Farm policy instruments and their effects Niek Koning Wageningen University Agricultural Economics & Rural Policy

Market organisation versus subsidies Market organisation –works by raising market prices –examples: import tariffs, export subsidies, production quotas –involves government cost or government revenue Subsidies –directly from the exchequer –Examples: price subsidy, direct payments, input subsidies –always involve (high) government cost

Market organisation in an importing country Import tariffs –fixed –ad valorem –Variable Import quotas In Agripol, price support in an importing country uses a fixed import tariff

price volume demand supply Domestic price Import tariff World market price import tariff import

Import protection: international effects Import protection harms exporting countries and farmers in countries without protection Import quotas and variable tariffs increase price instability in world markets –Import quotas prevent the domestic market from buffering fluctuations in global supply –Variable import tariffs prevent the domestic market from buffering fluctuations in global and domestic supply These effects are especially significant if the country is a large producer/consumer

Market organisation in an exporting country Intervention storage Increasing domestic outlets Exporting for lower than domestic price Production control Possibilities in Agripol: –Storage –price support using export subsidy –Production control by production quotas or set aside

price D2 supply Domestic price Intervention storage World market price V D1 import tariff volume

Increasing domestic outlets Mandatory Subsidised

Exporting for lower than domestic price Exporting government stock at a loss Monopoly (marketing board) Price quotas Export subsidy –Fixed, ad valorem or variable –In Agripol, price support in an exporting country uses a fixed export subsidy NB: all these measures also require import tariffs

price volume demand supply Domestic price Export subsidy World market price export subsidy export

Exporting for lower than domestic price: international effects All these measures harm other exporting countries and farmers in countries without protection Variable export subsidies increase price instability in world markets –They prevent the domestic market from buffering fluctuations in global and domestic supply These effects are especially significant if the country is a large producer/consumer

Production control Production quotas Set aside –Mandatory or voluntary for a premium Possibilities in Agripol: –production quotas in dairy and/or beef –mandatory set aside (with possibility for compensation) in cereals

price volume demand supply Domestic price Production quota World market price import tariff ABCD Shadow price quota rent

price S1 Domestic price Set aside World market price V demand import tariff volume S2

Subsidies Price subsidy Input subsidy Direct payments –payments per hectare or livestock unit –‘decoupled’ payments Possibilities in Agripol: –Price subsidy –Fertiliser subsidy (in cereals) –Decoupled payments

price volume supply Producer price Price subsidy price subsidy demand World market price (consumer price) import

price volume S1 World market price V Input subsidy S2 demand

Subsidies: international effects All subsidies harm exporting countries and farmers in countries without protection This includes ‘decoupled’ subsidies, which are not really decoupled –Wealth effects –Updating of base period In Agripol, direct payments can influence production through their effect on farm income  investment