US Considering Abandoning 'Direct Payment' Subsidy

Alyn Smith MEP, Scottish full member of the European Parliament's Agriculture and Rural Development Committee, has expressed his concern at reports that the USA is seriously considering replacing the direct payment model of paying subsidies with crop insurance.

This move could eventually lead to the EU and US being on a collision course with the World Trade Organisation (WTO).

Proposed changes to the US Farm Bill will see farmers paying insurance to private companies to insure against any food crises. However, the WTO has strict ceilings for subsidies which it sees to be trade-distorting which is what the new US system, if passed, will come under. The new Common Agricultural Policy (CAP) will cost approximately €40bn a year which is allowed under WTO guidelines because it is classified as non-trade and as such has no ceiling. On the other hand, the US model will cost only around $9bn a year while the amber box for WTO is set at $19bn which means that in times of any food crises if the price of food was to rise sharply then the US model could well overshoot its ceiling imposed by WTO.

Alyn said:

"I have always been vocal about my opposition to subsidies from European funds for crop insurance and income insurance tools, because we should not be spending European funds on hand-outs to insurance companies; because the financial commitments could potentially be extortionate and gobble up the entire Rural Development Budget; and because, in a time of limited financial resources, we should be focusing on measures which prevent risk through upgrading our agri-environmental schemes and diversification tools, not on compensatory measures for disasters which already have occurred.

"If Europe really wants action on risk management then it should focus on proposals for mutual funds, where farmers pool their own resources to help deal with common risks and problems, not through subsidising the profits of private insurance companies. A recent study showed that in the US, around 16 private insurance companies manage the insurance schemes and make "excess profits" while in practice returning most of the actual risk to the taxpayer.

"Of course, farmers are welcome to invest their own money as they see fit to deal with their risks, but for taxpayers then I believe that their money can be far better spent."

Notes:

According to a study presented to MEPs last October, in the USA taxpayers subsidise about 60% of the premiums across multiple crop insurance programmes, leading to a cost rising from around $2b in 2005 to $7.5b in 2011, equivalent to around a third of the EU's entire annual Rural Development budget. Moreover, payments fluctuate from year to year depending on market conditions leading to great budgetary uncertainty. Second, the programmes are extremely inefficient: the study calculated that taxpayers were in effect paying $2 of support for every $1 of support actually received by farmers in protection against risk.

Publicly-subsidised crop insurance was also criticised for creating moral hazard, and encouraging farmers to take on excessive risks, such as "plant crops in more risky areas, and creating incentives for diversifying less, hence accruing the use of pesticides" or even incentivising the bringing into production of more vulnerable land.