Cutting Support Can Help Farmers to Prosper

Farmers and policymakers in many Organisation for Economic Co-operation and Development countries view the negotiations of the World Trade Organisation on agriculture as a threat. If significant reductions of tariffs and subsidies for agriculture are agreed at Cancún, will that not undermine the viability of agriculture and diminish the positive role that farmers can play in rural areas and society?

The answer depends on whether current agricultural policies provide the intended benefits - and whether there are alternative policies that work better at home and do less harm to farmers in other parts of the world, specifically in developing countries.

Past policies providing high levels of support and protection to farmers responded to perceived problems at the time. But the world has changed. Food production has outpaced demand and food security is no longer a problem in OECD countries. Incomes of farm households are, overall, in line with those of the rest of society.

Interest has now shifted to the services that farmers can provide for the environment, for biodiversity and for rural areas; but old policies remain. Across OECD countries, governments support farmers with $235bn a year, making up for more than 30 per cent of farm revenue. Even more striking is the fact that two-thirds of these transfers come in the form of price support.

On average, the prices farmers get are 31 per cent above the equivalent in international trade, 80 per cent in the case of milk, nearly 100 per cent for sugar and 360 per cent for rice. Such high domestic prices can be maintained only behind the protective walls of correspondingly high tariffs. Indeed, agricultural tariffs are still about 10 times higher than those for industrial products. In countries with surplus farm production, such high prices also rely on export subsidies.

This price support encourages increased agricultural output. But this is not what governments want to achieve. In many cases, supply controls have been introduced to suppress surplus production. There is an obvious mismatch between current farm policy goals and continued reliance on previous farm policy instruments.

Agricultural policies can do much better. Rather than providing price support, direct payments should be targeted to the specific policy objectives. For example, where more hedges are considered desirable to enhance biodiversity, farmers can be paid per 100 metres of hedge planted and maintained. Training can assist farmers to become more internationally competitive. To deal with rural poverty, means-tested social safety nets ensure that the intended beneficiary is reached. Such policies do not require tariffs and export subsidies. And they do not distort international trade.

Here is the good news for farmers and policymakers concerned about farm incomes: payments that are not coupled to production are more efficient in raising the income of the people working the land. OECD analysis has shown that of each dollar transferred to agriculture through price support, no more than 25 cents end up in the pocket of the farm operator. The rest goes to landlords, is capitalised in land values, or is needed to cover extra costs of production. Decoupled payments can double the amount retained by the farm operator.

Only targeted policies can avoid the inequitable distribution resulting from price support, where the largest farms get the lion's share of the benefits. Some countries have started to go in this direction but much remains to be done. For as long as two-thirds of OECD farm support is still provided on the basis of units of output, there will be significant room for improvement.

Why is all this relevant for Cancún? The WTO negotiations on agriculture are about reducing tariffs, export subsidies and output-enhancing domestic support. Engaging in such reductions and moving towards more targeted policies is in the best interest of each OECD country.

In agriculture, the opportunity now is to make domestic policies more successful, for both farm incomes and the services valued by society.

In the process, distortions in international trade are reduced and the export interests of developing countries are served. All this is achieved more easily if everybody does it at the same time, in the context of multilateral negotiations. Cancún is not a threat; it is a unique opportunity.