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Farm subsidies alive and well, and about to grow again

- Tuesday, February 02, 2016

One of the noteworthy changes in global agricultural markets over recent decades has been the removal of the most 'production distorting' farm subsidies in the USA and Europe, and their replacement with income support policies that reduce unintended impacts on global markets. While from an Australian perspective the direct impacts of overseas subsidies on farmgate prices here in Australia have diminished, they have not disappeared completely. The imminent surge in subsidy payments to US (and Canadian) farmers as a result of low corn prices will still indirectly impact world grain markets, and therefore have an impact on Australian farmers. 

The US and the EU have long since moved on from farm subsidy programs that paid farmers based on the amount of grain or milk a farmer produced. These policies delivered the grain mountains and milk lakes that characterised global agricultural markets in the 1970s and 1980s, which had very major impacts on global agricultural commodity prices. Thankfully, these subsidies have been restructured so that they do not stimulate overproduction to the same degree. In the EU, most of the subsidies have been diverted to achieving environmental and community outcomes - such as farmers being paid to maintain hedgerows or paint barns - while in the US the focus shifted to farmers being paid for conservation projects and more recently subsidised crop insurance, that provides a high level of revenue certainty irrespective of commodity prices or seasonal conditions.

The change in the composition of farm subsidies over time can be observed in the following figure, based on OECD data. The graph displays the percentage of total subsidies paid in different jurisdictions that are linked to levels of farm production. Some of these - especially in the EU - are linked to acerage or normal numbers of animals and require the farmer to continue producing, but do not necessarily directly reward extra production. As can be observed, since the early 1990s US subsidies have progressively been de-coupled from production, as have EU farm subsidies since the early 2000s. Canada is the outlier, with the majority of farm subsidies in that nation linked to farm revenue protection measures which are intrinsically linked to farm production levels in previous years. In the case of the EU, more than 50% of total farm subsidy payments are now linked to conservation and landscape preservation requirements, and not to farm production.

The changes noted above have occurred against a backdrop of overall reductions in farm subsidy levels, as can be observed from the following figure. The reductions have been most pronounced in the EU and Canada, although the nature of the current farm subsidy programs in the US and Canada mean that subsidy levels are likely to increase significantly over the next few years as a consequence of low corn, grain and oilseed prices relative to the price levels that existed over the 2010 - 2014 period. 

Australia, by contrast, has virtually the lowest level of farm subsidies in the OECD (second only to New Zealand), and the lowest level of government and consumer support for the overall agriculture sector. This, in combination with a very large dependence on export markets, makes Australian farmers especially vulnerable to the adverse market impacts caused by international farm subsidies.

The current US corn price (around $US 3.70 per bushel) is well down on recent year highs ($US 7 +) and is therefore likely to trigger significantly higher payments to US and Canadian farmers (via subsidised revenue insurance programs) in 2016 than in previous years. Much of this additional subsidy expenditure will be borne by the commercial insurance companies which underwrite the various farm revenue insurance programs, although recent projections by the Congressional Budget Office (see Page 26) indicate there will also be higher US Government outlays over the next few years, despite the recently negotiated US Farm Bill supposedly creating savings compared with previous iterations

While the de-coupling of northern hemisphere farm subsidies from farm production has undoubtedly reduced the adverse impact of farm subsidies on global agricultural markets, it also seems apparent that a farmer receiving top up payments to compensate for lower prices would be less responsive to market conditions in subsequent farm planning decisions than one who experienced the full brunt of lower crop or livestock prices. Consequently, it seems likely that the higher farm subsidy payments projected over the next few years for North American farmers in particular will still have some indirect impact on global markets, and hence Australian farmers.
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