Class Notes 5: Canadian and Japanese Policies

Canadian Farm Policies: (including update to present (2004))

The notes provided give a fair amount of detail on the history of Canadian policies. In outline:

Canada a relatively new country, established as definitely different from the US;
Geographically separated, with grain basket well reomoved from both doemstic and offshore markets
Transport (rail) a critical element in early days -> grain freight rate control (Crow's Nest Pass)
Grain production subject to both production and market variability -> insurance, stabilisation & marketing policy (CWB)
Rapid settlement -> cooperation (grain pools and collective action (CWB again))
Eastern Canada (dairy, intensive livestock) more European in structure -> organised and managed marketing (supply control and formula pricing) - a divided policy, with west more inclined to (organised) markets and east more inclined to managed markets

Statutory freight rates (1899/1925) -> inevitable subsidy by Government (rail cars and track maintenance) in time -> pressure on use of budgetary funds and questions about the sense of encouraging export of raw grain rather than local processing (through livestock), & challenge through WTO -> eventual elimination of statutory rates, with compensation to grain farmers (1995)
Grain Marketing (CWB) grew from Grain Coops (Wheat Pools), pooled prices and delivery quotas, established in 1935, monopoly power in 1943, with government guaranteed initial payments (set by Federal Government), though with virtually no direct subsidy element -> conflicts with US grain trade on formation of NAFTA and elimination of tariff protection - ongoing - see CBC news story (March 2003). For an in-depth analysis of the costs and benefits of single-desk-selling (CWB) versus export subsidy (US), see Alston & Gray, "State Trading versus Export subsidy: the case of Canadian Wheat", Journal of Agricultural and Resource Economics, 25, 1, 52 - 67, 2000 - the results are rather ambiguous, and depend on particular circumstances (including the extent to which other policies are used to assist farmers.)
Insurance: Crop insurance (with producer contributions) for crop failures -> Gross Revenue Insurance Plan (GRIP) 1991 - 1995, based on 15 yr. moving average of gross revenues, which proved too costly for Provincial governments (bearing 25% of cost, in contrast to previous crop insurance programmes, where provincial government contributions were lower, discontinued in 1995/6 -> developed into: The Canadian Farm Income Program (CFIP) provides funds to producers who have had a sudden and severe drop in income for reasons beyond their control such as flooding, disease, price collapse, or rapidly rising input costs. CFIP is a whole farm three-year program covering the 2000, 2001, and 2002 claim years, and is delivered by the Federal Government, without provincial participation, and without any producer contribution. This programme applies to any farmer reporting a business loss to the Canadian Inland Revenue. It is designed to cover 70% of an historic average margin (over last five years), and, in essence, pays out the difference between the current margin (farm revenues less allowable costs, excluding capital and other investment payments etc.) and the reference margin (70% of the historic average).
Stabilisation: Price stabilisation (ASA) -> margin stabilisation with producer contributions (WGSA) -> Net Income Stabilisation Account (NISA), voluntary producer contributions to individual stabilisation account, with more than matching Federal government contributions to the account - to be drawn down as and when farm incomes fall (at producer's discretion). However, accounts were used as pension funds, rather than stabilisation accounts, and government contributions not achieving the economic stabilisation effects anticipated, while being commited to funding the NISA (and CFIP) accounts

Current Policy -> Consolidation of stabilisation and disaster (insurance) policies as part of a more general Agricultural Policy Framework (2003) - billed as "an Agricultural Policy for the 21st. Century".

The following statement comes from Agriculture and Agri-Food Canada's first edition of the new Policy Framework Newsletter.

"Since 2001, federal, provincial and territorial governments have been working with the agriculture and agri-food industry to help strengthen and revitalize the sector through a new Agricultural Policy Framework (APF) for Canada. Over the next five years, Canadian farmers will have new tools, services and options to strengthen their businesses, increase prosperity and meet the demands of consumers at home and abroad. The policy framework brings together five key elements—

Business Risk Management (CAIS below)
Environment,
Food Safety and Quality,
Renewal,
Science and Innovation

—in a single, solid platform that will help Canadian agriculture maximize new opportunities in world markets. No other country can lay claim to such a cohesive and integrated policy approach to agriculture. For Canada, there will be international recognition as the world leader in food safety and quality, environmentally responsible production and innovative products."

The Government of Canada has now signed the APF Framework Agreement with all provinces and territories (see second Agri-Info (the Agricultural policy Framework Newletter, August, 2003).

Canadian Agricultural Income Stabilisation (CAIS) programme (2002),
CAIS is intended to consolidate both income stabilisation and disaster payments - made when farm incomes fall dramatically, because of, e.g. disease outbreaks etc.)
Participating producers choose a deposit level of contigency funds (with recognised financial organisations (banks etc.)) which then triggers government funds to make good payouts from the individual farm fund, triggered when eligible (taxable) incomes fall below a reference income or margin (based on last five years, excluding highest and lowest).

Graph A

Graph A (from the CAIS page above) illustrates the three tiers of cost-sharing under the integrated income stabilization and protection program. The first 15 percent of a drop in income below the historical reference margin would be cost-shared equally between government and the producer. The next 15-percent loss would bring $2.33 from government for every farmer dollar. The portion of decline below 70 percent of the reference margin, considered an income disaster, would bring $4 from government for each farm dollar.

Producers effectively buy into a level of protection according to their contingency fund (producer contribution) - the more they deposit in their CAIS account, the more they stand to benefit from the scheme - based on the historical margins generated by their farms.
Producers who participate have to commit to a deposit equaling at least 14 percent of their reference margin. This would fully cover income drops of up to 40 percent of the reference margin, while returning 70 percent of the reference margin if the margin fell to zero in the claim year. (see link above)
Maximum protection, guaranteeing full coverage for margin declines of up to 65 percent and returning 92 percent of the reference margin if the claim-year margin falls to zero, could be obtained for a deposit of 22 percent of the reference margin.

See here for a very full and detailed assessment of this programme, carried out for Agriculture and Agri-Food Canada by a consortium of consultants, which generally supports this new programme (limited only by the extent to which government is prepared to contribute to releif payments). This assessed the new programme against "the objectives set out by Agriculture Ministers for business risk management programming, as follows:
• to ensure programs are responsive to demand and that government dollars are directed to areas of need with respect to income stabilization, disaster mitigation, insurance coverage and investment;
• to provide equal treatment for farmers across Canada facing similar risk situations;
• to minimize the distortion of farmers’ production and marketing decisions;
• to focus on management of risks related to the stability of the entire farm and to avoid duplication of payments;
• to be relatively simple and easy to understand; and
• to facilitate long term planning by farmers.”

Some highlights of this assessment:

The cap for the CAIS is that the total government payment cannot exceed 70% of a farmer’s calculated loss in Production Margin (their word for the reference margin). This is to help ensure that the program meets WTO requirements.
In CAIS, the government’s portion is only due when the income is taken. Therefore, governments do not incur a liability until a payment is triggered, and farmers will not be able to build and hold balances as with NISA. They must take the money when it is triggered.
The NISA program provided for a trigger of the account when income (specifically defined on a cash basis and incorporating off-farm income) fell below $30,000 for the year. This element of program design is considered a “support” component rather than a “stabilization” component and has not been incorporated into the CAIS.
CAISprovides more income stability than the previous (NISA) program in all three sets of analysis (based on NISA farm data, model farm simulations, and “real” farm data)
CAIS consistently provides more stability than the previous program when the aggregate NISA farms are disaggregated by type of farm, region, size of farm, or size of margin.
The version of the industry proposal that was analysed resulted in better measures of stability for some industries and disaggregations than does CAIS. However, the cost of the industry proposal is significantly greater than CAIS.
In conclusion: "We conclude that while the proposed new program has advantages and disadvantages compared to the current programs, on balance, it is clear to us that the proposed new programs better achieve the six objectives of business risk management as agreed to by the Federal and Provincial Ministers in Whitehorse."

For future resolution?

CWB's place and role - status as a monopsonist - single desk seller, or "state trading enterprise" (hardly state, since it is wholly producer owned) remains problematic, both in terms of NAFTA and the WTO, as well as having to compete with the US market for Canadian supplies.
Supply Managed commodities (dairy, eggs and poultry) still subject to pressure to become more market oriented against considerable producer and constituency resistance.
Development of Agricultural Policy Framework, including experience with CAIS and related programmes.
However, Canadian agricultural policy generally moving in the direction of freer trade and compatibility with WTO and external pressures (especially from the US) - though expect considerable frictions between Canadian and US grain farmers (especially), in terms of the support levels provided by the US under the 2003 farm act.

Japanese Policy and Update

Again, notes provide a good deal of the historical and geographical context and development of Japanese policy. In outline:

Limited agricultural land, with large farm population -> natural importer
Strong pressure of food security (and thus drive for self-sufficiency) from both geography and history
Post WWII land reforms - redistributing large estates to small tenants - coupled with political reform introducing democracy -> political power to peasant farmers.
Rapid non-agricultural growth, coupled with farm structure dominated by small farms (and strong cooperatives (NOKYO) -> strong pressure for farm support
History of government control -> state trading and formula pricing rather than market manipulation and direct intervention through subsidy and import taxes.
1961 Agricultural Basic Law: to achieve:

Parity of farm and non-farm incomes
Self Sufficiency in major foodstuffs (selective expansion in line with growth in demand)
Improvement of productivity (through expansion of farm size into viable units)

Through:

Price stabilisation and support (based on cost of production formula pricing) - e.g rice (and need for set-aside as rice policy achieves (uniquely for Japan) excess supply, and continuing small and increasingly part-time farms.
Import protection (especially quotas and non-tariff barriers) and state trading.
farmer training, rural infrastructure and structural support

High levels of protection, but very limited progress towards self-sufficiency (because of poor farm structures, and high land prices (from non-agricultural pressure).
Led to considerable evolution of the farm problem:

farm incomes adjust through non-farm activities - farmers no longer poor relative to rest of population
support policies become increasingly expensive, and fail to meet objectives (either generating unwanted surpluses or unsustainable set-asides (rice) or failing to improve self-sufficiency), exacerbated by land policies which encourage farming use, and restrict farm amalgamations, capitalising benefits of farm support into land values and hence increasing resistance to change.
increasing pressure from trading partners (vitally important for Japan)
changing political preferences and changes in political power of Iron Triangle (NOKYO, bureaucrats and traditional ruling political party (LPD)
slower domestic growth and increasing competition from NICs of pacific rim -> more pressure on budgetary spending on farm programmes, and on high share of food consumption in domestic spending
-> pressure for change in policy (lower rice prices, substitution of tariffs for state trading and import quotas)

Current Position
"Despite being a major beneficiary from multilateral market-opening measures in manufacturing, Japan continues to resist opening its agricultural markets. This position is becoming increasingly untenable multilaterally, especially following the inclusion of agriculture into the World Trade Organisation (WTO) during the Uruguay Round." (Trewin et al., "Moving Japanese Agriculture Forward" in a report (Issues, Options and Strategies for improving Japanese Agricultural Trade Policies) for the (Australian) Rural Industries Research and Development Corporation by the Australian-Japan Research Centre (Nov. 2000))

See, also, ABARE, (Bull 7 Roberts) Agricultural Trade Policies in Japan: The Need for reform (2001), for a very comprehensive account of current Japanese policy and agricultural performance (from the critical perspective of the Australians). (this is large pdf file - 102 pages.).

Domestic rice marketing was substantially deregulated in 1995 (following the URAA), although rice imports continued to be controlled by the Food Agency until 1999, rice stocks increased as imports of rice were forced through the URAA access agreement. In 1999, Japan converted quantity restrictions on rice imports into a (high to virtually prohibitive) tariff, which does nothing to resolve the rice market problems (continued high domestic prices, surplus production and restriction of imports) expected to be a major issue in the Doha (development) round of WTO negotiations). (see Honma, New Agricultural Basic Law, from RIRDC report above, page 17 - 36, which includes the provisions of the New Law.)

A New Basic Law for Agriculture was passed by the Japanese parliament in 1999. One article of this new law (30) states that "the state shall take necessary measures for allowing the prices of farm products to form appropriately, reflecting the real supply/demand situation and quality evaluation in order to promote agricultural production responsive to consumer demands" - indicating a more market oriented focus for new policy.
On the other hand, this article also provides that "the state shall take necessary measures for mitigating the adverse effects of significant price changes of farm products on farm management", which appears to negate any market reform intentions. In addition, the new basic law continues to set self-sufficiency targets, implying continued market intervention, and embraces (article 35) the concepts of multifunctionality (as in Europe) and the associated implication that this justifies continued support.
The New Law does provide for some land reform (joint purchase by farmers seeking cooperative management and operation of farms), while and amendment to the Farmland Law in 2000 allows joint stock companies to purchase land, although effective control is retained by farmers.

The general concensus (mostly from Australia, admittedly) seems to be that the New Basic Law does not really alter the general focus of Japanese policy very much, and that much remains to be done to bring policy into line with Japan's major trading partners. Shogenji - a professor in the Graduate School of Agriculture and Life Sciences, University of Tokyo - writing in the (Japanese) Government Auditing Review (March 2003), also concludes that the present reforms do not go nearly far enough, indicating that there is some authoratative criticism of the policy within Japan [this article is not an easy read, since the standard of translation is mediocre at best].
Some apparent points from Shogenji's review:

The target for self-sufficiency (45% of calorie supply) was subject to considerable debate before inclusion in the Law, with MAFF being reluctant to include such a target, although it was concerned to encourage (assist?) improvements in farm production and productivity
The Basic Law represents a continuing debate (and therefore possible evolution) about the relative roles of the market ("The phrase “shall take necessary measures” can be paraphrased more properly as “the government is moving in the direction of refraining from excessive involvement in the market.” and "There is also a belief that this change encourages production to meet with demand, resulting in an improvement in the self-sufficiency rate in the long term.") and the proper role of government (mitigating adverse price changes, and assisting multifunctionality), interpreted by Shogenji as dealing with market failures.
Shogenji deals especially with three policy measures: deregulation of domestic markets (wheat and soybeans); price supports and safety-net policies (echoing Canada); direct payments (echoing EU and US)

Market Deregulation (of wheat and soybeans) - to a "bidding mechanism" (presumably managed by the Food Agency - led to lower domestic prices, because of imports, and the use of fixed payments to bridge the gap between the old prices and the new - as in the EU. However, Shogenji is not convinced that the bidding system (currently limited to rather narrow price ranges) properly reflects genuine market signals, and hence will not generate appropriate adjustments in quality - supply adjusting to what the market wants. In addition, the fixed payment element is still coupled, thus supply response to market demands is limited. Furthermore, a part of the justification for continued subsidy - the fixed payment - is to encourage the diversification of rice paddy land, and is paid for any and all wheat production on this land, further divorcing the incentive from market requirements. "Can we say that the negative side of bureaucratic policy formation emerges
when the wheat price policies are controlled by Food Agency, and the subsidy measures to the wheat for crop change are controlled by Agricultural Production Bureau (currently Production Bureau)?"
Price Supports and Safety Nets. A "Measure for Stabilising Farm Income" (MSFI) emerged subsequent to the Basic Law, in response to declining rice prices, and also to rapid increases in vegetable imports from China. However, it is currently a slogan/idea rather than a well thought out policy, mixing the ideas of stabilisation and insurance with others of price support and protection. Shogenji favours an insurance/stabilisation scheme at the whole farm level (Canada), but not the price support (which is the most attractive part ot the farmers, of course - but make "discussions surrounding the MSFI meaningless".) Shogenji also argues strongly for widening policy to include rural development assistance, to encourage the adjustment of farming to a market based system.
Direct Payments: e.g. "(CAP) of the EU. They can be broadly classified into: (1)
direct payments as compensation for price cut of farm products; (2) direct payments for maintaining and promoting positive externalities of agriculture and controlling the negative externalities." "The Japanese agricultural policies under reform are moving towards these types of direct payment as a new policy method." But:

Japanese payments are dependent on continued use of the land (in rice in disadvantaged areas), and on community agreement - based on the community management of the rice irrigation and village activity in farming rice in these disadvantaged areas - in effect, a continued payment for the preservation of the rice-based village community.
Another direct payment is for dairy farming relying on local grazing (rather than on imported feed), to minimise pollution. Shogenji criticises this policy as being too crude to accurately reflect the costs of pollution (or benefits of non-pollution), though recognises the possibility of continued adjustment of rates and conditions to improve this.

Government Failure: Shogenji suggests that the key problems with Japanese agricultural policy stem from government (or policy) failure, rather than market failure. Specifically, he identifies:

Failure to define specific targets for policy, and hence failure to identify appropriate instruments.
Failure to count adminstrative (transactions) costs, and hence policies which potentially cost more than they deliver.
conflicting policy objectives (market encouragement versus income or margin support) leading to conflicting policy incentives and instruments - exacerbated in Japan by "sectional bureaucracies" rather than a general strategy (Canada and EU).

The Future? One view of Japanese policy is that it is still at an early stage of modern evolution, subject to the same pressures as elsewhere, but yet to adapt its basic structures and attitudes as much as Canada or the EU. It retains a sense of central regulation and control, and hence dependency on bureaucracy, while also finding it difficult to wean agriculture (and associated village communities) from dependence on government support and protection. Yet (e.g. Shogenji) there may be signs that debate and discussion of these issues is increasing, as would be expected from the internal and external pressures on the policy. If so, expect further, and perhaps rapid policy adjustment in the future.

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