Politicians have long justified the existence and maintenance of agriculture policies on the grounds that they protect the incomes of small and family business-type farms, thus sustaining all the multifarious functions of agriculture and rural policy.
Indeed, the maintenance of current policies which are now increasingly based on direct subsidisation, is being justified in Europe and other developed counties outside Europe on the grounds that it will favour the less geographically and economically advantaged in maintaining an agriculture capable of serving a number of socially, environmentally and economically desirable functions.
The reality is however that current policies are not performing these functions. They are not doing so for the simple reason that direct subsidies based on specific forms of production — as are the European Union‘s compensatory payments – must inevitably maintain the present type of production and, seen from a social and economic point of view, favour the large and prosperous over the smaller and less prosperous. More importantly from a broader perspective, they are geographically disproportionate and work against perceived environmental and social policy objectives.
Richest farmers get most subsidy
A recent OECD Policy Brief [*] summed up the inadequacies of current EU and other developed country farm policies as follows:
“At present only about 25 cents of every dollar spent on producer support actually finds its way into the producer’s pocket. The balance of the support is either capitalised into asset values, particularly land, or is transferred up or down the food chain to input suppliers or processors and distributors.
“Further, since support policies in most countries are based on prices, output or area planted, it follows that the largest – and often most productive and profitable – farmers benefit the most from present policies. The largest farms (i.e. the 25% of farms with the highest annual sales) generally receive more than half, and as much as 90%, of support provided by governments.”
The level of subsidy dependency created by these policies can be judged from the OECD conclusion that the share of support in farm income or net operating income is high in almost all developed countries, with the notable exception of Australia and New Zealand where subsidies have been trimmed to a minimum. In the European Union, Japan and Switzerland, it bizarrely exceeds 100%. While this indicates that the income of the largest 25% of farms would be negative, it also suggests the degree of adjustment needed to return to a more rational policy based on the market.
Farm incomes exceed urban incomes
What is more, current policies do not, as is often claimed, maintain equity between rural and urban areas. The OECD points out that those farms which benefit most from subsidies “are generally characterised by both higher household incomes and higher net worth than that of the average consumer and tax-payer who finances these transfers.”
Among EU countries comparable average farm incomes were substantially higher than urban household incomes in Belgium, France, Denmark and the Netherlands — in the latter country close to two and a half times higher. “Current policies tend to benefit a few large producers more so than the many small and medium-sized producers. This is true even of the emergency, ad hoc measures recently employed, few of which were specifically targeted or tailored to income needs.”
Policy inequities revealed
An earlier OECD study [**] demonstrated clearly the inequity of present support policies, particularly those operating in the European Union. It concluded that:
a) In all categories of farming, the distribution of the benefit of market price support follows that of output — the larger the farm the greater the share of market support – despite slight differences due to differences in product mix of farms;
b) On average, direct payments do achieve slightly more equal distribution than market price support, reflecting the continuing strong link between most direct payments and production or the factors of production. (There are some targeted payments whose distribution is inversely related to size, but they are minimal set against support as a whole);
c) Support is slightly more equally distributed across farm size than output.
d) Differences in output, support and income across regions are less than those across farm types or size classes.
e) Over the last ten years, the distribution of output, support and income in the countries reviewed shows little change: it has become slightly more unequal in Denmark and New Zealand, and a little more equal in Finland and Japan.
f) Because the distribution of support is close to that of output, the largest farms, and hence the most prosperous ones, are the main beneficiaries. In this sense, support is inequitable. At the same time, support overall in most countries has an (only slight) redistributional effect on income by farm size because, as mentioned above, its distribution is slightly more equal than output.
g) Support tends to increase income disparities between farm types
h) Small farms are more dependent on support than large ones, even though they receive only a small proportion of total support.
The calculations show that the largest farmers receive the largest share of the benefit from market support and subsidy. The top 25% of farms in terms of gross sales have a 40 to 75% share of total agricultural output, and their share of market price support ranges from 43 to 79%. The actual share varies according to the degree of specialisation and the level of support for each commodity.
The percentage share of total direct payments received by the top quarter ranges from 26 to 65% always lower than the group’s contribution to output, but to a relatively minor extent. This reflects the fact that most direct payments paid to producers in OECD countries are still tied to production levels or input use or both.
Income/support relationship in EU
In the European Union, the OECD looked at the income and subsidy relationship in the four main types of farm: arable farms, cattle farms, dairy farms and intensive pig and poultry, covering respectively 31, 12, l4 and l4% of the total.
Output and support are markedly more concentrated in arable farms than in the various types of livestock farm, among which there is a very similar distribution profile. The share of direct payments in total support is highest for arable farms owing to the importance of area payments. Direct payments account for the lowest share of total support for dairy farms since these farms receive even more market price support than the farm average and the other farm types. Overall, dairy farms receive twice the average support, while non-dairy cattle farms receive a little more than average.
The OECD concludes that; “Even if support achieves its objectives with regard to income, it does not do so cost-effectively or equitably. Thus providing support in order to limit the incidence of low incomes in the sector when the bulk of that support goes to the largest farms, is more expensive than providing income supplements only to those households that really need them.
“Similarly, in order to reduce income disparities in the sector, measures targeting less favoured farms would be more cost-effective. Moreover, concentrating support on the largest farms does not encourage them to improve performance and hence has a cost in terms of the sector’s economic efficiency.”
Targeted social policies needed
Overall, this study suggests that targeted social policies would be much more appropriate as a way of limiting the incidence of low incomes among farm households.
These figures make nonsense of the EU strategy of maintaining and strengthening the compensatory payment system and defending in the WTO and elsewhere its continuation on the grounds of the multifunctionality of agriculture in the European economy and society. Specifically targeted subsidies detached from production would, as the OECD emphasises throughout this analysis, more effectively achieve those objectives.