Description

A price subsidy is a payment from public funds paid to agricultural enterprises when they buy certain inputs (e.g. fertilisers, feed, pesticides, seed and fuel). Subsidising seeds of certain basic foods, such as maize, can be an effective measure for improving supplies of these foods.

Time-limited subsidies for special target products or groups, such as for needy small-scale farmers, are referred to as ‘smart subsidies’. The subsidy must be matched to the target group concerned and should not lead to permanent distortion of the markets. Where inputs such as fertilisers, pesticides or seed are subsidised, accompanying advisory measures are often employed to ensure that the inputs are used properly and the desired increases in production levels and incomes are achieved.

Despite being very costly, state subsidy programmes provide opportunities for personal gain for a large number of actors (policy-makers, public employees, sales staff, traders and better-off farmers). As a result, they often go hand-in-hand with corruption problems.

Requirements

• A properly functioning country-wide administration and monitoring system with access to the relevant information and sufficient technical and human capacities for its design, implementation and monitoring
• Clear and coherent political strategy and targets for policy-makers and public authorities
• Clearly recognisable product characteristics
• Clear responsibilities in public authorities
• Close cooperation and knowledge sharing with farmers' organisations
• Close cooperation and knowledge sharing with local advisory services
• Compatible regional and world trade law (WTO conformity)
• Country-wide register of farms and / or enterprises involved in the agri-food sector
• Definitions of good agricultural practice in respect of soil, water, climate and air, as well as biodiversity
• Open-access to all farms, regardless of size and location
• Regulated and legally protected payment structures

Possible Negative Effects

• Market distortion
• Heavy burden on the state budget
• Obstructs the development of sustainable private distribution systems and private investment
• Inefficient farms continue to operate despite negative contribution margins
• Improper use of fertilisers or pesticides can have negative effects on the environment
• Risk of abuse through nepotism, personal gain and corruption
• Free rider effects in agriculture with no promotional effect