A discussion of agricultural policy can be organized in a variety of ways. In this chapter we examine both major policy tools and major commodity-specific programs to summarize the influence of government. In order to provide a summary measure and a framework for the discussion, we have developed Producer Support Estimates by policy and by commodity for California agriculture.The Producer Support Estimate can be used as an approximate indicator of the magnitude of the net subsidy from a policy. The PSE is a widely applied summary measure of agricultural policy that attempts to measure the money value of explicit or implicit income transfers to agriculture. When calculated as a ratio of total transfer to total industry revenue, the percentage PSE is a rough guide that may be compared across commodities, time, and national or other geographic boundaries. When these comparisons are interpreted with care, they provide useful summary indicators. The PSE may also be decomposed by policy type to indicate the relative importance of different policies , 2002. The Producer Support Estimate is not a measure of production subsidy. It measures all transfers to an industry, including those that may do little to stimulate output. The PSE is not a substitute for a measure of import protection or export stimulant. Nor is the PSE a measure of producer benefit from government programs.The PSE does not offer a substitute for a full analysis of the market and non-market effects of government programs. It is simply a convenient summary measure of a variety of agricultural programs that does not require a full analysis of each industry. Changes in the PSE do not necessarily reflect changes in government programs. In particular, for a PSE that contains aspects of trade barriers, price support,mobile vertical rack or deficiency payments, the movement of market prices may dominate movements in the PSE over time. This means also that a PSE for a single year may not reflect accurately the degree of government support for a commodity in other years. Even with these limitations, we believe that it is useful to summarize government policies affecting California agriculture by using a variety of decompositions of the PSE for recent years.
The following sections discuss the PSE by program or policy category and by commodity, using recent data. The dollar value of the PSE is designed to reflect the government support provided to a commodity industry from a variety of policies and programs. We have used a large number of sources for information on budget outlays, internal and external prices, quantities, and other data that enter the calculation of the PSE. For many of the programs there is relatively little change from year to year. For these we have mainly use the most recent year available, often federal fiscal year 2000 , fiscal year 2001 or 2002. In some cases we use calendar year 2001 or calendar year 2002 data. In many cases we measure a portion of the government support as an average of recent years. For example, for commodity payments under the Farm Bill we use the average for crop years 2000 through 2002 for loan base program benefits and federal fiscal years 2001 through 2003 for payment programs under the Production Flexibility Contracts, Market Loss Assistance, Counter Cyclical Payments and Direct Payments. For discussion of the FSRI Act of 2002 see USDA publications by Westcott, Young and Price, and Sumner, 2003. For broad-based input subsidies, we use national data and allocate a share of the national total to California based on California’s share of national receipts. We then allocate the California total to commodities within California by their share of California agricultural receipts. In other categories of support, we use the California budget data for California fiscal year 2000 or 2001 as available. The California fiscal year runs from July 1 to June 30 so, that fiscal year 2001 runs from July 1 2000 to June 30 2001. Other specific measurements or data issues are dealt with below when we discuss individual programs and policies. The appendix contains a detailed description of our data and calculations. The PSE calculations and the percentage PSE results would differ somewhat if we chose different years or calculation methods, but, under any reasonable procedure, the pattern across commodities and policy instruments would differ little from the results presented here. The state average PSE would also change slightly if we used different base years. However, we do not believe that the current estimate represents any systematic bias. The crop PSE has likely been declining gradually over time as the share of relatively less subsidized crops has expanded. However, dairy, which is a high subsidy commodity, has an expanding share of California farm value. As noted in Table 1, the state PSE is about $3 billion or 10.7 percent of the total value of output and payments . The OECD calculates and reports PSEs for member countries for six major crop categories and seven livestock products. Fruits, vegetables, and other horticultural crops are not included in OECD figures.
For 2001, the OECD reports an aggregate PSE range from about 1 percent for New Zealand to over 69 percent for Switzerland . Norway, Iceland, Japan and Korea all have PSEs over 59 percent. The average PSE for all OECD member countries in 2001 was 31 percent . The OECD reports an aggregate PSE of 21 percent for the United States. For the thirteen commodities classified by the OECD, the average PSE in California is roughly equal to that of the United States as a whole. Support levels tend to be lower for fruits, vegetables and other horticultural commodities in the United States and some other countries. The crops that are less subsidized are particularly important inCalifornia and therefore the average PSE we report is well below the PSE for the United States as a whole as reported by OECD. Figure 1 illustrates substantial variation across commodities in the percent PSE. At that high end, sugar has a PSE of 63.9 percent. Rice is next at about 60.5 percent followed by cotton at about 40.5 percent. Wheat has a PSE of about 29.5 percent. Dairy, the state’s most important commodity in terms of value of production has a PSE of 33.4 percent. Feed grains, which include corn, oats and barley, have a PSE of about 24.3 percent. The PSEs for all other California commodities are in the single-figure percentage range, which is below the state average of 10.7 percent. Alfalfa and hay, for example, has a PSE of about 3.4 percent. Among the horticultural crops, PSEs range from 3 percent to 5 percent. Other livestock and poultry and the remaining crop categories have PSEs between 2 percent and 5 percent. These low PSE groups include such important California crops as nursery and flowers, grapes, lettuce, tomatoes, almonds, and strawberries. As background to further discussion, Figure 2 shows the distribution of total agricultural receipts in California by commodity category. The two broad categories of horticultural crops comprise well over half of all agricultural receipts in California. Dairy is the most important single commodity with about 17 percent of all receipts. Of the field crops, alfalfa hay is most important, followed by cotton and rice. Figure 2 is presented to provide a basis for comparison with Figure 3,vertical grow rack which shows the distribution of total support by commodity. Now the dairy industry is dominant in terms of its share of total support. Dairy is an important industry in California and also has a relatively high degree of government support. About 54 percent of all support in California agriculture is provided to the dairy industry. Notice that, because of their importance in total receipts, even the less subsidized categories of horticultural crops receive a combined total of over 19 percent of all the PSE for the state. Also, the heavily subsidized but relatively minor crops, cotton and rice, show up significantly in Figure 3. Table 2 provides an alternative categorization of the aggregate PSE. Rather than providing a distribution across commodities, Table 2 distributes the PSE by policy area and more specific policy tools. Import barriers account for the largest share of support, followed by government payments. Input assistance is ranked third. By far the most important policy tool in terms of the aggregate PSE is the dairy import barrier, valued at more than $1.15 billion per year.
Government payments are an important policy, accounting for an annual average of $210 million in Market Loss Assistance payments and $194 million in Production Flexibility Contract payments . Support from marketing loan benefits and Loan Deficiency Payments is valued at nearly $277 million. Direct payments account for about 25 percent of the total support in California agriculture.Dairy policy in California is important and unique. Policy governing the industry is highly developed and associated with a substantial share of industry revenue. It is unique in the sense that some policy instruments are unlike those used in other agricultural industries and, whereas much of California dairy policy is the same as in other parts of the United States, some is the instruments are unlike those used elsewhere. The California dairy industry participates in the U.S. federal price support program, the direct payment program and the industry benefits from U.S. import barriers and export subsidies. But California operates its own regulated milk marketing system, which has some features that differ from the federally regulated system governing most milk markets outside California and some federal programs have different effects in California . The federal price support program for milk in the United States is implemented with a government purchase program for manufactured dairy products. The USDA purchases butter, non-fat dry milk , and American cheese from processors at prices calculated to ensure that the farm price of milk used for the manufacture of those programs will generally remain above the legislated support price. From 1990 to 1995, the price support program included a small assessment on milk production to help offset the budget cost of the price support. The assessment varied from year to year and was implemented in a complex way, but was essentially a tax on milk output of approximately $0.11 per hundredweight . The FAIR Act of 1996 was to have eliminated price support program, but that was first delayed and then reversed. The dairy price support program was phased down 15 cents per hundredweight per year, from $10.35 per hundredweight, and was supposed to be completely eliminated by the year 2000 . The assessment on dairy production was eliminated immediately and this affected producers immediately . The FSRI Act continued the price support until 2007 at a rate of $9.90 per hundredweight of milk. Trade barriers are the most significant feature of U.S. dairy policy, and no serious trade policy reform was even contemplated in the discussions leading to the 1996 FAIR Act or the FSRI Act of 2002. In general, imports of dairy products in the United States have been limited to about 2 to 3 percent of U.S. consumption. The United States maintains binding tariff-rate quotas with high in-quota tariffs for imports of most major dairy products. These trade barriers have insulated U.S. dairy product markets from world market forces, with domestic prices for major agricultural products typically significantly higher than world prices. California’s dairy industry, which produces nearly half of the nation’s non-fat dry milk and approximately 20 percent of its cheese, benefits from these border measures. As part of the Uruguay Round Agreement on Agriculture that took effect in 1995, the system of absolute quotas gave way to a system of tariff-rate quotas . However, the second-tier tariffs that limit over-quota imports are prohibitively high; therefore, the effects of the TRQs remain the same as the absolute quotas that were replaced. The Uruguay Round GATT agreement also provided for a gradual increase in the quantity of dairy product imports into the United States under the TRQs. This provision allowed for a gradual increase in import access into the U.S. dairy market until 2000. The North American Free Trade Agreement , which became effective in 1994, eliminated dairy trade barriers with Mexico, but Mexico is a high-cost milk producer and so no new imports have arrived.