Agricultural Policies

Paper

Domestic Support to Agriculture in the European Union and the United States: Policy Developments Since 1996

International Food Policy Research Institute, Washington, November (2004)

Prior to the 1994 Uruguay Round Agreement on Agriculture, many developed countries supported production largely through support prices and government procurement. Since mid-1990s these countries have increasingly favoured income support or direct payments over price support policies. In this study, we outline the farm policy changes in the European Union, EU, and the United States, US, since 1996 and compare their levels of support under various policies. The producer support estimates for the EU are more than twice that of the US, although the value of EU agricultural production is only 30% more than the US production value. In the EU, reductions in the intervention (support) prices for cereals, oilseeds and beef sector have been compensated by increased direct payments, i.e., payments based on historical acreage and yield or animal head counts. In 1996, the US eliminated target prices and deficiency payments for major crops, and acreage set-sides for supply control. They have been replaced with fixed and emergency payments. However price floors (loan rate with deficiency payments) have been retained for major crops. The sugar and dairy sector policies of the EU and the US have undergone few changes since 1996. […] The EU and US have increasingly used direct payments, which are fully or partially decoupled from current market conditions. Whether or not payments with varying degrees of decoupling affect production decisions has been a subject of debate. Although decoupled payments do not depend on current acreage or yield, they could impact production under uncertainty or in a dynamic context. These payments help farmers cover fixed costs, and reduce constraints in capital and labor markets. They also change farmers attitudes towards risk and create expectations about future payments being contingent on current planting. Under uncertainty "partially coupled policies," like the US emergency payments, can induce a production response through the insurance effect (reduction in the degree of risk) in addition to the wealth effect. A review of modelling attempts shows a consensus that the wealth effects induce a relatively weaker production response than the insurance effect, but some find it of similar or even greater magnitude than the traditional subsidy effects. However, there is a wide range of estimates and substantial disagreement on the absolute magnitude of the insurance effect and its relative impact on production vis-à-vis the traditional subsidy effect. In addition, while many studies have acknowledged the importance of the expectations effects of decoupled payments, few have attempted to quantify it.

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