Industrialized countries should seize the opportunity of high world food prices to cut subsidies for farm production, the Organization for Economic Cooperation and Development (OECD) advised in a review of agriculture policies.
Published as the WTO gears up for an attempt to break through agriculture, subsidies and other issues blocking a world trade deal, the review says that OECD state subsidies to producers totaled US$258 billion last year.
State aid was running at a record low level but still accounts for nearly a quarter of all payments received by farmers in the OECD area.
Prices for many agricultural commodities reached “historically high levels in nominal terms [last year], although in real terms prices were considerably lower than in the 1970s,” the review said.
Nominal prices are current headline prices, whereas “real” prices remove the effect of inflation over a period.
The OECD argues that food prices have shot up in response to a coincidence of factors. These were a rise in demand from emerging economies, increased energy prices, drought in key markets, speculative activity and the use of crops for the production of biofuels.
Subsidies to agriculture, particularly in the EU and US, are a central issue in the long-stalled Doha round of trade-opening negotiations at the WTO.
“The current high price situation could offer opportunities to reform policies that would impact on international markets,” the OECD said.
The market-driven response to high prices would be an expansion of farm production, and governments could consider removing obstacles to such a reaction “and take the opportunity to improve domestic policy performance.”
Policies aimed specifically at low incomes, at providing safety nets and dealing with such matters as the environment or animal welfare “will generally be more effective, efficient and equitable than broad-based market interventions.”
The price rises to “extremely high levels” have had the effect of trimming the impact of subsidies to producers.
But once prices decline, “border protection and the price-related domestic support measures might well take a stronger hold again, leading to higher support and more production and trade-distorting transfers,” the report said.
The OECD said in a review of policies in its member countries, that state support to producers last year amounted to US$258 billion, equivalent to 23 percent of overall money taken in by OECD farm producers, from 26 percent in 2006 and 28 percent in 2005.
Support to producers now was the lowest since estimates began in the mid 1980s, down from 37 percent in 1986 to 1988.
“If higher agricultural market prices persist for some time, which may lead to higher incomes for farm households, policymakers have an opportunity to roll back the most distorting measures that still dominate agricultural policy,” the report said.
Such measures have not been effective in dealing with problems over farm incomes or the environment, it said.
“Not grasping the reform opportunities will prolong the life of policy measures that create market imbalances,” the report said.
Total support for agriculture, including state aid for research, infrastructure and subsidies for consumers, amounted to 0.97 percent of output by OECD countries from 2005 to last year, down from 2.49 percent in 1986 to 1989. Unless policy reforms are enacted to reinforce the effects of high prices, “the current reductions in support level will not be sustained,” it said.
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