Producer support estimate

What Is Producer Support Estimate?

The Producer Support Estimate (PSE) is an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers. It falls under the broader category of agricultural policy analysis and serves as a key metric for understanding the level and composition of government intervention in the agricultural sector. The PSE measures the support provided to farmers at the farm gate level, encompassing various policy measures regardless of their nature, objectives, or impact on farm production or income.²⁰,¹⁹

This metric is crucial for comparing agricultural support levels across countries and over time, facilitating discussions around trade and agricultural reform. The Producer Support Estimate accounts for different forms of support, including those that directly influence market prices and those delivered through budgetary subsidies or revenue forgone.

History and Origin

The concept of the Producer Support Estimate emerged from the need for a standardized measure to compare and monitor agricultural policies globally, particularly in the context of trade negotiations. The Organisation for Economic Co-operation and Development (OECD) developed the PSE in the mid-1980s. Its introduction was a response to growing concerns about the trade-distorting effects of various agricultural policies and the desire to foster greater transparency in government support to the sector.¹⁸,¹⁷

Prior to the PSE, comparisons of agricultural support were often hampered by disparate national reporting methods and varying definitions of what constituted "support." The PSE aimed to create a consistent framework, enabling comprehensive analysis. This development coincided with the Uruguay Round of multilateral trade negotiations (1986-1994) under the General Agreement on Tariffs and Trade (GATT), which ultimately led to the creation of the World Trade Organization (WTO) and its Agreement on Agriculture. The WTO Agreement on Agriculture aimed to reduce trade-distorting agricultural subsidies and improve market access, with the PSE providing an analytical tool for understanding these commitments.¹⁶,,¹⁵,¹⁴

Key Takeaways

The Producer Support Estimate (PSE) quantifies the annual monetary value of financial transfers to agricultural producers from consumers and taxpayers.
It is a comprehensive measure that includes various policy interventions, such as market price support and budgetary direct payments.
The PSE is widely used by international organizations, notably the OECD, to monitor and compare agricultural support policies across different countries.
A higher Producer Support Estimate percentage generally indicates a greater reliance on government support relative to farm receipts.
Understanding the PSE is essential for analyzing the impacts of agricultural policies on trade, production, and economic welfare.

Formula and Calculation

The Producer Support Estimate (PSE) aggregates various forms of support. It is not a single, simple formula but rather a summation of different components. The general framework involves summing up:

Market Price Support (MPS): The monetary value of transfers to producers resulting from policies that maintain domestic producer prices above world market prices. This is often achieved through measures like tariff barriers or import quotas.
Budgetary Payments: Direct government transfers to farmers, which can include direct payments based on area, head of livestock, or income, as well as payments for specific inputs.
Revenue Forgone: The cost of government programs that reduce input costs for farmers or provide other financial benefits (e.g., tax exemptions, reduced interest rates).

The formula can be conceptually represented as:

\text{PSE} = \text{MPS} + \text{Budgetary Payments} + \text{Revenue Forgone}

Where:

MPS is typically calculated as the difference between the domestic producer price and the world reference price, multiplied by the volume of production, adjusted for producer levies.

The percentage PSE (%PSE) is often calculated to provide a relative measure of support:

\text{%PSE} = \frac{\text{PSE}}{\text{Total Gross Farm Receipts (at farm gate prices) + Budgetary Support}} \times 100

This percentage expresses the PSE as a share of total gross farm receipts, providing a more intuitive comparison across different agricultural sectors or countries.¹³

Interpreting the Producer Support Estimate

The Producer Support Estimate provides insights into the extent to which government policies influence agricultural producer income. A high PSE indicates that a significant portion of farmer income is derived from government support rather than solely from market sales. For example, a country with a %PSE of 50% implies that half of the gross farm receipts come from various forms of government support.¹²

Interpreting the PSE also involves understanding its components. A high proportion of market price support within the total PSE suggests that policies are primarily influencing prices, potentially leading to higher consumer prices and acting as a hidden tax on consumers. Conversely, a higher share of budgetary payments might indicate a more direct and transparent transfer of funds from taxpayers. Analysts use these breakdowns to assess the potential for trade distortions and the overall efficiency of agricultural policies.

Hypothetical Example

Consider a hypothetical country, "Agriland," which produces wheat.

Market Price Support (MPS): The domestic price of wheat in Agriland is maintained at $250 per ton, while the world reference price is $200 per ton. Agriland produces 10 million tons of wheat.
MPS = (Domestic Price - World Price) × Production Volume
MPS = ($250 - $200) × 10,000,000 tons = $50 × 10,000,000 = $500,000,000
Budgetary Payments: Agriland's government provides direct payments to wheat farmers totaling $150 million for area planted and an additional $50 million for specific input subsidies (e.g., fertilizer).
Total Budgetary Payments = $150,000,000 + $50,000,000 = $200,000,000
Revenue Forgone: The government also offers tax exemptions for agricultural machinery, which results in $20 million in revenue forgone for the treasury.
Revenue Forgone = $20,000,000

Now, we calculate the total Producer Support Estimate:
PSE = MPS + Budgetary Payments + Revenue Forgone
PSE = $500,000,000 + $200,000,000 + $20,000,000 = $720,000,000

To calculate the %PSE, we also need the total gross farm receipts at farm gate prices.
Total Gross Farm Receipts = Domestic Price × Production Volume = $250 × 10,000,000 = $2,500,000,000

%PSE = (PSE / (Total Gross Farm Receipts + Budgetary Support)) × 100
%PSE = ($720,000,000 / ($2,500,000,000 + $200,000,000)) × 100
%PSE = ($720,000,000 / $2,700,000,000) × 100 ≈ 26.67%

This indicates that approximately 26.67% of Agriland wheat farmers' gross receipts come from government support.

Practical Applications

The Producer Support Estimate is a vital tool used by policymakers, economists, and international organizations for several practical applications:

Policy Monitoring and Evaluation: Governments and bodies like the OECD regularly use PSE data to monitor the scale and trends of agricultural policies. This helps in assessing the effectiveness and impact of different policy measures on farm incomes, food production, and trade.,
Tr¹¹a¹⁰de Negotiations: The PSE provides a common metric in international trade discussions, particularly within the framework of the World Trade Organization (WTO) Agreement on Agriculture. Countries refer to PSE values when negotiating commitments to reduce trade-distorting subsidies and open markets. For instance, the ongoing discussions at the WTO aim to limit domestic support that can create trade distortions in global trade.,,
E⁹c⁸o⁷nomic Research: Researchers utilize PSE data to analyze the economic effects of agricultural support on aspects such as food security, environmental sustainability, and rural development. The USDA Economic Research Service, for example, publishes extensive data and analysis related to agricultural support.
Pub⁶lic Awareness: PSE data contributes to public understanding of the extent of government intervention in agriculture and the associated costs borne by taxpayers and consumers. The level of subsidies provided to farmers can be substantial and directly impact consumer prices and market dynamics.

Limitations and Criticisms

While the Producer Support Estimate is a widely accepted indicator, it has several limitations and faces criticisms:

Gross Measure: The PSE is a gross measure of support, meaning it does not account for the costs that producers themselves incur to receive the support (e.g., compliance costs, increased input prices due to policies). It also d⁵oesn't directly measure the net income benefit to farmers, as it doesn't consider farm expenses.
Economic Distortions: A high PSE, particularly one dominated by market price support, can lead to various economic distortions. These include overproduction, inefficient resource allocation, higher domestic consumer prices, and reduced competitiveness for unsubsidized producers in international markets. Such policies can create trade distortions that negatively impact global agricultural markets.
Env⁴ironmental Impacts: Agricultural support, while intended to help farmers, can sometimes incentivize practices that have negative environmental consequences, such as increased fertilizer use or monoculture, due to guaranteed income support or prices.
Dif³ficulty in Disentangling Effects: It can be challenging to isolate the precise impact of specific policy measures within the overall PSE, as many factors influence farm income and production.
Data Availability and Comparability: While the OECD strives for consistency, data collection for PSE calculations relies on national submissions, which can sometimes be delayed or vary in detail, affecting real-time comparability. Many countries have been criticized by the WTO for delays in providing data on farm subsidies.

Produ²cer Support Estimate vs. Aggregate Measurement of Support (AMS)

The Producer Support Estimate (PSE) and the Aggregate Measurement of Support (AMS) are both indicators used to quantify agricultural subsidies, but they serve different purposes and have distinct methodologies.

The Producer Support Estimate (PSE), developed by the OECD, aims to provide a comprehensive measure of all gross transfers to agricultural producers resulting from agricultural policies, regardless of their objectives or impacts. It is an analytical tool used for monitoring and evaluating the overall level and composition of support across countries and over time, facilitating broader policy analysis and comparisons of economic welfare.

In contrast, the Aggregate Measurement of Support (AMS) is a specific calculation defined by the World Trade Organization's (WTO) Agreement on Agriculture. Its primary purpose is to identify and measure the level of "trade-distorting" domestic support that WTO member countries must commit to reducing. The AMS excludes certain types of support deemed "minimally trade-distorting" (e.g., "Green Box" policies) or "production-limiting" ("Blue Box" policies). Thus, while both involve summing monetary values of support, the AMS is a legal-contractual definition focused on WTO commitments, whereas the PSE is a broader analytical framework used by economists and policy analysts to understand the full scope of government intervention in agriculture.,

FAQs¹

What does a high Producer Support Estimate indicate?

A high Producer Support Estimate (%PSE) indicates that a significant proportion of agricultural producer income is derived from government support through various policies, rather than solely from market sales. This suggests a strong level of government intervention in the agricultural sector.

Who calculates and publishes the Producer Support Estimate?

The OECD is the primary international organization responsible for calculating and publishing the Producer Support Estimate (PSE) for its member countries and some non-members. This data is part of its Agricultural Policy Monitoring and Evaluation reports.

Does the Producer Support Estimate only include direct payments to farmers?

No, the Producer Support Estimate is a comprehensive measure that includes more than just direct payments. It accounts for various forms of support, such as market price support (where policies raise domestic prices above world prices), budgetary payments, and the cost of revenue foregone (e.g., tax exemptions) to farmers.

How does Producer Support Estimate relate to international trade?

The Producer Support Estimate is highly relevant to international trade because many forms of agricultural support can lead to trade distortions by influencing domestic production levels and competitiveness. International bodies like the WTO use metrics related to agricultural support, including concepts similar to PSE components, to guide negotiations aimed at reducing barriers and fostering fairer global trade in agricultural products.