In industrialized countries the agricultural sector is marked by a competitive structure, low price and income elasticity of supply and demand, rapid technical progress, and relatively low mobility of resources employed. One consequence is that farmers' returns on investments cannot be maintained by price policies alone. Despite this, most industrialized importing countries maintain farm prices well above international levels, often with the dual objective of supporting incomes and reducing reliance on imported foodstuffs. Once established, support prices can only be lowered with considerable loss to those who have invested in the industry in the expectation of higher returns, and have purchased land and equipment at prices which have been inflated by the support levels. Productivity of land is generally high and productivity of labour, though rising, is low. Established farmers expect their governments to control imports, a pressure which is often difficult to resist. The relative decline in the cost of producing certain commodities may enable governments to resist raising levels of price support, although this approach is incapable of solving basic structural problems.
At the beginning of the 1970s, European farmers' incomes were approaching the parity objective of the 'green laws' and the fair standard of living provided for in the Treaty of Rome. These objectives receded in the 1980s and farm policies were powerless in most European countries to prevent farm incomes from getting out of step with those in other sectors.
Agricultural subsidies have been heavily criticized for years and have been identified by the World Trade Organization as needing reform.
Agriculture in the European Union (EU) is driven largely by the Common Agricultural Policy (CAP), a price support mechanism that consumes nearly half of the budget of the EU. Most of the 40 billion euro annual cost comprises direct payments to farmers, maintaining EU prices above those of the global market by taxing imports, subsidising exports and paying for food storage when no market is available. Farmers also find the current CAP system to be flawed. As an example, the system of headage payments (a payment for each sheep) resulted in overstocking followed by price collapses, poorer quality animals and environmental degradation. The high stock density could have also favoured the spread of foot and mouth disease.
The cost of direct or indirect farm subsidies worldwide was estimated at $240 billion in 1990. In Europe and North America protectionism now covers almost the entire food cycle. In the EEC/EU such costs grew from $6.2 billion in 1976 to $21.5 billion in 1986; in Germany 165,000 of the 600,000 farms subsidized in 1990 were considered viable according to USA estimates. In the USA, farm subsidies grew from $2.7 billion in 1980 to $25.8 billion in 1986.
In 1990 it was estimated that farm subsidies and import barriers cost the 17 major industrialized countries $72 billion per year in lost income. Each agricultural job saved by farm supports costs the equivalent of $13,000 in lost household income in Japan, $20,000 in the European Community and the USA, and almost $100,000 in Canada, at the same time costing the consumer through higher prices - estimated for each Briton at £16 a week in 1990. Another 1990 study estimated two thirds of the European Commission's budget was spent to support its farmers. The International Trade Commission estimated that subsidies raised the US domestic price of sugar by 233%, of cheese by 132%, of milk by 142% and of peanut products by 90% in 1990. In the EC and Japan, equivalent tariffs were even higher for many products, including the raise in Japan's domestic price of rice by 733%.
The Uruguay Round failed to take the opportunity to end subsidized dumping. Although there has been just over a 20 percent reduction in the volume of subsidized exports, that leaves a massive 80 percent still in operation, with devastating effects in the South.
The international market for farm products from developing countries is barred by agricultural subsidy policies of industrialized countries. This leads the farmers in developing countries to grow poppies, coca leaves or marijuana.
Subsidies and price controls aid the poor at the cost of distorting market mechanisms, which leads to inefficiency and illegality (i.e. a black market on which bread is secretly sold above the control price).
The farm subsidy is simply the admission of the inefficiency of monoculture.