Rich nations and bad seeds

We've all heard complaints about farm subsidies and how unfair they are to our farmers trying to compete on world markets. The latest OECD review of farm subsidies provides a good picture of how much they actually cost. The information is startling.

The review found that agricultural subsidies in the 30 OECD member countries totalled $US252.5 billion in 2009 and accounted for 22 per cent of farmers' receipts. In other words, one dollar in five earned by a farmer came from taxpayers via the government. It was the same as 2007 and up from 21 per cent in 2008.

Within the average there is huge variation. In the period 2007-09, farmers in New Zealand received the least amount of their revenue from taxpayers, at less than 1 per cent. The figure was 4 per cent in Australia, 9 per cent in the United States, 12 per cent in Mexico, 17 per cent in Canada, 23 per cent in the European Union, 34 per cent in Turkey, 47 per cent in Japan, 52 per cent in Korea, 53 per cent in Iceland, 58 per cent in Switzerland and 61 per cent in Norway.

Australia was mentioned as having the largest reduction in budgetary support, due to the end of dairy industry restructuring payments.

The structure of support also varied considerably. Among the countries with the highest levels of support, the share of the potentially most distorting policies (ie support directly linked to output or protection) is also highest. This kind of assistance represents around 90 per cent of the total in Japan and Korea, 70 per cent in Iceland and 50 per cent in Norway and Switzerland.

Rice, sugar, livestock and dairy are traditionally the largest recipients of support based on commodity output, though the amount of support for dairy products has declined significantly due to high average dairy prices in 2007-2009 and the phasing out of dairy quota systems in the EU and Switzerland.

In some countries, support is increasingly conditional on farmers following specified production practices as part of their government's pursuit of broader policy goals, typically related to preservation of the environment, conservation of natural resources or animal welfare.

Linking payments to such requirements rather than production represented just 4 per cent of payments in 1986- 88, but increased to one third by 2007-09. The EU, US and Switzerland provided the highest shares (around 50 per cent) of their total support in this way.

A new form of assistance has emerged in the form of mandatory use of ethanol and biodiesel. Use mandates and tax concessions were expanded in many OECD countries in 2009, including Australia, some states in the United States and New Zealand.

One aspect of the subsidies that tends to be overlooked is that they are mainly of benefit to a small number of very large farm businesses. In the EU, for example, 75 per cent of the payments go to 11 per cent of the farms, among the largest being those owned by the Queen and Prince Albert of Monaco.

Also often overlooked is the damage they cause to farmers in developing countries, especially in Africa. Support for the dairy industry, for example, has led to over-production of milk which the EU has periodically dumped on the world market at low prices. When the EU simultaneously forces developing countries to open their markets through trade deals, the competitive impact can be severe.

From the perspective of OECD taxpayers there was some good news. Overall support to the agriculture sector, comprising both direct payments and support for services such as research, infrastructure, inspection, marketing and promotion, was "only” 0.9 per cent of GDP, down from 2.3 per cent in 1986-88. That still amounted to $US375 billion though.

But as the OECD points out, if price volatility continues, concerns about the long-term sufficiency and stability of food supplies may delay further progress. Taxpayers will be expected to continue paying, and it won't be cheap.

David Leyonhjelm works in the agribusiness and veterinary markets as principal of Baron Strategic Services, which provides consulting and market information services, and Baron Senior Placements, which provides executive recruitment services.