By Lantao Li*
The confrontation between Russia and Ukraine has increased the likelihood of a worldwide food catastrophe, and the need of solving food hunger is now becoming more pressing than ever. As a result, the agricultural sector will face a larger requirement for development in this overall setting, and it can involve in more than food issue. In the case of China for instance, it is linked to the survival of the Chinese rural population under the peasant economy, not merely about food security challenges.
Typically, agriculture development is highly correlated with the related policies of each country. While this sector shows general industrial characteristics, its production and operation are heavily confined by physical constraints and less responsive to agricultural product demand. The market equilibrium of agricultural products is inherently fragile and will be incompetent to conduct production and demand adjustment by solely relying on market mechanisms. Hence, agricultural development and protection towards farmers’ interests depend on the necessary support granted from the government. Throughout the globe, most of the developed countries including the United States, France, Australia, Netherlands, and so on, tend to be well developed in the agriculture sector.
Among them, the United States is not only the world’s biggest economy but also the world’s most developed agricultural country. The government’s laissez-faire attitude can be seen in different industries and commerce, yet policies of the agriculture sector are designed and executed with government intervention, and this has been the case since the country’s founding in 1776. In the long run, the U.S. agricultural policies are dedicated to ensuring farmers’ income, stabilizing the prices of agricultural products, protecting agricultural resources and ecosystems, and expanding the export of agricultural commodities. Hence, it is specifically delineated to cope with agricultural subsidies, agricultural resources and ecosystem protection, external trade in agricultural goods, and agricultural insurance.
Agricultural subsidy is positioned at the core of the U.S. agricultural policy. Statistically, the current crops subsidy in the U.S. accounts for 40% of farmers’ income. In contrast, the EU is 50%, South Korea and Japan are as high as 60%, and China is only 21.3%. Direct and indirect subsidies granted by the U.S. government even account for 40% of the farmers’ average income each year and penetrate all aspects of agricultural policy by taking subsidy as the emphasis.
First there is direct subsidy, which is also further classified into direct income subsidy, counter-cyclical income support program, and soil and water conservation fallow subsidy. The government calculates the direct income subsidy based on the base period’s subsidized yield and area rather than the current year’s planting area and market pricing. It will start a counter-cyclical income support scheme to subsidize farmers’ income if agricultural commodity market prices fall below the target price. As for whose arable land is located in environmentally sensitive areas, farmers could voluntarily sign a long-term land lease contract with the government, suspend the planting of the crops, and both parties shall mutually consult the rent.
Secondly, the indirect subsidies include low-interest agricultural loans and agricultural insurance subsidy programs. Low-interest agricultural loans are mainly to assist entrepreneurial and low-income farmers to engage in agricultural production and business activities. Next, the agricultural insurance subsidy program acts as a two-way subsidy for the insured farmers and commercial insurance companies provided by the U.S. government. Not just to subsidize premiums for farmers, the U.S. government subsidizes commercial insurance companies too that undertake agricultural insurance and provide reinsurance through the Federal Crop Insurance Corporation.
Being the world’s largest agricultural products exporter, the proportion of agricultural export in the U.S. accounts for more than 25% of the total agricultural sales. Thus, it led the foreign trade policy of agricultural products to become one of the most important agricultural policies of the country. Passing through years of improvement and development, a relatively intact agricultural product export promotion policy regime has been constructed. The first is the export credit guarantee program, including the commercial export credit guarantee program, supplier credit guarantee program, equipment guarantee program, etc. Second, there are the market development plans, encompassing those correspond to market growth, foreign market development cooperation, and emerging market. The third is the export subsidy plan for technical trade barriers, consisting of the biotechnology and agricultural trade program and the technical assistance for specialty crops. Lastly there is the export subsidy program, which includes doubling export and dairy export incentive program.
It is important to note that the United States’ agricultural policy has a somewhat broad scope. The Food and Nutrition Service Program is the largest spending project among the U.S. agricultural budget, which accounts for around 80% of the total, and the main purpose is to provide food and nutrition security for all low-income families. While the agricultural population in the U.S. takes up only about 2% of the total, however, more than 10% of the total population has been granted direct access to food and nutrition subsidies via agricultural policies. According to statistics, on an average monthly basis, there are about 42.1 million Americans who receive USD 68 billion in supplementary nutrition subsidy, and about 30 million students (around 44% of the school-age population) are benefiting from the USD 12.2 billion National School Lunch Program.
In addition, the U.S. agricultural sector enjoys further preferential tax policies. First is the tax deferral policy, which allows those agricultural products that are yet to be sold or yet to receive cash after being sold to defer until the following year for tax payment. The second strategy is tax reduction, which means that purchases of machinery, equipment, and production buildings, as well as spending on livestock rearing for more than a year, can be deducted as capital expenditures from current year income. Third, the tax exemption policy allows for a 60 percent tax exemption on revenue generated by the sale of agricultural fixed assets. The fourth is a favorable tax scheme for fixed-asset accelerated depreciation.
Finally, the tax exemption policy for agricultural insurance, in which all taxes are exempted for the franchise, capital, other assets of the U.S. Federal Crop Insurance Corporation, as well as the premiums, expenses, profits for both direct insurance and reinsurance contracts. Those commercial insurance companies that manage agricultural insurance business under the Federal Crop Insurance Program are eligible too to enjoy the taxes deductions other than sales.
*Lantao Li, Graduated from Beijing Normal University in 2013 with a PhD degree of Natural Resources and Harbin Institute of Technology with a bachelor degree of Transportation, is an assistant researcher in macroeconomics at Anbound Consulting which is an independent think tank headquartered in Beijing.