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Farm subsidies are monetary transfers from taxpayers and consumers to producers of agricultural commodities, and they are mostly a characteristic of high- and middle-income countries. They were first introduced in the United States on a large scale shortly after the 1929 crisis, mainly in response to fears of inadequate food supplies (Gardner 2002). Since then, subsidies have been renewed by the U.S. Congress every five to six years under legislation, the so-called Farm Bills. Farm subsidies were introduced in Europe after World War II, again as means to prevent food shortages, and were institutionalized after the introduction of the Common Agricultural Policy following the Treaty of Rome. Other countries with considerable levels of farm subsidies are Korea, Japan, Mexico, and Turkey. Farm subsidies achieved their objective of increasing food availability. However, despite huge food surpluses during the last three decades of the twentieth century, not only have they remained in place but they have been increased and applied to more commodities.
Based on their source of funding, farm subsidies are categorized as either taxpayer financed or consumer financed. Taxpayer-financed subsidies are direct transfers from the treasury to commodity producers; most payments are based on quantity produced or area planted, while some are based on input use or other requirements, such as conservation measures. However, because these types of subsidies cause considerable distortions to world commodity markets, countries have attempted to decouple payments from current production and instead give subsidies in the form of direct income support as a way to make them less trade distortionary (Baffes and de Gorter 2005). Consumer-financed subsidies are typically associated with tariffs imposed on imports or subsidies on exports.
Farm subsidies are monitored by the Organization of Economic Cooperation and Development (OECD), which publishes detailed figures each year. During 2002-2005 total transfers to agricultural producers or consumers of agricultural products in OECD countries averaged $357 billion, of which 56 percent were financed by consumers, while the remaining 46 percent were financed by taxpayers. The European Union accounts for 39 percent of subsidies, while the United States and Japan account for 27 percent and 16 percent, respectively. The remaining 17 percent are accounted for by Korea, Turkey, Mexico, and Canada. On a commodity basis, the largest beneficiary is the milk industry, followed by producers of beef, rice, and wheat.
Because farm subsidies induce overproduction, which in turn depresses world prices, there have been attempts to limit them (Aksoy and Beghin 2004). Limiting the level of farm subsidies was first considered during the Uruguay Round (1986-1994) of multilateral trade negotiations under the aegis of the General Agreement of Tariffs and Trade (GATT). It was agreed that taxpayer-financed subsidies with the most distortionary impact on trade would be gradually reduced from their 1986-1988 level. It was also agreed that export subsidies should be eliminated, while tariffs on imports should be reduced by approximately one-third of their initial level. However, because the formulas for calculating such reductions were complicated, most countries were able to fulfill their obligations by changing the nature of subsidies rather than undertaking real reductions. The issue of subsidies was reconsidered during the Doha Development Agenda, which was launched in 2001. However, farm subsidies turned out to be one of the most contentious issues of the agenda, and the negotiations were suspended.
Bibliography:
- Aksoy, M. Ataman, and John C. Beghin. 2004. Global Agricultural Trade and Developing Countries. Washington, DC: World Bank.
- Baffes, John, and Harry de Gorter. 2005. Disciplining Agricultural Support through Decoupling. Policy Research Working Paper 3533. Washington, DC: World Bank.
- Gardner, Bruce L. 2002. American Agriculture in the Twentieth Century: How It Flourished and What It Cost. Cambridge, MA: Harvard University Press.
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