Domestic Policies

In most industrial countries the income objective is paramount. There is a widespread acceptance of the notion that income in agriculture should evolve in line with incomes in other sectors of the economy and that any income differential between agriculture and other sectors should be narrowed by deliberate government action. This, together with production objectives, has generally led to the establishment of support programs involving the setting of prices at levels designed to provide farmers with returns higher than would be realized through reliance on market forces alone. The result is that high-cost domestic production is encouraged. Unless the objective of ensuring adequate supplies to consumers at reasonable prices is to be sacrificed, income support involves expenditures through the government budget which, in turn, have to be passed on to nonagricultural sectors via higher taxation. The traditional agricultural exporters have at times also used price policies for the purpose of assisting the incomes of domestic producers. Certain countries have tended to cushion the cost of income support by limiting it to specified maximum quantities produced. Others have used deficiency payments rather than direct price supports, affecting trade flows without directly distorting relative prices. In some countries attempts have been made to raise returns to farmers through supply controls or production quotas. While these might have avoided overproduction in certain instances, even strict supply controls, if practiced over a long period, lead to a freezing of production structures, thus impeding structural adjustment.

External Policies

A natural concomitant of the pursuit of domestic policies aimed at providing income support has been the application of trade policies that insulate the domestic agricultural sector from international competition, thus reinforcing the trade consequences of domestic policies. Trade policies frequently grant preferential treatment to domestic producers and discriminate against foreign suppliers in determining access to the domestic market. Quantitative restrictions on imports are very widespread. Governments generally apply a more liberal import policy when the level of domestic production for a given commodity is significantly less than the country’s requirements, and restrictions are reinforced when domestic supplies increase. In addition to the long-term trade consequences of such policies, they heighten trade uncertainties, thus discouraging adjustments in exporting countries as well. The pursuit of internal support policies has in many cases led to the emergence of surplus production and has necessitated trade actions either to limit imports or to promote the export of surpluses through incentives, including subsidies, which has led to trade frictions with the traditional, more efficient producers in third markets. Occasional export restrictions by major producing countries, designed to ensure domestic availability or to increase returns, have also led to long-lasting uncertainty of access to supplies for importers.

Measures restricting imports include import levies and quantitative restrictions, although internal revenue duties and import calendars are also used. Health and sanitary regulations may also have the effect of restricting imports. Import levies are widely applied, often in association with other forms of import restrictions, such as minimum price systems and state trading operations. Variable import levies aim to raise the import price to the level of the domestic price. Although some quantitative restrictions have been liberalized in the past three decades, global or bilateral import quotas are still widespread.

Measures supporting exports include export aids, which may take various forms, including direct subsidies, preferential credit facilities, and refunds or restitutions. Their primary purpose is to allow domestic producers to obtain for their exports the same price they obtain for sales in the domestic market, where prices are set by the government. Also, this provides a means for accommodating surplus production generated by domestic support programs. Export aids can avoid a short-run price deterioration on the domestic market because of excessive production and can effectively shift the burden of adjustment to the international market. As a result, traditional exporters may themselves be obliged to grant export aids in order to preserve their market shares. Export support can also take the form of price pooling between domestic and export sales, involving lower export prices that can be offset by setting higher domestic prices that are maintained with the help of import controls.

A noteworthy development is that long-term bilateral trade agreements are becoming an increasing phenomenon in world grains trade because they appear to provide security of access to market and supplies when international markets may be volatile; however, such agreements can also have trade-distorting effects, especially in times of shortages. The United States has long-term agreements covering wheat and coarse grains with the U.S.S.R., China, and Mexico. Canada and Australia also have long-term agreements with China. The European Community has recently expressed an interest in entering into long-term bilateral agreements in order to obtain assured access to foreign markets. In 1981 nearly 30 per cent of the wheat trade was conducted under bilateral grain agreements.

European Community

Prior to the formation of the European Community, several of the six original members had their own complex and generally protectionist agricultural policy. Under this situation, formulation of a mutually acceptable Common Agricultural Policy (CAP) in 1962 proved possible only by ensuring substantial self-reliance in food and agricultural raw materials through common prices and no direct production controls. The CAP aims at increasing productivity, ensuring a fair standard of living for the agricultural community, stabilizing markets, and assuring supplies to consumers at reasonable prices. These objectives are realized through a common price policy for key agricultural products and common protective devices against third countries. These are sustained through a common Community-wide financing policy, rules of competition, common organization and administration of rules, and removal of intra-Community barriers to trade in agricultural products.

While the specific mechanisms of the CAP can vary from product to product, the main elements are contained in the pricing system applied to agricultural commodities. These involve the determination of interrelated (1) target, basic, or guide prices; (2) intervention or support prices; and (3) threshold, sluice-gate, or reference prices applicable to imports. Target prices are set annually at a level that it is hoped will be obtained by the Community’s producers of cereals, wheat, rice, dairy products, sugar, olive oil, and oilseeds (Table 35). The basic price (for pig meat and fruit and vegetables) and the guide price (for cattle and calves) operate on a similar basis. Intervention or support prices, also set annually, are generally 5–10 per cent below target prices. They are prices at which the intervention agencies guarantee to buy stocks from producers. Threshold, reference, and sluice-gate prices are minimum import prices below which imports may not take place. Threshold and reference prices are strictly related to internal target and intervention prices. The threshold price for wheat, for example, is equal to the target price in the area of greatest deficiency, less freight from a given point at the border to that area.

The main protective mechanism of the CAP is the variable levy. This is a charge on imports imposed to equate the price of a commodity on the world market with the higher internal price in the Community. For most CAP products, the levy is calculated as the difference between an established import price and the Community’s threshold or reference price. The established import price is calculated according to world offer prices. Thus, levies can be varied monthly, weekly, or even daily, to insulate the market within the Community from import competition. Some agricultural products that are not subject to the full price support and import levy mechanisms of the CAP, and for which the self-sufficiency levels in the Community are relatively low, are subject to import duties. Shifts in the structure of Community imports of agricultural products are shown in Table 36.

The implementation of the CAP has raised domestic prices to levels that encourage the larger and more efficient producers to produce surpluses. Surpluses have developed in products such as sugar, grains, dairy products, and meat. As a result, the Community has found it necessary to encourage the export of these surpluses through subsidization in the form of export refunds. The export refunds are determined by consideration of factors such as the level of world prices, the Community’s internal agricultural prices, and the size of the agricultural surpluses.³¹ Even though attempts have been made to finance export subsidization through the imposition of a coresponsibility levy on the production of certain products, the burden has been largely met by the Community’s budget.

The CAP also involves subsidies for the production of certain commodities, including certain processed fruits and vegetables, cottonseed, flax and hemp, seed and dehydrated fodder, hops, silkworms, and olive oil. The subsidy is determined by the quantity produced or as a flat rate per hectare.

Responsibility for financing common measures is vested in the European Agricultural Guarantee and Guidance Fund (EAGGF), which is a chapter of the Community’s general budget. The Guarantee Section is concerned with financing price support programs and the Guidance Section with structural reform measures (i.e., modernization of farms). The Guarantee Section accounts for the bulk of expenditure on agriculture, the largest share of expenditure being on dairy and cereal products (Table 37).

Border taxes and subsidies are used under the CAP on intra-Community agricultural trade in order to avoid immediate adjustment of common agricultural prices in each member country’s currency when the currencies of member countries fluctuate against each other. These border taxes and subsidies are known as monetary compensatory amounts (MCAs). MCAs preclude the possibility of arbitrage operations that would benefit from the differences in prices arising from changes in exchange rates.³²

Concern about the rising budgetary costs of the agricultural programs led the Commission of the European Communities in October 1981 to propose to the Council of Ministers several changes in the CAP:

1. An increase was proposed in the participation of producers (coresponsibility) in the cost of surplus disposal when production exceeds target levels. In the case of cereals, a production target would be established for 1988 with intermediary annual targets fixed each year; any surpassing of permitted ceilings would result in a reduction of intervention prices in the following year. In the case of beef, intervention buying during certain periods of the year would be limited or suspended.

2. It was proposed that Community cereal prices should be gradually aligned with those received by U.S. producers. In addition to decreasing production surpluses, this policy would make imports of cereal substitutes less attractive and decrease the cost of protection of many products covered by the CAP.

3. It was suggested that a Community common export policy should be developed. The new policy would rely on the establishment of long-term sales contracts, creation of private export sales agencies to promote exports, and provision of long-term credit to facilitate exports.

In January 1982, the Commission proposed a price increase of 9 per cent for the majority of agricultural products covered by the CAP for the 1982/83 year and increases varying from 6 to 12 per cent for the remainder. For cereals, a price increase of 7 per cent was proposed. In May 1982, the Council approved increases in common prices averaging 10.7 per cent.³³ Implementation of the Commission’s proposal on widening the scope of coresponsibility was delayed until 1983/84, subject to endorsement by the Ministers of Agriculture.

United States

U.S. agricultural policy objectives are provision of income and price support to farmers, assurance of adequate supplies of food and fibers at reasonable prices, food assistance to low-income households, and promotion of agricultural exports. To achieve these objectives, the U.S. Government has relied on a number of commodity-specific programs. Important policy shifts have taken place through the years, particularly in the grain sector, where programs have been formulated to address either the disposal problems created by grain surpluses or the need to restore depleted grain inventories in shortage situations. U.S. policy aims at reconciling and coordinating the achievement of the farmers’ income objective with the maintenance of competitiveness on domestic and foreign markets, and at adjusting production capacity in ways that would reduce excess carry-over stocks to manageable levels. The commodity-specific programs generally involve either price supports, which establish floor prices for commodities, or outright income supports implemented through deficiency income payment schemes.

The price support programs are implemented through nonrecourse loans and government purchases of commodities. Under the nonrecourse loan program for grains, farmers are offered loans for their crops at specified price support levels, with the crops serving as loan collateral. Farmers have the option of repaying their loans and redeeming their crops or, alternatively, of not paying the loans and transferring title to the crops to the U.S. Government. The price support program for dairy products is implemented through purchases by the U.S. Commodity Credit Corporation (CCC), a financial agency of the U.S. Department of Agriculture. Set-aside and acreage limitation programs in grains have been used occasionally to complement price support programs. The deficiency payment scheme relies on target prices for its implementation. If market prices fall below the previously announced targets, a deficiency payment is made to eligible producers. Factors such as market prospects, the availability of funds, and the ability and willingness of producers to accept production limitations are also taken into consideration. The 1981 Agriculture and Food Act contains provisions for domestic support programs for wheat and other grains, dairy products, peanuts, soybeans, sugar, cotton, wool, and mohair.

Tariffs on agricultural imports have been reduced under the various rounds of trade negotiations. Import quotas are currently applied to cotton, dairy products, peanuts, and sugar. Separate restrictions are applicable on meat under the 1979 Meat Import Law. Under the MTN, many of the import quotas were raised.

Japan

Japan’s agricultural policy is aimed at achieving self-sufficiency and ensuring adequate incomes to farmers. The strong focus on food self-sufficiency reflects an acute sense of vulnerability—engendered by historical, geographical, and demographic factors—which has led to widespread acceptance of the costs of high self-sufficiency. The desire to retain sociocultural traditions associated with the land has also contributed to fostering special treatment of agriculture. Policy toward rice production is central in formulation of support programs for other products. Rice accounts for about 35 per cent of farm output, and the price of rice is supported at levels two or three times higher than world prices. Since input use for other crops and livestock must compete with rice, competition has raised costs of production for most other products and necessitated protection of other agricultural sectors. This situation has led to high degrees of self-supply for rice, vegetables, dairy products, meat, and fruits. Nevertheless, the food self-sufficiency ratio has declined to about 50 per cent in terms of caloric intake owing to a sharp reduction in the self-sufficiency ratio for grains; this development reflected severe constraints on available arable land and rapid growth in demand.

The Agricultural Basic Law of 1961 lays down the objectives for agricultural policy and provides the basis of protection for imports. The income support and price stabilization policy is based on administered prices reflecting the farm cost of production plus income compensation, so as to provide an opportunity for a full-time farmer with adequate resources to earn an income comparable with that of an industrial worker. In practice, however, the typical small farm does not provide profitable full-time employment opportunities, encouraging farmers to engage in nonfarm activities on a part-time basis. Given this off-farm income, support prices provide total incomes to farmers that, on average, exceed the average income of industrial workers. Production subsidies have also been used to encourage import substitution. In addition, a system of state or semistate trading has been used to ensure adequate returns to producers of products competing with imports.

The agricultural sector is protected basically by three means: (1) direct payments from the budget—i.e., subsidies that do not affect the price of the commodity; (2) restrictions on quantities supplied to consumers through import quotas that are managed by state trading, thereby increasing prices paid by consumers and transferred to producers; and (3) charges on imports that raise domestic prices and improve the competitive position of domestic producers. Although import duties and levies are important, especially in the beef sector, protection is largely accorded through the first two instruments. For some commodities, all three methods are used.

The product coverage of quantitative import restrictions has been progressively reduced, to 22 items at present. Import quotas now mainly cover meat, certain milk and milk products, dairy products, citrus fruits, wheat, barley, and rice. In addition to these formal means of control, Japan’s food distribution system has been viewed by other industrial countries as constituting an informal import barrier. Most food products are distributed to consumers through long chains of intermediaries closely bound to traditional domestic sources of supply.³⁴ Procedures for issuing import licenses for goods subject to quantitative restrictions have also been cited as having an adverse impact on foreign suppliers.

Other Countries

The Canadian agricultural sector is largely export oriented; 50 per cent of this sector’s cash receipts originate in exports. Government policies are mainly focused on facilitating production and export through the provision of infrastructural support. Nevertheless, various agricultural products are subject to a domestic support program through the Agricultural Stabilization Board. Under this program, supply management is aimed at ensuring adequate and stable returns to farmers. Commodities subject to supply management include butter, cheese, chickens, turkeys, and eggs. The Stabilization Board supports the prices of these commodities at not less than 90 per cent of the previous five-year average market or base price, with appropriate additional consideration for cash cost increases. Supply management has occasionally involved subsidization; the most important product subject to subsidization is cheese. When imports of stabilized or support products interfere with this policy, quotas and surtax measures are applied on a commodity-by-commodity basis. Distribution of import quotas by countries is based on informal understandings.

In addition to products subject to stabilization, controls are also applied to meat imports under the Meat Import Act of February 1982. These controls are similar to those applied by the United States and are aimed at protecting the Canadian market from trade deflection on account of the U.S. regulations, given the integrated nature of the North American market. Canada also applies discretionary licensing in order to restrain imports of certain other agricultural products; such actions have normally led to virtually no imports of affected products.

Australia is a major agricultural producer and an important supplier of wheat, wool, sugar, meat, and dairy products to world markets. Agricultural policy has been implemented through programs that vary in form or in the degree of assistance provided to agricultural production. The major forms of government assistance to the agricultural sector comprise discriminatory pricing arrangements; import restrictions; adjustment assistance programs, including concessional credits and tax concessions; and other programs, including government contributions to stabilization funds and a local content scheme. Discriminatory pricing arrangements may raise commodity prices above world prices or hold domestic prices below world prices. Discriminatory pricing arrangements currently operate for certain dairy products, sugar, wheat, rice, dried vine fruits, other fruits, and eggs. In 1979–80, these pricing arrangements resulted in transfers from producers to consumers of wheat, sugar, dried vine fruits, and manufacturing grade milk, while producers of eggs, apples and pears, rice, and fluid milk benefited from these arrangements. Restrictions are sometimes placed on domestic production in order to limit the output increases resulting from higher returns.

In the cases where domestic prices are maintained above world prices, imports are usually excluded or their prices raised through tariffs or other forms of restrictions. Import restrictions range from total prohibitions (e.g., sugar)³⁵ to less formal restraints on imports (e.g., canned ham and cheddar cheese) and tariffs (e.g., orange juice).

An Overview

To a greater or lesser degree, agricultural policies have insulated the domestic agricultural sectors from international competition. It has been estimated that the overall level of agricultural protection in industrial countries has averaged over three times that of manufactures and that both the level and product coverage of agricultural trade barriers have been rising.³⁶ A comparison of nominal protection coefficients, that is, the ratio of domestic wholesale to world prices, for selected agricultural products in the three major industrial areas—the European Community, Japan, and the United States—is illustrative of the degree of agricultural protection, although subject to many qualifications (Tables 39 to 41 and Chart 1).³⁷ The nominal protection coefficients are well above unity, reflecting positive protection, in both the European Community and Japan, the major importing countries for most commodities. For the United States, the ratios have generally remained around or below unity (except for sheep meat). The coefficients tend to be higher for essential foodstuffs, such as grains, including rice, than for products such as sugar and meat whose production in industrial countries competes with the traditional sources of supply in developing countries. The U.S. comparative advantage in the production and export of a wide variety of agricultural products, particularly grains, is shown by its lower protection levels relative to the Community and Japan. Table 38 shows the nominal protection rates for certain agricultural products in Australia and is indicative of its comparative advantage in wheat, meat, and sugar.³⁸

Trends in Nominal Protection Coefficients

(In ratios of domestic prices to world prices)

Source: Tables 39, 40, and 41.

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Trends in Nominal Protection Coefficients

(In ratios of domestic prices to world prices)

Source: Tables 39, 40, and 41.

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• Download figure as PowerPoint slide

Trends in Nominal Protection Coefficients

(In ratios of domestic prices to world prices)

Source: Tables 39, 40, and 41.

• Download Figure
• Download figure as PowerPoint slide

Trade Trends

Only about 3 per cent of world milk production enters international trade in the form of dairy products—i.e., milk powder, butter, cheese, and some other products. For cheese and butter separately, the proportions are 4 per cent and 12 per cent, respectively. Production and exports are concentrated in the OECD countries, while developing countries are becoming large net importers. International trade in dairy products is largely of a residual character; thus prices and volumes traded can vary considerably as a result of even marginal changes in production. Policies in this sector have also resulted in wider price dispersions than in other agricultural commodities. The price dispersions, together with export subsidy practices, have sharply distorted world trade from the situation that would prevail with a more optimal allocation of resources. World dairy prices are influenced to a considerable extent by the export subsidy levels of the world’s largest dairy exporter, the European Community.

There are some important differences in the evolution of trade in butter and cheese, the two main dairy products. While production of butter increased only marginally during 1972–81, world exports have grown more rapidly, largely because developing countries’ imports increased sharply (Table 27). Even though the European Community continued to be a major importer, its share in world imports fell from 36 per cent in 1975 to 12 per cent in 1981. The share of the U.S.S.R. in world imports rose from 2 per cent in 1975 to 30 per cent in 1981. Exports originated entirely in the European Community, Australia, and New Zealand. The Community became the largest exporter, accounting for 67 per cent of exports in 1981, compared with 39 per cent in 1976. The share of Australia and New Zealand fell from 61 per cent in 1976 to 33 per cent in 1981.

In contrast, the production of cheese has increased more steadily at an annual average rate of 4 per cent. The Community’s share in world production rose from 29 per cent in 1972–74 to 33 per cent in 1981. While exports of Australia and New Zealand stagnated, exports of the Community grew at an annual average rate of 20 per cent during 1976–81. Most of the Community’s export growth was the result of increased imports by the developing countries. Consequently, its share in world exports rose from 54 per cent in 1976 to 73 per cent in 1981. The Community, which was the major OECD importer of cheese in 1976 at 26 per cent of the total, accounted for only 15 per cent in 1981.

International Framework for Trade

The International Dairy Arrangement, agreed during the MTN, has been in force since January 1, 1980. It aims at (1) the expansion and liberalization of world trade in dairy products under stable market conditions, and (2) furthering the economic and social development of developing countries. To achieve these objectives, the Arrangement makes provision for a comprehensive information and cooperation mechanism. Three accompanying protocols contain specific provisions fixing minimum export prices of certain milk powders, milk fat (including butter), and certain cheeses. At present 16 countries participate in this Arrangement, which is operated by the International Dairy Products Council established within the framework of the GATT.³⁹ The Council follows the evolution of dairy trade on the basis of information supplied by the signatories on past performance, current situation, and outlook regarding production, consumption, prices, stocks, and trade. In the event that a serious market disequilibrium or threat of a disequilibrium is perceived, the Council may identify possible solutions for consideration by the participants. Canada withdrew from the Arrangement in 1981.

The commitments and undertakings by governments under the Arrangement have been supported by private dairy producers and exporters. The established minimum export prices have remained well below world market prices. The minimum export prices in effect serve as floor prices; thus, they establish a ceiling on subsidization of exports. The gap between these prices and world prices has, however, increased over the period following the inception of the Arrangement. In the past two years, there have been only two infringements of the undertakings on minimum prices. The Arrangement has been viewed as a means of providing conditions for orderly markets and preventing a collapse in a situation of increasing worldwide surpluses of dairy products.

The Tokyo Round of the MTN resulted in a number of relatively small concessions on access for traditional exporters. These included a mutual import-limiting agreement between the European Community and Canada that fixed the Community’s exports to the Canadian market at 60 per cent of the global import quota of 20,400 tons maintained by Canada. In exchange, the Community agreed to allow the import of 270,000 tons of Canadian cheddar cheese, primarily into the United Kingdom, subject to a price undertaking that exports to the Community would take place at prices higher than those prevailing in Canada. This quota is well below the traditional level of Canadian sales to the Community prior to the accession of the United Kingdom.

European Community

The Common Agricultural Policy (CAP) as applied to butter and cheese is closely interrelated to the policy applied to milk and the milk products market. There is a considerable problem of oversupply of milk at established prices. Only 25 per cent of milk produced in the European Community is destined for liquid consumption and the remainder is delivered to dairies for processing. Over 30 per cent of production originates in small farms that have limited alternative means for income generation. The CAP price system for dairy products sets a target price for milk that is supported by intervention prices applicable to butter, skimmed milk powder, and certain cheeses; liquid milk and certain other cheeses are not subject to intervention. The domestic target price is supported by a threshold price applicable to imports. All exports benefit from refunds. Since 1977 efforts have been made to slow down the growth of milk production by imposing a coresponsibility levy on production; the levy is calculated as a percentage of the target price for milk.

The target price for domestic milk is fixed annually as a minimum producer price consistent with the notion of a certain income support. This price, which is substantially higher than the world price, was increased by about 13 per cent between 1976/77 and 1980/81, and by 9 per cent and 10.5 per cent, respectively, in 1981/82 and 1982/83. For dairy products, intervention prices have been 6 per cent below the target price. Because there is no intervention price for milk, dairies pay to producers prices that reflect market conditions and are well below the target price. Protection from low-priced imports is ensured by threshold prices established for 12 pilot products; threshold prices of other products are derived from these prices. A variable levy is applied to imports, except imports for which the Community has concluded special agreements. The levy is equal to the difference between the threshold price and the free-at-frontier price for each product; it is fixed by the Commission of the European Communities on the first and the sixteenth of each month.

The Community has concluded with other countries specific agreements that govern imports subject to certain conditions; these apply mainly to certain cheeses. In addition, the Community maintains an agreement with New Zealand under which butter is imported in set quantities at a special levy. These quantities have declined from 125,000 tons in 1978 to 92,000 tons in 1982. Exports of dairy products from the Community, which account for 15 per cent of total deliveries, benefit from export refunds to cover the difference between internal prices and the prices of internationally traded products. Refunds may be differentiated according to the country of destination in order to take account of specific market circumstances. In order to develop exports of dairy products, the Community has concluded special export agreements for some cheeses with certain countries, including Australia, Austria, Canada, Spain, Switzerland, and the United States.

The coresponsibility levy introduced in 1977 was 1.5 per cent of the target price and was applied for all milk producers (with an exemption for the first 60 tons of butter equivalent for each farmer). The objective of the coresponsibility levy was to discourage a rapid increase in the Community’s production and to avoid the emergence of large exportable surpluses that would place a burden on the Community’s budget. After a reduction of the coresponsibility levy to 0.5 per cent of the target price in the 1978/79 and 1979/80 milk years, it was raised to 2.0 per cent in 1980/81, with certain exceptions for less favored regions. The levy was further raised to 2.5 per cent for the 1981/82 milk year and maintained at that level for 1982/83. The increases in the coresponsibility levy have contributed to a slowdown in the annual growth of milk deliveries in recent years to around 1.5 per cent. Since the structure of production has shifted toward large and more efficient farms, the growth of production is not expected to fall much below this rate. Given the virtually stagnant internal domestic demand, this increase could still result in surplus production.

Reflecting the increasing domestic production and the consequent need to subsidize exports through refunds, the direct cost of protecting the dairy product sector has gone up significantly. Expenditure for the dairy product sector (including the cost of intervention and export refunds) rose from about 24 per cent of the EAGGF guarantee budget to a peak of about 46 per cent in 1978, but declined in subsequent years. In 1981 it amounted to about 32 per cent of the EAGGF budget or ECU 3.7 billion (Table 37). In recent years more than one half of the expenditures have been for export refunds.

United States

The United States has implemented a dairy price support program for many years. The price support program is implemented by the Commodity Credit Corporation (CCC), which stands ready to buy butter, cheese, and nonfat dry milk at prices linked to the support price for milk. Until 1981, minimum support prices for dairy products were defined as a percentage of the parity price equivalent and averaged about 83 per cent of the parity price equivalent for several years.⁴⁰ CCC expenditures on dairy products have fluctuated widely during the 1970s. Such expenditures rose from $24 million in fiscal year 1979 to $1.0 billion in fiscal year 1980 and further to $1.9 billion in fiscal year 1981. They are projected to exceed $2 billion in fiscal year 1982 (Table 42). CCC stocks of dairy products on September 30, 1981 were valued at $2.4 billion, or about two to three times the levels of the preceding four years.

Concern with the rising expenditures has led to certain adjustments in the dairy support program. For fiscal year 1982, the support price in nominal terms will remain unchanged from the level of 1981. For the following three fiscal years, the 1981 Farm Act provides for nominal increases averaging about 3.5 per cent annually, or about one third of the average increases during 1978–80.

Dairy surpluses are disposed of through CCC export sales, the food aid program, and a free distribution program for low-income families. In 1981, the New Zealand Dairy Board purchased 100,000 tons of butter, about one half of its annual output, from the U.S. Government at above the minimum export price established under the International Dairy Arrangement to help the United States dispose of its butter surpluses. The butter is to be delivered in stages up to July 1982, with the New Zealand Dairy Board disposing of it in an orderly manner to avoid market disruption.

U.S. imports of dairy products are restricted by import quotas authorized under Section 22 of the Agricultural Adjustment Act. Import quotas exist for milk imports in various forms, for 12 categories of cheese, and for chocolate imports. Annual import quotas on buttermilk, skimmed and whole milk, dried cream, and butter are set at levels equivalent to only about one half of the level of actual imports some 30–50 years ago. In about one half of the cheese categories, current import quotas reflect the enlargements negotiated in the MTN and exceed by a factor of one or two the actual import level in the representative period chosen to establish the quota (generally the early 1950s or the middle 1960s). About 85 per cent of cheese imports are subject to import quotas. About 80–90 per cent of dairy product import quotas have been filled in recent years, except for the quotas on evaporated or dried milk. Notwithstanding the liberalization of quotas negotiated in the MTN, U.S. dairy import quotas are fairly strict in relation to domestic production levels. In 1981, the butter import quota was equivalent to 0.06 per cent of U.S. butter production, and the cheese import quotas to 0.3–14.0 per cent of U.S. production.

In August 1981, the U.S. International Trade Commission (USITC) initiated an investigation to determine whether casein and lactalbumin should be added to the list of dairy products subject to import controls. In January 1982, the USITC ruled that casein and lactalbumin imports were not materially interfering with the U.S. Department of Agriculture’s domestic dairy support program and that import quotas were not warranted.

Japan

Japan’s production of dairy products has been increasing rapidly under government subsidies and protection. Producers receive direct subsidies (deficiency payments) that, in conjunction with the prices received for dairy products, support prices for manufacturing grade milk products at levels linked to the assessed costs of production. Quantitative controls on imports of dairy products other than natural cheese contribute to maintaining domestic market prices for dairy products at a level several times that of world prices.

The increase in dairy production, coupled with a slow growth of demand since the early 1970s, has resulted in surpluses of dairy products in Japan that have necessitated increasing protection. In 1981, in view of the mounting surpluses of domestically produced dairy products, Japan held consultations with New Zealand that led to a voluntary cut in the export of compound butter by New Zealand to Japan by about 10 per cent over the next three years.

Canada

The dairy product sector in Canada, which on the basis of total milk production accounts for about 13 per cent of Canadian farm cash receipts, is comprehensively regulated and protected against import competition. It is based on a tight supply management system for milk based on specified production quotas for each milk producer. A distinction is made between milk produced for liquid consumption and for the manufacturing sector. If production exceeds specified quotas, the excess must be sold at world market prices; if this still does not reduce output, the base quota is reduced for the following year to bring about an adjustment in the predetermined output path.

The compulsory production quotas are complemented by the basic producer prices, which are determined by a formula based on changes in consumer prices, input costs, and a judgment factor to determine the “target return” on industrial milk. To achieve this target return level, the Government essentially uses some combination of direct subsidy to milk producers and support prices for butter and skim milk powder that are fixed in excess of world prices. The difference between the producer price and the world market price is met partly by a coresponsibility levy on producers but largely by the budget. Expenditures on the dairy industry account for 30 per cent of the federal agricultural budget. To guarantee the functioning of the domestic support program, dairy imports are restricted in Canada. Import tariffs, supplemented by quantitative restrictions, apply to all dairy products except butter. Cheese import quotas have been set at about 20,000 tons since 1977, equivalent to about 12 per cent of domestic output; 60 per cent of the cheese quotas are assigned to the European Community.

Trade Trends

Fats and oils account for about 5 per cent of world trade in agricultural products. Even though the OECD countries continue to be the major producers and exporters of fats and oils, developing countries have steadily regained their share in this market (Table 31). At the same time the dependence of developing countries on imports has increased, while industrial countries, particularly the European Community, have been able to reduce their dependence on imports through increased domestic production. Prices weakened in 1980 after steadily increasing through the second half of the 1970s in response to fluctuations in supplies leading to a slowdown in production. Trade volumes in 1981 probably declined as a result. Trade in fats and oils is generally subject to relatively low levels of protection. Recently, however, concerns regarding secure availability of imports have prompted an increased focus on expanding domestic production in certain OECD countries. The accession of Spain to the Community could lead to an important shift in the stance of the Community’s trade policy in this sector, because of the importance of Spain as a producer of olive oil and the possibility of substitution against other oils.

International Framework for Trade

Only olive oil is subject to internationally agreed rules under the International Olive Oil Agreement. This Agreement entered into force on January 1, 1981 and is managed by an intergovernmental International Olive Oil Council. The economic provisions of the Agreement aim at lessening fluctuations in supplies in order to prevent excessive fluctuations in prices and to create conditions “which allow production, consumption, and international trade to expand harmoniously.” The Council coordinates policies of producing countries; there are, however, no provisions for buffer stocks. In addition, an Intergovernmental Group on Oilseeds and Oils and Fats has been deliberating under the auspices of the Food and Agriculture Organization (FAO). Some liberalization of trade in fats and oils was negotiated under the MTN. However, it is difficult to ascertain the economic significance of these concessions.

European Community

Except for olive oil, in which the European Community is 70–80 per cent self-sufficient, oils and oilseeds are subject to protection only because of the commercial interrelationships between animal fats, butter, and edible oils. Rapeseed, sunflower seed, and soybeans are covered by the Community’s common regulations. However, the regime applicable to oils is different from that applied to other agricultural products.

Imports of oils are subject to an import duty of 10 per cent. Olive oil imports are subject to variable levies that are equal to the difference between the threshold price and the c.i.f. import price. Intervention operates to support a derived market target price for producers, with a deficiency payment being made to the Community’s producers to maintain the target price. In 1981/82, deficiency payments for olive oil amounted to about 30 per cent of the world price. Unless the target price is lowered, deficiency payments could increase sharply after the accession of Spain to the Community because Spanish production, at around 200,000 tons, is about the equivalent of the total world trade in olive oil.

For oilseeds, target wholesale and intervention prices are set and are seasonally phased. Intervention prices differ from country to country within the Community. A deficiency payment representing the difference between a higher target price for the Community and the lowest c.i.f. import price is paid to producers, wholesalers, or oilseed crushers. This is aimed at ensuring supplies of oilseeds by guaranteeing an adequate return to producers. In 1981/82, the rate of deficiency payments was around 45 per cent of the world price.

At present, exports of fats and oils are limited, going mostly to the United States and North Africa, and benefit from an export refund equivalent to the deficiency payment. The overall budgetary expenditures on protection of this sector rose from 4 per cent of the EAGGF guarantee expenditures in 1978 to 8.2 per cent in 1981.

United States

Although the United States is an efficient soybean producer and until fairly recently accounted for more than 95 per cent of world exports, it maintains a loan and purchase program to support soybean prices. In recent years, support prices have been consistently established below market prices. The 1981 Farm Act established a loan rate (support price) for the soybean loan program equal to 75 per cent of the price of soybeans received by farmers over the preceding five marketing years.

The U.S. support program for peanuts is regulated by production quotas, which were reduced in 1981. It is supported by a restrictive import quota—unchanged since 1953—and a high import tariff. In late 1980 and early 1981, following a sharp drop in domestic peanut availability owing to adverse weather conditions, additional import quotas were authorized in amounts equivalent to 175 times the traditional annual quota, and these were filled.

Japan

Japan’s imports of fats and oils are generally free of restrictions; however, preference is given to importing oilseeds rather than oils in order to encourage the domestic crushing industry. For this reason, oilseeds are imported free of duty but a tariff is imposed on seed oil. The Japanese Government attaches great importance to secure sources of imports; this has been attempted through an informal allocation of the domestic market to numerous foreign suppliers. In the case of soybeans, in which Japan is about 5 per cent self-sufficient, a system of deficiency payments, similar to the one applicable to grains, is used to protect domestic producers.

Trade Trends

World trade in grains (including wheat and coarse grains such as barley, maize, and millet) has quadrupled over the last four decades. This outstanding expansion reflects the significant shifts in production toward developed countries of the temperate zone associated with major technological developments and increased productivity per acre. At the same time, slower rates of domestic production in developing and Eastern state trading countries necessitated increased imports. The OECD countries—in particular the United States, Australia, and Canada—dominate in exports of wheat and coarse grains.

These trends are reflected in the evolution of international trade in the 1970s. Exports of wheat, after declining from 19 per cent of world production in 1975 to 15 per cent in 1976, rose to an estimated 22 per cent in 1981. The share of OECD countries in wheat exports remained above 80 per cent, rising to 94 per cent in 1981. Developing countries absorbed 59 per cent of world imports in 1972–74 and 64 per cent in 1981. The share of state trading countries in total imports has remained below 25 per cent.

In coarse grains, OECD countries account for 70 per cent of exports and 30 per cent of imports. However, import substitution in coarse grains, particularly in the European Community, has been much more pronounced than in wheat. The share of the Community in imports of coarse grains fell from 24 per cent in 1972–74 to 11 per cent in 1981. On the other hand, the share of both Eastern state trading countries and developing countries in imports has grown. Price instability in the grain market has increased in the past decade, reflecting fluctuations in production, crop failures in many developing and state trading countries, and lower stocks held by exporting countries.

Food self-sufficiency considerations affect the policy stance of net grain importers regarding grain production and trade. Developing countries have been particularly concerned about food self-sufficiency, but some developed countries like Japan also share these concerns.

International Framework for Trade

The International Wheat Agreement, in effect since 1971, was renewed most recently for a two-year period on July 1, 1981. The Agreement comprises a Wheat Trade Convention and a Food Aid Convention. The Wheat Trade Convention contains no substantive economic provisions but calls for regular consultations on world supply and demand. The Food Aid Convention provides for minimum annual contributions by members to developing countries of wheat and other grains or the cash equivalent thereof. The objective of the renewed Food Aid Convention is the achievement of the World Food Conference’s target of at least 10 million tons of food aid annually to developing countries. This is equivalent to about 5 per cent of international trade in grains (including wheat).

Negotiations on a new International Wheat Agreement have been under way for several years in the International Wheat Council. Efforts toward a new Agreement were abandoned in 1981 when Canada and the United States did not support a proposal to establish a network of individually held, globally coordinated, world food stocks and a scale of price levels at which worldwide consultations on accumulation or release of stocks would take place.

European Community

A significant development over the last ten years has been a sharp decline in the European Community’s imports and an increase in its exports of wheat and other grains, largely reflecting increases in domestic production. The self-sufficiency ratio for wheat stood at 112 per cent in 1979/80, compared with 94 per cent in 1968/69.⁴² For all cereals, the ratio has risen from 86 per cent in 1968/69 to 98 per cent in 1979/80 and to an estimated 105 per cent in 1980/81. The cost of supporting the cereal sector increased from less that 14 per cent of EAGGF guarantee expenditures in 1978 to 17 per cent in 1981, equivalent to ECU 2 billion. The Community’s producers have also been protected by voluntary export restraint arrangements with Thailand and Indonesia to stabilize imports of cassava, a cereal substitute, from these countries. In addition, the Commission of the European Communities has requested authorization to negotiate in the GATT the substitution of bound tariffs on corn gluten feeds, another cereal substitute, by import quotas.

The reference price for common wheat of bread-making quality has usually been fixed for several years by way of derogation from the Community’s pricing regulations on the common organization of the market. However, for 1981/82, the Council of Ministers reverted to the official regulations, providing for an actual reference price that serves as a basis for deriving the target price—and thus the threshold price—and a derived price at which intervention in minimum-quality bread wheat must take place. The derived price in 1981/82 was 5.5 per cent higher than the comparable reference price in 1980/81. In 1980, the internal wholesale price of wheat was 45 per cent higher than the relevant world price, while in the case of maize, the differential was more than 100 per cent (Table 39). Import levies in 1980/81 averaged 20–23 per cent of the c.i.f. price for common wheat, while for barley and maize they stood at 14–62 per cent and 48–68 per cent of the c.i.f. prices, respectively.

In view of the increase in production and the emergence of exportable surpluses, export restitution has been increasingly applied to encourage exports. Over the last four years, this support has accounted for about 72 per cent of the total EAGGF guarantee expenditures in the cereal sector. In 1980/81, restitution was granted to 7.2 million tons of common wheat (15 per cent of total production) and 3.4 million tons of barley (8 per cent of total production). Recently, the Community’s policy of subsidizing cereal exports has led to complaints under the GATT by the United States on wheat flour and pasta, and Australia has reportedly encountered difficulty in competing with the Community’s wheat exports in certain Middle Eastern markets.

United States

The U.S. price support program is implemented through a nonrecourse loan and purchase program, described earlier. During periods of surplus production, such as periodically during the 1950s and the 1960s, holdings of grain by the Commodity Credit Corporation (CCC) expanded significantly. The CCC also purchases wheat and feedgrains to implement the U.S. food aid programs and thus supports prices. During some years a second type of program was in effect, under which payments were made to farmers for diverting acreage away from wheat and other grain production. Diversion payments were eliminated in 1981.

Another program, originally introduced in 1973, supports farmers’ incomes through target prices for grains. If market prices fall below the targets set for the prices of wheat, corn, sorghum, and barley during the first five months of the marketing year, a deficiency payment is made. In order to be eligible for both the price support and the income support programs, producers must adhere to acreage limitations or set-aside directives, which are issued if market conditions warrant them.

During the 1977–81 fiscal years, the annual value of the grain collateral acquired by the U.S. Government as a result of the nonrecourse loan programs was $85 million on average, ranging from $2 million in 1981 to $240 million in 1979. Purchases (including those made for the food aid program) averaged about $200 million during the 1977–79 fiscal years, but equivalent amounts were disposed of during those three years. However, during fiscal year 1980 purchases amounted to $1.2 billion, and disposals were only $0.2 billion. In fiscal year 1981 purchases dropped to about $80 million, while sales were twice that value.

Table 43 shows the average support prices for the U.S. wheat program during the 1970s. After almost $900 million in annual government diversion payments during 1970-72, government payments declined to $500 million in 1973 because of sharp world price increases. The deficiency support programs in effect in 1977 and 1978 resulted again in large government payments, especially in 1977 when they amounted to $1 billion. There were also large price support payments in the early 1970s to corn producers, exceeding $1 billion, and on a smaller scale to sorghum and barley producers. In recent years deficiency payments to these producers have been on a much smaller scale.

The record-breaking U.S. grain harvests of the late 1970s prompted the establishment of a farmer-owned food grain reserve in 1977. The objective of the reserve was to allow farmers to remove grain supplies from the market until their value increased. Wheat, maize, sorghum, barley, and oats were eligible for this program. Participating farmers received a price support loan on the grain plus annual storage payments if the grain was stored for three years or until the market price reached predetermined release levels. If farmers sold their grain before prices reached these levels, they were obliged to pay storage costs plus interest, in addition to the original loan, as penalty. The grain reserve program was extended in 1981.

Japan

Japan implements a price support program for grains to increase its self-sufficiency and for sociocultural reasons. Its import policy is also guided by the need for security and stability of grain supplies. The economic consequences of this policy are reflected in the rice sector where domestic prices have traditionally been several times higher than in the world market (Table 41). Government losses on trading in rice are the largest expenditure item in the agricultural budget. Given the predominant position of rice in Japan’s agriculture, policies regarding rice influence attitudes toward other grains.

Because feedgrains provide the basis for the economy’s pig, poultry, and cattle industries, imports of maize, sorghum, and other grains are permitted liberally. However, for wheat and barley, which are domestically produced, imports are subject to global quotas despite the very low level of self-sufficiency. In recent years, wheat imports have been some 6 million tons and barley imports about 2 million tons. These quotas are determined as a residual, taking account of domestic production and market requirements. Import requirements are divided into half-yearly quotas, which in turn are broken down into a port-of-arrival basis, with quantities to each port allocated to individual millers and other processors on the basis of past purchases. The government sales prices for imported wheat are set primarily for stabilizing domestic prices and not as an instrument to protect domestic producers.

Quantitative controls on the import of wheat and barley are aimed at encouraging domestic production. The producer prices fixed by the Food Agency of the Ministry of Agriculture, Forestry, and Fisheries have consistently been much higher than the import prices. The Food Agency purchases virtually the entire production of wheat and barley and resells it at prices substantially below the producer prices. The deficit on this trading is financed from the consolidated budget. With the increasing divergence between the producer prices and the Food Agency’s sale price over the past decade, the cost of protecting domestic producers has gone up significantly, especially because of a significant increase in domestic production of wheat and barley.

Other Countries

Canada is a major exporter of wheat and barley. Almost 80 per cent of exports are to state trading countries and are channeled through the Canadian Wheat Board to purchase agencies in these countries under long-term contracts. The remaining 20 per cent of exports are handled by the multinational trading companies through the market. All grain sales to China and the U.S.S.R. are made through the Canadian Wheat Board and are governed by long-term agreements that provide for minimum amounts that Canada is committed to sell and importers to buy over the period of the agreement. In recent years there have also been long-term agreements with Algeria, Brazil, Jamaica, Japan, Mexico, and Poland. The actual sales contracts are negotiated for periods of six months; each contract specifies prices at which sales can be made. These prices are generally in line with U.S. market prices.

The domestic stabilization program for grains is based on a deficiency payments system. The Canadian producers are paid about 80 per cent of the anticipated price by the Canadian Grain Commission at delivery. After sales are completed, the balance of sales proceeds is distributed to farmers. In cases where realized prices fall short of initial payments and losses are incurred by the Canadian Wheat Board, the Federal Government makes special appropriations to meet the losses. No such losses have, however, been incurred in recent years.

The wheat industry is one of Australia’s efficient industries. There has been considerable government intervention in wheat production and marketing, involving the operation of a price stabilization fund, price setting arrangements, statutory monopoly control of domestic and export marketing, other assistance measures from government, and import controls. The Australian Wheat Board is the sole marketer of wheat in Australia and of Australian wheat and flour overseas. Since the early 1970s, government intervention in the Australian wheat industry has actually resulted in negative effective protection (Table 38). Wheat for human consumption in Australia is sold at an administered price determined annually according to a formula that takes into account movements in domestic costs and export prices and that provides a margin above long-term f.o.b. export prices. Movements in the prices of wheat destined for human consumption are subject to a limitation of 20 per cent between seasons. Wheat sold for industrial and stockfeeding purposes is priced by the Australian Wheat Board according to commercial considerations. The Australian Wheat Board has signed long-term agreements with a number of its wheat importers, including Abu Dhabi, China, Egypt, and Iraq.

Trade Trends

Long-term developments in production and trade of meat have followed generally the same pattern as in other foodstuffs, particularly grains, but the rate of growth has been slower than for grains. As in other foodstuffs, OECD exports have grown most rapidly, while developing countries and state trading countries have lost export market shares. Reflecting the pattern of production, imports have grown much faster in state trading and developing countries than in the OECD countries. During the 1970s, there was some shift in the long-term pattern with respect to production. By 1981, world production of bovine meat was only 13 per cent higher than the 1972–74 level, and developing countries’ share in production had increased somewhat (Table 29). Even so, the predominance of OECD countries was maintained. Production of meat, especially beef, is cyclical, as a result of the cattle breeding cycle, and beef faces strong competition from highly substitutable products, such as poultry and other types of meat.

Bovine meat trade as a proportion of production has remained at about 6 per cent throughout the 1970s. The share of OECD countries in exports rose from 71 per cent in 1972–74 to 82 per cent in 1981, while that of developing countries fell from 29 per cent to 18 per cent. Exports of Australia, despite the loss of the U.K. market following the accession of the United Kingdom to the European Community, more than doubled during the 1970s, accounting for about one half of OECD exports. New Zealand’s exports of bovine meat expanded by about one fourth and the Community’s exports, after declining steadily up to 1973, rose sharply in 1979 and stood at over three times their level of 1970. The share of developing countries in total imports rose from 6 per cent in 1972–74 to 17 per cent in 1981. While imports by the United States continued to rise steadily throughout the decade, the Community’s imports fell precipitously from 35 per cent of OECD imports in 1972 to 12 per cent in 1979. Intra-Community trade in bovine meat doubled during this period. Japan’s imports rose sharply throughout the 1970s, although the increase was based on an extremely small initial level.

New Zealand and Australia maintained their dominant share in the sheep meat market during the 1970s at 70 per cent and 30 per cent, respectively, but the volume of their exports stagnated because of the decline in their exports to the European Community.

International Framework for Trade

Participants in the MTN adopted the Arrangement Regarding Bovine Meat for a period of three years from January 1, 1980. The Arrangement aims, inter alia, at promoting the expansion, liberalization, and stabilization of the international meat and livestock market by facilitating the progressive dismantling of restrictions to world trade in bovine meat and live animals and by improving the international framework of world trade. To this end, the Arrangement provides a mechanism for cooperation in obtaining comprehensive information. There are 20 signatories to the Arrangement.⁴³ The International Meat Council, established by this Arrangement under GATT auspices, evaluates the world market situation and outlook and also recommends solutions in situations of potential or actual serious market disequilibrium for consideration by interested governments. The assessment is based on information supplied by signatories. The Arrangement does not contain economic provisions but provides a forum for exchange of views and informal understandings.

The MTN led to tariff reductions in the meat sector of 40–50 per cent and a move to more tariff-free categories. In addition, some liberalization of quotas was also negotiated, especially in Canada, Japan, and the European Community.

European Community

Under the CAP, intervention in support of beef prices occurs whenever the market price remains below the intervention price for two weeks. The intervention price is 90 per cent of the guide or target price. Intervention ceases when the market price remains above the intervention price for three weeks. The variable import levy is not applied to imports subject to special arrangements and quotas negotiated in the MTN; about four fifths of the European Community’s imports enter under these arrangements. Imports from Yugoslavia and imports from African, Caribbean, and Pacific (ACP) countries under the Lomé Convention are subject to reduced rates of variable levies. The quota for Yugoslavia was adjusted upward in 1982 to take account of the accession of Greece to the Community. All imports of beef and veal are subject to customs duty at the rate of 16 per cent for live animals and 20 per cent for frozen or chilled meat. Offals and breeding animals are imported free of duty.

In order to clear the domestic market, the export of surplus production is facilitated through export refunds. These refunds are fixed on a quarterly basis; as of April 1982, the standard refund rate was about 60 per cent of the world price. Refunds vary considerably according to destination of exports. The budgetary cost of the Community’s support policy in this sector has been rising in recent years, largely on account of increases in export refunds. Total support for bovine meat increased from 7.2 per cent of the EAGGF guarantee section expenditure in 1979 to 13 per cent in 1981, while the share of export refunds in expenditures on this sector increased from 36 per cent to 53 per cent.

In October 1980, the Community established a sheep meat regime under which voluntary export restraint agreements were negotiated with 12 countries, in exchange for a concession by the Community of more favorable treatment of imports in the form of a reduction in the variable import levy. The agreements are to be reviewed annually. Some traditional exporters of sheep meat have expressed concern that, as a result of the new regime, the Community’s self-sufficiency in sheep meat could rise to levels that would eventually eliminate imports by the Community.

United States

While meat production is not promoted through a domestic support program in the United States, the import of meat is restricted. The U.S. legislation, passed in 1964 and amended in 1979, provides that import quotas on the import of fresh, chilled, or frozen beef, veal, sheep meat, and goat meat are to be imposed when imports during the year are estimated to exceed 110 per cent of an adjusted trigger level for each product. The basic import level is fixed at 546,600 tons—the average of actual imports in 1968–77. This level is modified by a production adjustment factor and a countercyclical adjustment factor to obtain a trigger level for the imposition of import quotas. The production adjustment factor tends to increase the allowable import level in line with the long-run trend in domestic beef production. The countercyclical factor reduces the trigger level during the liquidation phase of the U.S. cattle cycle, when supplies are likely to be abundant. In 1980, domestic beef production declined, and the countercyclical factor increased the allowable import level by about 30 per cent. However, the countercyclical adjustment factor can be particularly prejudicial to meat exporters whose cattle cycle coincides with the U.S. cycle, because access to the U.S. market is reduced when they are also in the liquidation phase of the cycle. Since the 1979 amendment, the countercyclical adjustment factor has not operated to trigger import quotas.

In the past, the United States had avoided imposing meat import quotas by negotiating bilateral restraint arrangements with exporting countries when it appeared likely at the beginning of the year that imports would exceed 110 per cent of the trigger level. Bilateral restraints were applied in 9 out of 16 years until 1980; and the level of restrictions was about 5–7 per cent of domestic production during 1973–79.

Japan

Japan produces about 70 per cent of its consumption of beef and veal. The national policy toward beef trade is formulated in a way that ensures a certain target income support to the domestic livestock sector. Based on the available domestic supply and the desired returns to Japanese producers, the Ministry of Agriculture, Forestry, and Fisheries determines, in consultation with the National Beef Marketing Board, a global import quota that is broken down by type of beef. The quota is fixed every six months. The National Beef Marketing Board has the monopoly to import beef. Imports are sold at auction to domestic distributors on the basis of a predetermined minimum price. The profits obtained are allocated to a special fund to assist the domestic livestock industry. By following this mechanism, the Japanese policy effectively controls both the quantity imported and domestic prices. The United States supplies hotel-type beef, while the rest is supplied by Australia.

Under the MTN, Japan liberalized its import quota from 92,000 tons in 1977 to 135,000 tons in 1982/83. Given the wide differentials between domestic and international prices, excess demand (at world market prices) for beef in Japan is substantial.⁴⁴ In 1981, the minimum auction price was raised, leading to a reduction in demand; subsequently the import quota for the second half of the 1981/82 fiscal year was reduced by 6.4 per cent over the same period in the previous fiscal year. Certain exporters have also complained that the extremely strict health and sanitary requirements and inspection procedures for imported beef have at times effectively restricted foreign supplies.

Canada

The Canadian cattle sector is only one tenth the size of the U.S. sector, and the two cattle markets are highly integrated. Until recently, imports of beef had been regulated by ad hoc decisions on quotas, although in practice imports remained fairly stable and below the limits established. Coordination of Canada’s beef import policy with that of the United States has been considered essential to avoid trade deflection, which in the past necessitated safeguard actions in Canada.

In February 1982, Canada adopted a new Meat Import Act which is broadly similar to the U.S. legislation of 1979. Under the Act, Canada will negotiate bilateral export restraint arrangements with its meat suppliers if the trigger levels of the formula are reached. If exporters do not agree to restrain exports “voluntarily,” the Act authorizes the application of import quotas at levels lower than historical shares.

The Meat Import Act covers fresh, chilled, and frozen beef and veal. The level of restriction takes into account the average level of imports in 1971–75, adjusted for changes in domestic disappearance (consumption) of beef or veal and for cyclical changes in domestic supplies.⁴⁵ In addition, discretionary adjustments may be made to take into account health measures or trade restrictions that are unrelated to the Act but affect trade between Canada and other countries in cattle, beef, or veal, or other factors considered relevant by the Government. The formula argument that accounts for domestic disappearance tends to increase the allowed level of imports as consumption increases, while the argument for cyclical changes in domestic supply tends to reduce allowable imports in the slaughtering phase of the cattle cycle. The Meat Import Act also provides that, regardless of import levels determined in line with the formula and the other adjustment factors, if consumption of beef is falling, the meat import level must at least increase proportionately to the expected increase in population.

Trade Trends

Since the mid-1950s, world sugar production and trade have grown steadily. Although the OECD countries’ share in both production and world exports has been increasing, the developing countries retain their dominance. Technological improvements have permitted an expansion of beet sugar, which is grown primarily in developed countries. Reflecting the increase in production of sugar in the temperate zone developed countries, their share in total imports fell from 62 per cent in 1972–74 to 38 per cent in 1980, while the share of developing countries increased from 21 per cent to 41 per cent (Table 32). Exports of developed countries grew from 26 per cent of global exports in 1972–74 to 34 per cent in 1980. The decline in import shares was most pronounced in the European Community (including intra-Community trade), whose share fell from 15 per cent to about 9 per cent (Table 33). The share of the Community (excluding intra-Community trade) in world sugar exports rose from 12 per cent to 18 per cent between 1976 and 1980. Trade in sugar has also been significantly affected by sharp world price fluctuations.

International Framework for Trade

Free market trade in sugar has been governed by a series of international agreements since 1958; the latest agreement entered into effect provisionally in January 1978, and definitively in January 1980.⁴⁶ The current International Sugar Agreement (ISA) provides for export quotas and special stocks, nationally owned but internationally controlled, to protect an agreed price range of 13–23 U.S. cents per pound. In order to realize this objective, participating exporting countries may be required to limit their export, with the maximum possible limitation being up to 15 per cent of the basic export tonnage provided by the ISA. These economic provisions came into force early in 1978. In the first year of the ISA’s operation, the exporting countries were called upon to limit their exports to the minimum provided for by the Agreement, owing to the depressed prices on the world market; these minimum levels were maintained throughout 1979. Although the invocation of export quotas provided some support to sugar prices, prices remained depressed because the basic export tonnages were relatively large and because of the lack of participation in the ISA of the European Community. Following a rapid increase in sugar prices, export quotas were suspended in January 1980 but were reimposed in May 1981 and subsequently reduced to their minimum level in September 1981. In addition, exporting members were obliged to accumulate 1 million tons by June 30, 1982 and an additional 1.5 million tons by the end of 1983. In late 1981 the European Community announced plans to withhold excess supplies from the world market and held exploratory talks on the possibility of membership in the Agreement. In November 1981 the ISA was extended for two years. International trade in sugar is also affected by arrangements under the Lomé Convention that commit the European Community to import annually 1.2 million tons of sugar (refined sugar equivalent) from the associated developing countries at guaranteed prices, and by trade among state trading countries, notably Cuba’s sugar sales to the U.S.S.R.

European Community

The sugar market is subject to greater direct intervention and stricter control than other agricultural markets in the European Community. The sugar regime is based on quotas, support buying, and penalties for overproduction. A target price is set annually by the Council of Ministers, with the intervention price fixed at about 5 per cent below the target price, while the threshold price for imports is about 15 per cent higher than the target price. Intervention at the full amount supports only a limited quantity of sugar. However, target prices and the corresponding intervention prices have traditionally been fixed at levels well above those prevailing in the world market. Export refunds are provided at the rate of the difference between the target and the best export price. In July 1981, the Council defined the Community’s sugar policy for a period of five years, providing for the continuation of the quota system (explained below) and establishing the principle that producers should be fully responsible for the costs of disposing of any sugar produced in excess of Community consumption other than the equivalent of about 1.2 million tons imported from ACP countries, which is to be financed out of the EAGGF. Accordingly a coresponsibility levy is applied to producers in order to finance export refunds.

Sugar production in the Community is regulated through a system of quotas allocated to more than 100 sugar processors. Each processor is allocated two quotas—an A quota that benefits from a full guarantee at the intervention price, and a B quota for which the intervention price is 30 per cent below the announced level applying to the A quota. The sum of the A quotas is equivalent to the estimated total domestic demand. The B quota is determined as a proportion of the A quota and was reduced to 23.5 per cent of the A quota in 1981/82 from 27.5 per cent in 1980/81. The A and B quotas at present amount to about 11.8 million tons, including about 2 million tons for the B quota. Sugar produced in excess of these quotas, called C sugar, must be exported at the producer’s own risk; there is no intervention nor export refunds for C sugar. Producers in turn allocate quotas to beet growers and fix the purchase price of A, B, and C quotas on the basis of the target price, the estimated coresponsibility levy calculated by the Commission of the European Communities, and the expected export price for C sugar.

Domestic production has been far in excess of domestic consumption for several years, and the Community has resorted to export refunds to dispose of its sugar surpluses.⁴⁷ Until July 1981, export refunds were partly met by the levy of up to 30 per cent of the intervention price on B quota production, the balance being covered by the general resources of the EAGGF. Since that date, the sugar sector is expected to be self-financing. The Commission, therefore, calculates the coresponsibility levies necessary to finance all the export refunds. For this purpose, a coresponsibility levy of up to 2 per cent of the intervention price is applied on all A and B sugar. If the proceeds of this levy are not sufficient to cover the cost of refunds, a supplementary levy of up to 7.5 per cent can be applied on the B quota retrospectively, thus raising the contributions of the B quota, given the existing levy of 30 per cent, up to 37.5 per cent of the intervention price.

At the beginning of crop year 1980/81, high world prices induced Community producers to increase the area under beet cultivation by 11 per cent while selling forward their expected C sugar crop at prevailing high prices. Because of good weather, yields increased by nearly 20 per cent. As a result, the excess supply of the Community’s sugar reached about 4 million tons at the end of 1981, but falling world sugar prices led the Community to withhold about 2 million tons of sugar from the world market in 1981/82. These stocks would be counted as part of the A quota in 1982/83. EAGGF expenditures on the sugar sector are projected to increase from 6 per cent of the total in 1981 to 9 per cent in 1982.

In spite of these changes in the Community’s sugar regime, other sugar suppliers do not believe that these adequately neutralize the effects of subsidization or that further increases in sugar production will be discouraged in the future. Consequently, ten developing countries and Australia have lodged a renewed complaint with the GATT to seek redress from the Community’s sugar practices. Their basic argument is that the new financing arrangements, while amending the sourcing of funds, do not reduce or limit the total funds or rate of subsidization available for the Community’s sugar exports.

Sugar imports, other than those from some developing countries under the Lomé Convention and the German Democratic Republic, are subject to variable import levies based on threshold prices. The effect has been to virtually block such supplies.

United States

At the end of 1974, taking the opportunity presented by very high sugar prices, the U.S. Government dismantled the import quota system that had been in effect for several decades. The only restriction retained was an import tariff on raw sugar imports of 0.6250 U.S. cents per pound (equivalent to about 3 per cent of the average 1975 world price of 20.29 U.S. cents) and of 0.6625 U.S. cents per pound for refined sugar imports. To satisfy the requirements of existing legislation, a global import quota for sugar was established at the level of 6.9 million short tons of raw sugar, which far exceeded the levels of sugar imports.

In 1977, after precipitous declines in sugar prices in 1976 and 1977, the 1975 action was reversed and a new sugar price support program was instituted. In November 1977 import fees were imposed on sugar imports, and import duties were increased by one U.S. cent per pound. At the end of 1978 the import fee system was changed from a fixed import fee system to a flexible one, similar to a variable import levy. The flexible import fee is equal to the difference between the domestic support price, adjusted for freight, insurance, and related domestic charges, on the one hand, and the sum of the average spot (world) price plus the applicable import duty, on the other. Under Section 22 of the Agricultural Adjustment Act, the import fee may not exceed 50 per cent of the spot (world) price. As an alternative to import fees, the Act permits the imposition of import quotas, but the quota levels may not exceed 50 per cent of the quantity imported during a representative period. In October 1979 with sugar prices strengthening, import fees were eliminated for raw sugar imports and reduced to 0.52 U.S. cents per pound for refined sugar, and no price support program existed for calendar years 1979 and 1980. Import duties were also reduced in early 1980.

In December 1981 a domestic support program was reintroduced for the 1982–85 crops of sugar beets and sugarcane after world sugar prices had plummeted. For 1982, a domestic support price for raw sugar of 16.75 U.S. cents per pound was established, and it is supposed to be achieved through the implementation of nonrecourse loans. (The nonrecourse loan program for sugar went into effect on October 1, 1982; a Commodity Credit Corporation purchase program was in effect for the first nine months of the year although purchases will not be made until the 1983 fiscal year.) Accompanying the domestic support price, a market stabilization price was announced that is the sum of the domestic support price and attributed costs for domestic freight and other costs involved in the marketing of sugar in the United States to final consumers. To reduce the risk of the CCC acquiring sugar during the life of the program, import fees and tariffs were to be used to raise the price of imported sugar to the level of the market stabilization price. For the 1981/82 purchase program, a market stabilization price of 19.08 cents per pound of raw sugar was established in December 1981, and import fees and tariffs were reestablished accordingly in December 1981. Fees were raised twice during the first four months of 1982 to avoid the price of imported sugar falling below the market stabilization price because world sugar prices continued to decline.

By the end of April 1982, the import fee necessary to maintain the market stabilization price would have exceeded the allowed maximum of 50 per cent of the world price. Accordingly, a country quota system was reintroduced in May 1982. It is estimated that, in the absence of quotas, achievement of the established market stabilization price for 1982 would have entailed CCC purchases of some $400 million during the year.⁴⁸ Simultaneously, the market stabilization price was raised to 19.88 cents per pound. A global import quota of 200,000 metric tons was established through June 30, 1982; subsequent quotas are to be established on a quarterly basis, and the quota policy is expected to be implemented strictly. The country quotas were established according to historical trade patterns, with Australia, Brazil, the Dominican Republic, and the Philippines receiving more than 50 per cent of the total quota allocation.

Japan

Japan’s domestic sugar industry is small and has been supplying only about 20 per cent of domestic needs. The cost of producing sugar in Japan has been above world levels and, as a result, the cane and beet sugar industries have required government support. Notwithstanding physical constraints on expanding production capacity, the official policy is to stimulate sugarcane and beet production by providing incentive payments above the guaranteed minimum producer prices set each year. Actual production costs are taken into consideration in setting the minimum producer price.

In order to make domestically produced sugar competitive with imported sugar, a sugar price stabilization law was introduced in 1965 to protect the domestic industry and to prevent excessive fluctuations in prices for refined sugar. This law established the Sugar Stabilization Agency, a public corporation which trades in domestically produced and imported sugar and which applies certain charges to imported sugar so that a competitive balance is maintained between domestic and imported production. The agency carries out paper transactions with sugar millers by purchasing raw cane sugar from them at a price based on the minimum price to be guaranteed to growers and the cost of manufacturing, and by selling it back to millers at the raw sugar equivalent price of the current domestic refined sugar price. Generally, the buying price of the Agency is twice as high as the selling price. The millers are then required to sell it to refiners at the current Agency sellback price. At this stage, the Agency also subsidizes domestic white beet sugar so that the raw material and processing costs are covered.

In addition, imports are subject to a system of variable charges or rebates and are determined by the interaction of four prices: (1) the maximum stabilization price, (2) the minimum stabilization price, (3) the target price or standard price for domestic sugar, and (4) the average import prices. The maximum and minimum prices are fixed on the basis of an index of imported sugar prices, but other factors also influence their determination. The target price reflects domestic production costs but must be within the band of the maximum and minimum prices. In practice, however, it is well below the cost of production and involves subsidization through the Sugar Stabilization Agency in the form of the Agency’s purchase price. The Agency imposes charges or rebates on imported sugar (sugar imported by trade houses, which in turn sell it to the Stabilization Agency), depending upon whether import prices are below the minimum price or above the maximum price. Proceeds from the import levy are channeled to a price stabilization fund to pay rebates to refiners when import prices exceed the maximum price. Another surcharge is added, which is used to support domestic producers’ prices at their predetermined levels. Reflecting the price support and related policies, the average price paid by the Sugar Stabilization Agency for cane sugar in the decade of the 1970s was approximately 80–90 per cent above the average c.i.f. import price.

Effective February 1978, the Sugar Stabilization Agency has been given additional powers to limit supply on the market to prevent a fall in prices that could disrupt the orderly structural adjustment in this industry. These powers include limitations on imports of both unrefined and refined sugar.

Price Distortion Effects

The internal terms of trade between different economic sectors in an economy evolve over time according to the changing demand and supply conditions. The terms of trade for any particular sector of the economy may improve or deteriorate for purely economic reasons and could well be the result of an efficient allocation of the resources at the disposal of an economy. However, in the agricultural sector, the terms of trade are protected by government domestic support policies, and changes can be partly ascribed to these policies. An indicator of the internal terms of trade is a comparison of wholesale prices in agriculture and manufacturing, shown in Table 44. In the European Community and Japan, there has been a steady improvement in the terms of trade in favor of agriculture during 1974–81, although in the former they deteriorated in the second half of this period. In contrast, in the United States there has been a steady deterioration of the terms of trade for agriculture since 1974.

Agricultural policies have also contributed to increased self-sufficiency in many agricultural products. In several products (wheat, sugar, and dairy products), the European Community has attained a net export position (Table 45). In the case of Japan, self-sufficiency ratios have generally remained stable or have declined somewhat (Table 46).

Budgetary Cost of Domestic Support Programs

The most visible internal effects of agricultural protection are the direct budgetary costs. An indication of such costs is provided for the European Community and the United States in Table 47. In the Community, growth of gross EAGGF guarantee expenditures, after averaging some 28 per cent during 1974–79, decelerated to 2.7 per cent in 1980–81. As a proportion of total budget expenditures, EAGGF guarantee expenditures rose from 67 per cent in 1974 to 73 per cent in 1979 but fell to 63 per cent in 1981. In terms of the combined gross national product (GNP) of the Community (excluding Greece), they have shown a generally rising trend, from 0.31 per cent of GNP in 1974 to 0.52 per cent of GNP in 1981.⁴⁹ As a percentage of the Community’s expenditures on food, EAGGF guarantee expenditures have stabilized in recent years at about 2.8 per cent.

In the United States, the Commodity Credit Corporation’s net expenditures (costs of price support and related programs plus PL 480 food aid expenditures) rose from under $2 billion in fiscal year 1976 to more than $5 billion in 1981. As a proportion of federal budget outlays, they rose from 0.5 per cent in 1976 to 1.4 per cent in 1978 but declined to 0.8 per cent in 1981.⁵⁰ In terms of GNP, they rose from 0.1 per cent in 1976 to 0.3 per cent in 1978, but declined to about 0.2 per cent in 1981.

Adequate information on the budgetary costs of agricultural protection for specific commodities in Japan is not available. However, budgetary appropriations for agriculture have consistently been far greater than the share of agriculture in Japan’s gross domestic product (GDP); in 1980–81 appropriations amounted to around 8 per cent of the budget while agriculture’s contribution in the GDP was 4 per cent.

The budgetary cost calculations cited above are underestimated to the extent that revenue forgone as a result of preferential tax treatment ascribed to the agricultural sector is excluded; in some cases, such agricultural tax exemptions have been sizable.

International Impact

A number of studies have been undertaken to measure the international effects of agricultural protection. One analysis of the European Community’s trade policies showed that during 1962–79 agricultural protection in the Community had changed the structure of its agricultural trade to the detriment of foreign exporters.⁵¹ The decline in market shares of the efficient OECD producers and the developing countries, which resulted in heavy foreign exchange losses, had been almost entirely matched by an increase in the share of intra-Community trade.

Several empirical investigations have focused on the adverse effects of agricultural protection on developing countries. One study estimated the effects of trade liberalization in 17 OECD countries applied to exports of selected agricultural products from 56 developing countries.⁵² It found that a 50 per cent reduction in trade barriers would increase world trade by $8.5 billion per year; of this, 36 per cent would accrue to the selected developing countries, 20 per cent would accrue to OECD exporters, and the remainder would accrue to the rest of the world. The annual increment in exports of developing countries was estimated at 11 per cent of total developing country exports of agricultural products in 1975–77. For the OECD members, the study estimated large increases in imports in the Federal Republic of Germany, Italy, Japan, New Zealand, and the United Kingdom, and major increases in exports in Australia, Canada, New Zealand, and the United States; France and Italy would experience a substantial reduction in exports.

The benefits of agricultural trade liberalization may be considerable for developing countries when viewed in terms of domestic employment creation effects. Studies by the International Labor Office show that developing countries may use on average up to 30 times as much labor per unit of agricultural output as some developed countries; thus liberalization of agricultural trade could significantly improve the employment situation in developing countries.⁵³

The effects of agricultural price distortions on output, consumption, trade, and rural employment were estimated in another study for nine countries.⁵⁴ It found that, in developed countries where pricing policies for agricultural commodities result in positive rates of protection, the levels of agricultural production are higher than they would be without intervention; for example, production of sugar is estimated to be up to 50–60 per cent higher in France and the Federal Republic of Germany, and rice production is more than double in Japan. In developing countries, where agricultural commodities often have negative rates of protection through price intervention measures, output is significantly lower than it would be in the absence of distortions—for example, wheat production is estimated to be up to 40–60 per cent lower in Egypt and Argentina. The distortions encourage consumption in developing countries and discourage it in developed countries; for example, wheat consumption in France and the Federal Republic of Germany and sugar consumption in the United Kingdom are estimated to be 6–10 per cent lower. Regarding effects on trade, the study found that pricing policies cause a decline in imports by industrial countries with nominal protection coefficients of more than one and in exports of developing countries with nominal protection coefficients of less than one.

Studies have also been made concerning the effects of protection in specific commodity sectors. An FAO study on the quantitative effects of market protection on international trade in the beef sector, undertaken for the Intergovernmental Group on Beef, assessed the impact of a 25 per cent uniform reduction in the rates of protection. The study calculated that world beef trade would have been 22 per cent larger than actual trade in 1977–79 and that the average price in international trade would have been 7 per cent higher. It also estimated that this liberalization would enable low-cost developing countries to raise their beef exports by over 50 per cent.⁵⁵ A study on the dairy market concluded that a movement to multilateral free trade would not involve costly policy changes for the United States, the European Community, and Canada, whose domestic prices for dairy products were found to be close to the level of the world prices that would prevail under free trade.⁵⁶

Another study estimated the effects of the Community’s variable import levies on world prices for 1976.⁵⁷ The study assumed a range of elasticities. With upper-limit price elasticities, the Community’s system of variable levies was estimated to depress the world prices by at least 2–3 per cent for wheat, barley, and maize. With lower world demand and supply elasticities, the model estimated that the variable levies depressed the world prices by about 7–11 per cent.

Market Instability

The instability of exports of particular commodities and of exports from particular countries have been widely discussed in the economic literature.⁵⁸ Generally these studies have found greater export instability in developing countries than in developed countries and mixed results regarding the instability of export earnings of primary products versus manufactured goods. According to Fund staff estimates for the period 1972–81: (1) the volume and unit value of agricultural exports were more unstable than the volume and unit value of total exports; (2) the instability in the prices of agricultural exports was greater than the instability in the volumes of these exports; (3) output of agricultural commodities in general was more unstable than world commodity output (Table 48).⁵⁹

While agricultural policies are not the only determinant, or possibly not even the main determinant, of market instability (weather-related production fluctuations are also significant), they can be an important factor. Because international markets for agricultural products are generally small relative to production and are dominated by a few major importers or exporters, the shifting around of surplus or deficit tonnage may result in substantial international market instability. Attempts to maintain domestic price stability can also be an important source of international market instability. For example, when world prices are rising, variable import levies fall automatically. In this case import demand would be higher than under a fixed nominal tariff; this excess demand in an inflationary period would contribute to a further increase in world prices. Similarly, in periods when world prices are falling, the variable levies rise, thereby restricting any increase in import demand. Thus import demand is rendered inelastic to changes in world prices.⁶⁰ Management of stocks or disposal of surpluses can also add to market instability, especially since these techniques are generally inadequate to provide additional supplies during a time of acute shortages.