from 2,900 square miles in 2012 to 5,840 square miles in 2013, has been called a dead zone because the algae suck oxygen out of the water and prevent other aquatic life from developing. 28 Price supports are another category of subsidies. They are intended to keep domestic crop prices high enough to encourage farmers even during periods of overproduction, when prices would tend to fall due to oversupply. This can be achieved by imposing a tariff or quota on agricultural imports so that potentially cheaper foreign agricultural products cannot drive down domestic prices. 29 In conjunction with import barriers, a price-supporting government can offer to buy agricultural commodities at a certain price; this raises the price to consumers, as farmers will refuse to sell below the government's support price. 30 Price supports make up almost 70 percent of China's subsidy spending, and the government particularly encourages the growth of staple crops such as rice and wheat. 31 China increases the minimum price for rice There is a 5,840 square mile dead zone in the Gulf of Mexico vitalsigns.worldwatch.org 3

4 and wheat yearly; between 2007 and 2012 the price doubled for rice and increased by 70 percent for wheat. 32 If the price for either wheat or rice falls below this minimum price, the state-owned China Grain Reserves Corporation will continue to make purchases at the minimum price until the price farmers can ask rises above that number. 33 Price supports can cause overproduction and oversupply because they encourage greater production of a specific commodity and less domestic consumption (since consumers tend to buy less as prices rise). 34 Rather than let the oversupply go to waste, it is traded on the international market at artificially low prices. Since subsidized farmers are insulated from the true cost of farming, they can afford to sell at a lower price than their less-subsidized foreign counterparts. 35 Many developing countries have argued that this undermines their own agricultural sectors as they cannot afford to spend billions in subsidies to overcome this handicap. 36 This disparity is particularly obvious when farmers in industrial countries are pitted against farmers from the least developed countries (LDCs). Due to the importance of agriculture in their economies and the relatively lower cost of labor, LDCs have a comparative advantage in farming over the industrial world. 37 However, the U.N. Conference on Trade and Development (UNCTAD) argues that this advantage evaporates in the face of heavy subsidization and cites a number of cases where LDCs opened their markets to low-priced subsidized crops that ended up crippling their local agricultural sector. 38 According to UNCTAD, LDCs turned rapidly from net exporters to net importers, and between 2002 and 2008 LDCs saw their food imports jump from $9 billion to $24 billion. 39 The inability of developing countries to compete against subsidy-backed crops can be seen in a trade deal between the United States and sub-saharan Africa called the African Growth and Opportunity Act. 40 The Brookings Institution estimates that agriculture accounted for less than 1 percent of exports from sub- Saharan Africa to the United States as part of this deal even though two thirds of the population there is involved in agriculture. 41 Agriculture is one of the most contentious subjects at World Trade Organization (WTO) negotiations due to the tension over subsidies. In Geneva in 2006, the Doha Development Round fell through in part because the United States was unwilling to reduce trade-distorting subsidies further and because developing countries were unwilling to reduce import tariffs for U.S. crops further. 42 Following a long period of stalled negotiations, a Bali Package was finally agreed on in December 2013, which WTO considers a major source of hope for a more harmonious future for agriculture and trade. The Bali Package includes, among other things, a pledge to reduce export subsidies and agreements on how to administer agricultural tariffs. 43 Grant Potter is a development associate at Worldwatch Institute. Vital Signs Online provides business leaders, policymakers, and engaged citizens with the latest data and analysis they need to understand critical global trends. Subscribe now for full access to hard data and research-based insights on the sustainability trends that are shaping our future. Worldwatch Institute th St., NW, Suite 430 Washington, DC Phone: vitalsigns.worldwatch.org Notes 1 Organisation for Economic Co-operation and Development (OECD), Agricultural Policy Monitoring and Evaluation 2013: OECD Countries and Emerging Economies (Paris: 2013), pp vitalsigns.worldwatch.org 4

5 2 Ibid., p Ibid., p Ibid. 5 Ibid. 6 Ibid. 7 Ibid. 8 Ibid., pp Ibid. 10 Ibid. 11 European Commission, "CAP Expenditure in the Total EU Expenditure," February 2014, at ec.europa.eu/agriculture/cap-post-2013/graphs/graph1_en.pdf. 12 OECD, op. cit. note 1, pp Ibid. 14 Ibid. 15 Chris Edwards, Downsizing the Federal Government: Agricultural Subsidies, The CATO Institute, June 2009, at 16 European Commission, Agriculture and Rural Development: Direct payments, at ec.europa.eu/agriculture/direct-support/direct-payments/index_en.htm. 17 Ron Nixon, Senate Passes Long-Stalled Farm Bill, With Clear Winners and Losers, New York Times, 4 February Ibid. 19 Allison Aubrey, Congress Poised to Make Crop Insurance Subsidies More Generous, National Public Radio, 30 May Bruce Babcock, Taxpayers, Crop Insurance, and the Drought of 2012 (Washington, DC: Environmental Working Group (EWG), 2013), p Ibid., p Bruce Babcock, Cutting Waste in the Crop Insurance Program (Washington, DC: EWG, 2013), p George Monbiot, Farming Subsidies: This is the Most Blatant Transfer of Cash to the Rich, (London) Guardian, 1 July Rich Landowners Paid Millions in Farming Subsidies, BBC, 5 March EWG, Government Records Show Crop Insurance Subsidies Are a Boon to Big Farm Interests, press release (Washington, DC: 31 May 2012). 26 Ibid. 27 Laura Reynolds and Danielle Nierenberg, Innovations in Sustainable Agriculture, Worldwatch Report 188 (Washington, DC: Worldwatch Institute, December 2012), p Tom Philpott, Why This Year's Gulf Dead Zone Is Twice As Big As Last Year's, Mother Jones, August Robert L. Thompson, "Agricultural Price Supports," Concise Encyclopedia of Economics, at 30 Ibid. 31 OECD, op. cit. note 1, pp Ibid., p Ibid. 34 Thompson, op. cit. note Mark Tran, EU Agriculture Policy 'Still Hurting Farmers in Developing Countries', (London) Guardian, 11 October World Trade Organization (WTO), Export Subsidies and Competition, 1 December 2004, at 37 International Monetary Fund, Global Trade and the Developing Countries, Issue Brief, Washington, DC, November U.N. Conference on Trade and Development, Sustainable Agriculture and Food Security in LDCs, UNCTAD Policy Brief No. 20, Geneva, May Ibid. vitalsigns.worldwatch.org 5

6 40 Emmanuel Asmah and Brandon Routman, Removing Barriers to Improve the Competitiveness of Africa s Agriculture, in Brookings Institution, Improving AGOA: Toward a New Framework for U.S.- Africa Commercial Engagement (Washington, DC: 2011), pp Ibid. 42 Charles E. Hanrahan and Randy Schnepf, WTO Doha Round: The Agricultural Negotiations, CRS Report for Congress (Washington, DC: Congressional Research Service, updated 22 January 2007). 43 World Trade Organization, Days 3, 4 and 5: Round-the-Clock Consultations Produce Bali Package, press release (Geneva: 5 7 December 2013). vitalsigns.worldwatch.org 6