Why the fixed external reference price of 1986-88 should be challenged

Jacques Berthelot (This email address is being protected from spambots. You need JavaScript enabled to view it.), December 7, 2015

To solve the conflicting positions of the developed countries and the G-33 on the fundamental issue for Nairobi of placing in the green box and not in the amber box (or AMS, agregate measurement of support) "the difference between the acquisition price and the external reference price" of public stocks for food security purposes, it is necessary to challenge the four concepts of "administered price", "market price", "reference price" and "fixed external reference price" (FERP). Indeed the present rule of the Agreement on Agriculture (AoA) Annex 2, paragraph 3, foonote 5 makes a clear distinction between the food purchases at "market prices" – which is presented as the situation in the United States (US) – and at "administered prices", which is presented as the situation in India (and in other countries). Let us illustrate the issue for wheat.

Indeed there is no reason to differentiate between the "administered prices" paid to farmers in developing countries (DCs) and the so-called "market prices" paid in developed countries (paragraph 4 of Annex 2 of the AoA) as the latter are not actual market prices, being heavily subsidized.

1 – The concept of "administered price"

Investopedia defines an administered price as "The price of a good or service as dictated by a governmental or other governing agency. Administered prices are not determined by regular market forces of supply and demand… When supply and demand for the good change, the administered price may change to subsidize the supplier or protect the consumer"[1].

The concept of agricultural "administered price" is not defined in the WTO although it works in opposite ways in developed countries and DCs. Whereas in DCs the administered prices – the Indian MSPs (minimum support prices) for example – are fixed above domestic market prices to ensure remunerative prices to small farmers, particularly just after the harvest, and to force the private traders to pay higher market prices, in developed countries they are minimum prices fixed below the prevailing market prices in order to reduce their level or security nets when the market prices fall too low. But – here lies the fundamental difference – these lower administered prices were accepted by Western farmers only because they were offset by domestic subsidies, including by the alleged decoupled[2] fixed direct payments in the EU and US (before the 2014 Farm Bill) plus coupled subsidies, such as the US various types of marketing loan benefits, countercyclical payments and insurance subsidies. In developed countries administered prices are always triggering subsidies, apart from the other means necessary to render them effective: import duties, export subsidies or restrictions, land set aside, production quotas, etc. Indeed the US Farm Bills and EU CAP reforms since the 1990s have consisted in lowering by steps their administered prices to increase their domestic and external competitiveness – importing less and exporting more – through massive compensatory alleged non-trade-distorting subsidies of the blue and green boxes[3].

[1] http://www.investopedia.com/terms/a/administered-price.asp

[2] A subsidy is coupled when related to the production or price levels, and decoupled in the opposite case.

[3] The blue box corresponds to the EU fixed direct payments per hectare (cereals and oilseeds), cattle head (bovines and ovines), or litre of milk decided by the CAP (common agricultural policy) reforms of 1992, 1999 and 2004 to offset the reduction of administered ("intervention") guaranteed prices but farmers received them only if they produced the corresponding products. The green box covers two types of alleged non-trade distorting subsidies: 1) the traditional green box of in-kind aid to general agricultural services benefitting to farmers collectively: agricultural infrastructures, schools, research, agri-environment, calamities, phytosanitary warnings, etc.); 2) the green box of decoupled income support in place in the US from 1999 to 2014 and in the EU since 2005 where farmers continue to receive the average amount of blue box direct payments received in 2000-02 without being obliged to produce anything or being allowed to produce other products than those having benefitted of blue payments.

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Last modified onMonday, 14 December 2015 21:23
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