Asian Governments Maintaining Agriculture Support Policies

Many Asian countries are trying to reach or maintain self-sufficiency in key grain commodities, in a bid to insulate domestic rice sectors from price instability on the international market and increase food security as they record soaring demand for agricultural products. As a result, Asian governments have been slowly ramping up their policies to support agricultural production, in the form of input (subsidy programmes, direct payments to farmers) and output (market price support) assistance. However, some countries have implemented rather unstable farm subsidy policies, as the need to reduce budget deficits has forced governments to phase out the assistance provided to farmers.

Developed countries such as Japan and South Korea have maintained relatively high levels of support to farm production for many years. Although both countries have been reducing the support they provide to farmers, it is still twice the average of OECD member countries (i.e. most developed states). Direct subsidies to farmers are rather rare in Japan and South Korea, and government support to production takes the form of market price support and import quotas. The Japanese government allocated JPY2.3trn in 2012 as part as of its farm support programme.

China implemented in 2004 a large government support programme for agriculture in order to promote further production, including input subsidies, procurement prices, direct payments to farmers, and preferential loan rates. The government has been stepping up this support policy since then, with subsidies to farmers soaring by almost 170% between 2007 and 2011 to CNY138.1bn (US$22.1bn), making China the global leader in absolute terms. The sharp increase pushed the share of Chinese farm income from subsidies to 17%, nearing the OECD average of 18%. The number and scope of programmes providing budgetary support to agriculture has been constantly increasing since 2004. To an increasing extent they take the form of direct income support payment, with seed, fertiliser and machinery subsidies. Going forward, we expect China to maintain a generous subsidy policy, as the country is struggling to meet its goal of being 95% self-sufficient in wheat, corn and rice.

India and Indonesia have similar profiles. Both countries increased support to farmers, but growing fiscal deficits, especially in the case of India, are pushing these two nations to phase out part of their subsidies programmes. India spent US$4.43bn on subsidising domestic production and imports of fertilisers in 2011, but it announced in March 2012 that it would cut by a fifth the subsidy it gives to phosphate and potash-based fertilisers in FY2012/13 in an effort to reduce its growing fiscal deficit. However, the government left unchanged the level of subsidies for urea, the crop nutrient used the most and that accounts for the bulk of the government’s spending on fertilisers.

Similarly, Indonesia is struggling to reduce fuel subsidies (the government allocates a hefty 15.8% of its total expenditures to the oil subsidy) and aims to maintain farm subsidies below 2009 levels in order to address its fiscal deficit. Expenditures on fertilisers are targeted at IDR15.3trn in FY2012/13, down 10.0% year-on-year (y-o-y). Despite the recent drop in input subsidies, we believe India and Indonesia will return to more generous policies in the coming years.

This blog is tagged to:
Sector: Agribusiness, Country Risk, Food & Drink
Geography: Asia, China, India, Indonesia, Japan, South Korea

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