As noted above, the total Producer Subsidy Equivalent for California agriculture represents $2,344 million or about 10.6 percent of total commodity receipts in California. This number may be compared to the PSE from elsewhere. The Organization for Economic Cooperation and Development (OECD) reports for a variety of countries PSEs for 12 field crops and livestock commodities. The national average PSEs range from about 3 percent of agricultural revenue for New Zealand to over 80 percent for Switzerland. Norway, Japan and Iceland all have PSEs over 70 percent. The OECD reports an average percentage PSE of 21 percent of revenue for the United States. Our figure for California is lower mainly because we use a broader set of commodities and because subsidy rates tends to be lower for fruits, vegetables and other horticultural commodities that are particularly important in California. On a commodity-by-commodity basis, California percentage PSEs roughly equal those for the US as a whole.
The Commodity Distribution of the California PSE
Dairy is the largest single farm industry in California, accounting for more than 14 percent of California farm receipts. The dairy industry is also dominant in terms of government support; when summed across all policy instruments, about 45 percent of all Producer Subsidy Equivalent in California agriculture is provided to the dairy industry. On the other side, the two broad categories of horticultural crops, which include all tree crops, vegetables, and melons, berries and nursery crops, comprise well over half of all agricultural receipts in California, but receive a combined total of only 25 percent of the total PSE for the state.
Producer Subsidy Equivalent by Commodity in California
Discussion of Specific Policies
Irrigation Water. Irrigation is a key input for agriculture in California. In California, surface irrigation water is provided to some users at prices below cost and below potential market prices for the water.
Much of the reservoir and distribution system that serves agriculture was developed long ago. The federal government's Central Valley Project (CVP) and the California State Water Project (SWP) system of dams and canals are important providers of water. Almost half of the water available in the San Joaquin Valley comes from CVP or SWP sources. Of course, not all growers use project water, and as with other programs, our calculations are averages In addition, over 90 percent of Imperial Valley water comes directly or indirectly from federal or state projects.
Our PSE calculations are based on irrigation water usage by crop and estimates of the subsidy implicit in the state and federal water projects. For quantities of water, we calculate the share of project water by region multiplied by the applied water for that commodity in that region of California. For price subsidy, we use two subsidy rates based on some approximate calculations (by UC Davis Professor Richard Howitt) of transport costs and how a water market would develop if restrictions on water movement towards urban uses were eliminated. For the Sacramento River and Central Coast Regions we use an average subsidy rate of $15 per acre foot of water. These regions have low distribution costs and had substantial irrigation water supplies even before development of the major subsidized projects. For the San Joaquin, Tulare Lake, South Coast, Colorado River and South Lahontan regions, we use an average subsidy rate of $30 per acre foot of water. Overall we estimate that California agriculture producers receive approximately $236 million per year in subsidy from government water projects. This amounts to about one percent of the total value of California agriculture, and is distributed widely across crops. Alfalfa, important in dairy feed rations, receives the largest total water subsidy; about $70 million; more than ten percent of the value of the alfalfa.
Dairy Policy. A substantial share of dairy revenue derives indirectly from several government programs. The total Producer Subsidy Equivalent for dairy in California is about one billion dollars. The California dairy industry participates in the US price support program and the industry benefits from US import barriers and export subsidies. California operates its own marketing order system that differs from the federal system.
Under the federal price support program for milk, whenever prices are too low, the USDA purchases butter, non-fat dry milk (NDM) and cheese from processors. However, the price support program contributed little to the dairy PSE in the 1994-1996 period, and the 1996 FAIR Act scheduled a gradual elimination of the program by 1999.
Import barriers are a fundamental feature of US dairy policy, accounting for more than 70 percent of the total dairy PSE in California. In general, imports of dairy products have been limited by tariff rate quotas to about 2 percent of US consumption. The PSE calculations attribute the difference between the domestic market price and the international market price for tradable dairy products (standardized for quality) to trade barriers.
As with the federal regulations that apply elsewhere, California milk marketing orders establish specific minimum prices according to the end use of the milk (classified pricing). A higher price is required for milk that is used for fluid products. California milk marketing orders include a program under which the additional revenue transferred from consumers by the classified pricing policy is provided to a subset of dairy farmers who own "pool quota." Recently, the amount transferred in this way has been about $154 million per year. This is our measure of the dairy industry subsidy due to the California milk marketing order system.
Direct Payments. Until the FAIR Act, federal deficiency payments were the major government program for rice, cotton, wheat and feed grains. Participants now receive direct payments each year based on a percentage of past deficiency payments. Producers are also relieved of requirements to idle land or plant specific crops. Payments to California participants totaled about $205 million in 1996.
Policies Affecting Fruits, Nuts, Vegetables, Melons, Nursery and Flowers. Commodities in these categories have little government intervention into their markets. The PSEs for these commodities range from about 3 percent to 8.5 percent of the revenue. This subsidy level is derived mainly from the broad based programs (inspection programs, research, farm credit) that support all of agriculture. While these commodities have no explicit export subsidies, they do benefit from small amounts of assistance for foreign market development. Crop insurance benefits and disaster payments are also a source of support for this group of commodities (only strawberries did not receive some income support from crop insurance or disaster payments during 1988-93). In the citrus industry, crop insurance and disaster payments comprise almost 30 percent of the total citrus PSE, based on a 1988-93 average. Large payments were made following a 1990 freeze that took a heavy toll on the California citrus industry.
All commodities in this group have a marketing order or related program. The marketing orders, which are supported largely by assessments, provide a small amount of the subsidy used for promotion or research. Of course, these commodities also are supported by state and federal research funding.
Because of its commodity mix, and the level and distribution of subsidy across commodities, California agriculture has an average percent PSE that is below the comparable figure in other places. The major horticultural industries in the state compete effectively with little direct subsidy and almost no commodity-specific support. These industries tend to welcome market-oriented policy reform of the sort, for example, that is being pursued in the World Trade Organization. Other California commodities such as dairy products and sugar continue to maintain relatively high import barriers and have traditionally resisted market opening and other policy reforms. However, even these segments of California agriculture expect to prosper as markets are opened and subsidies reduced on a world wide basis.
*Daniel A. Sumner is the Frank H. Buck, Jr., Professor in the Department of Agricultural and Resource Economics at UC Davis and the Director of the Agricultural Issues Center. David Hart is a recent graduate from UC Davis with a major in Agriculture and Managerial Economics. The full version of this research is published as a chapter in California Agriculture: Issues and Challenges, Jerome B. Siebert, Editor.