Reconciling Farm Support and Environmental Protection:
Trends and Prospects

• Agri-environmental policy: evolution and trends
  • An evolutionary perspectives on Québec agri-environmental policy
  • Agri-environmental policy in the industrialized countries
  • Reflections on agri-environmental policies in Québec and abroad
• Agricultural support measures and their impact on sustainable development
  • Sustainable development and agriculture
  • Environmental impacts of agricultural supports
  • The distribution of farm support
• The challenge of integrating sustainable development considerations into agricultural policy
• Bibliography
• List of acronyms

Agricultural support measures and their impact on sustainable development

Sustainable development and agriculture

In agriculture, sustainable development implies production that is not only economically profitable, but also preserves the integrity of the environment and respects social equity. Figure 1 illustrates the challenge of applying the concept of sustainable development to agriculture. The point where the three circles intersect represents the zone of sustainability. The present situation, illustrated by three circles of different sizes, reflects the importance currently placed on the three different dimensions of sustainable development. In the case of agricultural policy, this has translated into a predominant emphasis on economic measures. Agri-environmental measures have been developed more recently, and initiatives to address social concerns remain relatively marginal. This situation has not favor bringing more farms into the sustainable development zone. However, the evolution of agricultural policy toward a better balance between the three circles would encourage a stronger focus on environmental and social measures, thereby expanding the zone of sustainability and allowing the inclusion of a greater number of farms into that zone.

In Québec, the BAPE (Office of Public Hearings on the Environment) Commission (2003) on the sustainable development of hog farming highlighted the important role all three dimensions of sustainability have in ensuring the long-term viability of the pork industry. The Commission’s report contained numerous concrete suggestions intended to help policymakers ensure the sustainable development of hog farming and agriculture in general. Inevitably, this integrated vision represents a challenge to many existing agricultural policies. It is within this perspective that the following sections will attempt to appraise the main farm support mechanisms on the basis of their potential contribution to sustainable development. We will begin by reviewing the environmental impact of the main farm support measures, followed by a brief assessment of agricultural support from a social equity perspective.

Figure 1: The challenge of sustainable agriculture

Source: Adapted from Jacob, P. and B. Sadler, 1990 and MENV, 2004.

Environmental impacts of agricultural supports

Before beginning our analysis of the linkages between agricultural support measures and the environment, it is worth reviewing a few notions to facilitate comprehension. Table 3 presents the various main types of farm support using a dual classification based on World Trade Organization (WTO) and OECD categories.

The WTO classification is based on production and trade distortion effects and comprises support measures categorized either in the amber, blue or green boxes².

Table 3: Classification of main farm support measures

Sources: AAFC, 2003; OECD, 2003d; Unisféra, 2003; Portugal, 2002.

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² According the terminology of WTO Agriculture Agreement, subsidies are classified by boxes which are given a colour depending on how support measures are considered to distort production and trade.

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Measures listed in the amber box have the greatest distortion effect and are therefore among the categories of support targeted for reduction during the new round of WTO negotiations. Measures in the blue box are considered to cause less distortion because they put certain limits on production. Finally, the mechanisms in the green box generate limited distortion, and are therefore not targeted for reduction (Unisféra, 2003). In addition to the types of subsidies listed in Table 3, the green box also includes other policy instruments such as agri-environmental payments (e.g., Prime-Vert program), support for general-interest services (research, training, extension, etc.), and food aid programs.

The OECD classification distinguishes between the different types of support that make up the producer support estimate (PSE), a measure used to assess total farm support allocated and conduct comparisons between countries. This classification divides types of support into six different categories: market price support, payments based on output, payments based on input use, payments based on cropped surface and/or animal numbers, payments based on historical entitlements or overall farming income, and payments based on input/resource constraints (Portugal, 2002). A brief description of each of these categories is presented in table 3—along with examples of various Canadian and Québec measures to illustrate the classification—based on compiled OECD data (2003d).

Assessment of the impact of farm support measures on the environment is based on a number of premises and considerations. First, in situations where there are no limits on production, guaranteed prices that are higher than world prices tend to encourage increased production, and even overproduction. This can harm the environment due to increased use of inputs and environmental pressures that exceed the carrying capacity of the land. Conversely, decreases in price support measures tend to encourage less intensive agriculture. Support that varies directly with production volumes is considered amongst the most environmentally harmful, since it couples maximum support to maximum output. This contrasts with decoupled support mechanisms—i.e., measures that do not link payment to output—which eliminate this incentive to maximize production and are less environmentally harmful (OECD, 2003c). Finally, support mechanisms that have a “lock-in” effect that favors particular crops, inputs, or technologies are also considered more harmful to the environment. On the one hand, the lock-in effect tends to limit the crop and livestock options available to farmers by encouraging specialization, monoculture, and inadequate crop rotation; on the other, it tends to hinder the adoption of more environmentally beneficial farming practices and production methods (Unisféra, 2003).

Together, these considerations allow us to establish an initial ranking of PSE-category support measures according to environmental impact. As we can see, market price support mechanisms and payments based on output and use of inputs are the most harmful for the environment. These three types of support represent close to 77% of all farm subsidies in the OECD countries and a somewhat lesser portion—62%—in Canada. Payments based on cropped surface and/or animal numbers, and those based on historical entitlements or overall farming income are considered more neutral in terms of environmental impact; in the first case, they place limits on production, and in the second, they constitute a form of decoupled support. In Canada, these types of assistance represent nearly 40% of support available to farmers, twice the level found in OECD countries. Finally, payments based on input/resource constraints are presumed to be beneficial because they help reduce agricultural pressures on the environment. However, this type of measure is not used in Canada.

It should be mentioned that the Canadian figures shown in the table are based on aggregate data and do not reflect regional variations in support programs in effect in the different provinces. For example, market price support mechanisms are much more common in Québec because the province produces a greater share of supply managed commodities, notably on account of its more than 45% share of national milk quotas (UPA, 1999). Moreover, in 2001, Québec’s Farm Income Stabilization Insurance (FISI) programs accounted for some 85% of Canadian payments based on production. As for programs based on historic entitlements and overall farming income, they are more common in Western Canada, but less developed in Québec (OCDE, 2003d).

Another regional particularity worth mentioning is the level of support Québec farmers enjoy. Given the relative importance of supply managed commodity production in Québec and the payments made under the FISI programs, we can easily deduce that the level of farm support (i.e., PSE level) in Québec would be significantly higher than the Canadian average. Although available data does not allow for precise calculations, certain indications support this conclusion. First, although Québec agriculture generates only 16% of farm cash receipts in Canada, Québec farming enterprises accounted, on average between 1997 and 2001, for 24% of all payments made under Canadian support programs. Second, total public expenditures in support of the Québec agrifood sector represented 18.5% of the Canadian total for the 1999–2002 period (data from AAFC, 2003). Lastly, the adjusted value of production (AVOP) of government transfers to Québec farmers for the period 1997–1999 was almost twice as high as the AVOP for Canada as a whole (AAFC, 2000). Together, these data tend to confirm a higher overall level of support for Québec farms.

But the classification presented in Table 4 is only the first step in assessing the environmental impacts of the various forms of farm support. To refine the analysis further, a certain degree of “filtering” is required. This involves assessing support measures in conjunction with the other elements of agricultural policy. For example, market price support mechanisms in Canada are accompanied by measures restricting production (supply management). As a result, they are more like support measures based on the number of animals. This, in turn, leads us to conclude that these mechanisms will tend to have a more neutral effect on the environment. It is also important to verify whether support measures engender a “lock-in” effect—i.e., favor certain products or use of specific inputs or technologies. If so, they are considered more harmful for the environment. Farm income stabilization insurance programs and, to a lesser extent, crop insurance programs can cause a lock-in effect. Moreover, initial classification of certain programs in PSE support categories may be less appropriate when assessing environmental impact. This is the case for the property tax refund program, which was ranked in the “payments based on inputs” category when, in terms of environmental impact, it belongs more in the “payments based on cropped area” category of the PSE classification system. These examples clearly illustrate the importance of completing this policy “filtering” step before attempting to evaluate the environmental impact of support measures. Drawing on these considerations, we have developed a classification scale in Figure 2 to rate Québec support programs according to their environmental impact. Although agri-environmental support payments are not included in PSE support measures, they have been included in this figure.

Figure 2: Classification scale of agricultural support measures available in Québec according to their environmental impact

As the above illustration shows, farm income stabilization insurance programs (FISI) are the Québec support measures considered most harmful for the environment. They encourage overproduction by linking support payments to production levels and also provoke a lock-in effect that leads to specialization and inadequate crop rotation. Crop insurance programs, even though they allow for considerable flexibility in farm practice management, can also engender a lock-in effect in some cases by favoring certain inputs. They may also be unsuited to certain more environmentally friendly forms of production (e.g., organic farming). As a result, their effects, although limited, may run counter to goals for improved environmental performance. The remaining support measures are considered relatively neutral in their environmental impact. This brief examination of the relationship between agricultural support measures and the environment allows us to better appreciate the significance and scope of one of the recommendations made by the BAPE commission on pig farming in Québec with respect to the FISI program:

The Committee recommends that the current farm income-stabilization insurance (FISI) program for the pork industry be replaced by an overall farming income protection plan for farmers, that a maximum net income be protected, and that this protection apply regardless of the output, type of commodity, or cost of production.
(translation)

BAPE, 2003; p. 154, Recommendation 25.

The distribution of farm support

Although the main purpose of examining farm support measures is to assess their environmental impact, we cannot pursue a goal of sustainable development—and take into account the three components comprising it—without also considering the issue of social equity. Agricultural policy has primarily been developed to support farm household incomes, both for reasons of equity within the agricultural sector and with the rest of society, and to enhance stability in managing risk related to market failure and weather conditions. Although farm support measures in Canada, like those in most industrialized countries, have helped reduce variability in farm income and bring average farm household income levels in line with those of other households, significant income disparities between farm households still persist.

In analyzing agricultural policy from a sustainable development perspective, we must therefore take a closer look at the issue of social equity in the distribution of farm assistance. OECD research (2002) on farm household income has found that farm support measures have failed to achieve equity in farm income distribution and tend to benefit larger—and often more prosperous—operations that generally do not need support.

Figure 3: Distribution of payments to hog feedlots under the Farm Income Stabilization Insurance (FISI) program for the pork industry – finishing (2002–2003)

Source: Based on data from Financière agricole du Québec (FADQ), 2003.

In Canada, for example, the average net farm income of the largest farm enterprises—25% of total farms—is three times higher than the overall average. Another example of the problematic relationship between farm size and the concentration of farm assistance, this time in Québec, is shown by the Lorenz curve³ in Figure 3, which illustrates the distribution of Farm Income Stabilization Insurance (FISI) aid to hog feedlots. The Lorenz curve shows the cumulative percentage of FISI-insured hogs based on the proportion of these farms. The distance between the Lorenz curve and the curve of “absolute equality” reflects the degree of inequality in distribution. The greater the distance between the two curves, the more pronounced the concentration of aid and the more unequal its distribution. The curve reveals that 23% and 44% of FISI payments to hog feedlots went to 0.8% and 6.4% of hog raising farms, respectively.

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³ The Lorenz curve is used in economy theory to graphically represent scales of inequality in wealth or income distribution; it can also be used to represent other distributions (Encylopédie économique, 1984, pp. 164–165).

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In addition to size-related variations, average farm income also varies according to farm type. Canadian dairy farms earn nearly three times the farm sector average, whereas crop farm incomes are average and cattle operations two times lower than average. In short, distribution of support tends to be unequal and there are significant income disparities that also vary with farm type. Moreover, agricultural policy instruments also generate “wastage” of aid measures—in other words, a significant share of support is transferred to beneficiaries not initially targeted by the measures. Some of these funds end going to economic agents upstream and downstream from production (input suppliers, resource holders, etc.) or being used for purposes other than those originally intended, for example, capitalization into farm assets (increased value of property, quotas, etc.) (OECD, 2002).

Together, the elements presented in this section led the OECD (2002, p. 32) to conclude that “current agricultural policies are not sufficiently well-targeted […] to meet the specific needs of farm households with income problems” (translation). Generic measures such as market price support and support measures based on output levels and input use are incapable of significantly altering farm income distribution patterns. Yet as we have seen, these measures accounted for nearly 78% of producer support estimates (PSE) in the OECD zone in 2001.

To rectify inequities in the distribution of agricultural support, OECD suggests that farm payments be decoupled and targeted specifically on the basis of farm revenue. In Québec, the BAPE commission on sustainable pig production made a similar recommendation, as we saw earlier. But the commission also made some precise suggestions about how to ensure that agricultural support measures would also guarantee greater equity between agricultural beneficiaries.

The Commission recommends that all agricultural income support programs…
… target people who work on family farms or farms of human dimensions, i.e., requiring the work of no more than four people;
… be available only to individuals, even for people who exercise farming activities through the intermediary of a corporate entity. (translation)

BAPE, 2003; p. 154, Recommendations 26 and 27.

The challenge of integrating sustainable development considerations into agricultural policy

Québec agricultural policies have been designed to meet the objectives that Québec society has collectively set for itself over the years. In the 1960s and 1970s, the goal was to improve the socioeconomic standing of farm households and develop agriculture. The 1980s were marked by an agricultural policy—Nourrir le Québec (feeding Québec)— whose goal was to increase Québec’s level of food self-sufficiency. And in the past decade, policy has focused on the development of new markets by encouraging the agricultural sector to increase agrifood exports. The farm support programs put in place during these periods have been designed to support these different agricultural policy goals.

As the 21st century begins, however, the main challenge facing Québec agriculture is to integrate the principles of sustainable development—a challenge Québec farmers themselves identified in the early 1990s, and which led them to demand a redefinition of agricultural policy on the basis of the principles of sustainable development (UPA, 2004). However, this transition to sustainability cannot be readily achieved without first undertaking a genuine review of the tools developed under previous “productivist” policies. The BAPE commission on sustainable pig production has helped foster reflection and debate on this issue and identified a number of prospective ways to bring hog farming and agriculture in general on a course toward sustainability, on the one hand, and to a type of development consistent with societal expectations on the other—a condition essential to legitimizing ongoing agricultural aid and maintaining levels of farm support.

Among the conditions required to bring agricultural policy in line with the imperatives of sustainable development, several key prerequisites stand out. First, it is vital to develop a comprehensive vision of all agriculture-related policies to ensure that the policy components do not generate impacts that may run counter to any of the three dimensions of sustainable development. And, as the BAPE commission demonstrated with the 58 recommendations in its report (BAPE, 2003), a sustainable agriculture strategy must propose a diverse array of initiatives and measures that address a wide range of economic, environmental, and social concerns. Finally, strong public and institutional leadership priorizing sustainable development is another important factor in mobilizing stakeholders and bringing them to make the changes necessary to meet this new challenge.

In this paper, we have sought to highlight some of the main issues involved in developing a sustainable agricultural policy. Using an evolutionary perspective, we have shown that a panoply of agri-environmental measures have been put in place in Québec, as well as in the rest of the industrialized world, to address the environmental problems and pressures engendered by the intensification of agriculture. Despite the growing importance of these measures in agricultural policy and the increasingly severe restrictions they impose, their effect to date has been limited. Integrating environmental issues into agricultural policy requires more than just a series of agri-environmental measures, it demands a thorough assessment of how farm support policies exacerbate environmental problems. If we are to pursue a goal of sustainability in agriculture, we should make the environmental dimension part of agricultural policy and program design.

It is in this perspective that the OECD recently undertook studies to better understand the relationship between the environment and farm support polices. Although research is still underway, analysis to date has generated a number of findings. For example, market price support and support payments based on production levels and input use are environmentally harmful measures that are in contradiction with agri-environmental measures in a number of countries. Support measures engendering a “lock-in” effect favorable to specific inputs or technologies have also been found to be harmful for the environment. The pervasiveness of these various types of support makes it harder and more expensive to achieve environmental objectives. Conversely, environmental pressures have been eased in cases where support has been decoupled from production, or is accompanied by restrictions on production. As for the social equity issue, other OECD studies have shown that generic support measures like market price support and payments based on output levels and input use also lead to inequalities in the distribution of farm support. The situation is no different in Québec and the rest of Canada. In this area, too, the decoupling of aid measures is viewed as one way to alleviate the problem.

By applying this analysis to the various aid measures available in Québec, we have shown that Farm Income Stabilization Insurance (FISI) programs may cause environmentally harmful effects, whereas crop insurance programs have limited environmental impact, and other support measures are considered to be relatively neutral. Furthermore, certain Québec farm support programs tend to introduce inequities into the distribution of aid.

These observations raise several points worth considering if we are to change our approach to agricultural policy and introduce a sustainable development perspective. First, reconciling farm support and environmental protection requires a better understand of the relationship between farm support policies and the environment. Use of tools developed for environmental assessment purposes could make a significant contribution in this regard and facilitate analysis of farm support programs. Efforts begun by Québec’s Department of Agriculture in the 1990 to review agricultural policies and programs with a view to making them more sustainable (MAPAQ, 1997) is worth pursuing and should be expanded to all available programs, as called for in its departmental sustainable development policy adopted in 1995.

Furthermore, we can expect that a “greening” of farm support programs will result in a gradual shift away from more harmful support measures toward less harmful measures and/or agri-environmental payments, as has been the case with the reforms introduced in the European Union. Anticipated benefits of this “greening” of agricultural aid programs include an increase in the effectiveness of environmental regulations due to a decrease in the environmental impact of farm support, as well as a reduction in the cost of achieving environmental objectives. These adjustments would enhance the productivity of our agri-environmental investments and make farm support measures more effective vehicles for meeting our goals for sustainability. In addition, these benefits should be particularly significant in a context like the one in Québec, where the overall level of support for farms is higher than the Canadian average. However, despite the fact farm support reform is a necessary step toward improving environmental performance in the agricultural sector, correcting the harmful impacts of these measures is not enough on its own to resolve these environmental problems. Reforms in this area must be part of a series of initiatives to develop a new agricultural policy architecture built on a strong foundation of sustainable development principles.

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List of acronyms