copy the linklink copied!Chapter 4. Agricultural policy environment

This chapter outlines the diversity of agricultural policy measures and associated support to producers and to general services to the sector in reviewed countries. It discusses the extent to which the different measures affect the drivers of agricultural productivity and sustainability: innovation, structural change, natural resource use and climate change. Outlining the importance of general services to improve the long-term performance of food and agriculture, this chapter consolidates the recommendations for agricultural policies made in country reviews.

    
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  • Reviewed countries display a diversity of agricultural policies: levels of support to producers range from 1% to more than 50% of gross farm receipts, and the policy mix includes a variety of instruments, from price support and broad direct payments to more targeted measures.

  • Most agricultural policy support goes to individual producers, although support to general services to the sector is best at enabling long-term performance in both food and agriculture.

  • Agricultural policy heavily influences farmers’ decisions in countries that rely on high support levels, and where the share of support that distorts the most production is highest within the overall policy mix. Such support, based on output or variable input use without constraints, negatively affects productivity and sustainability.

  • Other countries rely more heavily on income support with limited distortions to markets. This may increase investment capacity to innovate, but also slow structural adjustment, and thus productivity growth.

  • Most reviewed countries provide investment support to farmers, often as a means to facilitate adjustment and acquire modern equipment to increase productivity. In the presence of regulatory and policy incentives, this can also improve sustainability.

  • Many reviewed countries make efforts to improve risk management tools for farmers, including a few which already rely heavily on specific risk management measures. More effective risk management can facilitate innovation, which is a risky business, but government support in this area may encourage unsustainable behaviour.

  • Efforts to improve agriculture’s environmental outcomes include regulations on resource use, the removal of negative policy incentives, and payments to change practices, taxes and education programmes. The design of payment programmes (practice versus performance based) may influence their environmental effectiveness.

  • Climate change policies are still in development, with most countries having taken action on adaptation, much fewer on mitigation.

  • In some countries, agricultural policy compensates for failures in other policy areas (such as credit, competition).

Agricultural policy affects farm investments and practices through a variety of instruments, with different intended and unintended impacts on structural change, natural resource use and innovation, and thus productivity and sustainability in food and agriculture.

Reviewed countries have very different agricultural policy environments in terms of support level and type of policy measures (except for members of the European Union that implement the Common Agricultural Policy). For example, some rely heavily on direct support to production or income, while others provide risk management tools or support general services to the sector as a whole.

copy the linklink copied!Most support to agriculture goes to individual producers

Support to individual producers (measured by the Producer Support Estimate, PSE) accounts for over 80% of total support to the sector as a whole (measured by the Total support Estimate, TSE) in eleven out of fifteen countries (Figure 4.1).1 Australia is an exception as support to general services to the sector (GSSE) accounts for over half of the TSE, but this share is also about 30% of the TSE in Brazil and Canada. In the United States, about half of the TSE is comprised of government expenditure to consumers from food programmes, with negligible links to agricultural productivity or sustainability. Of the remainder, around 80% is support to individual producers.

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Figure 4.1. Composition of total support to agriculture, 2015-17
Figure 4.1. Composition of total support to agriculture, 2015-17

1. The OECD total does not include the non-OECD EU Member States.

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933998557

As a result, agricultural producers derive a significant share of their income from government support in many countries. At one end of the spectrum, producer support accounts for close to or above 50% of gross farm receipts in Japan, Korea and Switzerland. At the other end, the share of producer support in gross farm receipts of Australian and Brazilian producers is below 3%. In comparison, the OECD average was 18% in 2015-17 (Figure 4.2).

Using information contained in the PSE database, Table 4.1 summarises the main characteristics of support to producers derived from agricultural policies.

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Table 4.1. Summary of approaches to agricultural policy, 2015-17

%PSE1

% share in PSE

% share in all direct payments of least distorting payments3

Annual average TFP growth 2001-14 (%)

Environmental Progress in Agriculture Index (EPAI) 2004-144

Share of distorting support in gross farm receipts (%)

MPS2

Investment support

Direct payments

With input constraints

< 1%

Argentina5

..

-13.6

..

..

..

..

..

2.4

..

Australia

0.1

1.7

0

24

56

19

85

1.2

0.4

Brazil

0.9

2.7

29

28

3

69

0

2.9

..

1-10%

United States

3.1

9.6

28

4.2

50

54

50

1.9

-0.1

European Union6,7

5.2

19.3

20

6

65

60

65

1.6

-0.4

Canada

6.5

9.3

63

1.7

28

0

0

1.9

0.3

OECD

9.4

18.2

46

4.1

40

36

59

1.9

-0.1

10-20%

Colombia

11.3

13.1

82

4.6

0

10

..

1.1

..

China

11.8

15.5

73

7.3

15

1

20

3.3

..

> 20%

Turkey

23.1

25.3

81

1.6

8

1

0

2.4

0.7

Switzerland

30.5

56.0

49

1.2

42

42

67

1.1

-0.1

Japan

39.4

46.0

81

1.3

12

6

55

2.5

-0.1

Korea

47.6

52.3

90

0.7

8

4

44

1.9

0.4

Notes: TFP: Tota1 Factor Productivity; ..: Not available.

1. Producer support estimate as a share of gross farm receipts. 2. Market price support. 3. Payments based on fixed parameters and based on non-commodity criteria as a share of all direct payments. 4. The EPAI measures the difference between the proportion of nine selected agri-environmental indicators (agriculture methane emissions, agriculture nitrous oxide emissions, agriculture ammonia emissions, direct on-farm energy consumption, total pesticides sales, agriculture freshwater abstraction, nitrogen balance, phosphorus balance and farmland birds index) that registered positive growth and those that registered a negative growth between 2004 and 2014. A positive value (from 0 to +1) indicates an increase in the number of environmental pressures while a negative value (from 0 to -1) indicates a decrease in the number of environmental pressures. 5. %PSE, 2015-17 from OECD (2019a). 6. Among reviewed EU countries, TFP growth ranges from 1.4% in Sweden to 3.8% in Estonia. 7. EU figures for EPAI include only the 22 OECD members.

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en; USDA (2018), Economic Research Service, International Agricultural Productivity: www.ers.usda.gov/data-products/international-agricultural-productivity.aspx (accessed October 2018).

copy the linklink copied!Most support to producers is not linked to outcomes

Support levels give an indication of the reliance of producers on government intervention, but in terms of productivity and sustainability impact, the composition of support matters.

OECD analysis has shown that measures that distort input and output markets, such as border protection, supply controls, output-based payments and variable input subsidies, reduce producers’ incentives to use production factors more productively (OECD, 2012). As such, they hinder structural adjustment and discourage producers for innovating to become more competitive. These distorting measures can maintain resources in the sector that would otherwise be reallocated to more productive uses; they can encourage more intensive production, sometimes on marginal or fragile land; and they can encourage production practices that do not take adequate consideration of longer term environmental sustainability.2 For instance, fertiliser subsidies used in the People’s Republic of China (hereafter “China”) have contributed to increasing crop production at the cost of the environment.

Moreover, being for the most part commodity specific, this type of support favours products that may not be the most adapted to the region, to a changing climate, and impedes adjustment towards more productive and sustainable production choices (Ignaciuk, 2015; Wreford et al., 2017).

Broad-based income support decoupled from commodity production is more effective in transferring income to producers and thus increasing their capacity to invest and innovate. It also leaves more flexibility to producers to undertake new activities and switch to new products. However the effects of decoupled income support payments on productivity may be small, particularly where farm credit is not constrained as observed in Sweden. Furthermore, even if decoupled from production choices and targeted, income support slows structural adjustment needed to facilitate economies of scale, attract new entrants and thus foster innovation and productivity growth.

Research on the impact of US decoupled payments on farmers' decisions suggest they had negligible effects on the adoption of innovations or farm productivity: recipients did not invest at a higher rate than non-recipients, and although payments have increased household wealth they have led to no or modest changes in farm operating decisions (OECD, 2016a).

The impact of decoupled payments on the environment will generally be limited, although the context and type of impact matters. Existing studies find that partial decoupling tends to have a neutral or negative impact on biodiversity as they tend to homogenise agriculture production and in some cases encourage land abandonment (OECD, 2019b). Ongoing OECD analysis suggests that the marginal environmental effect of an increase in direct payments decoupled from production on nitrogen balances and greenhouse gas emissions is negligible (Henderson and Lankoski, 2019). At the same time, absolute effects may depend on the context. Lankoski et al. (2018)’s crop farm level model simulations in Finland suggest that decoupled area payment may increase GHG emissions and nutrient runoff compared to no policy, in the case when decoupled area payment is paid for cultivated cropland but not for idled land. A similar simulation using US regional data finds that decoupled crop area payments have no impact on productivity or mitigation of GHG (Lankoski, Ignaciuk and Jésus, 2018). Further, decoupled payments may have a cushioning effect in some cases that could affect the risk behaviours of farmers.

Investigating the determinants of Total Factor Productivity (TFP) growth in crop farms of selected EU Member States, Bokusheva and Čechura (2017) found that farm support payments negatively affect crop farm productivity and efficiency of input use. Farms receiving higher payments per ha or per tonne produced displayed lower TFP growth and higher persistent technical inefficiency, controlling for farms located in areas with natural handicaps. Payments more decoupled with production were found to affect productivity less than other forms of support.

In about half the countries considered, support is predominantly provided through measures that are considered most distorting to production and trade (Figure 4.2and Figure 4.3). This is support based on output (including market price support and output payments) and on the unconstrained use of variable inputs. These include high support countries like Japan and Korea, as well as countries with lower support levels, where these types of support, collectively termed “most distorting support”, account for a relatively small share of gross farm receipts. For example, most distorting support accounts for three-quarters of producer support in China, but only 11% of gross farm receipts in 2015-17. Similarly, EU support to producers accounted for 20% of gross farm receipts, but most distorting support only 5%. Conversely, countries with a lower share of most distorting support include countries with higher support levels. For example, the share of most distorting support is about 50% of producer support in Switzerland and 90% in Turkey, but their share in gross farm receipts is lower in Turkey (23%) than in Switzerland (30%).

In countries with a large share of “other support” such as the European Union, Switzerland and the United States, a large part is made of broad based direct payments with varying links to production parameters, and conditions attached to them. For example, two-thirds of direct payments in the European Union and over 40% of payments in the United States are not linked with current production parameters and do not require production, while over half of payments in Switzerland are not linked with current production parameters, but require production for the most part. In other countries, most payments are based on current area, animal numbers of income.

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Figure 4.2. Composition of Producer Support Estimate, 2015-17
Figure 4.2. Composition of Producer Support Estimate, 2015-17

1. Support based on output (including market price support and output payments) and on the unconstrained use of variable inputs.

2. The OECD total does not include the non-OECD EU Member States.

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933998576

Other types of support include investment support and payments for more specific purpose such as compensation of income losses or agri-environmental payments; these are discussed later.

In some countries, a high share of support is specific to single commodities. This includes market price support (MPS), output payments as well as payments based on area planted in specific commodities or animals. Rice and cotton are the commodities receiving highest levels of commodity-specific support, mainly in the form of price support for rice and sugar, and mainly using specific payments for cotton (Figure 1.11 in OECD, 2018b). However, differences in commodity-specific support, across commodities, have decreased across commodities in the last 15 years.

In countries with the lower levels of support and (relatively more) limited use of most-distorting forms of support, such as Australia and Brazil, exposure to competition has been particularly fundamental to incentivising innovation.

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Figure 4.3. Producer Support Estimate level and composition, 2015-17
Figure 4.3. Producer Support Estimate level and composition, 2015-17

1. Producer Support Estimate (PSE) as a share of the gross farm receipts.

2. Potentially most distorting support as a share of the PSE.

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933998595

copy the linklink copied!Some measures target innovation, structural change, natural resources and climate change

While all policy measures affect drivers of productivity and sustainability, some measures target innovation, structural change, natural resources and climate change more directly. These include: agricultural investment support, which facilitates investment in new technologies, and is sometimes conditional on innovation or sustainability improvements; support for advisory services when delivering advice to individual producers (considered in the next section); various measures facilitating labour or land adjustment; and incentives for the adoption of more sustainable technologies and practices.

Agricultural measures that support innovation directly are likely to create stronger incentives and capacity for innovation among agricultural producers, and will help structural change. Similarly, agri-environmental payments that explicitly target the desired environmental outcome would steer farmers towards innovative sustainable practices more effectively than broad-based measures (OECD, 2015a).

Few of the reviewed countries provide direct support to innovation through agricultural policies. Examples are found in Canada, with the AgriInnovation programme of Growing Forward 2 (Box 4.1); and in the European Union where Pillar 2 of the Common Agricultural Policy (CAP) includes since 2015 a number of optional measures to facilitate participation in innovation networks and co-operative approaches to innovation (Box 4.2). However, in most reviewed countries investment support has facilitated the adoption of new technologies and practices leading to productivity and sometimes sustainability improvements. Investment support has also facilitated farm consolidation.

For a long time, most countries have provided investment support to farmers, in the form of grants or cheaper loans, to co-finance the acquisition of land, buildings or equipment, often based on approval of a development plan. This can be part of a setting-up of young farmers, the development of new activities, changes in practices or upgrade of technology. The effect of investment support has been particularly spectacular in transition economies like Estonia and Latvia, where governments chose to dedicate a larger than EU average share of Pillar 2 CAP payments to investment support, and where some investment support originally aimed at new Member States upgrading farm and food processing facilities to meet EU safety and sustainability requirements. Other countries like China and Turkey have made significant efforts to improve agricultural and rural infrastructure.

In the United States, farm investment has taken place without specific government support to farm investment, but in the current Farm Bill support to young farmers and ranchers was introduced to address a specific market failure. In Brazil, farm credit support is a major instrument of agricultural policy, with two different programmes for commercial farms and for smaller subsistence farms, mainly to compensate for failure in credit markets. In EU agricultural policy, investment support is also to compensate partly for high land prices, which make it particularly difficult for young farmers to set up. However, in most cases, farm investment support programmes have been long-established. While credit market failure may have been a justification when farm investment support was first introduced, conditions may have changed and so the rationale for farm investment support may no longer apply in some countries, called for regular assessment of needs. Further, it is difficult to evaluate the impact of such programmes because of difficulties in assessing the extent to which investment would not have occurred in the absence of investment support.

In many reviewed countries, food processing industries have not invested and consolidated as much as agriculture and lack capacity to innovate. In Canada and the European Union, however, some programmes are also available for co-operatives and the restructuring of first stage processing, in particular as part of reform packages (e.g. EU sugar reform). EU support is also available for diversification of activities, including for adding value through processing at the farm. This usually facilitates adjustment of labour and capital resources, the former being often under-employed in smaller farms.

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Box 4.1. AgriInnovation in Canada

The AgriInnovation Program of Growing Forward 2 addresses the three stages of the innovation continuum: from research, to technology transfer, to the commercialisation and adoption of innovation. It contains three streams of innovation initiatives:

  1. 1. The Research Acceleration Innovation stream led by Agriculture and Agri-Food Canada (AAFC) addresses emerging science-based requirements of the sector through research development and knowledge transfer activities to identify and mitigate risks to production, keep pace with sustainability considerations, improve productivity and capture market opportunities. It targets far-from-adoption, cross-cutting research.

  2. 2. The Industry-led Research and Development stream supports pre-commercialisation research, development and knowledge transfer for innovative agriculture, agri-food and agri-based products and processes. This stream may provide financial support to approved applicants, and/or support in the form of collaborative assistance given by AAFC research scientists and experts for knowledge transfer. It provides support to two types of projects: Agri-Science Clusters and Agri-Science Projects.

    • Agri-Science Cluster support aims to mobilise and co-ordinate a critical mass of scientific expertise in industry, academia and government. Funding is available to not-for-profit and for-profit applicants (the latter under certain conditions); partners can include AAFC researchers/resources (under a Collaborative Research Agreement). It is national in scope, industry-led, and addresses components of the sector’s applied science plan under a single application. Maximum funding, in the form of a non-repayable contribution, is CAD 20 million over five years and requires industry contribution.

    • Agri-Science Projects are less comprehensive, but available for a single research project or a small set of projects. Their scope may be national, regional or local, and for profit and not-for-profit organisations are eligible. Maximum funding, in the form of a non-repayable contribution agreement, is CAD 5 million and requires industry contribution.

  3. 3. The Industry-led Commercialisation and Adoption stream aims to facilitate the demonstration, commercialisation and adoption of innovative agri-based products, technologies, processes or services. This stream provides support to approved industry-led pre-commercial demonstration, commercial or adoption projects.

These federal initiatives are complemented by cost-shared programmes with provinces and territories, which are designed to reflect the innovation requirements unique to different provinces and territories to address the broader innovation objective of the country.

Source: OECD (2015b), Innovation, Agricultural Productivity and Sustainability in Canada, https://dx.doi.org/10.1787/9789264238541-en using www.agr.gc.ca/eng/?id=1354301302625.

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Box 4.2. Choice of EU support in national Rural Development Plans 2014-20

In EU Member States, national or regional Rural Development Plans (RDP) funded by Pillar 2 of the EU Common Agricultural Policy (CAP) have for a long time included support for investment and the adoption of environmentally-friendly practices. For the period 2014-20, governments can also choose to support risk management tools, knowledge transfer (M01 and M02), collective actions, such as the setting-up producer groups and organisations (M09) and co-operation (M16).

Knowledge transfer measures cover arrangement of training activities, arrangement of demonstration and information activities, arrangement of visits to enterprises and study groups, and long-term programmes (M01), as well as support to individual advisory services and support for training advisors (M02).

Collective actions also have a direct link to innovation through the funding of participation in innovation clusters, and the development of value chains and local markets, which can be considered as marketing innovation, and the activities of producer organisations in these areas.

Figure 4.4 compares the choices of reviewed EU Member States in the RDP 2014-20. The largest share of RDP funding is for investment support in Estonia and the Netherlands, while Sweden dedicates more than half of RDP budget to measures enhancing sustainability and animal welfare. The share of innovation-related measures is small but larger than EU average in the Netherlands and Sweden.

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Figure 4.4. RDP 2014-20 choices by reviewed EU Member States
Figure 4.4. RDP 2014-20 choices by reviewed EU Member States

Note: Countries are ranked according to Investment levels. Innovation includes Measures 01 and 02; Investment is the sum of Measures 04, 05, 06 and 08; Sustainability is the sum of Measures 10, 11, 12, 13 and 15; Collective actions are Measures 09 and 16; and Risk management is Measure 17.

Source: European Commission (2015), Factsheet on 2014-2020 Rural Development Programme for Estonia, https://ec.europa.eu/agriculture/rural-development-2014-2020/country-files/ee/factsheet_en.pdf.

 StatLink https://doi.org/10.1787/888933998614

Source: OECD (2018c), Innovation, Agricultural Productivity and Sustainability in Estonia, https://dx.doi.org/10.1787/9789264288744-en.

Structural adjustment is mainly driven by market incentives as farmers want to benefit from economies of scale to become more competitive. In countries where the regulatory and policy environment does not prevent adjustment, farm consolidation has been rapid. This is, for example, the case in Australia, Brazil, most sectors in Canada, and the United States, but also the reviewed EU Member States, in particular Estonia where land is relatively abundant. Conversely, in Asian countries, land scarcity and restrictions on land use and markets have hindered the adjustment needed to improve productivity and sustainability. Efforts are being made, however, to improve the functioning of land markets, in part to respond to the shortage of labour in the sector. Policies to improve land consolidation in China are summarised in Box 4.3.

High support levels also contributed to slowing structural adjustment in some countries and for some commodities, and distorting resource allocation. Production quotas are particularly constraining, depending on implementation mechanisms. Even if tradeable, production quotas can still be constraining as they make farm expansion and setting-up more costly. EU dairy production quotas have been gradually abandoned, which has permitted increases in dairy production and farm size in Estonia and the Netherlands (Kimura and Sauer, 2015). Switzerland also abandoned dairy quotas in 2009. However, supply management remains in Canada for three commodity sectors, including dairy, and marketing orders remain in the United States for milk and more than 20 fruits and vegetables, but constrain production volumes of only one product (tart cherries). The EU sugar quota system ended in 2017. In the United States, marketing quotas appear to have restricted structural change and productivity growth, given the sharp changes that occurred after the quotas were eliminated for peanuts and tobacco (MacDonald, Korb, and Hoppe, 2013).The US sugar programme retains marketing allotments for processors that limit how much sugar can be marketed domestically in a given year. However, the allotments have not been binding in recent years.

At the same time, countries where the main policies have slowed structural change implement specific policy measures to facilitate the transition to a new generation of more innovative and productive farmers through early retirement schemes and the provision of specific or higher support to younger farmers. This is in particular the case in EU Member States. In other cases, structural adjustment packages accompanied reform, for example in Australia with the dairy reform; and in the European Union with the 2006 sugar reform, which included a two-year voluntary restructuring scheme, with funds available for processing factory closure, assistance to sugar beet growers, diversification measures, and transition measures (Box 6.2 in OECD, 2007).

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Box 4.3. Policies to facilitate land use consolidation in China

Consolidating small and fragmented farm operations into large-scale units is one of the most important pathways of improving productivity growth and sustainability of agriculture in China.

China aims to exploit the leading role of diverse forms of large-scale operations, promoting the consolidation of land resources to new agricultural operation entities including family farms, farming service providers and co-operatives. The diverse formats of land use consolidation have the advantage of being flexible in adapting to the local conditions and can facilitate more rapid structural change than a simple transaction of land use rights between individual farmers.

The new co-operative organisation emerged in the late 1980s as a voluntary organisation of farmers to disseminate agricultural technology and carry out marketing activities. For example, Farmer Professional Co-operatives (FPC) play key roles for small-scale family farms to adopt technology, integrate with supply chains and benefit from economy of scale in farm operation. FPC services typically include technical training, processing, marketing and purchasing inputs. The co-operatives often function as a broker of technologies through sharing information and providing advisory and training services. In other cases, the co-operatives allow smallholder farms to obtain more competitive prices in input and output markets through increasing their bargaining power. Land Shareholding Co-operatives (LSC) is an emerging type of co-operative which allows a group of farmers to put in trusts their land operational rights and receive dividends every year according to their share.

The development of farm machinery services in China contributed greatly to the mechanisation of major farming tasks in China. The use of farm machinery service providers allows small-scale farmers to save their labour input and to avoid a large capital investment and maintenance costs associated with farm-owned machines.

The government supports the development of co-operatives as a new type of farm management unit. In addition to providing a legal status and standard operational rules for the farmers’ co-operatives, the government is increasing direct support to them. For example, it provides them with financial and technical support through preferential treatment for value-added tax and stamp duties, credit guarantees and personnel training.

Source: OECD (2018d), Innovation, Agricultural Productivity and Sustainability in China, https://doi.org/10.1787/9789264085299-en.

Risk management is essential to improve adoption of innovation and more sustainable practices that could increase risk exposure (OECD, 2015a). However, care should be taken that support to risk management instruments does not encourage unsustainable behaviour.

All policy measures that increase income help farmers manage risk to some extent, through savings and investment in income diversification, investment in risk-reducing technologies, and if provided as fixed payments, by reducing relative income fluctuations (OECD, 2009). This is in particular the case for single payments in EU countries, which cushion variations in market receipts. Moreover, investment support can facilitate the adoption of risk reducing technologies and practices, such as buildings improving health and welfare conditions of farm animals, or on-farm storage facilities.

Most reviewed countries also provide more direct risk management support. This can be in the form of a direct payment conditional or based on a reduction in farm receipts, at individual or regional levels, linked to specific current of fixed areas, commodities or group of commodities. These have been most important in US and Canadian agricultural policies. Korea introduced a variable payment for rice in 2005.

Subsidising crop insurance schemes has been a traditional way to help farmers manage crop risks in Canada and the United States. Crop insurance subsidies are also an important part of support to Brazilian agriculture. Other reviewed countries also offer such insurance programmes, as well as support to mutual funds to compensate for losses, but to a much smaller extent. For example, in Estonia, participation in insurance for livestock has been low, partly because the support is not attractive, and no insurance company offered crop insurance, which could also benefit from subsidies. In other EU Member States, the uptake of risk management support under the Rural Development Programme has also been limited.

As support to crop insurance is based on current parameters, it is expected to encourage higher input use to maximise profit, which can in turn increase resource and environmental pressures. It could also encourage farmers to undertake risky behaviour, and thereby be inconsistent with climate change adaptation objectives. In non-catastrophic risk setting, they could distort insurance markets and encourage the use of crops not adapted with a changing climate (Ignaciuk, 2015; OECD, 2016b).3 Empirical analyses on US programmes find very small effects of crop insurance subsidies on total land use, but some suggest a non-negligible impact on crop rotation, and variable input use (OECD, 2017b).

In Australia, most support, which is low compared to other OECD countries, is to help farmers manage risk, which includes drought. Drawing from experience with former programmes (Box 6.1 in OECD, 2015c), catastrophic risk has been more clearly defined and the Agricultural Competitiveness White Paper (Australian Government, 2016) suggests measures to help farmers be better prepared in the face of risk in addition to support measures to help cope with the consequences of risk, giving more responsibility to farmers in deciding how to use support. Direct support is also provided to upgrade on-farm infrastructure and irrigation efficiency with the aim of improving natural resource use and environmental management.4 Tax concessions form part of the policy approach aimed at helping producers manage production and market risk through allowing them to smooth their incomes, and also provide further incentives for on-farm preparedness-related investments (OECD, 2015c). In Sweden, farmers are usually covered by normal insurance schemes (OECD, 2018e).

Agricultural policies include two broad types of economic incentives encouraging the adoption of more environmentally-friendly practices: mandatory cross compliance applying to most payments and specific payments based on voluntary participation in agri-environmental schemes. As shown in Figure 4.5, these support programmes vary in scope but remained under 5% of total gross farm receipts in most reviewed countries.

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Figure 4.5. Support conditional on the adoption of specific production practices, 2015-17
Percentage of gross farm receipts
Figure 4.5. Support conditional on the adoption of specific production practices, 2015-17

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933998633

More specifically, there is a wide range of agri-environmental and natural resources policy approaches, depending on the type of problems. Some countries rely heavily on positive incentives, other on regulatory constraints, few on market-based mechanisms. For instance, Brazil's Low Carbon Agriculture (ABC) Plan provides loans to support conservation practices, or the restauration of pastures. The Environmental Farm Plans programme in Canada supports environmental assessments of farm practices on specific farms that are then eligible for the cost shared financial assistance programme (the Environmental Stewardship Incentive programme). Sweden was one of the first countries worldwide that introduced taxes on pesticides. Combined with other policy measures on pesticide registration and application, and measures encouraging integrated pest management, the tax contributed to a reduction of more than 50% of pesticide sales nationally, and a large decrease in pesticide risks for human health and to the environment. Sweden also requires an environmental impact assessment for a wide range of agricultural activities, in particular, for intensive livestock production; the cost of the assessment is borne by farmers (OECD, 2018e). The Netherlands has introduced a charge (since 2013) for the Storage of Sustainable Energy (ODE) in addition to the standard tax on energy (EB). A low tax rate has been agreed for heating used to assist the growth of horticultural products, but the sector will have to pay for exceeding the CO2 emissions target agreed with the government. The country also applies a performing regulatory programme to curb nutrient runoff from agriculture (OECD, 2015d). The United States has implemented a federal regulation on manure management of large cattle operations that has also shown to be effective (OECD, 2016a).

While there remain significant gaps in the literature, a range of studies has attempted to evaluate the environmental impacts and effectiveness of agri-environmental policies. An OECD study reviewing the literature showed in particular that action-oriented (also called practice-based) agri-environmental measures often performed more poorly than result-oriented measures (OECD, 2019d). Results-oriented agri-environmental policies are considered to have the potential to stimulate on-farm innovation and adaptation of environmental management practices to local conditions. However, empirical evidence on the degree to which results-oriented mechanisms spur innovation is scant, not least because results-oriented mechanisms are still in their infancy.

US conservation policies have been among the most studied thanks to robust data collection and rigorous analyses. The development of cross-compliance and voluntary conservation programmes in the United States has partly contributed to reduce soil erosion and environmental impacts of agriculture since the 1980s (see Box 4.4 on the Conservation Reserve Program). There exists quantitative evidence that both cross-compliance and voluntary conservation programmes have indeed encouraged the adoption of environmentally-friendly practices, although several other explanatory factors have also been pointed out such as technology, information and markets (OECD, 2016a).

Despite these encouraging results, there are still several issues and challenges regarding the design and performance of US agri-environmental programmes. First, there exists evidence that sustainability performances could be further improved, in particular in terms of water use, and pollution, and that market mechanisms, regulations and incentives used to promote more sustainable use of resources have not solved acute local problems. Second, additionality of conservation programmes may be lower for certain practices. Third, conservation programmes, by increasing profitability of farming, may have indirect land-use and input use effects, which can in turn worsen environmental performances — the so-called “slippage effect”. Fourth, targeting and tailoring mechanisms such as the Environmental Benefit Index could be further refined and expanded. Fifth, research continues to suggest that commodity and crop insurance programmes encourage crop production on a small but measurable amount of land that would otherwise not be used for crop production (OECD, 2016a).

Fewer studies yet have looked at the impact of agri-environmental policies on productivity. Results from a farm-level simulation model built to study the policy synergies and trade-offs between climate change adaptation, mitigation and productivity in agriculture suggests that context may matter; the same instrument may have positive or negative productivity effect in the US Midwest or Finland (Lankoski, Ignaciuk and Jésus, 2018). In its literature reviews, OECD (2019b) found that there are mixed impacts, finding cases where agri-environmental payments can have positive or negative effects on productivity.5

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Box 4.4. The US Conservation Reserve Program (CRP): Competitive tendering based on an environmental performance index

The Conservation Reserve Program (CRP) of the United States provides 10-to-15-year contracts to remove land from agricultural production and place it under grass or tree cover. CRP enrolees can choose from a menu of farm practices (establishment of permanent native grasses, tree planting, riparian buffers, field-edge filter strips, etc.) that provide permanent grassland, reforestation, wetland restoration, and wildlife habitat. CRP enrolees receive land rental payments, and additional payments reflecting a share of the costs of installing various conserving practices on their land.

Although the programme is based on a predefined list of activities and practices, it provides funding proportional to expected environmental performance. Whole-field and whole-farm CRP expenditures are awarded on the basis of ex ante expected environmental benefits. Increasingly, CRP funds have been reoriented to support high-value partial field land retirements.

Enrolment is competitive. Competition for participation is generally managed through a bidding process. In most cases, eligible producers submit offers for participation, specifying the CRP practices they are interested in applying and details of the land to which they would apply them, as well as, in some cases, what payment they are willing to accept. These offers are scored on potential environmental benefits and ranked according to an ex ante estimation of the value of benefits against the cost of payments producers are willing to accept to achieve them. The primary ranking mechanism is the Environmental Benefits Index (EBI), which scores bids on the practices offered and the payments required to reach a composite score that can rank all bids on a single scale. The EBI thus helps assure that programme funds are used most effectively.

Sources: OECD (2017a), “Evaluation of farm programmes in the 2014 US Farm Bill: a review of the literature”, https://dx.doi.org/10.1787/ff39e390-en. USDA (2017), Conservation Reserve Program website, www.fsa.usda.gov/programs-and-services/conservation-programs/conservation-reserve-program/index (accessed 21 June 2017).

Policies regarding climate change are often managed outside of the agriculture sector, but reviewed countries have introduced programmes supporting adaptation to climate change or the mitigation of the sector’s GHG. A recent assessment showed that while all OECD countries have developed policies in the agricultural sector that support adaptation to climate change, progress on the specification of national (and subnational) adaptation strategies varies widely across countries and implementation is still limited (Ignaciuk, 2015). Examples of programmes in reviewed countries include the Delta Programme in the Netherlands, aiming at redesigning flood risk management, including agricultural land areas, and the USDA Regional Climate Hub initiative which provides tailored made information for advisory services in agriculture and forestry on projected climate change risks in different parts of the country (OECD, 2017b).

Efforts have been less systematic on GHG mitigation, as countries continue to be developing policies. Australia has introduced the Emission Reduction Fund (ERF), which attributes funding to the most cost-effective bidders to reduce GHG emissions. While eligible to other sectors, agriculture is one of the key sectors targeted by the initiative. The Korean government excluded agriculture from its emission trading system, just like other OECD countries so far.6 But it has engaged in other initiatives, including the provision of cost-share investments into livestock manure treatment facilities that recycle livestock manure into usable fertilisers (OECD, 2018f). The Dutch programme Greenhouse as Energy Source (Kas als Energiebron) was launched in 2005 with the aims to make all new greenhouses climate-neutral and economically profitable from 2020 onwards (Box 2.2 in OECD, 2015d).7

copy the linklink copied!General services are key to improving long-term performance of food and agriculture

Providing general services to the sector is more efficient than support to individual producers to enhance the long-term competitiveness of the food and agriculture sector. The GSSE includes policies that directly affect innovation and thus sustainable productivity, such as public expenditures for agricultural R&D and advisory services (Chapter 4). It also includes government expenditure on inspection and infrastructure, which are considered as part of the policy environment enabling innovation, productivity and sustainability in food and agriculture (Chapter 5). Other general services such as support to marketing and promotion, and public stockholding, are not considered as enabling productivity growth.

Brazil appears as the country with the largest share of innovation-related expenditure in the GSSE (Figure 4.6). This is consistent with the dominant role the public agricultural research organisation, Embrapa, plays in Brazilian agricultural and at the international level, but also the relative lack of infrastructure. The European Union (mainly as part of national expenditure), Switzerland, Australia and Colombia — countries with very different levels of support to producers — dedicate close to 50% of their expenditure on general services to the agricultural innovation system. In contrast, Japan and Turkey invest a considerably higher share of their expenditure on general services in agriculture-related infrastructure.

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Figure 4.6. Focus of general services support, 2015-17
Share of expenditure on agricultural innovation and on infrastructure in the General Services Support Estimate (GSSE)
Figure 4.6. Focus of general services support, 2015-17

Notes: Agricultural Innovation System (AIS), including R&D, agricultural schools and advisory services. The OECD total does not include the non-OECD EU Member States.

Source: OECD (2018a), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), https://dx.doi.org/10.1787/agr-pcse-data-en.

 StatLink https://doi.org/10.1787/888933998652

copy the linklink copied!Main knowledge gaps

The OECD database on support to agriculture contains a lot of useful information on agricultural policies, comparable across countries. For this exercise, broader coverage of the whole food system, bioeconomy and rural economy would be useful, in particular for general services.

In many countries, income support is a major objective of agricultural policies. However, information on the income and wealth of farm families is often incomplete, and not comparable to that of other households for tax purposes. This makes it difficult to address income issues in farming in an equitable way via social policies.

Information asymmetry between farmers and the government also makes it difficult to identify potential market failures in the provision of credit, risk management tools or public goods demanded by society. Consequently, governments do not have enough information to design efficient policies.

Evidence on the impact of specific agricultural policy measures on the productivity and environmental performance of the sector remains limited.

copy the linklink copied!Recommendations on agricultural policies

This section consolidates recommendations for agricultural policies made in country reviews, which are detailed in the country notes of Annex B.

Adopt a food and agricultural system strategy

  • Identify deficiencies in the value chain and design appropriate incentives to address them, including within the scope of agricultural policy.

  • Develop further digital solutions to collect and manage data, reduce control costs, and to improve traceability along the food chain.

Focus agricultural policy on the sector’s long-term development objectives

  • Move towards measures to improve the sector’s long-term productivity and sustainability, such as investment in general services that strengthen human and infrastructure capacity, and farmers’ connection to input and output markets. These services include various forms of sector-specific hard and soft infrastructure, appropriate biosecurity efforts, and agricultural innovation systems responsive to needs (as discussed in Chapter 6).

  • Develop a long-term vision reconciling productivity and sustainability improvements to reduce policy uncertainty and contradictory policy signals.

  • Reduce the relative importance of government support in agricultural incomes and increase the share of farmers' returns from the market.

Strengthen capacity to respond to future challenges and opportunities

  • Ensure that environmental and climate change concerns are taken into account when developing and evaluating policies that can contribute to productivity and competitiveness.

  • Improve preparedness of farmers and adaptation to climate change.

  • Review current policies to test their capacity to respond to future challenges and opportunities (i.e. higher frequency of natural disasters and risk management tools, new pest and diseases, change in water management needs, etc.)

  • Explore options for reducing GHG emissions from agriculture, in particular grazing livestock, facilitate farmers’ adaptation and initiate relevant research.

Better information for better agricultural policies

  • Improve or maintain a good information base and analytical capacity to monitor policy implementation, evaluate policies and guide farmer decisions, with specific attention to innovation adoption and environmental practices.

  • Foster the development of internationally-comparable indicators and open data to facilitate benchmarking and knowledge sharing.

  • Continue to improve information on the potential impact of climate change at the local level through research and scenarios analyses to help adaptation of farming systems.

  • Better link agricultural policies to clear objectives to facilitate policy evaluation and reduce policy uncertainty.

Identify market and policy failures when providing support to producers

  • Investigate or revisit the extent and causes of market failures, and their impact on investment and resource use to adapt policies to new issues.

  • Improve information on income levels and variability in agriculture to allow the government to design better-targeted policies. Take steps to induce farmers to declare their income situation.

  • Evaluate farmers’ access to credit, and whether lack of access is linked to specific, individual circumstances, or general failure in the sector or in the credit market, to design the appropriate level of intervention.

  • Improve information on risk exposure, farmers’ risk perceptions and use of risk management tools, and the impact of these factors on willingness to invest.

  • Explore the impact of policy measures on innovation, structural change, natural resource use and climate change.

Reduce agricultural policy distortions

  • Reduce support levels, minimise support that distorts agricultural commodity markets and trade, and reduce variations in support level across commodities to enhance reallocation of resources based on market demand. This should provide opportunities to take advantage of growing and more diverse demand, in particular for high value products. In particular:

    • Eliminate domestic price support measures, such as border protection and commodity-specific support, and consider introducing direct payments to facilitate the transition, if needed.

    • Remove measures that reduce the cost of specific variable farm inputs, without imposing environmental constraints.

    • Limit the provision of coupled payments to very targeted and temporary measures.

    • Reduce transfers to state economic enterprises and agricultural co-operatives that distort competition.

Remove impediments to innovation, structural change and sustainable resource use

  • Move away from measures and compliance conditions that discourage innovation.

  • Remove impediments or disincentives to structural adjustment and the realisation of scale economies that may exist in the land and labour markets.

  • Minimise policy incentives to unsustainable use of resource from measures pursuing other objectives.

Harness agricultural policy measures to target more precisely productivity and sustainability drivers

  • Focus agricultural policy to support innovation, structural change, sustainable resource use and climate change adaptation in areas where markets fail to send a signal to farmers to adapt.

  • Improve the targeting of measures designed to pursue these objectives.

Provide more specific incentives to innovation and adjustment

  • Target innovation directly, using dedicated incentives within investment support, service provision, or payments for the adoption of new production and marketing practices.

  • Support investments into the modernisation and restructuring of farm and agri-food firms and the uptake of new technologies, including digital-based opportunities.

  • Support diversification of activities.

  • Use agricultural policy to support collaborative activities and participation of farmers or farmers’ representatives in knowledge networks.

Strengthen incentives to sustainable use of natural resources

  • Strengthen the ability of agricultural policy to improve the environmental performance of agriculture, by improving the design of agri-environmental programmes, using best available scientific and economic evidence basis to better target and tailor to actual needs.

    • Establish a framework of agri-environmental policies, which clarifies the reference environmental quality levels as well as environmental targets

    • Encourage performance-based evaluation of policies and implement measurable indicators of performance. Explore the scope for using digital technologies for monitoring outcomes, possibly through pilot programmes.

    • Revisit the balance between regulation and economic incentives in view of fostering environmentally-friendly innovation.

    • Increase the scope of the polluter-pays-principle to hold farmers accountable for harmful environmental effects from crop and livestock pollution, while raising funds for more ambitious agri-environmental targets where appropriate.

    • Consider market-based approaches to further reduce environmental pressure and the development of environmental service markets, such as carbon offsets and water quality credit markets.

    • Take a multi-dimensional approach to manure management, including regulation, incentives to invest in new technology, capacity-building of producers and building partnerships between stakeholders.

    • Strengthen efforts to provide targeted and tailored advice to farmers on sustainable technologies and practices.

  • Improve the overall efficiency of agriculture water use at the river basin level by combining a flexible and robust water allocation regime, cost-effective and targeted investments in water storing infrastructure and irrigation, and self-financing mechanisms to ensure the viability of irrigation systems.

  • Integrate climate change adaptation and mitigation as a cross-cutting aspect of agricultural and agri-environmental policies

  • In countries where agri-environmental policy is designed at the local level, strengthen the role of the federal government to co-ordinate and facilitate the implementation of efficient approaches to state or local agri-environmental problems. Provide guidelines, mechanisms to share experiences, and matching funds if appropriate.

Promote farmers’ preparedness and risk management to facilitate future investment

  • Review and improve risk management tools (if needed), focusing government role on preparedness, provision of information and catastrophic risk.

  • Consider an assessment of existing subsidised agricultural insurance, with regard to its longer-term financial and actuarial soundness and in view of climate change risk.

  • Evaluate risk management instruments to ensure they do not transfer risk to the public budget that should be borne by farmers, and to monitor they effectively lead to better targeting of risk.

  • Move towards an all farm-revenue approach to exploit differences in price and yield variability across products, thereby reducing government costs for a given objective as well as removing distortions across commodity sectors.·

Better target investment support to needs

  • Assess investment needs and enhance the effectiveness of public investment support by focusing on areas where financial markets fail to provide funds for the provision of public goods, and better integrate business advice and synergies with research and innovation.

  • Streamlining programmes and simplifying access procedures, if this is an issue.

  • If needed, increase the role of rural credit institutions in financing farm capital investment.

  • Further promote the development of private non-bank financial instruments for agriculture and agro-industries, subject to a review of existing instruments.

  • Enhance criteria for loan eligibility to better screen out borrowers that would have invested without support.

  • Focus concessional investment credit on projects that explicitly incorporate technological innovations, and advanced farm management and environmental practices.

  • Adapt credit support rate to needs, without encouraging unsustainable investment in equipment.

Better account for the diversity of the farm population

  • Adapt programmes to different farm population needs, e.g. small, subsistence farms versus commercial farmers.

  • Review the situation of small, semi-subsistence farmers and address their specific needs using a wider range of policy approaches.

Pursue wider objectives with non-sectoral policy

  • Address policy and market failures that are not specific to agriculture at the level they occur, and do not use agricultural policy. For example, agriculture policy is not the most appropriate to compensate for general failure in the credit market, or address general social or rural development issues.

  • For rural development, take a more bottom-up approach to promoting integrated investments and public services that respond to local needs to attract non-agriculture industries to locate in rural areas.

  • Consolidate and enhance rural diversification activities across various agencies and within various programmes; consider a co-ordinated national rural diversification framework that focuses on the development of rural industries; increase the emphasis on rural diversification in regional and rural development investments.

  • Increase the role of general social security system as an income safety net for farm households by introducing adjusted eligibility criteria and additional incentives for early retirement and resource transfer to young commercial farmers.

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Bokusheva, R. and L. Čechura (2017), “Evaluating dynamics, sources and drivers of productivity growth at the farm level”, OECD Food, Agriculture and Fisheries Papers, No. 106, OECD Publishing, Paris, https://dx.doi.org/10.1787/5f2d0601-en.

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Grafton, R.Q. et al. (2018), “The paradox of irrigation efficiency”, Science, Vol. 361, No. 6404, pp. 748-50, http://science.sciencemag.org/content/361/6404/748.

Henderson, B. and J. Lankoski (2019), “Evaluating the environmental impact of agricultural policies”, OECD Food, Agriculture and Fisheries Papers, No. 130, OECD Publishing, Paris, https://doi.org/10.1787/add0f27c-en.

Ignaciuk, A. (2015), “Adapting Agriculture to Climate Change: A Role for Public Policies”, OECD Food, Agriculture and Fisheries Papers, No. 85, OECD Publishing, Paris, https://dx.doi.org/10.1787/5js08hwvfnr4-en.

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Lankoski, J., A. Ignaciuk and F. Jésus (2018), “Synergies and trade-offs between adaptation, mitigation and agricultural productivity: A synthesis report”, OECD Food, Agriculture and Fisheries Papers, No. 110, OECD Publishing, Paris, https://doi.org/10.1787/07dcb05c-en.

Lankoski, J., et al. (2018), “Modelling policy coherence between adaptation, mitigation and agricultural productivity”, OECD Food, Agriculture and Fisheries Papers, No. 111, OECD Publishing, Paris, https://doi.org/10.1787/ee62a5ae-en.

MacDonald, J., P. Korb, and R.A. Hoppe (2013), Farm Size and the Organization of U.S. Crop Farming, US Department of Agriculture, Economic Research Report No. 152, August, www.ers.usda.gov/publications/pub-details/?pubid=45110.

OECD (2019a), OECD Review of Agricultural Policies: Argentina 2019, OECD Review of Agricultural Policies, OECD Publishing, Paris, https://doi.org/10.1787/9789264311695-en.

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Notes

← 1. Estonia, Latvia, the Netherlands and Sweden are all represented by the EU28 in Figure 4.1.

← 2. OECD (2013) identified the potentially most environmentally harmful support categories as market price support; payments based on commodity output, without imposing environmental constraints on farming practices; and payments based on variable input use, without imposing environmental constraints on farming practices. OECD work has analysed the environmental impacts of these support mechanisms using market level and farm level ex ante simulation (Henderson and Lankoski, 2019).

← 3. For instance, Annan and Schlenker (2015) find that American farmers with insurance opt for more heat sensitive crops and do not have the incentive to engage into adaptation.

← 4. There are questions, however, on the actual saving realised by irrigation efficiency investments (Grafton et al., 2018).

← 5. The review of literature also found that agri-environmental policies tend to decelerate the pace of structural change by allowing land retirement, fallow or low-management land uses to become a (more) profitable land use option for farmers.

← 6. At the subnational level, the Canadian province of Alberta allows industries and organisations with GHG mitigation obligations to purchase emission reduction credits from agriculture producers (OECD, 2019c). The US State of California also allows the purchase of carbon offsets for methane reduction in livestock operations and in rice cultivation (see www.arb.ca.gov/cc/capandtrade/offsets/offsets.htm).

← 7. See www.kasalsenergiebron.nl/over-ons/kas-als-energiebron/ for more information on the Greenhouse as Energy Source programme.

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Chapter 4. Agricultural policy environment