Source: OECD
These subsidies may take several different forms, which can be broadly grouped into output-based market price supports and input-based subsidies to cover on-farm costs. The OECD views output-based market price support as potentially the more distortionary of subsidies, which can impact on production and trade. The majority of output-based market price supports in the OECD are generated through border protection and domestic price regulation.
Recent examples of these policies in action have been seen in India and Argentina, where dairy exports have been effectively banned in order to control domestic prices and inflation by boosting domestic supply. Product can only be exported if an extremely high price is achieved. In Argentina’s case, it was reported that a price of US$4000/tonne was required for milk powder exports.
In the EU, the dismantling of the milk quotas will have fully taken effect in April 2015, and will remove the production barriers that have been in place since 1984. But other subsidies such as high tariffs on imported product, export subsidies, intervention purchases and private storage aid remain under the new Common Agricultural Policy in the EU. The OECD estimates that direct subsidies accounted for 1.5% of European dairy farmers income. This has declined from 50% in the 1995 – 1997 period.
Across all of the OECD member countries, the share of dairy-related subsidies over gross farm income has declined from 60% in the 1986-1988 period to 10% in 2013. Much of this decline has been due to high commodity prices, which have rendered market price support subsidies irrelevant as prices required to activate subsidies are far below market prices. In the US, the 2014 Farm Bill has replaced its purely milk price-based Milk Income Loss Contract subsidy with its Margin Protection Program, which considers both the milk price and feed costs. Dairy farmers in the US are estimated to receive direct subsidies worth 6.3% of their gross income in the form of government purchases, high tariffs on imported product and export subsidies.
Within the OECD, the share of dairy-related subsidies over to gross farm income ranges from 40-60% in Canada and Japan to just over 6% in the EU, to about 2% in the US, and finally at 0% in NZ and Australia.
