The agricultural support policies of major industrial countries have resulted in large imbalances and excess production. These policies have reduced market access for efficient agricultural exporters, many of which are developing countries, and the disposal of surplus production on world markets has had a depressing effect on world food prices. Between 1980 and 1987 the Fund’s food commodities price index has fallen by one third in nominal terms and is almost half the 1980 level in real terms. Agricultural trade policies have led to an escalation of friction in the international trade of agricultural products during the 1980s, imposed a high cost on taxpayers and consumers in industrial countries, and adversely affected their macroeconomic performance. These factors underlie the prominence given to agricultural trade policy reform in the OECD and in the Uruguay Round negotiations.

Introduction and Summary

The agricultural support policies of major industrial countries have resulted in large imbalances and excess production. These policies have reduced market access for efficient agricultural exporters, many of which are developing countries, and the disposal of surplus production on world markets has had a depressing effect on world food prices. Between 1980 and 1987 the Fund’s food commodities price index has fallen by one third in nominal terms and is almost half the 1980 level in real terms. Agricultural trade policies have led to an escalation of friction in the international trade of agricultural products during the 1980s, imposed a high cost on taxpayers and consumers in industrial countries, and adversely affected their macroeconomic performance. These factors underlie the prominence given to agricultural trade policy reform in the OECD and in the Uruguay Round negotiations.

The burden of agricultural support policies on taxpayers and consumers in major industrial countries is high, averaging $185 billion a year in 1984-86, a substantial increase from the early 1980s. This amount was about six times more than annual official development assistance by OECD countries in 1984-86. Although these support policies were originally undertaken for domestic reasons, they have been accompanied by trade restrictions and export subsidies that have adversely affected efficient agricultural exporters. Despite attempts to reform support policies in some industrial countries, significant action to reduce the adverse effects on international trade has not yet materialized.

Many of the policies in the 1985 Food Security Act of the United States substantially increased the taxpayer costs of agricultural support, particularly for grains. Using a broad measure of public spending, agricultural support increased from $24 billion in 1980 to $54 billion in 1986,119 Most was used to increase income payments to farmers, while part was used to subsidize exports. Efficient exporters and U.S. consumers have also been adversely affected by the intensification of import restrictions, particularly for sugar.

The costs for the European Community (EC) have also increased as a result of surplus production and the increased U.S. subsidies. The intervention policies of the EC have led to large stockpiles of dairy products and beef, with stocks of butter peaking in 1986 at 92 percent of annual EC consumption. Spending on the Common Agricultural Policy (CAP) and by governments of EC members has increased by about 50 percent between 1979-81 and 1984-86 to $25 billion a year, and spending on the CAP will amount to over two thirds of EC budget expenditure in 1988. Measures have been introduced during the 1980s in an attempt to slow the increase in CAP costs, but their success to date has been limited. A package of measures was approved in February 1988 that could potentially reduce the rate of cost increases; however, these measures do not address the basic issue of high domestic prices nor do they include measures to improve market access for traditional exporters or reduce the extent of subsidized exports.

While budgetary spending on agriculture in Japan has remained fairly flat, the use of quantitative import restrictions has meant that the burden to the consumer more than doubled between the early 1980s and 1984-86, and the impact of the appreciation of the yen has been to increase quota rents (received by importers) rather than to lower consumer prices. The domestic prices of a number of basic farm products, including rice, are about ten times the level of world prices. Despite recent modest reductions across the board in producer prices and plans to liberalize the import of beef and citrus products, market access for the other major agricultural commodities is still an issue.

Other major agricultural exporters among industrial countries have responded in different ways to the crisis in agriculture. Canada has continued to provide substantial support for its agricultural sector and has introduced a special income support scheme for grain and oilseed producers to offset the impact of increased subsidies by the United States and the EC. Australia and New Zealand have reduced support for all sectors of the economy, including agriculture, as part of their structural reforms to improve their overall macroeconomic performance.

The situation in developing countries is substantially different from that in industrial countries. Despite recent policy reforms whereby an increasing number of developing countries now pay producer prices roughly equivalent to world prices, many other developing countries continue to have a bias against agricultural sectors, because of policies such as price controls, overvalued exchange rates, and state-marketing monopolies. Moreover, a large number of countries support the consumption of imported cereals (e.g., wheat) by providing additional consumer subsidies.

Similar patterns of extensive support and increased trade friction are evident across the major internationally traded food commodities. The dairy sector stands out as the sector that receives the highest level of support; in 1986 total support for the dairy industry in the United States amounted to $1,400 per cow (the EC was not far behind), which was greater than the per capita GDP of 64 countries accounting for half the world’s population. The disposal of surplus stocks has necessitated sales at prices well below those set in the International Dairy Arrangement.

The costs of these support policies both to the countries initiating them and to other countries and, conversely, the gains from liberalization, can be substantial. The costs for an individual country are analyzed here in terms of the direct impact on producers, consumers, and taxpayers as well as in terms of the broader implications for structural adjustment and macroeconomic performance. Liberalization of support policies is likely to generate direct gains to consumers and taxpayers that substantially exceed losses to producers. These losses will not be completely at the expense of needy groups of farmers as most of the producer supports in the United States and the EC benefit large-scale farms. Since producer losses would be less under multilateral than under unilateral liberalization, great importance is attached to the opportunity provided for the former by the Uruguay Round. Nevertheless, the evidence suggests that unilateral liberalization by the major trading countries implies no lower (and possibly greater) benefits to the liberalizing country as a whole than does multilateral liberalization because of the much larger welfare gains to consumers.

Agricultural support policies also contribute to macro-economic imbalances and structural rigidities. The cost of agricultural support forms a significant part of the budget deficit of the United States. Structural rigidities resulting from support for agriculture (which would otherwise have experienced a decline relative to other sectors) also impose costs on the economy because tax and consumer-financed support reduces the competitiveness of the unsupported sectors. Studies on the EC suggest that liberalization would result in substantial gains in overall employment, income, and exports of manufactured goods and services. Japan and Korea would also benefit similarly, although the final impact would depend on the extent of liberalization in other sectors of their economies, and by other countries for Japanese and Korean exports.

Overall, developing countries are likely to gain in terms of both net welfare and net earnings of foreign exchange from the liberalization by industrial countries of all agricultural products, including tropical products. These gains are likely to be unequally distributed, however, unless substantial changes are made in the policies of many countries with currently sizable cereal imports. Almost all countries in Asia and Latin America, many of which are highly indebted, are likely to benefit substantially from industrial country liberalization. However, evidence suggests that many countries in Africa (including North Africa) will suffer substantial foreign exchange and net welfare losses without changes in their own policies, primarily because of the higher cost of wheat and rice imports. Many of these countries hold producer and/or consumer prices well below world levels, discouraging production and increasing the consumption of imported food. Much of these losses could possibly be offset by expanding production of other cereals more suited to agronomic conditions in the region with more appropriate price and structural policies, although the long-run result has not been analyzed in comprehensive studies.

Developments in Individual Countries

The proliferation of institutional arrangements for support policies that have common features, while often reflecting the influence of a special political constituency, tends to reduce the transparency of the type and overall level of agricultural support. Table 7 sets out the main types of support policies classified in terms of their method of operation and summarizes their direct costs, while Table 8 summarizes the main policies used in selected countries and explains the main instruments.

Table 7.

A Summary of Common Agricultural Support Policies

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Table 8.

Main Agricultural Producer Support Policies for Selected Countries and Major Commodities, 1982-87

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Notes:This table includes only main support mechanisms and excludes support provided at the state or provincial level for all countries and at the national level for EC countries.An overview of U.S., EC, and Japanese support policies is contained in Miller (1986). Details are contained in Organization for Economic Cooperation and Development, National Policies and Agricultural Trade(Paris, 1987b).United StaresCommodity Credit Corporation (CCC) inventory operations and commodity loans for grains and oilseeds involve a program under which farmers are offered loans for their crops at a specified price, termed the Loan rate. The crops serve as collateral and farmers may either repay their loans and redeem their crops or not pay their loan and surrender or forfeit their crops to the CCC, The latter option is attractive when the market price is below the loan rate. The interest rate is also below the market rate. CCC support purchases are also made for dairy products and, until 1985, for sugar.A deficiency payment is used to raise the effective price a producer receives to the target price by making up the difference between the target price and the higher of the market price or the loan rate.Beef is supported by the U.S. Meat Import Law, which provides for quotas on meat imports when annual imports are estimated to exceed a certain trigger level defined as 110 percent of an adjusted base quota. Quotas have not been applied since 1979 and usually voluntary export restraint agreements are used.European CommunityA variable levy is a levy that is used to raise import prices of grains and dairy products to a threshold price, and of beef to a guide price, both of which tend to be above the domestic market price for the same commodity, thus effectively excluding imports. Legally the European Community has argued that this is not a quantitative import restriction but a frequently adjusted tariff.Guarantee thresholds result in a price reduction in the next year if a level of output for the current year is exceeded (it does not directly Limit production in the current year), and are applied on a Community-wide basis. These differ from production quotas which are applied to individual producers for the current year.The current sugar regime has remained effectively die same since 1981. Domestic prices are maintained by production quotas and variable levies that effectively exclude all imports except special imports from African, Caribbean, and Pacific (ACP) countries. The production quotas, which include high fructose corn syrup (HFCS), are divided into three categories. Production for domestic consumption (“A” quota) receives full price guarantees. Production for export (“B” quota), set at a proportion of LLA” quota, receives an export restitution. The remainder of sugar production, “C” sugar, is carried over into LLA” quota for the next year. Co-responsibility levies are used to finance the sugar regime, A levy of 2 percent of the intervention price is made on all sugar produced under quota. In addition, a levy of up to 37,5 percent can be made on sugar produced under the “B” quota. However, revenue generated by these levies has been insufficient to cover the heavy cost of export refunds and so an elimination levy was introduced in 1985 and a supplementary levy was approved in February 1988.Japan

Slate trading in grains is by the Food Agency of the Ministry of Agriculture. Forestry, and Fisheries; in beef, by the Livestock Industry Promotion Corporation (LIPC); and in sugar, by the Japan Raw Silk and Sugar Price Stabilization Corporation (JRSSPSC).

The LIPC acts both to stabilize the domestic price of beef and to manage the supply of imported beef by quotas. The domestic price stabilization operation is based on calculating the median price of the band using a formula that includes production costs and the average market price in the past seven years. During the year, the LIPC intervenes to keep the price of beef within the stabilization band.The institutional framework for intervention in the sugar market has not changed greatly since 1932 when the Sugar Price Stabilization Law was amended. The operations of the JRSSPSC to stabilize the price of imported sugar entail setting a stabilization price ceiling band and with it a target price. When the import price of sugar is below the target price, as it was during the 1980s, the JRSSPSC imposes surcharges and variable levies based on this difference. Part of these receipts is kept for rebates should the import price exceed the stabilization ceiling. To encourage domestic production, the Government fixes minimum producer prices. The JRSSPSC is obliged to buy sugar from refiners who have paid growers the minimum producer prices; the JRSSPSC resells the sugar lo the same refiners (in a book transaction) at a lower price, which is comparable to the price of sugar made from imported raw sugar. The loss on this operation may be regarded as a deficiency payment and is financed from JRSSPSC levies and from the Governments budget. The production of high fructose corn syrup (HFCS) is also regulated by production quotas, variable levies, and surcharges.CanadaThe programs are the Western Grain Stabilization Program (WGSP) and the Special Canadian Grains Program (SCGP). The Canadian Wheat Board (CWB) runs a pool deficit if market prices fall below initial guaranteed prices and this deficit is made up by the Federal Government (these deficits have been infrequent).AustraliaThe Australian Wheat Board (AWB) runs a pool deficit if the market price falls below the guaranteed minimum price, and this deficit is made up by the Federal Government. (A deficit has occurred only in 1986/87.) Domestic price discrimination entails charging a stable price on the domestic market that is generally, but not always, above world prices, and profits from this may assist the export industry. A price equalization levy was applied to domestic consumption to equalize returns of exported products. This policy was terminated in July 1986.

Cross-country comparisons of support policies are difficult because many policies are not transparent. Producer subsidy equivalents (PSEs) can be used to overcome this problem as they provide a comprehensive measure of the gross value of the support policies. In essence, a PSE converts the full range of support policies to the equivalent subsidy that would be needed to provide the producer with the same income if the support policy was removed. This is particularly important for comparing nontariff measures and output restrictions, which are less transparent, with budgetary measures. A PSE is expressed as a monetary amount (Table A33) or as a percentage of the gross value of agricultural production to producers (Table A34).120 Industrial countries make the heaviest use of market price-support policies and direct income support (Table A33). In percentage terms, in 1984-86, PSEs ranged from 69 percent for Japan to 40 percent for the EC and 28 percent for the United States (Table A34). The interpretation of PSEs is more difficult for developing countries because the agricultural sector in many of these economies is subject to inflated input costs as a result of protection for other sectors, which can offset some or all of the agricultural support. A few of the developing countries shown in Table A34 have net taxes on their agricultural sector, while some are neutral and others provide substantial support (e.g., Korea has a PSE of 59 percent).

United States

During the 1980s there has been a major shift in U.S. farm policy. Prior to the 1985 Food Security Act the policy effectively supported the world price of grains at considerable budgetary cost. From 1985 this policy was changed, support prices were reduced, domestic farm incomes were supported by direct budgetary payments, and the subsidization of exports was introduced. Both policies have resulted in greater budgetary spendin than before. Import restrictions have been tightened, particularly for sugar. The United States has also made frequent use of GATT dispute settlement procedures and bilateral trade agreements. It has stated its willingness to completely liberalize its agricultural sector as part of its proposal in the Uruguay Round, which calls for the elimination of all distorting support programs by all major countries.

A characteristic of U.S. agricultural policy is that the major policy variables are mandated in the Food Security Acts (commonly known as Farm Bills) that cover four to five crop years. The 1981 Farm Bill, reflecting the optimistic outlook for prices at that time, fixed support prices (loan rates) at historically high levels and resulted in the large accumulation of surplus stocks by the Commodity Credit Corporation (CCC), particularly in grains and dairy products. This stock accumulation had the effect of a market price-support policy which, by virtue of the position of the United States in world trade in grains, bolstered their world price (at the expense of the U.S. budget) and permitted other countries with surplus production to expand their exports.

The Food Security Act of 1985 sought to redress the problems created by the previous Farm Bill by reducing the incentives for further CCC stock accumulation and providing subsidies for exports through the Export Enhancement Program (EEP) and the Targeted Export Assistance (TEA) program.121 The incentives for CCC stock accumulation were reduced by bringing support prices of grains and dairy products closer to market prices and stipulating that programs for some other commodities were to be run without CCC acquisitions. Farmers’ incomes were maintained by large deficiency payments. The EEP provided $2 billion to subsidize exports over the three-year period to September 1988 through a subsidy payable in cash or commodities, the latter entitling the exporter to additional commodities from CCC surplus stocks. In July 1987, additional funding for the EEP was authorized from other programs, and the 1988 Trade Bill has a provision to extend the EEP from 1990 until 1992 up to a limit of funding of $2 billion. As of end-June 1988, export sales of $5 billion had been assisted under the EEP, with the subsidy provided having a market value of $2.1 billion. The United States has defended the EEP as a means of countering unfair practices—including subsidies—by competitors and of encouraging exporters that subsidized to negotiate reform. However, the homogeneous nature of agricultural products means that the prices received by “fair” agricultural exporters are also affected. The inclusion of the TEA program in the 1985 Farm Bill aimed at countering the effects on U.S. agricultural exports of practices by foreign governments deemed unfair by the United States. However, the program has been administered as a market promotion fund rather than as a price-support policy. This combination of policies has contributed greatly to the decline in world prices for grains in 1985-87 and has increased U.S. budgetary costs. Budgetary spending on agricultural support rose from 0.3 percent of GNP in 1980 to 0.6 percent in 1987 (Table A35). The firming of world grain prices in late 1987 and 1988 has started to reduce the budgetary costs of these policies.

The United States has also continued to use and intensify a number of quantitative import restrictions. Under the 1955 GATT waiver for the products included in Section 22 of the 1933 Agricultural Adjustment Act, the United States maintains quantitative import restrictions on dairy products, peanuts, and cotton. This waiver was justified on the grounds that the United States needed time to adjust its agricultural policies although no specific time limit for doing so was included. The EC has requested a review of this waiver by a GATT panel. The quota on sugar is imposed under a “headnote” to the U.S. Tariff Schedule. Following successive reductions in the U.S. sugar import quotas, at the request of Australia, the GATT Council has agreed to establish a dispute settlement panel to review this situation. Quotas and voluntary export restraints are also used for beef and have not been approved by GATT. These restrictions are summarized in Table A36.

The long-running dispute in GATT over EC treatment of U.S. citrus exports and EC subsidies of pasta exports was settled in 1986 with a bilateral agreement for improved market access for U.S. citrus products and a limit on subsidies of EC pasta exported to the United States. Disputes and threats of retaliation have also arisen over U.S. access to the EC market for oilseeds and vegetable oils, over compensation for U.S. export markets for feedgrains to Spain and Portugal arising from the expansion of the EC, and issues affecting U.S. beef exports. The United States has also brought Japan’s restrictions of certain agricultural products before the GATT dispute settlement panel, which found them to be inconsistent with GATT. Japanese restrictions on beef and citrus products have been the subject of intensive negotiations resulting in new bilateral agreements for the liberalization of the markets. Complaints about Korea’s restrictions of beef imports have been lodged under GATT Article XXIII separately by the United States and Australia.

European Community

In the European Community the Common Agricultural Policy (CAP) provides the main framework for agricultural support, although national spending is still important. The CAP aims to maintain a fair standard of living for farmers and reasonable prices for consumers and to stabilize markets. The combination of market price-support mechanisms and increases in productivity has led to increases in production that have boosted selfsufficiency in all major agricultural commodities to well beyond 100 percent (Table A40). Surplus production, together with imports permitted under special arrangements, has necessitated the export of surpluses, with substantial restitutions (subsidies), and the stockpiling of large amounts of certain products, notably butter and beef.122 The use of these subsidies enabled the EC to become the largest exporter of food products in 1986. The EC was the largest net importer of food in the 1970s and is still a significant net importer. It has also used dispute settlement procedures to improve its market access.

In the period 1984-86 taxpayers in the EC are estimated to have paid an average of $18 billion a year for agricultural support through the European Agricultural Guarantee and Guidance Fund (EAGGF) (two thirds of the EC budget), and national and provincial expenditures are estimated to have provided an additional $8 billion (Tables A32 and A41 present these data in terms of ECUs). In 1988, EAGGF expenditures alone are estimated to be $30 billion, over two thirds of EC budget expenditure.

Proposals for the reform of the CAP have been made during much of its history. The most recent efforts came in the mid-1980s, reflecting the high costs of the CAP and the emergence of constraints on exporting surpluses because of their effect both on other industrial countries (particularly the United States) and on developing countries. The reform measures have taken the form of price restraint (including the use of guarantee thresholds), limits on the entitlement to support, and limits on the overall expenditures on price support from the EC budget. Some of these measures, including those agreed upon in February 1988, represent both a step to restrain the growth in the budgetary cost of the CAP and a first step on the path of reform. However, they do not include steps to increase market access for other exporters—and thereby reduce the cost of the CAP to consumers—or to reduce subsidized exports.

Price restraint has involved a freeze (and in some cases a slight reduction) in intervention prices in European currency units (ECUs) since 1983/84 (Table A42) and in the use of guarantee thresholds. However, these measures by themselves have not been effective in restraining production because of the initially high prices and productivity increases that have compensated for real reductions in prices. The effectiveness of guarantee thresholds depends on a realistic setting of the threshold level and the magnitude of price reductions. In July 1987, guarantee thresholds were introduced for soybeans and olive oil and renewed for oilseeds. Measures decided on in February 1988 set guarantee thresholds for cereals, oilseeds, tobacco, and sheep meat.

The impact of the above measures on price restraints has been partially offset in terms of prices in national currencies by the operation of monetary compensatory amounts (MCAs). Support prices for farm products are set in ECUs at the beginning of each marketing year and translated into the national currencies of the member states. MCAs have been introduced to enable member states to postpone some of the effect on agricultural prices of exchange rate changes within the Community. Countries that revalue their currencies adopt “positive” MCAs that serve as import taxes and export subsidies to mitigate reductions in support prices, whereas countries that devalue adopt “negative” MCAs that serve as import subsidies and export taxes to alleviate some of the inflationary impact of the devaluation. MCAs give rise to “green” currency rates that differ from actual exchange rates, and member states are obliged to phase out these differences over time.123

From 1984 price increases in ECU terms became so small that strong currency countries in need of dismantling positive MCAs faced the prospect of reducing agricultural prices in domestic currency terms. To avoid this, the system was changed by effectively linking prices in ECUs to the strongest currency in the European Monetary System (EMS). This system effectively put a floor under agricultural prices in domestic currency terms and placed upward pressure on support prices in the Community (Table A43). At the end of June 1987 the European Commission adopted a scheme for phasing out MCAs, including the use of Community-wide reductions in price levels expressed in ECUs. Member states in which prices would have to decline as a result of these measures are entitled to grant to farmers aid financed from their own budgets, provided it is not linked to output. While the negative MCAs could be phased out more rapidly by green rate depreciations, countries with strong currencies, which face price freezes or reductions, have resisted this measure to prevent devaluing countries from improving their competitive positions. In addition, raising national currency prices would increase the cost of the CAP.

Limits on the entitlements to support have come from restricting the period of intervention purchases during a marketing year and from production quotas. Production quotas have been in place on sugar since 1981 and on milk since 1984. The February 1988 measures also included a land set-aside program. Participation for farmers is voluntary but each member country must have a program. In return for setting aside at least 20 percent of his arable area for at least five years, a fanner receives certain payments and exemptions from levies on the remaining production.

Expenditure limits were introduced as part of the February 1988 measures. These limit the increase in spending on agricultural support to no more than 74 percent of the increase in Community GNP. Total EC expenditure would be limited to 1.2 percent of Community GNP. The limit on agricultural spending is to be achieved by the use of stabilizers, such as guarantee thresholds, production quotas, and intervention limits, applicable on most CAP products.


The institutional framework through which Japan’s agricultural policies are implemented has remained much the same since the 1970s. Although its factor endowments would appear to favor other industries, Japan supports significant agricultural production. Despite recent reductions in the administered prices of all major products, import restrictions have raised the domestic prices of agricultural products to up to ten times world prices. A growing awareness of the high costs of Japan’s agricultural policies to consumers has been tempered by an official stress on food security for basic farm products,124 as well as the influence of farm groups on the political process, characteristic of many industrial countries. As a result significant pressure for reform has come from major agricultural exporting countries. This pressure, together with the Government’s efforts to reduce food prices, has brought about some liberalization of several items, most recently beef and citrus products, and small reductions in producer prices over a range of products. Access to the Japanese market, however, remains a major issue.

Although Japan is the largest single net food importer, about 70 percent of food consumed in Japan is produced domestically (Table A44). Reflecting the special position of rice in Japanese agriculture, self-sufficiency in rice is over 100 percent. Since no rice is exported on commercial terms (some is exported as food aid), the disposal of excess production in rice has been a problem. Feedgrains have been the main source of import growth as the livestock industry has grown rapidly. With the inclusion of imported feedgrains in the measure of self-sufficiency (i.e., on a calorie basis), the rate is roughly 50 percent, which is lower than the rate in other industrial countries but about the same as in the United Kingdom before its entry into the EC.

Producer prices are shown in Table A45. Producer prices are generally set to encourage a certain level of production and, based on an estimate of input costs, to ensure that income from farming will be comparable to that of nonfarm jobs. In 1987 producer prices were reduced across the board, reflecting the lower costs of imported inputs as well as the need to improve farm sector efficiency and increase reliance on market prices. The 6 percent reduction in the price of rice was the first decrease in 30 years. In 1988, the producer price of rice is to be reduced by 4.6 percent. Despite these price reductions, the quantitative import restrictions coupled with the depressed world prices for agricultural commodities set in U.S. dollars and the appreciation of the yen against the U.S. dollar have meant that the ratios of the domestic producer prices to world prices (nominal protection coefficients) have risen to up to ten times the world price (Table A46).125 This support is substantially financed by consumers (see Table A32) and was equivalent to a subsidy of 57 percent of the value of producers’ income (the PSE ratio) in 1979-81 and 69 percent in 1984-86, the highest among OECD countries (Table A34).

Most of the budgetary spending on agriculture is for long-term assistance, such as structural policies and the development of rural infrastructure (see Table A47). Budgetary spending on price-support policies, estimated at ¥ 353 billion for 1988, has been declining steadily over the past decade, from ¥ 767 billion in 1980. State-trading entities use some of the proceeds from profits on imports (quota rents) for price-support policies. The total of budgetary and extrabudgetary price-support spending (about ¥ 858 billion in 1980) increased during the early 1980s but declined to ¥ 760 billion in 1987; this decline is much smaller than for budgetary spending only.

In October 1986, the United States lodged a complaint with the GATT over Japanese import restrictions on 12 agricultural products (which account for a relatively small proportion of trade). A dispute panel found that restrictions on 10 of the products were not justified under Article XI:2(c). In February 1988 Japan accepted the report and undertook to liberalize restrictions on 8 of the products and initiated bilateral discussions on compensation for the remaining 2 products—starches and processed dairy products. These discussions have not been concluded. In June 1988, on the expiration of bilateral agreements on citrus (with the United States) and beef (with the United States and Australia), Japan reached new bilateral agreements with these countries for the phased liberalization of these markets.


Canada’s agricultural sector is largely export oriented and, despite its extensive land resources, has in recent years provided increased subsidies and support to agricultural producers, as evidenced by the increase in its PSEs from 24 percent in 1979-81 to 39 percent in 1984-86 (Table A34). Subsidies have increased substantially as a result of both the rapid decline in world prices and attempts by the Government to counter the impact of competitive export subsidization by the United States and the EC. Canada has also used countervailing duties to protect its producers from the subsidized exports of other countries; these included duties on beef imports from the EC and on corn imports from the United States. In 1986 a GATT panel found the former to be inconsistent with the GATT code (for details see Section IV).


Agriculture in Australia receives relatively little support from government programs. The average PSE for this sector was 15 percent in 1984-86 (Table A34). Relatively high levels of assistance are given to the dairy industry and minor products such as dried vine fruits and tobacco. In accordance with the general government policy of reducing assistance economy wide, all these schemes are under review. In particular, the dairy industry, which has by far the largest support in the Australian agricultural sector, is subject to the Australia New Zealand Closer Economic Relations Trade Agreement; under this agreement the Australian dairy industry is to be made competitive with the New Zealand industry by 1992. It was announced in May 1988 that assistance to the sugar, dried vine fruits, tobacco, and citrus industries would be reduced in line with tariffs on manufactured goods. The Government also undertook to eliminate the monopoly position of the Australian Wheat Board in the marketing of wheat.

New Zealand

The Government of New Zealand has embarked on an economy-wide program of reductions in assistance for industry, including agriculture. While New Zealand agriculture had a PSE of 23 percent in 1984-86, the elimination of subsidized credit, direct price supports, and some tax concession will eventually reduce it significantly. During the period 1985-87 assistance to agriculture remained high because of the write-off of certain types of loans made under previous policies. Although New Zealand is one of the most efficient producers of pastoral products, its rural incomes are very low as a result of low world prices, relatively higher interest rates on large loans made during the period of subsidized credit, a relatively strong New Zealand dollar, and the reduced but still high level of assistance to the manufacturing sector. While these factors led to a contraction of sheep flocks and lamb production, a diversification into more profitable nontraditional products and recent increases in wool prices have partially offset this situation. Although parts of the farm sector have faced problems in adjusting to the changed international circumstances, New Zealand has experienced an improved macro-economic and structural performance.

European Free Trade Association

All members of the European Free Trade Association (EFTA) provide extensive support for their agricultural sectors mainly through quotas on domestic production and variable levies on imports. The dairy industry is an important sector in these countries, which typically have a fairly high level of self-sufficiency and surpluses in dairy products, some of which are exported. Meat production is also important in the Scandinavian countries. In Austria, in which high levels of support for grains and dairy products have led to excess production, the upward trend in PSEs has been dampened by the requirement that producers pay an increasing share of the high cost of disposal of surpluses, resulting in a slight decline in PSEs, from 36 percent in 1979-81 to 35 percent in 1984-85. Switzerland was granted a waiver for its agricultural policies at the time of its accession to the GATT. The Swiss Constitution incorporates the principles for its policies for agricultural support, with provisions for the preservation of farms and the maintenance of secure food supplies. The OECD is currently updating PSE estimates for EFTA countries other than Austria.

Developing Countries

The agricultural policies of developing countries are much more diverse than those of the industrial countries and have been undergoing significant changes in recent years. A major review of their policies was presented in the World Bank’s 1986 World Development Report,126 which highlighted the bias against agriculture in many developing countries, particularly low-income countries, in the late 1970s and early 1980s. This bias is particularly significant because the agricultural sector tends to be the most important in these economies in terms of employment and output. Also, household incomes are lower in this sector. Higher-income developing countries, including Korea, were found to have more neutral policies or policies that favor agriculture.

The 1986 World Development Report noted several sources of bias: (1) industrial protection resulting from inward-looking strategies both raises the cost of inputs in the farm sector and results in a less depreciated exchange rate, which reduces the price of traded goods, primarily agricultural commodities; (2) the control of domestic food prices reduces the prices received by farmers; (3) an overvalued exchange rate may also be used to hold down the cost of food imports, which reduces demand for domestic production and the profitability of exports; (4) export taxes often fall on agricultural exports; and (5) statutory marketing boards often have a monopoly on farm output for export or for domestic use, or on the supply of farm inputs. Inefficiencies resulting from these arrangements, as well as implicit price control, may also introduce a bias against agriculture.

The ratio of producer or consumer prices to world prices provides some indication of the overall bias for or against agriculture, particularly if adjusted for overvalued exchange rates. For wheat (Table A48), while some developing countries promote agriculture and maintain producer prices at around world levels, many countries hold these prices and especially consumer prices at very low levels (with Egypt showing the greatest bias), discouraging domestic production and strongly encouraging consumption of wheat, which is often imported.

During the 1980s, and particularly in recent years, there has been increased recognition of the problems that result from such policies, including the development of severe food shortages. This has led to the reversal of policies that discriminate against agriculture in some developing countries. Large exchange rate changes in many African countries (for example, The Gambia, Ghana, and Nigeria) have led to improved producer prices for agricultural products and have stimulated production. The relaxation of price controls and the liberalization of grain marketing arrangements have occurred in other countries (e.g., Tanzania). In the face of low world prices for their exports, Argentina and Thailand have reduced their export taxes.

Some developing countries, particularly in Asia, have placed emphasis on achieving self-sufficiency in food, particularly cereals, for a number of years. Subsidized inputs for agricultural production are a common form of assistance to agriculture in developing countries (see Table A33). Input subsidies typically relate to credit, irrigation, and fertilizers. However, the extent of these benefits is not clear. India subsidizes fertilizer for farmers, but much of the subsidy goes to high-cost domestic producers of fertilizer, rather than to farmers. Subsidized credit has been one of the main forms of assistance to farmers in Brazil, but the subsidy element, arising from interest rate controls and high and variable inflation, and access to credit have varied greatly in recent years.

Information is also available on the tariffs and trade restrictions imposed by developing countries.127 A study of 50 developing countries found that, with the exception of manufactured goods other than chemicals and machinery and equipment, food has the highest average tariffs and across all levels of per capita income except the highest group. Similarly, food has the largest number of nontariff measures including the largest number of multiple nontariff measures applying to the same tariff item.128, 129 In addition, countries in lower-income groups tend to have higher average tariffs and frequency of nontariff measures than those in higher-income groups (Tables A22 and A23).

The apparent contradiction between the above finding, which indicates a greater incidence of border measures in low-income developing countries, and the earlier observation of a greater bias against agriculture in low-income developing countries compared with higher-income countries appears to be due to the heterogeneous nature of food items. A disaggregated analysis for Asian countries indicates that cereals typically have the lowest tariff rate, whereas meats, dairy products, beverages, and spices typically have higher tariff rates. 130 This analysis suggests that nonessential foods may be considered luxury goods and are more heavily taxed.

The presence of import licensing and state-trading monopolies is not necessarily associated with domestic prices that are consistently above world levels. Many developing countries use licensing to gain more control over import flows rather than using more general macro-economic instruments. In addition, imports may be controlled to limit the higher demand for imported subsidized cereals.

Developments in Trade in Individual Commodities

Tables A49 through A54 show data on agricultural production, trade, and stocks for a number of products, They show that, particularly in the case of dairy products and grains, high levels of support have been associated with large stock accumulation. For sugar, the growth in exports by temperate zone industrial countries has reduced the share of exports by developing countries.

Dairy Products

Within the agricultural sector, the dairy industry receives the highest level of assistance across OECD countries and within individual countries.131 In 1986 this support is estimated to have amounted to $1,139 and $833 per cow in the United States and the EC, respectively. For comparison, in 1986, 64 countries accounting for about half the world’s population had per capita GDP below the former level.132 The incentives for production provided by this assistance have led to surplus production, necessitating large expenditures to accumulate and store stockpiles, particularly in the EC but also in the United States. In 1985-86 stocks were at record levels and had to be disposed of at very low prices, partly reflecting the deteriorated state of the stocks owing to extended storage.

The problems in the dairy industry have been recognized for some time. After protracted discussions during the Tokyo Round, the International Dairy Arrangement (IDA) was established under the auspices of GATT in 1980. The IDA set minimum export prices for various types of dairy products, which have been periodically changed in light of market conditions. Despite the general observance of the IDA, very high stocks have forced some producers to enter into sales at very low prices: in categories excluded from the IDA (e.g., stock feed); in new categories created outside of the IDA (e.g., 18-month-old butter); or by obtaining a derogation from some parts of the IDA.

In 1984 the EC announced sales to the U.S.S.R. of 200,000 tons of old and deteriorated butter stocks at about 40 percent below the IDA minimum price. The United States and Austria left the IDA in October 1985 in protest. At the same time, it was agreed that butter at least 18 months old was not subject to the IDA minimum prices. In 1986 the EC sold an additional 475,000 tons of old butter and butter oil to the U.S.S.R., also at very low prices. In 1987, it was determined that sales of fresh butter to the U.S.S.R. could not be made at the IDA minimum prices and a derogation from the IDA was obtained to permit traditional suppliers to that market to sell at prices below the minimum during 1987. Also in 1987, New Zealand sold 50,000 tons of butter oil to Brazil at about half the minimum export price under a separate derogation of the IDA. Sales of cheese below export quality have also been below the IDA minimum price and milk powder for stock feed, which is excluded from the IDA protocols, has generally been sold at about half the minimum price of that for human consumption. 133

United States

The United States restricts imports of dairy products by quotas, permitted under the 1955 waiver for Section 22 of the 1933 Agricultural Adjustment Act. The quantities of imports permitted are shown in Table A36.

The dairy industry also benefits from support purchases by the CCC. Up to 1985, this support entailed the accumulation of large stocks of dairy products, mainly cheese and powdered milk (Table A37). The Food Security Act of 1985 contained a number of provisions for the dairy industry. First, support prices were reduced. Second, the Dairy Herd Termination Program was introduced to reduce production by buying whole herds of dairy cattle for slaughter, which cost $1.3 billion during 1986-88. However, improved productivity has offset most of the effect on milk production of less cattle, Third, to permit the CCC to reduce its butter stocks, exports of 100,000 tons of surplus butter were provided for in each of the fiscal years 1986-88.

A new Dairy Export Incentive Program was adopted in February 1987 in which some 140,000 tons of fresh butter were offered for sale to a large number of countries. No significant export sales have been reported under this program. The low stocks mean that the United States is unlikely to be a significant exporter in the near future.

European Community

The Community’s stocks of surplus dairy products continued to accumulate until 1987, a tendency characteristic of the dairy sector since the earliest days of the CAP. EC stocks of butter exceeded 1,500,000 tons at the end of 1986, about 92 percent of EC consumption in that year; of this amount approximately 600,000 tons was older than 18 months and much of it was in very poor condition. There has been a long history of unsuccessful attempts to deal with this problem. In the early 1980s, guarantee thresholds were applied whereby the increase in the intervention price would be reduced by a few percentage points if certain production levels were exceeded. However, in the absence of a mechanism to prevent intervention prices being increased to offset this reduction in the next marketing year, this policy was abandoned.

Steps have been taken since 1984 to reduce the entitlement to support through production quotas and by measures to reduce the incentive for intervention sales. In 1984, quotas on milk production were established, but to give the system some flexibility, the overall Community quota had an allowance for 10 percent additional production. These additional quotas were quickly utilized and excess production continued. In December 1986, further steps to eliminate surplus production were taken. Milk quotas over the period 1987-89 were to be reduced in two steps by a total of 8.5 percent with 3 percent coming from the voluntary abandonment of milk production (with compensation), and a uniform 5.5 percent reduction in quotas. In December 1986, to make intervention purchases less attractive, the delay in payment for the purchase of such stocks was increased and the seller was made responsible for the first 240 days of storage. Intervention purchases of skimmed milk and butter were also limited to certain months of the year if intervention purchases exceeded specified quantities.

In February 1987 it was also decided to dispose of 1 million tons of old butter in 1987/88. These measures included special exports of 400,000-500,000 tons in 1987 (to the U.S.S.R.) at very low prices and sales of 300,000 tons for animal feed and industrial uses. The overall cost of the measures was about ECU 3.2 billion.

Despite having large surpluses of butter, the EC continues to provide access for New Zealand butter to the United Kingdom at intervention prices that are well above world prices. The quota has been reduced gradually, from 81,000 tons in 1985 to 74,000 tons in 1988. While this access was only intended as a transitional measure, New Zealand argues that it faces difficulties expanding its dairy export markets (e.g., to the U.S.S.R.), as these have become highly competitive with large subsidized sales by the EC at well below IDA prices.


Support for dairy producers in Japan has enabled selfsufficiency to be maintained at about 85 percent during the 1980s. The guarantee price for manufacturing milk, the basic price received by producers, remained relatively constant prior to 1986 but was subsequently reduced to reflect lower input costs (Table A45). Despite this small decline in real prices, increases in productivity have led to increased production and surpluses in some products, necessitating the introduction of some supply control measures. The supply of milk has been controlled by quotas on raw milk production that are allocated to individual producers. After increasing steadily up to 1985, the quotas were reduced in 1986. Production in excess of this quota results in a significant penalty.

Import quotas are used to maintain the domestic price (standard transaction price) of dairy products above world prices. However, as this price would still not provide typical producers with the desired income, the difference between the standard transaction price and the guarantee price to producers is made up by a deficiency payment from the Livestock Industry Promotion Corporation (LIPC). The payment is funded partly from the budget and partly from the LIPC’s own revenue from the quota rents on beef imports.

Japanese import restrictions on processed dairy products were included among the agricultural products that were the subject of investigation by a GATT panel requested by the United States. Article XI:2(c)(i) of the GATT permits import restrictions on agricultural products that are necessary to support measures to restrict the production of a “like” domestic product. However, the panel report found that as the domestic production restrictions were on raw milk and the import restrictions were on processed dairy products, the latter were not consistent with Article XI because they did not meet the likeness condition with raw milk. Although Japan accepted the GATT panel report in February 1988, it noted that there was a domestic scheme to limit raw milk production and that, if this was not sufficient to justify import restrictions on processed dairy products, it would call into question the legality under GATT of similar restrictions in other countries.134


World production of grains for export (except rice) is concentrated in the temperate industrial countries. Developing countries, including China, which is the world’s largest producer of wheat, grow large quantities of grain mainly for domestic consumption. Production of grain has grown strongly during the 1980s because of increases in yields and a number of favorable seasons. Trade volumes of grain declined during the 1980s as former large importers, such as China, India, and Indonesia, achieved a high degree of self-sufficiency. Stocks of grain, particularly those held in the United States, reached a peak in 1986/87 but have subsequently declined owing to conscious stock disposal policies. Reflecting changed intervention practices and the export subsidies of the United States and the EC, prices fell to very low levels in 1985/86 but appear to have bottomed out during 1986/87 owing to poor seasons in a number of countries and cutbacks in production.

United States

As the largest exporter of grains, the policies of the United States have a heavy influence on international markets. Under the 1981 Farm Bill, both target prices and support prices (i.e., loan rates) were set at levels that turned out to be excessively high relative to market prices.135 Loan rates at well above market prices provided incentives for significant amounts of production to be surrendered to the CCC (that is, the crop was forfeited). This policy increased CCC stocks of grain substantially and, at the same time, reduced the quantities available for export. In effect, this policy supported world prices for grain while permitting other countries with surplus production, particularly the EC, to expand their exports. U.S. stocks of wheat and coarse grains peaked in 1986/87 at about 202 million tons, equal to 94 percent of U.S. consumption in that year.

The Food Security Act of 1985 sought to redress a number of problems created by the previous Farm Bill. To reduce the incentive to forfeit the crops to the CCC, loan rates were substantially reduced and based on a formula related to market prices. For wheat the loan rate was reduced from $3.30 a bushel in 1985/86 to $2.40 a bushel in 1986/87 ($121 and $88 a ton, respectively). This action sharply reduced CCC stock accumulation after 1986/87. However, target prices for wheat were frozen at $4.38 a bushel, the level since 1984/85, for two years and were to decline thereafter to $3,94 a bushel in 1990 (Table A39). This large gap between target price and loan rate or market price, which is made up by a deficiency payment, was, however, a continued incentive for overproduction, as well as a substantial budgetary cost. To limit budgetary exposure, land set-aside programs continued to be mandatory for receiving deficiency payments. However, the set-aside program has been only moderately effective in limiting production. The least productive land is set aside first and the high target prices give a strong incentive for more intensive cultivation of the remainder. In 1987,27.5 percent of the base acreage was set aside, and only at this level was there a significant impact on production. The set-aside was reduced to 10 percent in 1988. As a result of these measures, budgetary expenditures on wheat and coarse grains rose sharply and accounted for most of the increase in budgetary spending on agriculture from $18 billion in 1985 to $26 billion in 1986. Grain exports have been the main beneficiary of the Export Enhancement Program (EEP) included in the 1985 Farm Bill and subsequently extended. Significant sales assisted by the EEP were made to the U.S. S.R. (13 million tons), China (7 million tons), and Egypt (6 million tons).

The support program for rice had an additional subsidy element. Since the loan rates for rice were not reduced to world market prices, the 1985 Farm Bill specified that the CCC loan could be repaid at the higher of the world market price or at 50 percent of the loan rate. This preferential rate was needed to allow U.S. export prices to match world market prices more closely and to minimize forfeitures. In addition, rice exporters were entitled to negotiable certificates for CCC commodity stocks equivalent to the difference between the world market price and the loan repayment rate, should the latter exceed the former.

Changes in U.S. grain policy contained in the 1985 Farm Bill have had a major impact on the international grain market. The removal of market price support in the form of CCC stock accumulation, the subsidization of exports through the disposal of CCC stocks under the EEP, together with the depreciation of the U.S. dollar vis-à-vis other major currencies since 1985, have meant that other exporters, particularly the EC, faced very strong competition. Between 1984 and 1987, wheat prices fell by 25 percent in U.S. dollars but by almost 50 percent in ECUs. The United States regained much of its share of world grain exports; in the case of wheat, this had fallen from 47 percent in 1980/81 to 29 percent in 1985/86 but increased to 41 percent in 1987/88. The EC has had to increase greatly its export restitutions (subsidies). At a substantial budgetary cost, Canada introduced an additional deficiency payment to offset the effect of increases in subsidies by the United States and the EC. In Australia the stabilization scheme required government payouts in 1986/87, but as producer prices follow market prices fairly closely, there was a large shift out of wheat production. Substantial subsidization of rice exports enabled the United States to increase its share of world exports but has also reduced world prices, with a detrimental effect on other rice exporters, including Thailand—the largest rice exporter—and other Asian countries.

While the stated aim of the EEP was to intensify competition with subsidizing exporters, the resultant decline in world prices affected all exporters. Australia has protested on a number of occasions against the EEP and considered its extension and changes in funding in June 1987 a breach of the standstill agreement in the Punta del Este Declaration. The United States considered the changes in funding to be a routine renewal of an established program.

European Community

As with many of the commodities supported by the CAP the high level of support has enabled the EC to change from being a net importer of cereals in the 1970s to a net exporter in the 1980s. As noted earlier, the EC’s share of world wheat exports increased during the early 1980s, but declined in the face of strong competition. Intensified competition from the United States has greatly increased the cost of the support for the cereal sector. Export restitutions have increased from ECU 945 million in 1984 to an estimated ECU 3,615 million in 1988.

The budgetary cost of restitutions for surplus disposal and the resultant trade tensions have prompted continued efforts to restrain production. Guarantee thresholds were introduced in 1982/83 and, although these have produced slight price reductions, productivity increases have maintained the incentive for increased production. In February 1988 the guarantee threshold for 1988/89 was set at 160 million tons, compared with actual production in 1987/88 of 155 million tons. In addition, a co-responsibility levy of, at most, 3 percent was imposed (supplementing the basic levy of 3 percent), payable at the beginning of each marketing year 1988/89-1991/92. If production in the year exceeds the guarantee threshold by less than 3 percent, the supplementary levy is to be partially refunded. If production exceeds the guarantee threshold by more than 3 percent, the levy is not returned and intervention prices are reduced by 3 percent in the next marketing year.

The use of grains as animal feed is an alternative use of surplus production. Competition has been provided by the use of noncereal animal feeds (e.g., cassava (manioc), corn gluten feed, molasses, and brans) that enter the Community levy free and are subject to zero or very low tariffs; and, with the exception of brans and molasses, all are bound in GATT. As a result, the EC has negotiated VERs with Thailand on imports of cassava. Proposals have also been made for the increased subsidization of domestic grains for this purpose, but they have not been adopted.


Rice is the main agricultural product in Japan and is considered a basic food product in which a high degree of self-sufficiency is desired for food security, as well as for social-political-cultural reasons. Support for production of rice and other grains in Japan is provided mainly through quantitative restrictions on imports implemented through state trading by the Food Agency of the Ministry of Agriculture, Forestry and Fisheries (MAFF). Only very small amounts of special types of rice are imported. As a result of the restriction on supply and the sharp appreciation of the yen since 1985, domestic producers are able to receive ten times the world prices for grains, up from three times in 1980.

In addition to import restrictions, the producer prices of grains are supplemented by deficiency payments funded from the budget and by profits from state trading in wheat imports. Importers are paid world prices for wheat and the Food Agency sells this wheat to millers at a higher price, approximating the wholesale price of domestic wheat. The budgetary component of support has declined from ¥ 652 billion in 1980 to ¥ 262 billion in 1988 while the extrabudgetary component increased from ¥ 59 billion in 1980 to ¥ 183 billion in 1987 (Table A47).

The high producer price of rice has led to excess production despite the high cost of production on small farms. In 1986, self-sufficiency in rice was 108 percent (Table A44). To reduce excess production, diversion schemes for rice have been in operation for a number of years. These schemes divert paddy fields away from rice cultivation to other crops, mainly cereals and citrus products. In late 1986, a new six-year program of the Paddy Field Use Reorientation Program was adopted with an increase in the target acreage for diversion from 600,000 hectares to 770,000 hectares.


The Canadian Wheat Board has the monopoly on the export of western-grown wheat, barley, and oats. It regulates producer deliveries through quotas, sets producer prices, and controls access to the grain handling system. The main support programs for grains and oilseeds are the Western Grain Stabilization Program (WGSP), transportation subsidies, and the Special Canadian Grains Program (SCGP). The WGSP is a voluntary program that provides support for the income of western grain and oilseed producers. Producers and the Federal Government pay into a fund, and payments from the fund are made when either net cash flow or net cash flow per ton, whichever is larger, falls below the average of the previous five years. The WGSP is intended to reduce the impact of large declines in grain and oilseed prices on farm incomes but, through use of the moving average, force producers eventually to adjust to world prices. While payments from the fund were infrequent prior to 1984, they have been substantial in subsequent years owing to low world prices, reaching Can$l,364 million in 1986/87. Grain and oilseed producers in western provinces also benefit from subsidies under the Western Grain Transportation Act and despite attempts to have producers pay a larger share, subsidy payments by the Government have risen from Can$324 million in 1980/81 to Cao$l,090 million in 1986/87. The SCGP, first announced in December 1986, provides deficiency payments to grain and oilseed producers based on the seeded area and at rates proportional to the price decline attributed to the impact of increased subsidies by the United States and the EC. Expenditure for the 1986/87 crop was Can$923 million, and Can$l,100 million has been provided for the 1987/88 crop.


The Australian Wheat Board is the sole domestic seller of most domestic and all export wheat. It operates a price stabilization scheme underwritten by the Australian Government. This price stabilization scheme provides protection to producers against rapid price declines but quickly incorporates export prices into producer prices. The guaranteed minimum price is set at 95 percent of a three-year moving average (including the current season) of net grower returns, which is related to the export price. Owing to the rapid and substantial price decline in 1986/87, the guaranteed minimum price was above the export returns, and government funding of about $A 230 million was required to support the scheme, the first such support since its introduction in 1979. With increases in export prices in 1987/88 and the inclusion of the past low prices in the moving average, government funding is unlikely to be required in 1987/88. As a result of the low prices, wheat production in Australia declined from 16.2 million tons in 1986/87 to 12.1 million tons in 1987/88.


Most meat is consumed in the country of production. Beef and veal form the main components of the international trade in meat, and exports account for less than 10 percent of total consumption. Since 1970 major changes have occurred in the pattern of trade. The relative and absolute importance of Latin American exporters (Argentina, Brazil, and Uruguay), where production is not subsidized, has declined, especially with Argentina facing reduced markets in Europe as Spain and Portugal entered the EC. In 1984, the EC emerged as the largest exporter of beef through the use of export subsidies. The EC exports mainly processed beef products and its markets are primarily in Egypt, Saudi Arabia, and the U.S.S.R. Recently the market for beef has been affected by dairy herd liquidations in the United States and the EC.

As a result of the Tokyo Round, in 1980 producers and consumers of meat agreed to an arrangement regarding bovine meat and the establishment of the International Meat Council. The Council aims to liberalize and expand trade and operates primarily to gather data and make market assessments.

United States

Since 1985, U.S. trade in beef has been affected by two policies: the continued operation of the U.S. Meat Import Law and the impact of the Dairy Herd Termination Program.

Meat prices in the United States are maintained above world prices by the operation of the U.S. Meat Import Law, which provides for quotas (Tables 8 and A36), although these have not been applied since 1979. To avoid the imposition of quotas, which are not included under the 1955 GATT waiver, the United States enters into negotiations with exporters, generally Australia and New Zealand, for voluntary export restraint agreements if meat imports are expected to exceed the trigger level (110 percent of the quota). As a result, VERs were negotiated in 1982, 1983, 1987, and 1988. Quotas are only imposed if it is determined that the trigger level will be exceeded too late in the year to enter into negotiations. Exporters have an incentive to enter into a VER because the quantity under this arrangement will be 10 percent above the quota level.

The 1985 Food Security Act included the Dairy Herd Termination Program, whereby the CCC bought whole herds of dairy cattle for slaughter. To avoid disruption of the domestic market, more than half was exported at very low prices and the remainder used for domestic food aid and for the U.S. military in Europe. Of the 180,000 tons of meat purchased, half was exported to Brazil, which was experiencing a temporary meat shortage (see below), at about $0.33 a pound (about one third of the price of beef imported into the United States). Argentina, Australia, and New Zealand registered complaints at this sale.

U.S. exports are relatively small and are mainly of high-quality beef to Japan (see the section on the Japanese market for meat). U.S. exports of beef are assisted by two programs included in the 1985 Farm Bill, the Targeted Export Assistance program and the Export Enhancement Program. The amounts involved in both programs are relatively small, with allocations of $7 million and $5 million, respectively, as a subsidy element.

European Community

As with a number of other products, the operation of the CAP has changed the EC from being a net importer to being the largest exporter of beef. The EC continues to import beef largely as a result of international agreements, including some undertakings on market access made during the Tokyo Round when the EC was a net beef importer. These undertakings remain in place despite the change in the EC’s trading position. In addition, as a result of the EC enlargement in 1986, Argentina’s quotas for high-quality beef and frozen boneless beef were raised by 7,500 tons to a total of 87,000 tons. Beef stocks in the EC reached a peak of 885,000 tons in 1985 (12 percent of EC consumption and 115 percent of exports in that year) but declined substantially in 1986 as a result of the special sale of 200,000 tons of beef to Brazil.

In December 1985 the EC farm ministers prohibited the use of all hormone and growth promoters used for beef cattle fattening as of January 1,1988, with a subsequent postponement to January 1989. While supported by some consumer and health groups, the directive has been opposed both internally and by foreign beef exporters. In February 1988, the European Court of Justice overturned the directive on technical and procedural grounds, but as national legislation was already in place the directive was reissued and this is not expected to delay the January 1989 introduction. The United States has strongly objected to the hormone ban as it would exclude U.S. beef exports to Europe (worth more than $100 million annually) and has prepared a set of retaliatory measures.

The EC operates a Third Country Meat Directive under which only specified meat packing plants are able to export to the EC to ensure compliance with certain health and safety regulations. Although this directive has been applied to other non-EC countries for a number of years, it had not been applied to the United States and the EC announced that a list of plants in the United States would be publicized in January 1988. The U.S. meat industry considered this a protective device and filed a complaint under Section 301 of the 1974 Trade Act. As a result of bilateral discussions, the EC published a list of approved U.S. plants that covers the current trade flows.


Producer prices for Japanese beef are primarily supported by import quotas operated by the Livestock Industry Promotion Corporation (LIPC). Japan has remained about 70 percent self-sufficient in beef during the 1980s. The quotas for beef imports are divided into approximately 80 percent operated by the LIPC, 10 percent operated by private traders, and the remaining 10 percent for special categories (e.g., hotels, Okinawa, and meat processing).136 The quantity and pattern of beef imports are influenced by separate bilateral agreements with the United States and Australia, most recently covering the four-year period from March 1984 to 1988. The agreement with the United States was for high-quality beef; the agreement with Australia was for total imports of beef; the growth rate in the former quota was set at a much higher rate than the global quota.137 In addition, because quota rents on high-quality grain-fed beef were much higher than on the lower-quality grass-fed beef, the share of the former imported by private traders also increased dramatically. Both factors contributed to a substantial increase in the share of beef imports from the United States at the expense of Australia and New Zealand. A study by the Australian Bureau of Agricultural and Resource Economics of the demand for beef in Japan suggested that in the absence of quotas, the lower-cost grades of beef would have a much larger share of the market. The study also noted the very large quota rents and estimated that in 1986 the quota rents on beef imports by the LIPC and private traders alone were about ¥ 108 billion ($640 million) and ¥ 50 billion ($300 million), respectively, totaling 169 percent of the value of beef imports in that year.138

In June 1988 Japan entered into new bilateral agreements with the United States and Australia on the liberalization of beef imports. The agreements called for annual increases in the beef quota of 60,000 tons for each of the three years to 1990/91, giving a quota level of 394,000 tons, almost twice the level in 1987/88. During this period the role of the LIPC will be reduced and the proportion of beef imports handled by private traders will increase. From 1990/91, quotas will be eliminated and the tariff increased to 70 percent, declining to 50 percent in 1992/93. The agreement with Australia has a special provision that guarantees the growth of imports of chilled and aged beef that currently is almost entirely supplied by Australia.


Brazil has traditionally been a large exporter of beef. However, in 1986/87, after a period of high inflation, beef and other prices were frozen under the Cruzado Plan and beef producers withheld cattle from the market. Production dropped by about 400,000 tons or 17 percent, and to satisfy demand, Brazil imported beef under the above-mentioned special sales from the United States and the EC at very low prices.


The international price of sugar remains extremely depressed at about one fourth of its peak in 1980 despite having risen slightly in 1988 owing to the impact of weather on some producers. Sugar provides an important example of the extent to which protection in temperate industrial countries has fostered large increases in domestic production at the expense of low-cost producers in developing countries. Low-cost sugarcane is grown in tropical and subtropical climates, while higher-cost sugar beets are grown in temperate zones. The high cost of sugar in industrial countries has encouraged the production of nonsugar sweeteners in some countries. Brazil has large tax incentives and subsidies on the use of alcohol made from sugarcane as a petroleum substitute. The gains from a less protective environment are likely to be large for developing countries even though the loss of special access to industrial country markets by some developing countries may offset some of this gain. The last International Sugar Agreement with provisions to affect market prices was effective from 1978, and market support operations were abandoned in 1984 as the free market price was well below the agreed price range. The EC refused to sign the last agreement on the grounds that its export quota was too low; earlier the EC had changed from being a net importer to being a major net exporter of sugar.

United States

The 1985 Farm Bill mandates that raw sugar prices be supported at no less than 18 cents a pound through 1990 and that import quotas be set to minimize loan forfeitures to the CCC. With the world price of sugar at less than 7 cents a pound in 1987, the relatively high price of domestic sugar has encouraged U.S. production, which increased from 5.5 million tons in 1981/82 to 6.5 million tons in 1987/88, The high domestic price has also encouraged the production of high fructose corn syrup for use in processed foods as it is not controlled as in the EC and Japan. (The production of high fructose corn syrup would not be profitable at the current free market price of sugar.) This factor and the use of noncaloric sweeteners have led to a decline in U.S. sugar consumption. To balance demand and supply, import quotas have been steadily reduced to one fourth of their original level, from 2.6 million tons in 1982/83 to 0.7 million tons in 1988,139 although shortfalls in U.S. production in 1988 have permitted a revision of the quota to 1.1 million tons. A continuation of the current sugar policy is highly likely to require zero quotas in a few years. The reduction in quotas has caused severe problems for sugar exporters, many of which are highly indebted developing countries, particularly in Latin America, the Caribbean, and the Philippines. For example, Caribbean basin countries, whose economies are highly dependent on sugar, have lost over $1 billion in foreign exchange earnings since 1984.140 Thus, compared with the U.S. support policies for grain, the market price-support policy for sugar shifts the cost of the producer subsidy away from the budget and on to consumers and exporters.

European Community

The high levels of open-ended support encouraged domestic production and transformed the EC from a net sugar importer into one of the four largest sugar exporters in the late 1970s. The current EC sugar regime was introduced in 1981 in response to the high budgetary cost of support and friction with traditional exporters to the EC. The latter was caused by restrictions on market access to the EC for traditional suppliers and the use of export restitutions (subsidies) by the EC for disposal of surplus production. Domestic prices are maintained by production quotas and variable levies that effectively exclude all imports, except those under special market access for African, Caribbean, and Pacific (ACP) countries that were former colonies of EC members. Sugar from ACP countries under quota allocations receives the guaranteed domestic price as a form of aid, either as sales in the EC market or as an export restitution (on their own exports). Although the sugar regime was intended to be financed from co-responsibility levies, the very low world prices have meant that these levies, despite several increases, have at times not been sufficient to cover the cost of the restitutions.

Costs of Agricultural Support Policies

Agricultural support policies have a high cost, both for the country adopting the policies and for other countries. The most apparent are the direct budgetary costs and costs to consumers in terms of higher prices and inefficiencies in agricultural production fostered by protection. These direct costs are only first-round effects, because the financing of the support and the inappropriate relative prices resulting from support policies have a detrimental impact on overall macroeconomic performance. In addition, the insulation of one sector from the process of adjustment to changes in economic conditions, particularly exchange rate and relative price changes, increases the burden of adjustment on the other sectors. The cost of support policies is also transmitted to the international market by import restrictions and export subsidies that result in lower and more unstable international prices for agricultural products.

The studies reviewed in this section conclude that, while the world economy can gain significantly from the complete liberalization of agriculture proposed by some participants in the Uruguay Round, the benefits from unilateral liberalization are no less and might even be greater for the liberalizing country.141 Thus, it does not make economic sense to delay unilateral measures to obtain multilateral liberalization. Liberalization of agriculture by individual industrial countries is particularly important because this sector generally receives the highest levels of support, resulting in the net taxation of nonagricultural sectors. Industrial countries will gain from an expansion of their nonagricultural sectors, which can absorb increased employment. Most developing countries will gain from higher prices for their agricultural exports. To make full use of this opportunity, however, developing countries would also need to address the burdens on their agricultural sectors, including the net taxation imposed on them through the protection of their manufacturing sectors, and to ensure that consumer prices reflect economic costs and are not biased in favor of imported foods.

Direct Costs

The direct (or partial equilibrium) costs of agricultural support policies can be measured on a gross or a net basis. The gross costs to taxpayers and consumers have been used in the earlier part of this section, with the estimates by the OECD (Table A32) being among the most comprehensive.142 Some of these payments by taxpayers and consumers are reflected in producer incomes and hence represent transfer payments. In addition to this transfer, support policies also result in a net welfare “deadweight” loss that represents the difference between the cost to consumers plus net payments by the government, and the increase in producer income.143 Some studies have focused on the net welfare effects on the grounds that the simple transfer of income from one group to another does not have a welfare effect. While the results of these studies vary with the products covered and assumptions on price elasticities, they show that these welfare losses are not insignificant.144 The results of Tyers and Anderson are of particular note because of their broad coverage of products and their use of recent estimates of elasticities and transmission of world prices into domestic prices. In this study, the net welfare losses of all industrial countries from protection in the early 1980s are estimated at about $20 billion (in 1985 U.S. dollars) (Table A55).145

More attention has been given to the gross value of the transfer in this section because the net welfare losses do not take account of distributional issues and are likely to underestimate significantly the effect on the economy, because the transfer to producers does not always reach the targeted group. The political decisions to support the agricultural sector are usually based on the goal of supporting small-scale farms. However, in the United States and the EC, the more efficient large farms have been able to capture most of the benefit, enabling them to compete with and take over small farms.146 A farm sector based on very small farms, as in Japan, leads to inefficient production. Moreover, the benefit originally intended for actual producers is built into land or quota values, restricting new entrants, and generating pressure for support policies to preserve asset values. Also, financing this producer support by consumers through higher food prices places a relatively greater burden on lower-income groups. The consumer transfers, taxes, and deficits used to finance the transfers create additional problems: assistance to one sector has to be paid for by other sectors, with adverse effects on efficiency, competitiveness of the whole economy, and overall macroeconomic performance.

Macroeconomic Effects

Reflecting the above concerns, more recent studies of the costs of agricultural support policies have tended to focus on the macroeconomic effects. These studies, using general equilibrium models in which the agricultural sector is linked to the rest of the economy, show that the full costs of the support policies greatly overshadow the partial equilibrium net welfare losses.

The effect of the CAP on the European Community has been the set of policies most widely studied in this field. A study by Stoeckel and Breckling of France, the Federal Republic of Germany, Italy, and the United Kingdom has divided each economy into four sectors, including agriculture.147 The study focuses on the gains from liberalization that are taken as the reverse of costs of the CAP, and examines the differential effects on the four countries in the study. Important assumptions of the model are use of an explicit consumption tax to finance the agricultural policies and rigid real wages. Thus, support policies reduce the competitiveness of manufacturing and service industries and, since the encouraged sector—agriculture—uses capital and land more intensively than labor, the unemployment resulting from the relative decline of the manufacturing and service sectors will not be fully absorbed by the agricultural sector. With liberalization, although jobs would be lost in agriculture, other sectors would gain, resulting in a net increase in employment of about two to three million depending on the actual flexibility of real wages. Liberalization is also likely to increase the share of agricultural output from small farms. Aggregate income increases by 1.6 percent on average; owing to their lower share of value added from agriculture, Germany and the United Kingdom would benefit the most from liberalization.

A study by Dicke and others on the Federal Republic of Germany reached similar conclusions about the employment and growth benefits from liberalization of the CAP.148 While farmers lose, this loss would be reflected mainly in a fall in farm values. To overcome this loss, the authors note that farmers might be issued special bonds to compensate them for this one-time loss. The general equilibrium approach was also applied by Rosenblatt and others (1988), in measuring the effect of the CAP on the Federal Republic of Germany. They also assume rigid real wages and show that while an increase in agricultural prices from the CAP will increase agricultural employment and exports (if subsidized), these gains are more than offset by losses in other sectors. The authors suggest that the complete liberalization of agriculture would reduce consumer prices in Germany by 5 percent, increase employment by 4¾ percent, and raise GDP by 3 percent.

Studies on the impact of liberalization on the U.S. economy are less complete. The liberalization of agriculture would improve U.S. macroeconomic performance chiefly through the reduction in the budget deficit. As noted earlier, U.S. budgetary spending on agricultural support increased rapidly during the 1980s, to $27 billion in 1987/88 (Table A35). According to Feltenstein, the improvement in the current account deficit would be slightly more than the reduction in the budget deficit, although the actual result could vary depending on the response of interest rates and net private savings.149 Hertel, Thompson, and Tsigas (1988) look at the efficiency gains from a transfer of labor and capital from the farm to the nonfarm sectors. While farmers bear the brunt of unilateral liberalization, the output of the manufacturing sector and overall GNP are significantly increased.

In a similar vein, two studies by Vincent show that support for agriculture is at the expense of manufactured exports and real wages in Japan and Korea.150 Liberalization would also bring about a sharp drop in rural land prices, as the encouragement of agriculture places a large premium on land, which is relatively scarce in both countries. It is important to note that while these countries could gain from the liberalization of agriculture through the expansion of manufactured exports, this expansion is limited by quotas and VERs, or threats of such action, mainly by industrial countries.

Although Australia and New Zealand provide some support for their agricultural sector (currently much less than most OECD countries), it is offset to some extent by the higher protection for the manufacturing sector, which increases input costs to agriculture. As noted in Center for International Economics (1988, p. 45), the disadvantage with the use of PSEs is that they do not take into account the cost of inputs.151 More important, the potential problems are noted for a country such as Australia (and by implication, some developing countries) in which agriculture is relatively lightly assisted compared with the manufacturing sector; in this case if agriculture is liberalized and the manufacturing sector remains heavily protected, resource allocation is likely to worsen. This suggests that the focus on global liberalization of agriculture, in isolation from protection in other sectors, is misplaced. The removal of support for agriculture is important for many OECD countries because it is their most heavily protected sector. Countries with more heavily protected industrial sectors should place greater emphasis on removing these distortions.

While all the countries studied are likely to gain significantly from the unilateral liberalization of their agricultural policies, it is a practical reality that the countries with poor economic performance have the greatest incentives to liberalize. The underlying economic performance of Australia and New Zealand was weaker than most other OECD countries in the early 1980s, and growth was sustained by substantial foreign borrowing. Although these countries are traditional and efficient agricultural exporters, they have chosen to remove most of their own agricultural support policies while simultaneously reducing industrial protection and regulation. This has occurred despite the continued use of subsidies by less efficient agricultural producers to expand their market share. The agricultural sectors in Australia and New Zealand have sustained some loss of income, but this loss has been partially offset by the incentives to produce nontraditional agricultural commodities. These policies have fostered structural adjustment and, particularly in New Zealand, have helped to improve its fiscal position and overall macroeconomic performance. Similarly, many developing countries, under programs supported by the World Bank’s structural adjustment loans and the Fund’s structural adjustment facility and other facilities, have reduced the distortions faced by their agricultural sectors. Despite the great range of evidence supporting the view that the major trading countries can also gain from unilateral liberalization, they have not yet significantly reduced protection for agriculture.

International Effects

Impact on Commodity Prices

A variety of studies have shown the extent to which agricultural support policies in industrial countries have reduced world prices of commodities, reduced trade volumes, and, by stabilizing domestic prices, increased the instability of world prices. Recent major studies on the effect of the liberalization on agricultural prices have tended to be in the context of multicommodity, multi-country models of world agricultural production. While these models are partial equilibrium models and abstract from the effects of liberalization on nonagricultural sectors, they capture most of the salient effects of support policies on the market for agricultural products. In particular, these models take into account the linkages among agricultural products; the effects on support policies in one country of other countries’ policies; and the impact of liberalization on a multilateral basis.

The use of these models is mainly to suggest the broad magnitude and direction of price changes resulting from liberalization because the interactions in commodity markets are so complex that the results are likely to have a significant margin of error. Table A56 compares the results from the two versions of the Tyers and Anderson model and the OECD Ministerial Trade Mandate model.152 The two Tyers and Anderson models are included to illustrate the sensitivity of these models to changes in their specifications. All models are based on the levels of assistance prevailing in the early 1980s, but while the Tyers and Anderson models examine the consequences of complete liberalization by individual countries, as well as by all industrial countries, the OECD study focuses on an across-the-board 10 percent reduction in PSEs for all OECD countries.153 Although there are significant differences in the actual values of the effect on the prices of agricultural products on world markets, the results show the general tendency for support policies to depress world food prices (or liberalization to increase them). The fall in grain prices resulting from the removal of support policies in the OECD model reflects the removal of production restrictions (set-asides) for wheat and coarse grains in the United States, which is projected to increase grain output. However, Tyers and Anderson and other studies by the International Institute for Applied Systems Analysis and the Economic Research Service of the U.S. Department of Agriculture suggest that grain prices would increase.154 Also important is that the increase in world prices resulting from liberalization is likely to be greater as a result of multilateral action than of unilateral action.

Impact on Industrial Countries

The impact of liberalization by industrial countries on the volume of trade is shown in Table A57. The direction of the results generally shows a reduction in exports or an increase in imports by industrial countries across food products. As noted earlier, the exception is coarse grains, with increases in exports because of the removal of set-asides in the United States. The developing countries would respond by increasing their net exports, and centrally planned economies in Europe, by decreasing their imports.

The global welfare effects of liberalization can also be analyzed in these models in a partial equilibrium context as discussed in the subsection on direct costs. The results (Table A55) clearly show that the main beneficiaries of liberalization are the countries that liberalize themselves; in particular, the gains to the liberalizing industrial country are likely to be greater under unilateral liberalization than under multilateral liberalization. These countries will import more food, and consumer welfare will increase substantially under unilateral liberalization, because the domestic price decline will be greater than under multilateral liberalization. Under both multilateral and unilateral liberalization, agricultural producers in the EC and Japan lose heavily, but this loss is more than offset by gains to other groups in their own countries. The studies also show why multilateral liberalization in the Uruguay Round has advantages for agricultural producers: it reduces the price adjustment they face so that they would lose less than under unilateral liberalization. Of particular interest, U.S. producers, although heavily subsidized, would not lose from multilateral liberalization because the United States is a low-cost producer of certain agricultural products (including grains) and could be expected to increase exports to currently protected markets, particularly with the removal of the land set-aside scheme.

Impact on Developing Countries

The liberalization of agricultural support and trade-restricting policies by industrial countries on all commodities, including tropical products, can potentially yield substantial benefits to developing countries. Their gains from increased agricultural exports are likely to outweigh both the increased foreign exchange cost of food imports and the related welfare losses. The distribution of these gains, however, is likely to be quite uneven, with Asia and Latin America having overall net welfare gains, but Africa (including North Africa) suffering a substantial loss because of their large cereal imports.155 The net welfare loss to developing countries shown in Table A55 probably results from the exclusion of tropical products, which are of great interest to developing countries. As noted in the 1986 World Development Report, the gains to developing countries could be greater if agricultural producers in developing countries could take full advantage of the increased world prices through reductions in the net taxation placed on them. If developing countries liberalized their own agricultural policies at the same time, there could be a substantial welfare gain of about $18 billion (in 1980 U.S. dollars).156

Despite the likelihood that developing countries overall will gain from liberalization of agricultural markets (as they are substantial exporters of cereals, beef, sugar, tropical products, and agricultural raw materials), there is need to focus on the special case of cereal-importing countries. Although these countries will receive higher prices for their agricultural exports, which may offset some of the higher prices of cereal imports, the price increases of the latter are likely to be greater than the price increases of tropical products and agricultural raw materials because industrial country support and protection is much less for these commodities than for cereals.

A study of cereal-importing countries suggests that the impact of liberalization by industrial countries on the former’s foreign exchange position and overall cereal consumption depends on how much domestic prices are adjusted to encourage domestic production and on how much consumer prices are adjusted to reflect the relative costs of imported and domestically grown cereals, thereby redirecting demand to domestic cereals. Some evidence of this is provided in the study by Quizon, Gardner, and Quin (1988). They assumed that developing countries pass on all of the changes in world prices to producers and consumers but make no other policy changes. They found that, for wheat, Asian countries gained substantially in terms of foreign exchange and were about neutral in terms of net welfare, while Latin American and African countries lost in terms of both measures; Egypt was by far the largest loser, and large losses were also experienced by Peru and Sudan. The extent to which countries would actually incur losses depends on their policy responses. Many of the countries that incur the largest losses are those that hold producer and/or consumer prices well below world prices (Table A48); adjusting these would reduce both foreign exchange and welfare losses. A similar pattern exists for rice, where the main beneficiaries were Asian countries, with Latin American countries showing smaller gains but African countries, large losses. The situation is very different for maize, where there were no significant developing country losers, primarily because Latin American, and particularly African, countries are able to expand production. This is in contrast to wheat and rice, which are not well suited to conditions in many of these countries, particularly in Africa. Thus, increases in world prices for cereals will not necessarily reduce the cereal intake of the current cereal-importing countries, but the extent to which reductions are avoided depends on changes in domestic prices to encourage domestic production and to shift consumption to cereals suited to domestic agricultural conditions. The impact of industrial country liberalization has not been fully studied in multicountry, multicommodity models for developing countries.

Impact on Price Variability

Tyers and Anderson (1986 and 1987) and a number of other studies cited in World Bank (1986b) also show that the liberalization of agriculture would significantly reduce the variability of international prices. One mechanism is support policies that insulate domestic producers and consumers from market price and exchange rate disturbances. Under the support policies of many countries, there is no incentive to reduce production or increase consumption during times of increased supply, and vice versa for periods of reduced supply, which increases the burden of adjustment on unprotected markets. With liberalization, a larger number of producers and consumers would bear the adjustment for supply disturbance and, hence, overall price fluctuations would be less. An additional factor is important for sugar, one of the most volatile commodity markets. Studies suggest that the asymmetric response of policymakers, who rapidly adjust producer prices upward in response to a surge in world prices from a short-term supply problem (often weather-related), and who are relatively slow to lower prices after the boom has passed, amplifies the sugar price cycle. Typically, because sugarcane production takes two to three years to respond to higher prices, most of the stimulated production will enter the market after the boom, amplifying the downturn in prices.157