IV Agricultural Trade Policies
- Naheed Kirmani, Shailendra Anjaria, and Arne Petersen
- Published Date:
- July 1985
Following several years of decelerating growth, the value of world agricultural exports declined by 9 percent in 1982 to $212 billion. In 1981–82, marked declines in international commodity prices characterized agricultural markets, and in 1983, world agricultural exports were stagnant. Commodity prices improved in the second half of 1983 and continued to do so at a slower pace in the first half of 1984; prices softened subsequently. Agricultural production and trade data, based on figures of the Food and Agriculture Organization (FAO), are presented in Tables 32 through 40.84
Agriculture in OECD countries is still characterized by a tendency for supplies to exceed effective demand from all sources. Surpluses, which in the past had assumed serious proportions mainly for dairy products and sugar, have now become apparent in practically all commodities.
Technological progress and government policies, including domestic price support policies, have been largely responsible for inducing rapid increases in production, although other factors, such as the weather, have also played a role. At the same time, the demand for agricultural products in the OECD countries has grown slowly, and slow growth and balance of payments difficulties have constrained export demand from developing countries. High stocks and pressures on prices, farmers’ incomes, and government budgets reflect the general overproduction which has led to more demands for government intervention and measures that impede or distort trade. International trade frictions in agriculture have increased.
Motivated primarily by rising budgetary costs, several countries have begun to reassess their agricultural policies. Various measures have been taken, including price and production restraints and incentives to set aside acreage. The steps taken so far are positive and encouraging but have been limited in relation to the magnitude of the problems. Even these have occurred against the background of strong opposition from affected producers, highlighting again the entrenched and complex nature of protectionism in agriculture.
In an examination of agricultural markets, in late 1984 the OECD Committee for Agriculture noted that the prospects for expansion in world demand for agricultural products were not bright.85 In view of this, the Committee called on OECD countries to increase efforts to contain surpluses. It pointed out the desirability of an effective production strategy which would ensure that the burden of adjustment was not transferred from one agricultural subsector to another. Such a strategy needed to be flexible and based increasingly on market mechanisms. More consistent national objectives for domestic policies needed to be accompanied by greater harmonization of policies at the international level. To improve disciplines in agriculture and adherence to agreed rules, international cooperation would be essential.
Rapid increases in production have characterized agricultural developments in the past few years and have been induced to a great extent by the operation of domestic support programs. Agricultural exports declined by 11 percent in each of the fiscal years 1982 and 1983, as the appreciating dollar reduced external competitiveness and as demand in traditional markets in developing countries contracted, owing to their balance of payments difficulties and, in some cases, to favorable harvests. By 1983, stocks had risen to their highest levels since the 1960s. Net expenditures of the Commodity Credit Corporation (CCC) shot up from $3.8 billion in fiscal year 1980 to $18.8 billion in fiscal year 1983 (Table 41). As a proportion of federal government net budget outlays, they rose from 0.66 percent to 2.36 percent over this period. In fiscal year 1984, CCC net expenditure declined to $7.3 billion but is estimated to rise sharply in fiscal year 1985 to $15 billion.
Three features of the Government’s response to these developments may be noted. First, measures were taken to reduce surpluses and expenditures by reducing or freezing domestic support or target prices (dairy, tobacco, wheat, cotton, corn, rice) and by programs designed to reduce or divert acreage under production. Further, a reassessment is under way of the affordability of domestic support programs. The 1981 Farm Act was formulated against the background of an inflationary environment and expectations of continued high inflation, which did not materialize; moreover, the impact of rapid technological advances on productivity may have been underestimated. A new Farm Bill is scheduled for discussion in the U.S. Congress in 1985. The Administration’s general objective is to seek increased reliance on market mechanisms in the conduct of domestic agricultural programs.
Second, the United States intensified efforts to improve discipline in the conduct of international trade in agriculture, particularly with regard to competition in third markets and the extent of export subsidization by the European Community, and also with regard to foreign market access, including the Japanese market. Toward this end, the United States has pressed for bilateral and multilateral consultations, including within the OECD and the GATT, and has also made increased recourse to the GATT’s dispute settlement mechanism.
Third, the United States has made increased use of export market programs, partly to reduce its dairy stocks, but to some extent also to match subsidized exports by foreign competitors in third markets. Many of these programs have existed for a number of years, but the intensity of their use has varied. Exports under government-financed programs (Public Law 480 and the U.S. Agency for International Development) averaged about one half of the value of total U.S. agricultural exports in the late 1950s and early 1960s; this proportion declined to 5 percent during 1976–80, and further to less than 4 percent in fiscal year 1983. On the other hand, the use of credit sales has increased. CCC credit sales (under General Sales Manager (GSM)-5. GSM-101, GSM-102, and blended credit programs) declined from about 8 percent of the value of total U.S. agricultural exports in 1971–75 to 5 percent in 1976–80 but rose to about 13 percent in fiscal 1983. Under the GSM-5 program, the CCC makes direct, short-term export credit loans; in 1984, the interest rate charged borrowers was set at 1.5 percent above rates paid by the U.S. Treasury on 52-week treasury bills.86 Under the GSM-101 program, operative from 1979 to 1981, the CCC provided credit guarantees against noncommercial risks. In 1981, commercial risk was added to the guarantee through GSM-102, which replaced GSM-101. Under GSM-101 and GSM-102, short-term credit is provided through commercial institutions at financing costs set by U.S. banks. The blended credit program, begun in October 1982, uses GSM-5 direct credit and GSM-102 commercial export credit guarantees. The credit is blended on a ratio of a minimum of four parts government-guaranteed credit (GSM-102) to one part interest-free direct government credit (GSM-5). In fiscal year 1983, blended credits were directed principally to developing countries to purchase U.S. wheat, rice, corn, vegetable oil, soybean meal, and cotton. In fiscal year 1984, blended credits were authorized for countries such as Morocco, Tunisia, Algeria, and Egypt to purchase wheat and wheat flour.
Exports with CCC credit sales amounted to around $4½ billion in fiscal year 1983, of which $1.0 billion was under the blended credit program. Other measures included long-term sales agreements with certain countries and a few barter agreements.
Agricultural policies are conducted under the framework of the Common Agricultural Policy (CAP).87 Implementation of the CAP and technological improvements have induced rapid increases in domestic production. Self-sufficiency ratios have increased steadily over the past decade. During 1980–83, they reached or exceeded 100 percent for most commodities except maize, fresh fruits, and sheep and goat meat, for which they ranged from 66 to 85 percent (Table 41). The export of surpluses over domestic demand has necessitated substantial export “restitutions” (subsidies), because world prices have generally been well below domestic prices. Over the past decade, the Community has increased market shares abroad in several products, including sugar, dairy products, wheat, and meat; yet it still remains the largest world importer of agricultural products, of which the most important are agricultural raw materials, fruit and vegetables, and natural textile fibers.
The cost of domestic supports and export restitutions under the CAP have led to marked increases in budgetary expenditures on agriculture. Expenditures under the Guarantee Section of the European Agricultural Guarantee and Guidance Fund (EAGGF) rose from ECU 11.3 billion in 1980 to ECU 15.9 billion in 1983; in 1984, they are estimated at ECU 18.4 billion (Tables 40 and 42). Such expenditures declined from 69 percent of the overall Community budget in 1980 to 60 percent in 1982, but rose to over two thirds in 1984. The Guidance Section of the EAGGF accounts for around 3 percent of the overall Community budget.
Rising budgetary expenditures on agriculture have been a source of concern and have stimulated discussions on changes in the CAP. Over the past several years, some measures have been taken with a view to restraining production, reducing surpluses, and controlling the growth of budgetary expenditures. These proved inadequate, however, in relation to the magnitude of the adjustment required. Debate on the reform of the CAP consequently intensified during 1983–84, and became linked with discussions to expand the total size of the Community budget.
The discussions resulted in the adoption of a set of measures commonly referred to as the CAP “reform.” The main features of the agreement were (i) a more realistic price policy; (ii) restoration of a single market by dismantling the monetary compensatory amounts (MCAs);88 (iii) control of milk production through production quotas; (iv) extension of the principle of guaranteed thresholds (already applicable to cereals, rape, processed tomatoes) to new products (sunflower, durum wheat, dried grapes); (v) rationalization of aids and of premiums for various products; and (vi) compliance with Community preference.
The average level of common agricultural prices (the intervention price or equivalent price) was reduced by 0.5 percent in 1984/85 in ECU terms, compared with increases of 4.2 and 10.4 percent, respectively, in the previous two years; prices were reduced for most commodities, and price increases decelerated for others (Tables 45 and 46). In terms of national currencies, there was an increase in prices in 1984/85 averaging 3.3 percent, compared with increases of 6.9 and 12.2 percent, respectively, in the previous two years. The 1984/85 measures envisaged a reduction in prices in real terms on an overall basis. The increase in national currencies ranged from 1.5 percent for Denmark to 17.6 percent for Greece. Price reductions in national currencies (of less than 1 percent) were effected for the Netherlands, the United Kingdom, and the Federal Republic of Germany.
In order to eliminate positive MCAs, a new green ECU has been introduced which, in practice, is pegged to the deutsche mark. This avoids the emergence of new positive MCAs for the Federal Republic of Germany, but may create negative MCAs in other countries if the deutsche mark is revalued, thereby making room for CAP prices in national currencies to rise for other members. As an “exceptional” measure, Germany was allowed to compensate for the dismantling of its positive MCAs through fiscal measures. Value-added tax (VAT) payments by German farmers were lowered by 5 percent for two years and 3 percent for the subsequent three years. (Details of the sectoral measures are given below.) Along with the reform measures, the Community is trying to restrict imports of certain cereal substitutes.
With regard to the overall budget, the Community has decided to increase its amount of “own” resources by increasing the VAT ceiling from 1 percent to 1.4 percent beginning in 1986; this aims, in principle, at accommodating the envisaged accession of Spain and Portugal and providing the Community with resources to expand its activities in the nonagricultural areas. In view of the concern of some member states, particularly the United Kingdom, that the availability of additional resources could dilute the incentive to contain agricultural expenditures and reform the CAP, it has been agreed in principle that the growth in EAGGF (Guarantee) expenditures will be kept below the rate of increase of total expenditures. This principle has not yet been formally adopted as a Council decision.
The combination of price restraints and production controls reflected the Community view that it was not feasible to rely wholly on the price mechanism to bring about adjustment; for a significant cutback in production, reductions in support prices would have to be so large as to be politically unacceptable.
The recent measures to reform the CAP are expected to slow the growth in production and in surpluses. They are a step in the right direction; their vigorous implementation, followed by additional steps in the future, should help tackle the problem of overproduction in the medium term.
In the event, unusually favorable weather and increased yields brought about record harvests in 1984, which raised output of cereals (by 22 percent), sugar beets (13 percent), potatoes (19 percent), oilseeds (34 percent), and durum wheat (59 percent). Production of milk declined by an estimated 2 percent.
Japan’s agricultural policy has remained essentially unchanged in the past several years.89 Rice accounts for about 35 percent of farm output and its price is supported at levels three or four times higher than world prices. The price support program for rice has contributed to increased production costs for most other agricultural products and has necessitated protection of other agricultural sectors. While high degrees of self-supply have been achieved for rice, dairy products, vegetables, meat, and fruits (Table 40), the global food self-sufficiency ratio has declined to about 50 percent in terms of caloric intake, owing to a sharp reduction in the self-sufficiency ratio for grains and livestock feeds; this development reflects severe constraints on available arable land and rapid growth in demand.
The agricultural sector is basically protected in four ways: (1) direct payments from the budget—that is, subsidies that do not affect the price of the commodity; (2) restrictions on quantities supplied to consumers through import quotas managed by state trading; (3) domestic price support measures; and (4) charges on imports that raise domestic prices and improve the competitive position of domestic producers. Although import duties and levies are important, especially in the beef sector, protection is provided largely through the first three instruments. About 78 percent of the value of Japan’s agricultural production was subject to price support in 1982. The cost of price support programs has declined continuously from ¥ 881 billion in 1979 to ¥ 697 billion in 1983 (Tables 41 and 48). In the same period, their share in total budget allocation to the agricultural sector also declined continuously from 30 percent to 23 percent. The cost of price support for rice accounts for two thirds of the total agricultural support program.
The product coverage of quantitative import restrictions has been progressively reduced, to 22 items at present. Import quotas now mainly cover meat, certain milk and milk products, dairy products, citrus fruits, wheat, barley, and rice. In addition to these formal controls, Japan’s food distribution system is sometimes viewed by trading partners as constituting an informal import barrier. Most food products are distributed to consumers through long intermediary chains closely bound to traditional domestic sources of supply (Houck 1979). Procedures for issuing licenses for imports subject to quantitative restrictions have also been said to hurt foreign suppliers.
In consideration of trading partners’ concerns, Japan has included certain agricultural goods in its four market-opening packages. Tariff reductions were included on 15 agricultural items in the May 1982 package, 60 items in the December 1982 package, 3 items in the October 1983 package, and 32 items in the April 1984 package.90 After the United States lodged a complaint with the GATT against Japanese import controls on 13 agricultural products,91 and after subsequent bilateral discussion under GATT Article XXIII, Japan agreed to liberalize 6 agricultural products92 in April 1984. In response, the United States agreed to suspend the GATT procedure for two years. Separate agreements were reached on imports of citrus products and high-quality beef. Following negotiations with Australia, the Government announced its intentions regarding total imports of beef in October 1984.
Canada’s agricultural sector is largely export oriented. The major agricultural exports are grains and oilseeds, in which Canada is very competitive. There have been no major changes in the framework of agricultural policies in the past two years. Various agricultural products (such as beef cattle, hogs, sheep and lamb, industrial milk and cream, and corn) are subject to a domestic support program through the Agricultural Stabilization Board (ASB). The Board supports the prices of these commodities at not less than 90 percent of the previous five-year average market or base price, taking into account cash cost increases.
In the dairy sector, compulsory production quotas are complemented by the basic producer prices. The difference between the producer price and the world market price is met partly by a coresponsibility levy on producers but largely by the budget. Expenditure on the dairy industry accounts for around one third of the federal agricultural budget. To guarantee the proper functioning of the domestic support program, import tariffs, supplemented by quantitative restrictions, apply to virtually all dairy products. Cheese import quotas have been set at about 20,000 tons, equivalent to around one tenth of domestic output; 60 percent of the cheese quotas are assigned to the European Community.
Both the egg and poultry sectors in Canadian agriculture are regulated and controlled through marketing agencies.
In addition to products subject to stabilization, controls are applied to meat imports under the Meat Import Act of February 1982. In 1984, Canadian producers filed a complaint about subsidized beef imports from Ireland and Denmark. The complaint was referred to the Canadian Import Tribunal for an advisory opinion on injury and, in August 1984, the Tribunal advised that there was no evidence that the allegedly subsidized imports were causing material injury to Canadian production. As a result, no countervailing duty investigation was initiated based on the complaint. In view of the surge of imports of beef, particularly in the latter half of 1984, and the anticipated very high level of imports in 1985, the Government decided to impose restrictions on imports of beef and veal into Canada during 1985. The quota established under the Meat Import Act was 146.5 million pounds (equivalent to Canada’s minimum access commitment under the GATT). Consultations are currently taking place with suppliers to the Canadian market.
Around four fifths of exports of wheat and barley are to state-trading countries and are channeled through the Canadian Wheat Board to purchase agencies in these countries. Long-term agreements with China and the U.S.S.R. provide for minimum amount commitments. In the past several years, there have also been long-term agreements with Algeria, Brazil, Jamaica, Mexico, and Poland. The actual sales contracts are negotiated for periods of six months, and the contract prices are generally in line with U.S. market prices.
Australia is an important exporter of wheat, wool, sugar, meat, and dairy products. There have been no noteworthy changes in agricultural policy in the past few years. While the overall level of assistance to the agricultural sector is low, certain individual sectors are supported through a wide range of measures, such as discriminatory pricing arrangements, import restrictions, adjustment assistance programs (including concessional credits and tax concessions), and other programs (including government contributions to stabilization funds and a local content scheme). Discriminatory pricing arrangements may raise commodity prices above world prices or hold them below world prices. Discriminatory pricing arrangements currently operate for certain dairy products, sugar, wheat,93 rice, dried vine fruits, other fruits, and eggs. In some years, these pricing arrangements resulted in transfers from producers to consumers. The average effective rate of protection of agricultural products has generally been less than 10 percent, but in 1982/83 it increased sharply to 16 percent, owing in part to the weather. The effective rate of protection is likely to have declined in 1983/84. To limit the output increases resulting from higher returns, restrictions are sometimes placed on domestic production. When domestic prices are maintained above world prices, imports are usually excluded or their prices raised through tariffs or other forms of restrictions.
Since 1980, production of dairy products has outpaced commercial demand, large stocks have accumulated, and prices in international dairy trade have fallen. According to the FAO (1984), government expenditures on milk price support in developed market economy countries increased to $9 billion in 1983.
World production of milk, at some 500 million tons, reached a new record level in 1983. The increase was largely attributable to expansion of output by the Community, which, with one fourth of world output, is the leading producer of dairy products, and by the U.S.S.R., which has been the largest importer in recent years. International trade in dairy products declined and stocks continued to increase; in particular, stocks of butter rose sharply.
The gap between international prices and the minimum prices for dairy products established under the GATT’s International Dairy Arrangement (IDA) steadily narrowed during 1983–84. In 1984, the Community announced special sales of 200,000 tons of storage butter (mainly to the U.S.S.R.), at prices some 40 percent below the minimum level of $1,200 a ton established under the IDA. At a special meeting held by the GATT Committee of the Protocol Regarding Milk Fat, the Community expressed the view that, because of the age of the butter to be sold, its sale price would have to be lower than the IDA minimum. The Committee found that some of the envisaged sales were not consistent with the provisions of the Protocol. The Community requested a derogation under Article 7 of the Protocol, but some countries (e.g., the United States) did not agree. In mid-December 1984, the United States notified the GATT Director-General of its decision to withdraw from the IDA within 60 days, ascribing it to the Community’s decision to proceed with the special sales.
The domestic program supports the milk price received by farmers through purchases by the CCC of butter, nonfat dry milk, and cheese. The Agriculture and Food Act of 1981, passed at a time of large CCC purchases, used a set of triggers relating the minimum support level to the size of CCC purchases. This was a major departure from traditional price support policy under which price changes were tied directly to parity.94 As long as large CCC purchases continued, the support prices were specified in dollar terms, with the 1981–82 price set at the 1980–81 level of $13.10 a hundredweight, and modest increases thereafter.
Concern over continued surpluses and rising expenditures led to legislation in 1982 which froze support prices for two years and provided for deductions from milk producers’ marketing receipts to partially offset rising government costs. The 1983 Dairy and Tobacco Adjustment Act lowered the minimum price support level from $13.10 to $12.60 and allowed for further $0.50 reductions in support on April 1 and July 1, 1985, if net government purchases in the succeeding 12 months were projected to be above 6 billion or 5 billion pounds, milk equivalent, respectively. Based on current purchases, these reductions appear likely. The 1983 Act also provided for the first time for a milk diversion program.
Since 1979–80, net CCC expenditures on dairy price support and related programs have exceeded $1 billion annually (Table 50). In the 1982–83 marketing year, net expenditures were a record $2.6 billion, about 13 percent of farms’ total cash receipts for milk and cream, or an average of about $13,000 per commercial dairy farmer. Net expenditures were lower in 1983–84, but still substantial ($1½ billion), and are expected to remain at this level in the current marketing year.
In 1983, the CCC purchased the equivalent of 16.8 billion pounds of milk (12 percent of total milk marketed), exceeding total CCC removals during 1973–77. Even though donations of dairy products under government food distribution programs have been expanded in recent years, government stocks stood at over 17 billion pounds (milk equivalent) at the beginning of 1984, representing more than seven weeks of commercial use of all milk and dairy products.
At September 1984 exchange rates, U.S. domestic dairy prices were about the same as domestic prices in most major dairy producing countries with price support programs, but two-to-three times higher than world market prices. Import controls have been used for many years to prevent disruption of the domestic support program. Quotas exist for imports of milk products in various forms, for 12 categories of cheese, and for chocolate.
In 1981 and 1983, barter agreements were concluded with Jamaica involving an exchange of CCC-owned commodities (dairy products and, in 1983, grains) for Jamaican bauxite; the transactions, valued at $13 million and $34 million, respectively, were effected in 1982 and 1984. In the past several years, the CCC has made direct sales of dairy products, valued at world market prices but below CCC’s acquisition cost, to a number of countries.
The tendency for Community milk deliveries to rise at a significantly higher rate than the increase in normal internal consumption and in export demand has been a feature of the milk sector since the CAP’s earliest days. Dairy products currently account for about one third of EAGGF (Guarantee) expenditures on crops; dairy program expenditures (costs of intervention and export subsidies) account for 15 percent of the value of Community production of milk and milk products.
The earliest measures to restrain production were concentrated on voluntary actions to reduce output by premiums to producers for dairy cow slaughter or conversion to beef production. In 1977, a flat-rate coresponsibility levy was introduced on producers’ milk deliveries. In 1982 and 1983, production targets were adopted in the form of guarantee thresholds; if exceeded, price increases for the milk sector in the subsequent year would be subject to specified “abatement,” that is, a reduction in prices from the levels that would normally have been granted (which did not necessarily imply actual price reductions). In the event, these measures failed to contain overproduction.
In mid-1983, the Commission proposed adoption of more effective measures to control milk surpluses. It suggested a 12 percent reduction in milk support prices, or the introduction of a production quota system. The Council agreed to introduce quotas for a period of five years beginning 1984/85. The target price (in ECUs) for 1984/85 remained unchanged, in contrast to increases of 2.3 percent and 10.5 percent, respectively, in the previous two years.
The national quotas were to be calculated from the 1981 deliveries plus 1 percent, except for Ireland and Italy, for which the guaranteed quantity would be that for 1983 deliveries. Taking account of internal consumption and the scope for exports, the Council agreed on a guaranteed final quantity of 98,363,000 tons. As a transitional measure, it approved a total quota of 99,235,000 tons for 1984/85. It also created a “Community reserve,” enabling additional quotas of 335,000 tons to be assigned to Ireland, the United Kingdom (Northern Ireland), and Luxembourg. The Council also agreed that, when the quantities added to the reserve were distributed, Ireland would enjoy priority treatment so that the quantities available for that country would not be reduced in future years. As a counterpart to the flexible arrangements for 1984/85, the coresponsibility levy was raised from 2 percent to 3 percent.
The national quotas are distributed among the various regions of each member state, on the basis of either individual quotas (granted to each dairy farmer) or collective quotas (granted to a dairy). Each member state remains free to choose one or the other arrangement, provided that the formula applied is the same for all farmers in a given region. An individual member state may, therefore, operate both systems, in different regions.
Quota overruns entail penalty levies of 75 percent (for individual quotas) and 100 percent (for collective quotas). Special arrangements have been made for dairy farmers who operate development plans and for young farmers who have started farming since 1981. In view of adjustment difficulties, the Council renewed the Community’s direct aid to small dairy farmers for two years at an unchanged level of ECU 120 million.
Implementation of the milk quotas is difficult because of the large number of producers involved. By the end of 1984, a number of problems, such as the transferability of quotas, still needed resolution, and collection of levies was delayed. Nevertheless, indications are that, on an overall basis, milk output is likely to fall in 1984/85, although it is still uncertain whether the aim of a 4.25 percent decline will be achieved. Over the medium term, it is estimated that adherence to quotas would reduce surpluses to around 15 percent of production, compared with the current 18 percent.
The Community has granted special access for New Zealand butter since the United Kingdom became a member. Access was reduced gradually from 165,000 tons in 1973 to 83,000 tons in 1983. In 1984, the Community decided to guarantee access for a further five years, with a reduction to 79,000 tons in 1986; quantities have not yet been determined for the remaining period.
Japan’s dairy production has increased rapidly under government subsidies and protection. The Livestock Industry Promotion Corporation (LIPC) is entrusted with the purchase and sale of butter, condensed milk, and powdered skimmed milk. The difference between the guaranteed price to farmers and the basic marketing price of milk for manufacturing is subsidized from the government budget through the LIPC. The guaranteed price is determined on the basis of estimated costs of efficient producers. Quantitative controls on imports of dairy products other than natural cheese contribute to maintaining domestic market prices for dairy products at a level several times that of world prices.
In the early 1980s, the increase in dairy production, coupled with a slow growth in demand, resulted in dairy product surpluses. In 1981, Japan held consultations with New Zealand that led to a “voluntary” cut of about 10 percent in New Zealand’s exports of compound butter to Japan over the following three years. At the same time, the annual rate of increase of guaranteed prices for processed milk was held back to less than 0.5 percent during 1982–84, leading to a slight decline in subsidy payments. The production of dairy products is now broadly equivalent to 100 percent of self-sufficiency levels, with minor imports of butter and powdered skimmed milk.
World production and exports of grains (wheat and coarse grains) are concentrated in developed countries in the temperate zone. North America accounts for more than 60 percent of world exports of wheat and the United States for about two thirds of world coarse grain exports. The developing countries import the most wheat, and the developed countries the most coarse grains. State-trading nations are important importers of both wheat and coarse grains.
World output of wheat continued to rise strongly in 1982/83–1983/84. International trade in wheat declined in both years, partly reflecting better harvests in some importing countries and balance of payments difficulties in many developing countries. World stocks of wheat have consequently risen sharply in the past three years, and international wheat prices have fallen. In 1983–84, the tendency of world trade in coarse grains to increase as production declined led to a fall in stocks and a strengthening of international prices.
The price support program is implemented through a nonrecourse loan and purchase program.95 The loan rate rose in 1981 and 1982 but declined in the 1983 and 1984 crop years. In addition to price support, a number of programs are in operation, with objectives such as reduction of official stocks, or farm income distribution.
Under a program introduced in 1973, deficiency payments are made to farmers when farm prices fall below a target price, with the maximum payment rate equal to the difference between the target price and the CCC loan rate. The program aims to support income without affecting the market price. The Agricultural Programs Adjustment Act of 1984 lowered the target price for wheat from $4.45 to $4.38 a bushel for 1984 and 1985 and required farmers participating in the wheat program to cut back total wheat acreage by at least 30 percent, consisting of a 10 percent paid diversion and a 20 percent unpaid acreage reduction.
Under the farmer-owned grain reserve (FOR), established in 1977, in return for loans and annual storage payments, farmers agreed not to market their grain for an extended period (3–5 years), unless the average farm price reaches a specified level.
Since 1970, direct cash payments for each crop have been limited to $50,000 a person, and participation in set-aside programs has become mandatory for eligibility for direct payments or loan programs. A new and more specific acreage reduction program (ARP) was introduced in 1981.
Since 1982, there has been a 15 percent acreage reduction for wheat in which the diverted land had to be put in an approved conservation program. In 1983, a payment-in-kind (PIK) program was introduced for wheat (as well as for cotton, feedgrains, and rice). Payments-in-kind are made to farmers in exchange for agreeing to let up to 50 percent of their acreage base lie fallow. The payment-in-kind program proved very popular, partly because it was not subject to the $50,000 cash limit. It also proved to be costly (the imputed value of payment-in-kind entitlements in 1983 was $1.94 billion) and has been terminated for wheat.
Direct payments under the wheat programs were as low as $97 million in 1979/80 but reached $3.3 billion in 1983/84, with payments-in-kind accounting for 60 percent of the total. Direct payments, including payments-in-kind, were over 35 percent of the farm value of 1983/84 production and nearly 67 percent of the returns above cash expenses. Prior to payment-in-kind, direct payments were much smaller—less than a tenth of the farm value of production in 1981/82 and 1982/83—but they still accounted for over a fifth of the returns above cash expenses.
As the United States is the largest exporter of wheat, the domestic loan rate supports international prices. A higher loan rate may encourage other wheat exporting nations to raise their production. Foreign exporters have expanded wheat production 54 percent since 1975 and have more than doubled exports. The strong dollar has exacerbated the effects of U.S. price support programs on exports. The U.S. Foreign Agricultural Service estimates that, from 1975/76 to 1983/84, the U.S. loan rate expressed in local currencies rose 166 percent in the United States, but 275 percent in Australia and 227 percent in Canada.
In 1983, an export payment was made to U.S. wheat millers under an agreement between the United States and Egypt that provided for the commercial sale and delivery of flour equal to 1 million metric tons of wheat to Egypt. The agreement stipulated that wheat flour would be purchased from U.S. millers on a tender basis at a suggested price of $155 a metric ton (compared with U.S. wheat flour prices of $250–260 a ton), with 77.5 percent of the purchase price eligible for financing under the GSM-102 credit guarantee program. The value of this export payment was $103.5 million.
With regard to other grains, the 1984 Agricultural Programs Adjustment Act froze the target price for corn at $3.03 a bushel in 1985 ($0.15 lower than the price dictated by the 1981 Farm Act). If the corn carryover level is projected to exceed 1.1 billion bushels on September 30, 1985, an acreage cutback of 5–20 percent must be provided through a combination of acreage reduction and paid diversion. The target price for rice was also frozen (at $11.90 a hundredweight compared with $12.40 in the 1981 Farm Act), and provision was made for acreage cutback.
A guarantee threshold production level of 121 million tons of cereals has been established for 1984/85. If actual production (defined as the average of the actual in the most recent three years) exceeds the threshold, the subsequent year’s support price will be reduced by 1 percent for each 1 million tons in excess, with a ceiling of 5 percent on the price reduction. This may be partly offset by adding 1 percent to prices for each 1 million tons of imports of cereal substitutes in excess of 15 million tons. The maximum 5 percent price decline is relative to the price that would normally have been granted. The 1984/85 threshold may be exceeded by 8 million tons, as average production is estimated at 129 million tons. Imports of cereal substitutes did not exceed 15 million tons, so no adjustment for this factor was necessary. In accordance with the formula, prices in 1985/86 must be reduced by 5 percent; because the “normal” price increase has not been decided, it is not yet possible to determine whether actual support prices for cereals will be reduced.
Following the U.S. complaint to the GATT about wheat flour subsidies by the Community, the Community voluntarily limited its exports of wheat and wheat flour to 14 percent of the world market in 1982 and 1983. As production continued to increase, Community stocks rose to 8–9 million tons by the end of 1983. In 1984, the Community may have exceeded its self-imposed export limit, as a result of a decision to prevent further stock accumulation in the face of increasing cereal output. World wheat prices have been declining, owing in part to the appreciation of the U.S. dollar, in which they are set. This has enabled the Community to increase exports in 1984 without increasing export restitutions in ECUs.
High domestic prices of cereals have induced a rapid increase in Community imports of cereal substitutes (such as corn gluten feed and manioc) for use as animal feed. Manioc imports are controlled by quantitative restrictions. In 1982, the Community negotiated a voluntary restraint agreement with Thailand, limiting the latter’s manioc exports to the Community until 1986; at the same time, the Community provides assistance to Thailand for agricultural diversification. There is also a GATT quota on manioc, mainly utilized by Indonesia, and a quota for non-GATT members, mainly China. As part of the CAP reform proposals, the Community is seeking an unbinding of its GATT-bound tariff on corn gluten feed and a limit on imports of corn gluten feed, which are mainly supplied by the United States, and, to a smaller extent, by Brazil. The Community proposed to allow U.S. imports of up to 3.3 million tons at the current tariff level and to impose a variable import levy, equal to that on cereals, on imports of corn gluten feed exceeding this level. Bilateral negotiations with the United States, however, have thus far been unsuccessful.
The Community took countermeasures in 1983 in response to the subsidized sale by the United States of cereals to Egypt—a traditional Community market. To win back part of the Egyptian market in common wheat flour, the Commission decided to pay a special refund to Community exporters in addition to the ordinary export refund, for a limited period, for a quantity of 400,000 tons of flour.
Japan implements a price support program for grains to increase its self-sufficiency, and for sociocultural reasons. Its import policy is also guided by the need for security and stability of grain supplies. The Government buys rice from farmers at a guaranteed price determined on the basis of production costs, commodity prices, and other economic conditions to ensure broad self-sufficiency in the production of rice. Rice is resold to wholesalers at a lower price, determined to stabilize the consumers’ household economy. Producer prices for rice have risen somewhat faster than other guaranteed prices (an average of 1.7 percent during 1982–84). Increases in producer prices are generally passed to the consumer. Government rice subsidies have declined by one third from 1979 to 1983, but nevertheless remain the largest expenditure items in the agricultural budget. Production of rice is broadly equivalent to domestic consumption, and Japan does not normally export rice, except occasionally in the form of food aid. Realizing the potential for excess production owing to a decrease in domestic consumption of rice, the Japanese authorities have expressed their intention to undertake adjustments to bring production in line with demand.
As feedgrains provide the basis for the economy’s pig, poultry, and cattle industries, imports of maize, sorghum, and other grains are permitted liberally; however, imports of wheat and barley, which are produced domestically, are subject to global quotas, despite the low level of self-sufficiency (13 percent in 1982). In recent years, wheat imports have remained stable at 5.5 million tons, and barley imports at about 2 million tons.
As in the case of rice, producer prices for wheat and barley have consistently been much higher than the import prices. The Food Agency of the Ministry of Agriculture, Forestry, and Fisheries buys virtually the entire production of wheat and barley, and resells it at substantially less than producer prices. The resulting deficit is financed from the consolidated budget. The cost of protecting domestic producers rose from ¥ 84 billion in 1980 to ¥ 113 billion in 1982, mainly because of a significant increase in domestic production of wheat and barley; support prices for wheat have remained unchanged since 1982.
Australia is an efficient producer of wheat. There is, however, considerable government intervention in wheat production and marketing, involving the operation of a price stabilization fund, price setting arrangements, statutory monopoly control of domestic and export marketing, other assistance measures from government, and import controls. The Australian Wheat Board is the sole marketer of wheat domestically, and of wheat and flour overseas. During most of the 1970s, government intervention in the wheat industry resulted in negative effective protection, but effective rates of assistance of 5–11 percent were provided during 1980/81–1982/83.
According to new regulations in effect since October 1984, the guaranteed minimum price for standard quality wheat is set annually at 95 percent of the average of estimated net returns for the subject season and of net returns in the lowest two of the preceding three seasons. Government-guaranteed differentials are applied to other qualities of wheat, based on expected returns relative to those of standard-quality wheat. An interim first advance representing a substantial share of the estimated guaranteed minimum price is paid on delivery. A second advance payment is made when the final guaranteed minimum price is fixed. Any difference between the guaranteed minimum price and the final actual return for a season is met by the Government, which has not made any such contribution since the 1972/73 season. Wheat for human consumption is sold at an administered price determined quarterly on the basis of the average of the Australian Wheat Board’s export price for the forward quarter and the last quarter, plus a margin to cover additional costs to the Wheat Board of servicing the domestic market. Wheat for domestic stockfeed may be sold directly to users by growers and is not subject to a minimum price arrangement.
A large proportion of exports is made under long-term arrangements. In response to sales on longer credit terms by major suppliers, Australia recently extended credit for two-to-three years to a limited number of markets. The financing of such credit was borne directly by the Wheat Board without government involvement.
Developed countries account for two thirds of meat production and over three fourths of world trade. World meat output accelerated in 1983, but world trade and international prices declined.
While meat production is not promoted through a domestic support program, the import of meat is restricted. U.S. legislation passed in 1964 and amended in 1979 provides for quotas on the importation of fresh, chilled, or frozen beef, veal, sheep meat, and goat meat when annual imports are estimated to exceed a trigger level defined as 110 percent of an adjusted base quota.96 There have been no import quotas since 1979. Whenever it appeared likely that the trigger level might be reached, the United States avoided imposing import quotas by negotiating voluntary restraint arrangements with exporting countries. Voluntary restraint arrangements with Australia and New Zealand were in effect in the last quarters of 1982 and of 1983. No restrictions or voluntary export restraints were imposed in 1980, 1981, and 1984. The operation of the U.S. Meat Law during 1965–84 is presented in Table 53.
Output and exports of meat have increased in recent years. CAP expenditures on meat rose from ECU 1.3 billion in 1982 to an estimated ECU 2.4 billion in 1984. In 1984/85, beef support prices were reduced by 1 percent (in ECUs), compared with a 7.9 percent increase in 1983/84. At present, there are no production limits on meat; however, the Council has agreed, in principle, to introduce a guarantee threshold production system if meat surpluses become a major problem. The introduction of milk quotas has contributed to the rise in beef production in 1984, probably by some 100,000 tons, because of increased slaughtering of dairy cows. The Community currently has 700,000 tons of beef in public intervention stores—some 300,000 tons more than a year ago.
Domestic production of sheep meat is around 720,000 tons. Imports of sheep meat are restricted by voluntary export restraints negotiated with certain countries in exchange for lowering the 20 percent GATT-bound tariff to 10 percent. The major suppliers are New Zealand, Australia, and certain South American countries. Actual imports from these sources have recently been lower than the 320,000 tons allowed. There are also subceilings on imports into France and Ireland.
The domestic market for bovine meat is protected by a system of variable import levies, and few imports enter under the normal regime. There is a GATT-bound global quota of some 50,000 tons of frozen beef and veal, with a 20 percent tariff. This quota has effectively been applied on a bilateral basis through detailed product specification in a manner which ensures that particular amounts can be imported only from particular countries. There are, in addition, a series of preferential regimes. Under the Lomé Convention, 50,000 tons are allowed levy-free entry into the Community, provided that the exporter levies an equivalent export tax. In addition, “balance sheet” arrangements were put in place during the Tokyo Round negotiations. At that time, the Community had been in deficit for certain cuts of meat, mainly for the canning industry. An agreement was therefore made to evaluate the import requirements annually with the parties to the arrangement and to fix an annual import quota. As the Community has been a surplus producer since 1979, these arrangements have created internal difficulties, but they have still been continued. For 1985, they allow 50,000 tons of beef and veal for processing (mainly from Uruguay, Argentina, Australia, and New Zealand) and 190,000 head of young male calves for fattening (mainly from Yugoslavia, Hungary, Poland, and Romania). There is also a preferential quota for “Hilton” beef (29,800 tons for 1985), mainly from the United States, Canada, and Argentina. Altogether, preferential quotas have totaled between 350,000 and 400,000 tons in recent years, compared with Community exports of 800,000 tons.
Japan produces about 70 percent of its consumption of beef and veal. Policy is directed at ensuring a certain target income support to the domestic livestock sector. To maintain market prices within a predetermined range, the Livestock Industry Promotion Corporation (LIPC) conducts purchase and sales operations of bovine meat. When wholesale prices exceed the intended range, the LIPC increases the sale of imported and domestic beef. If wholesale prices fall below the minimum price, the LIPC withdraws domestic beef from the market for storage. Beef imports are subject to a global import quota that is broken down by type of beef. The LIPC conducts the purchase and sales operations of most imported beef to stabilize demand and supply, as well as prices. Imports are auctioned to domestic distributors, subject to the predetermined minimum price, at a premium over import prices (c.i.f.) of some 50 percent. The profits are allocated to a special fund to assist the domestic livestock industry.
The United States supplies virtually all imports of high-quality beef, while Australia supplies the preponderance of other types of beef. Under the Tokyo Round of trade negotiations, Japan liberalized its global import quota from 92,000 tons in 1977 to 135,000 tons in 1982/83. Following bilateral consultations with the United States, Japan liberalized high-quality beef imports from 16,800 tons in 1979/80 to 30,800 tons in 1983/84. Further consultations with the United States led to new understandings in April 1984 for additional liberalization of high-quality beef imports to 58,400 tons by 1987/88—an annual average increase of 6,900 tons. After negotiations with Australia, the Japanese Government announced its intention regarding the evolution of global imports of beef in November 1984. According to the announcement, global beef imports will increase from 141,000 tons in 1983/84 to 177,000 tons in 1987/88, with increases of about 9,000 tons each year, including an annual increase of 2,100 tons for the type of beef supplied by Australia. Thus, Australia’s share in Japanese beef imports, which declined from 75 percent in 1980/81 to 66 percent in 1983/84, is likely to decline further.
World trade in sugar expanded in 1981–82, mainly because of large imports by China and the U.S.S.R. Trade declined by an estimated 5 percent in 1983, as these countries reduced purchases and output increased in other importing developing countries. Negotiations to renew the International Sugar Agreement have been unsuccessful, and it currently operates as a cooperation agreement without economic provisions.
About two thirds of the sugar consumed in the United States is produced domestically, with a farm value of $1.53 billion in the 1982 crop year, equivalent to 2 percent of the total value of all principal crops.
In December 1981, against the background of falling world market prices of sugar, a domestic price support program was reintroduced for the 1982–85 crops of sugar beets and sugarcane. The program established a domestic support price for raw cane sugar of US¢16.75 per pound, with scheduled per-pound annual increases to not less than US¢17.0, US¢17.5, US¢17.75, and US¢18.0 during 1982–85. The domestic support price is to be achieved through the implementation of nonrecourse loans by the CCC. It has been the CCC’s aim, however, not to acquire sugar stocks under the program. Accordingly, a market stabilization price (MSP) has been announced that is the sum of the domestic support price and specified costs. Import controls are used to raise the price of imported sugar to the level of the market stabilization price.97
In May 1982, the import fee necessary to maintain the market stabilization price reached its maximum statutory limit, and a quota system was reintroduced. The global annual quota was fixed at 2,800,000 short tons during October 1982–September 1983, and raised to 3,050,000 short tons for the subsequent year. Largely to offset the effect of continuing replacement of sugar by nonsugar sweeteners (especially high fructose corn syrup), the global quota for the period starting September 1984 was lowered to 2,550,000 short tons, and the quota period was extended by two months to the end of November 1985. Within the global quotas, country quotas were established according to historical trade patterns, and traditional suppliers (Australia, Brazil, the Dominican Republic, and the Philippines) accounted for more than half of the total allocation. The relative country shares remained unchanged in the past few years, with the exception of a reduction in the allocation to Nicaragua and a reallocation of the difference to El Salvador, Honduras, and Costa Rica.
The direct effects of the U.S. sugar price support program on U.S. sugar producers are substantial. The difference between the world price (f.o.b. Caribbean, converted to a New York basis) and the actual U.S. domestic price of raw sugar represents the premium of the U.S. market to the world market owing to import restrictions. During October 1982–September 1983, this premium is estimated to have averaged US¢12.5 per pound, raw value. The premium of the 1982/83 crop of 5.9 million tons yielded domestic sugar growers and processors an estimated $1.5 billion. The direct budget costs were negligible, as the CCC acquired no sugar stocks. The effects on consumers are difficult to estimate; high sugar prices also affect prices of other products, especially other sweeteners. A U.S. Department of Agriculture estimate, assuming full pass-through of cost increases, suggests that the US¢12.5 per pound premium attributable to the U.S. sugar price support program cost U.S. consumers of industrial and nonindustrial sugar and sugar substitutes about $3 billion a year.
Following rapid increases in sugar production in the late 1970s, large surpluses developed, the export of which necessitated substantial export refunds because of the significant difference between internal Community prices and world market prices. This created pressures on the budget and also led to frictions with other sugar-exporting countries, which felt that the Community’s sugar policy was depressing international prices.
In July 1981, the Council defined the Community sugar policy for five years. This provided for a continuation of the domestic production quota system and for the implementation of a coresponsibility levy in accordance with the principle that producers should be fully responsible for the costs of disposing of sugar produced in excess of Community consumption (other than preferential imports from the ACP countries, which are financed by the EAGGF).98 A levy of 30 percent is applied on the B quota. A coresponsibility levy of up to 2 percent of the intervention price is applied on all A and B sugar. If the proceeds of this levy do not cover the cost of refunds, a supplementary levy of up to 7.5 percent can be applied on the B quota retroactively.
Between 1981/82 and 1983/84, sugar acreage and production declined by 18 percent and 27 percent, respectively. The Commission has attributed this to the operation of the production quota regime and the coresponsibility levy.
In 1981/82, in view of low world prices, and to take account of concerns of trading partners, the Community initiated a policy of maintaining large stocks. In 1982/83, Community producers carried over 1,083 million tons of C sugar to the following marketing year. The Commission limited export commitments in 1982/83 to the same level as in 1981/82, that is, 5.2 million tons of quota on C sugar. In 1983/84, exports fell to 4.1 million tons and a similar or possibly lower level is expected for 1984/85. Stocks of sugar in the Community have continued to remain high. Target prices for sugar were kept unchanged in 1984/85.
In 1978 and 1982, Australia, Brazil, and a group of ten sugar-exporting countries made three separate complaints to the GATT against the Community’s sugar policy, two of which were examined by GATT panels. The panels did not find the Community to be in breach of Article XVI of the GATT relating to subsidies, as it was not demonstrated that the Community had acquired an “inequitable” world market share; they found that the Community policy had contributed to depressing world prices but did not hold it to be solely responsible. Although the Community was not obliged under the GATT to take remedial action, it offered to cooperate with trading partners through bilateral consultations.
Japan’s domestic sugar industry is fairly small, supplying about 30 percent of domestic needs in 1983, compared with 20 percent in 1979. Under the impact of price support schemes, domestic production has increased at about 3.5 percent a year; domestic consumption meanwhile has stagnated. Imports declined from 2.4 million tons in 1979 to 1.8 million tons in 1982.
A sugar price stabilization law was introduced in 1965 to protect the domestic industry and to prevent excessive fluctuations in prices for refined sugar. To support the price of domestic sugar, the Japan Raw Silk and Sugar Price Stabilization Agency purchases domestic sugar from sugar millers at a price based on the minimum price to be guaranteed to growers, which is based on their production costs, plus the cost of manufacturing. The agency subsequently resells the sugar in the market at a price corresponding to the price of imported sugar as fixed by the agency. Generally, the buying price of the agency is about twice as high as the selling price.
The price of imported sugar is stabilized through a system of variable levies or rebates, to maintain the price within a range fixed by the agency. If the price of imported sugar falls below the floor price, the agency imposes a variable levy, part of the proceeds of which are transferred to the Sugar Price Stabilization Fund. Conversely, the fund pays a rebate to importers when import prices exceed the maximum. In recent years, import prices have been below the minimum price. In 1983, import prices (c.i.f.) were only 50 percent of domestic wholesale prices. Part of the agency’s surplus from its operational transactions with imported sugar is used to subsidize the domestic producer price scheme. The remaining amount is subsidized by the consolidated budget of the Government; budgetary subsidies have shown a slightly declining trend, from ¥ 31.9 billion in 1979 to ¥ 28.6 billion in 1983.
Fats and Oils
Fats and oils account for 4 percent of world trade in agricultural products. Developing countries account for much of the world production and for two fifths of world exports. Following a decline in 1981, world production rose during 1982–83. Available data indicate that world export values declined in 1981–82. International prices were generally weak.
The United States is an efficient soybean producer and the world’s largest exporter. The farm value of soybeans is over $12½ billion (Table 54). This sector is relatively free of direct government regulations, such as production or acreage restrictions, but support programs for other crops do affect production levels, if only indirectly. Although support prices were introduced in 1977 and retained in the 1981 Farm Act, they were consistently established below market prices. The Act requires a support price equal to 75 percent of the simple average of prices received by farmers over the preceding five marketing years—excluding the high and low years—with a minimum level of $5.02 a bushel. This formula is inoperative until the simple average is over $6.69 (the formula-determined price would have been $4.74 a bushel in 1983).
The 1981 Farm Act covers the peanut support program for the 1982–85 crops. There is a two-tier price system. Peanut producers are subject to poundage quotas, with output up to the quota level being supported by the higher price. Additional output is eligible only for the lower support price and is subject to marketing controls (including controls on exports to Canada and Mexico). The price support program is supported by import restrictions in the form of import quotas and high import tariffs.
To reduce the cost of the peanut program to the Government, the national poundage quota was decreased over time. It declined from 1.68 million tons in 1978 to 1.2 million tons in 1982 and is scheduled to be reduced to 1.1 million tons in 1985. The quota support price was increased under the 1981 Act to $550 a ton from $455 a ton in 1981, and should increase over time in line with production costs, but by not more than 6 percent annually. The price support for nonquota peanuts is based on the crush value for peanuts, that is, oil and meal prices, and was $185 a ton in 1984.
The Community is 70–80 percent self-sufficient in olive oil. Rape seed, sunflower seed, soybeans, and olive oil are covered by the Community’s common regulations, but the regime applicable to oils differs from that applied to other agricultural products. Deficiency payments are made to producers to maintain the target price for olive oil. Imports of oils are subject to an import duty of 0–17 percent, depending on the degree of refining, intended use, and origin; oilseeds are imported free of duty. Olive oil imports are subject to variable import levies. In 1984/85, the system of production guarantee thresholds was extended to sunflower seed; such a system was applied to rape seed in previous years.
In October 1983, the Commission proposed the introduction of a tax on oils and fats, which has not been accepted by the Council. This issue may be reassessed in connection with the envisaged accession of Spain and Portugal. The oils and fats tax proposal was viewed with concern by trading partners, particularly the United States, as the tax could reduce consumption and thereby affect imports of soybeans.
Japan’s imports of fats and oils are generally free of restrictions. A tariff is imposed on seed oil, but oilseeds are imported free of duty to encourage the domestic crushing industry. Japan attaches great importance to secure sources of imports; this has been attempted through an informal allocation of the domestic market to numerous foreign suppliers. In the case of soybeans, in which Japan is about 5 percent self-sufficient, a system of deficiency payments, similar to the one applicable to grains, is used to protect domestic producers. There has been little change in the fats and oils sector in recent years.
In the European Community, the common organization of the market in wine covers table wines and quality wines as far as production rules, planting controls, and enological processes are concerned. However, the price and intervention system, which is concerned with establishing the guide prices and, if necessary, with activating the intervention system in the market by withdrawing quantities for distillation and by the use of private storage, applies only to table wines. Wine surpluses have developed from the increasingly divergent trends in consumption and production. Total consumption of wine has declined by 0.75 percent a year, while total production has increased by 1 percent a year. Since 1976, acreage under production has declined by 10 percent, but, owing to the increase in productivity, production has not fallen. The Community grants refunds on exports of table wine to a few countries, for example, Norway and Sweden.
If imports of wine into the Community are priced below the so-called reference price, a “countervailing charge” is applied. The rule for applying countervailing charges, however, has become the exception since most of the wine-producing nonmember countries have undertaken to observe the reference prices; when giving this guarantee, the Community exempts them from the payment of the countervailing charge. In 1984, the Community reduced to zero the “countervailing charge” levied on imports of wine in bottles for the few countries where this charge still applied.
Medium-term and long-term rules for the wine sector in the Community are geared toward reducing the area under production. Short-term measures include a limitation on the quantities of table wine which may be delivered for voluntary distillation (at 65 percent of the guide price) and a strict application of the compulsory distillation (50 percent of the guide price for the first 10 million hectoliters and 40 percent for the quantities exceeding that level). Community exports to the United States have increased rapidly. U.S. wine producers recently filed a subsidy complaint against the Community, but the USITC found no injury. The U.S. Trade and Tariff Act of 1984 allows, for two years, the inclusion of grape growers in the definition of the wine industry for antidumping and countervailing duty petitions. The Community has complained to the GATT that this aspect of the U.S. legislation is inconsistent with GATT rules. The U.S. Act also requires the U.S. Trade Representative to identify trade barriers to U.S. wine exports and to consult with trading partners on their removal; the President is empowered to retaliate against measures or practices applied by other countries and considered by him to constitute “unfair” barriers to U.S. wine exports. The Community has been concerned about the concept of sectoral reciprocity implied by the U.S. legislation.
Costs of Protection
The economic effects of agricultural protection are well documented. Persistent high domestic price support levels can lead to overproduction and underconsumption of agricultural output in the protecting country, as well as distortions in resource allocation. Protection may also reduce output, exports, and employment in agriculture and agro-based industries of efficient foreign producers in both developed and developing countries. Traded volumes may be significantly reduced, contributing to instability in international markets.
Price Distortion Effects
To provide insights on how protection has changed over time, as well as the effects of protection on price variability, Webb (1984) examines changes in world and domestic prices (in nominal terms) of major trading countries for selected agricultural commodities over the past 15–20 years. In the case of wheat, prices in the Community were found to be generally above world prices, and did not appear to have responded at all to the rapid price increases in 1973–74, or to the subsequent price declines in 1975–77. Argentine prices were found to rise somewhat with world price increases, but Argentine export taxes appear to have kept the actual gains of producers from reaching their potential, at least until 1977. The price movements in the United States, Canada, and Australia closely tracked the movement of world prices. Broadly similar results were obtained from price data for corn, with Community prices remaining above world prices and exhibiting less variability than those in the United States, Argentina, and South Africa.
The same study found, in the rice market more than in any other, a tendency toward growing protection among a few important traditional importing countries. The prices received by Japanese and Korean rice producers, which were close to the world price in the early to mid-1960s, rose dramatically thereafter, both in absolute terms and relative to the world price. Producer prices in Japan rose from 150 percent of the world price in 1960–62 to between 350 and 400 percent in 1980–82. While the rice price increases in Korea were an example of the growing tendency toward agricultural protection in some newly industrialized countries, the example of Pakistan—where prices remained below the world price and did not respond to the large world price movements of 1972–76—suggests that, in many other developing countries, negative producer support policies exist. Finally, data on sugar prices reveal the high degree of protection accorded to producers in the Federal Republic of Germany, France, and the United States during the last two decades. Price variability reveals the differences in the type of protection that was afforded in the United States and Community member countries. The greater price variations in the United States stemmed from the fact that policy was designed mainly to provide a price floor to producers, while, in the Community, protection was also geared to domestic price stabilization.
Data provided by the Japanese Ministry of Agriculture, Forestry and Fisheries indicate that, in 1983, nominal protection coefficients were above 4 for wheat and rice, above 2 for butter and sugar, and above unity for meat and oranges (Table 49). In the United States, domestic prices for grains (except rice) and meat have generally tracked world prices (Table 55), but have been substantially higher than world prices for dairy products and sugar.
A study by T. Kugo (1982) compares 1981 food prices in Tokyo and in other major world cities and brings out the sharply higher beef and milk prices in Tokyo compared with other cities; for beef, prices were up to five times more than in New York, and double those in London and Paris. A study by Hayami and Honma (1983) found that the ratio of the cost of agricultural price supports to the value of domestic agricultural production in Japan rose from 15 percent to 46 percent between 1955 and 1980. Costs to Japanese consumers were estimated at about $0.5 billion in 1955, $4.2 billion in 1970, and $20.5 billion in 1980.
Various studies using effective rates of protection reveal that these can differ substantially from the nominal rates of protection. Sampson and Yeats (1979) estimated protection to Community producers by the variable import levies on grain imports in 1969–70; they found the ad valorem tariff equivalent of these levies to be 52 percent of border prices, and the average effective protective rate to be 127 percent. Jabara and Brigida (1980) found that the effective levy varied among Community members, owing to border taxes and subsidies resulting from the system of monetary compensatory amounts (MCAs). Inclusive of MCAs for the period 1970–78, protection offered by the levy was equivalent to an ad valorem tariff of 62 percent in the Federal Republic of Germany and 57, 41, and 17 percent, respectively, in the Netherlands, France, and the United Kingdom. Furthermore, during 1972–74, for most grains in the Federal Republic of Germany, effective rates of protection were over 50 percent higher than nominal rates, and in France they were over 40 percent higher. A study by Jabara (1981) compared nominal effective rates of protection for grains in the Federal Republiç of Germany and France during 1972–75, when Community variable levies were at their lowest level in 15 years, and found effective rates to be 30–350 percent higher than nominal rates of protection.
The budgetary impact of the CAP is examined in a study by Josling and Pearson (1982). Using 1980 as a base year, the authors calculate that, if agricultural prices are raised in line with inflation rates of Community members (i.e., prices are maintained in real terms), the proportion of total Community revenue taken up by the obligatory costs under the CAP will rise to 105 percent in 1985. If prices are adjusted to fully compensate producers only in the country with the lowest inflation, this proportion will be 71 percent in 1985. Finally, if the pricing policy only serves to protect a member state from decreases in nominal prices (implying decreases in real terms), the proportion declines to 40 percent. As spending on surplus disposal increases with the size of the surpluses, the rates of growth of agricultural production and consumption are key variables in the calculations. Changes in world prices do not appear to have a dominant effect on the budget.
International Trade Effects
A study by Anderson and Tyers (1983) analyzes the international effects of the CAP using a dynamic model of world demand and supply for five commodities: wheat, coarse grain, rice, meat of ruminants (cattle and sheep), and meat of nonruminants (pigs and poultry). The study indicates that while Community grain and meat policies raise the level—and reduce the instability—of prices within the Community, they depress world prices by about 15 percent, increase world price instability by 30–100 percent, reduce world trade in grains and meats by about one fifth and two thirds, respectively, and reduce welfare substantially, both in the Community and in the major grain and meat exporting countries; benefits, however, accrue to the food deficit countries, including the developing countries as a group.
The same study investigates implications of alternative hypothetical scenarios. First, if the Community embarked on a policy of only slight sustained reductions in domestic food prices (a 2 percent annual reduction is assumed), the welfare gains to the Community and other food exporters could be considerable by 1990. Second, should the Community introduce a 2 percent levy on wheat production, increase consumer prices by 4 percent, and use the gain in revenues to finance increased export subsidy payments, it would increase its exports and self-sufficiency by 1990, with all the negative effects on its own and other countries’ welfare, without any additional funds from the Community budget. Finally, should the United States retaliate against Community export subsidies by granting a 15 percent subsidy to U.S. wheat exports, other countries as well as the Community and the United States would be adversely affected; in particular, the U.S. Treasury would sustain a heavier burden than the Community by maintaining the subsidies.
Based on 1980–81 data, a study by Paarlberg and Sharpies (1984) estimates the effects on U.S. agricultural exports of liberalizing the Community grains policy. World wheat prices would rise by 8 percent, and domestic Community prices would fall. As a result, Community production would be reduced by 8 percent, and net Community exports of wheat would fall by about 6 million tons. The United States and other exporters would sell an additional 1.4 and 0.8 million tons, respectively. Because world market prices would rise, other importing nations would reduce purchases by 4 million tons. In value terms, Community export earnings on wheat would fall by $1.2 billion, and export earnings for the United States and other exporters would rise by $1 billion and $700 million, respectively. Finally, the cost of imports to other countries would increase by $500 million. Liberalization of protection for coarse grain would have effects similar to that for wheat. Community coarse grain prices would fall by 25 percent, and consumption and imports would expand. World grain prices would rise by 4 percent, and net Community imports would expand from 5.8 million tons to 20.5 million tons and cost an additional $2.5 million. U.S. exports of coarse grain would rise significantly, as would those of other exporters, although to a lesser extent. A reduction in imports of other importing countries, as a result of the increased world market price, would offset over half the increase in Community coarse grain imports. The study also investigates the effects on the United States of a liberalization by Japan of its rice policy. This would have increased U.S. exports of rice and wheat by $20 million and $30 million, respectively, in 1980.
Coyle (1983) examines the trade impact of a full liberalization of the Japanese beef market. Assuming constant world prices, liberalization would raise Japanese consumption and import volumes of beef by 89 percent and 189 percent, respectively, by 1990. The large expansion is attributable to the large population and to the limited potential for increasing domestic production in Japan. Liberalization would also reduce imports of pork (by 40 percent) and chicken (by 22 percent), which are beef substitutes, and those of feed-grains for Japanese livestock (by 20 percent). However, the decline in Japanese demand for feedgrains would be roughly offset by increased demand in the United States and Australia, in order to increase beef production for export to Japan. The study suggests that liberalization of the Japanese beef market would primarily provide a stimulus to trade between Australia and Japan.
For details of the institutional and legal framework governing agricultural policies in major trading nations, see Anjaria and others (1982), pp. 32–36 and 65–68. As in that survey, the focus of this section is on the main temperate zone and competing zone agricultural products in which OECD countries dominate; see Appendix I for classification of countries used.
No new GSM-5 interest-paying loans were made in 1984 and none are contemplated in the future.
MCAs refer to border taxes and subsidies used under the CAP on intra-Community agricultural trade to avoid immediate adjustment of common agricultural prices in each member country’s currency when the currencies of member countries fluctuate against each other. “Green rates” are the rates of exchange between the unit of account used in agriculture and the national currencies. For further details, see Anjaria and others (1982), p. 34.
Resulting in a reduction in the average tariff on the relevant items from 19.4 percent to 16.8 percent and from 14.5 percent to 11.8 percent in the May and December packages, respectively.
Including milk and cream products, processed cheese, dried leguminous vegetables, preserved oranges and tangerines, starches, groundnuts, canned beef and pork, grape sugar and caramel, fruit puree and paste, canned pineapple and fruit pulp, noncitrus juices, ketchup and tomato sauce, and other food preparations containing sugar, such as TV dinners.
High-test molasses (raw material for production of monosodium glutamate), prepared or preserved products of pig meat or offal, fruit purees and paste (except for citrus, pineapple, peach, apple, and grape), fruit pulp, other food preparations containing added sugar, and tropical fruit juices.
A guaranteed minimum price is fixed on 95 percent of the average of estimated net returns for the subject season and net returns in the lowest two of the preceding three seasons. Domestic prices for wheat are based on the export price with a margin (on the order of A$20 a ton) to cover additional costs of servicing the domestic market.
The U.S. Department of Agriculture defines the parity price as the commodity price that will pay for the same goods, taxes, labor, etc., as in the base period 1910–14.
Under the nonrecourse loan program for grains, farmers are offered loans for their crops at specified price support levels, with the crops serving as loan collateral. Farmers have the option of repaying their loans and redeeming their crops or, alternatively, of not paying the loans and transferring title to the crops to the U.S. Government. The CCC also purchases wheat and feedgrains to implement the U.S. food aid programs; the P.L. 480 program, under which U.S. wheat may be sold overseas for local currencies, is quite important in this regard. For data on the wheat programs, see Appendix II, Tables 51 and 52.
The adjusted base quota is equal to a basic quota of 1,204,600,000 pounds multiplied by two factors—growth and countercyclical. The growth factor, defined as the ratio of three-year moving average of domestic meat production to ten-year average meat production, 1968–77, tends to increase the allowable import level in line with the long-run trend in domestic meat production. The countercyclical factor, defined as the ratio of five-year moving average per capita supply of domestic cow beef to two-year moving average per capita supply of domestic cow beef, tends to reduce the trigger level during the liquidation phase of the U.S. cattle cycle when supplies are likely to be abundant. The countercyclical adjustment factor has the potential of being particularly prejudicial to those meat exporters whose cattle cycles coincide with the U.S. cycle, as their access to the U.S. market could be reduced at the time of the liquidation phase of their cycles.
The instruments of import control are import fees (in addition to existing, but quite low, tariffs) and import quotas. The flexible import fee, quite similar to a variable import levy, is equal to the difference between the domestic support price adjusted for freight, insurance, and related domestic charges, and the sum of the average spot (world) price and the applicable import duty. The use of quotas and fees is subject to certain statutory limitations. The import fee may not exceed 50 percent of the world (spot) price. The import quota levels may not exceed 50 percent of the quantity imported during a representative period. Import duties are subject to legal ceilings (e.g., US¢2.8125 per pound, raw value).
Under the system, “A” and “B” production quotas are established. “A” quotas are equivalent to estimated domestic demand. “B” quotas are determined as a proportion of the “A” quotas (determined in 1981–82 at 23.5 percent) and are eligible for export subsidies. Sugar produced in excess of these quotas is called “C” sugar, for which there are no intervention or export refunds.