Appropriate Policy Measure Combinations
to Safeguard Non-Trade Concerns
 of a Multifunctional Agriculture

Informal Process of Analysis and Information Exchange 
of the WTO Committee on Agriculture, 28 September 1999
Paper presented by Norway

17 September 1999

Table of contents

SUMMARY AND CONCLUSIONS	iv
1.	INTRODUCTION	1
2.	JOINTNESS BETWEEN NON-TRADE CONCERNS 
	AND AGRICULTURAL PRODUCTION	2
3.	COST DIFFERENTIALS BETWEEN HIGH 
	AND LOW-POTENTIAL AREAS	3
4.	APPROPRIATE POLICY MEASURE COMBINATIONS 
	– THE CASE OF NORWAY	6

List of tables and figures

Table 1:	Production costs in dairy farming in selected countries	4
Table 2:	Production costs in cereal production in selected countries	5
Figure 1:	Possible functions of a multifunctional agriculture	2
Figure 2:	Revenues and costs (1998) on a 40 ha grain producing farm 
	of the lowlands in Eastern Norway (0.8 man years)	7
Figure 3:	Revenues and costs (1998) on a dairy farm with 12 cows 
	in Western Norway (1.6 man years)	8
Figure 4:	Revenues and costs (1998) on a dairy farm with 23 cows 
	in Eastern Norway (2.5 man years)	9
Figure 5:	Revenues and costs (1998) on a sheep farm with 122 ewes (1.2 man years)	10

SUMMARY AND CONCLUSIONS
1.	There is a broad consensus among WTO Members that non-trade concerns (NTCs) such as agriculture’s contribution to food security, the viability of rural areas, the cultural heritage, the agricultural landscape, agro-biological diversity, land conservation and a good plant, animal and public health are legitimate and valid concerns for all Members. However, opinions are varying with respect to the policy measures needed to address appropriately the different NTCs. This paper examines the appropriateness of different policy measure combinations targeted to safeguard NTCs of a multifunctional agriculture. The attention is focused on low-potential areas, which often have agricultural production costs far above the world average. 
2.	Many contributions to the AIE process of the WTO Committee on Agriculture point to the fact that the different NTCs (i) often have public goods characteristics; (ii) are often specific to the agricultural sector; and (iii) are to a large extent provided as joint products of the agricultural production activity itself. Therefore, continued and sustained safeguarding of NTCs requires a viable domestic agricultural sector with agricultural production.
3.	Substantial cost differentials exist between various WTO Members. In dairy production, for instance, the lowest costs can be found where farms combine year-round grazing, low wage levels and high labour productivity. In dairy and cereal production, costs in Norway are 4-7 times the production costs of the most efficient producer countries.
4.	In the long run, production will only take place if it is profitable, i.e. if production revenues are covering production costs. The paper presents four farm cases in Norway comparing the present situation with a scenario consisting of a “world-market-only” scenario in which all production-related policy measures (i.e. Blue Box and AMS, including border protection) have been replaced by green box support. There are two major reasons why such a scenario does not seem to be possible in Norway, from the point of view of safeguarding NTCs. 
5.	First, the data presented clearly indicate that the “world-market-only” scenario is not likely to provide sufficient financial incentives to farmers to continue production in the long run. With world market prices only, production revenues would only cover 30-41% of total production costs, which is clearly not sufficient. Second, extensive detailed targeting of measures directly to a number of NTC-related criteria that would be necessary to safeguard NTCs under a “world-market-only” scenario, would most likely not be practically feasible and would in any case probably involve unacceptably high administration and control costs. 
6.	To conclude, agricultural production conditions are varying considerably among WTO Members. Due consideration must be given to the heterogeneity and diversity of country situations in order to ensure sufficient flexibility and room for manoeuvre to safeguard NTCs of all WTO Members. Based on the analysis undertaken in this paper it seems clear that, in Norway, most NTCs can only be safeguarded in an appropriate way through a policy measure combination that includes extensive use of production-related policy measures.

1.	INTRODUCTION
7.	According to Article 20 of the Agreement on Agriculture, non-trade concerns (NTCs) should be taken into account in the continuation of reform process. The Preamble of the Agreement recalls that the long-term objective “is to establish a fair and market-oriented agricultural trading system” and notes that “commitments under the reform programme should be made in an equitable way among all Members, having regard to non-trade concerns, including food security and the need to protect the environment ...”
8.	During discussions in the AIE process of the Committee on Agriculture, different Members have so far focused on NTCs such as agriculture’s contribution to food security, the viability of rural areas, the cultural heritage, the agricultural landscape, agro-biological diversity, land conservation and a good plant, animal and public health. Naturally, the importance and weight attached to a given NTC may vary between countries, depending on their particular situation and national priorities.
9.	There seems to be a broad consensus among WTO Members that NTCs are legitimate and valid concerns for all Members. However, opinions are varying with respect to the policy measures needed to address appropriately the different NTCs. While some countries have pointed to Green Box measures alone as most efficient, others have highlighted the need for additional flexibility and room for manoeuvre in national policy design.
10.	This paper examines the appropriateness of different policy measure combinations targeted to safeguard NTCs of a multifunctional agriculture. The attention is focused on low-potential areas, which often have agricultural production costs far above the world average, illustrated by examples from Norway. 
11.	Section Two of the paper summarises previous discussions on jointness between NTCs and the agricultural production itself. Through some empirical examples Section Three illustrates the cost differentials between high and low potential agricultural production regions. Based on the higher costs that agriculture is facing in low-potential areas, Section Four concludes that, in many cases, Green Box measures alone will not be sufficient to safeguard vital NTCs. In case of Norway, the cost-analysis undertaken in this paper shows that an appropriate policy mix to address NTCs would have to include a substantial proportion of production-related policy measures. The results of analysis undertaken in many other low-potential areas may turn out to be similar to those of Norway. 

2.	
JOINTNESS BETWEEN NON-TRADE CONCERNS AND AGRICULTURAL PRODUCTION
12.	Different NTCs have been described relatively extensively in a number of written contributions to the AIE process of the WTO Committee on Agriculture, notably by Mauritius, India, Japan, the European Union, the Republic of Korea and Norway. Many of these contributions point to the fact that the different NTCs (i) often have public goods characteristics; (ii) are often specific to the agricultural sector; and (iii) are to a large extent provided as joint products of the agricultural production activity itself. These special features are further elaborated below.
13.	First, while private goods can be exchanged in a market, public goods are by definition lacking functioning markets. Figure 1 lists various functions of a multifunctional agriculture, making the distinction between goods that are predominantly private and public, respectively. The NTCs listed by WTO Members generally have public goods characteristics and appear in the right-hand side of the figure. Also, the scope for privatising the NTCs (i.e. market creation) seems to be limited. Therefore, in order to safeguard NTCs and thus ensure the provision of public goods according to people’s preferences, government intervention and financial transfers may be justified and are often needed, according to what Norway has 

Figure 1:	Possible functions of a multifunctional agriculture

suggested could be called a Provider-Gets-Principle. Application of the PGP means that, if necessary, payments must be made to the provider of public goods in order to achieve the desired resource allocation.
14.	Second, while also several other sectors exhibit some degree of multifunctionality, few sectors seem to fulfil such a wide variety of functions as the agricultural sector. Moreover, most of the actual NTCs safeguarded by agriculture cannot be provided by other sectors. Of the various NTCs listed so far by WTO Members, the viability of rural areas is likely the only one for which other sectors can play, and are playing, an important role. However, in remote regions of many developed countries or in case of developing countries with predominantly agrarian economies, agriculture is a cornerstone whose contribution to rural employment and economic and social viability is fundamental.
15.	Third, most NTCs examined so far cannot be disassociated from the agricultural production activity itself. The joint production relationship between the different NTCs and the agricultural production activity is complex and may relate both to certain types of input use, farming practices and technologies, and agricultural output, as well as a combination of all these elements. For instance, a genuine and authentic agricultural landscape cannot be provided without agricultural production activity. Moreover, as part of a country’s long-term food security, a certain degree of domestic food production may be judged as essential. Therefore, in our view, continued and sustained safeguarding of NTCs requires a viable domestic agricultural sector with agricultural production. For further discussions of this issue, see the three previous AIE-papers submitted by Norway.

3.	COST DIFFERENTIALS BETWEEN HIGH AND LOW-POTENTIAL AREAS
16.	Efficiency gains through freer trade cannot be made if the product in question cannot be traded. As discussed in the previous section, contrary to most private goods for which international markets exist, NTCs, in general, cannot be supplied by international markets, but need to be provided by domestic agricultural production activities. The costs of safeguarding the NTCs will vary substantially from country to country, depending on national priorities and the cost levels that each country’s agricultural sector is facing. In this Section, evidence of the substantial cost differentials that exist between various WTO Members will be given, based on examples from dairy and cereal production.
17.	The costs of dairy production in different countries have been documented by the International Farm Comparison Network (IFCN). Table 1 gives the preliminary findings on dairy production costs (break even point of producing 100 kg milk), that resulted from the IFCN study on the international competitiveness of dairy farming.

Table 1:	Production costs (break even) in dairy farming in selected countries
Source: IFCN (all countries, except for Norway) and Norwegian Agricultural Economics Research Institute (data for Norway, applying the IFCN methodology, direct support not deducted)
18.	The Table shows that of the countries that were included in the IFCN study, production costs are more than 4 times higher in the least cost-efficient producer, Austria, compared to Bulgaria and New Zealand, which, according to the study, are the most cost-efficient producers. According to estimates by the Norwegian Agricultural Economics Research Institute, production costs are even higher in Norway, amounting to US$ 78, US$ 110 and US$ 114 for a farm with 29 cows (South Western Norway), 16 cows (Northern Norway) and 13 cows (Western Norway), respectively. The average cow herd in Norway is 13 cows.
19.	The study points to differences in labour and land prices and productivity and in fixed costs as major reasons for different cost levels. For instance, while a qualified worker earns less than US$ 1/hour in Bulgaria and around US$ 8/hour in Australia and New Zealand, his/her wage reaches more than US$ 16/hour in several Western European countries. And the labour productivity (kg milk/hour) is around six times higher on a farm with 1800 cows in USA, compared with a farm of 23 cows in Austria. Another major cost component relates to infrastructure and fixed costs. The report therefore concludes that the lowest costs can be found in New Zealand, Australia and Uruguay where farms combine year-round grazing, low wage levels and high labour productivity.
20.	Another preliminary IFCN study covers the competitiveness of international cereal production. Table 2 presents the production costs for wheat, barley and maize, based on data from various sources compiled by IFCN. Corresponding production costs in Norway have been estimated to US$ 38/100 kg.

Table 2:	Production costs in cereal production in selected countries
Source: Isermeyer, Möller and Riedel, 1999 (all countries, except for Norway), and Norwegian Agricultural Economics Research Institute (data for Norway, mixed production of wheat and barley on a 35 ha farm in Eastern Norway)
21.	In agriculture, Norway is facing unusually high production costs for a number of reasons. The average farm size is around 12ha arable land. The average field size is only 1.5 ha, and nearly 20 per cent of the agricultural area have a gradient exceeding 1:5. Dairy farms have an average herd of 13 cows. The arctic and subartic conditions in Norway are characterised by harsh climate, low temperatures and a short growing season, which varies between 100 and 190 days, depending to a large extent on latitude. The indoor period for livestock varies from around 230 to 290 days a year. All the disadvantages stemming from a harsh climate, long distances, a difficult topography, a low population density and a small-scale structure, combined with high labour prices, result in high costs and a very low degree of competitiveness at world market prices.
22.	Structural adjustment of the agricultural sector could contribute to reductions in overall cost levels. However, in many countries like Norway the scope for such reductions is relatively limited, for a number of reasons. First, in many countries the potential for structural adjustment in terms of large-scale production is restricted by natural conditions, partly because fields and farms are relatively scattered. Second, the data presented in Tables 1 and 2 indicate that even with a shift to larger production units (most Norwegian farms in Tables 1 and 3 are far above the national average regarding farm size), overall costs would still be very high, suggesting that costs relating to labour and natural conditions are very important. In addition, extensive structural adjustment would have a considerable negative impact on important NTCs such as rural employment, agricultural landscapes and bio-diversity
4.	APPROPRIATE POLICY MEASURE COMBINATIONS – THE CASE OF NORWAY
23.	Based on the discussion in the previous Section, it seems clear that because of wide variations in costs, the NTCs of a low-potential high-cost agricultural producing country can only be safeguarded through considerable levels of transfers to the agricultural sector. Theoretically, for a given country the most efficient solution exists where the marginal costs, in terms of such transfers, of supplying or safeguarding a NTC equal the marginal utility of having this good provided. In practice, a country’s willingness to pay for public goods is often reflected through political processes in which costs and benefits of different options are assessed.
24.	As pointed to in Section Two, most NTCs depend on a viable agricultural production. In the long run, production will only take place if it is profitable, i.e. if production revenues are covering production costs. Figures 2-5 present production costs and revenues of 4 so-called reference farms in Norway, comparing the present situation with a scenario consisting of a “world-market-only” scenario in which all blue and yellow box support, including border protection, have been replaced by green box support. There are two major reasons why such a “world-market-only” scenario does not seem to be possible in Norway, from the point of view of safeguarding NTCs. 
25.	First, Figures 2-5 clearly indicate that the “world-market-only” scenario is not likely to provide sufficient financial incentives to farmers to continue the production that is required to safeguard NTCs as described in Paragraph 15. At present, production-related policy measures amount to 58-64% of total revenues. While total production costs would decrease slightly under a “world-market-only” scenario, mainly due to reduced fodder prices, this reduction is far from sufficient to offset the elimination of production-related policy measures that would occur under this scenario. If the farmer is profit-maximising and if green box measures are fully decoupled from production, such support would not be taken into account when the farmer is making his/her production decisions. With world market prices only, production revenues would only cover 30-41% of total production costs, which is clearly not sufficient to ensure a profitable production in

Figure 2:	Revenues and costs (1998) on a 40 ha grain producing farm of the lowlands in Eastern Norway (0.8 man years)
Source: Reference farm, number 27, Norwegian Budget Committee for Agriculture (world prices from the OECD). Data compiled by the Norwegian Agricultural Economics Research Institute and the Ministry of Agriculture, Norway.

Figure 3:	Revenues and costs (1998) on a dairy farm with 12 cows in Western Norway (1.6 man years)
Source: Reference farm, number 10, Norwegian Budget Committee for Agriculture (world prices from the OECD). Data compiled by the Norwegian Agricultural Economics Research Institute and the Ministry of Agriculture, Norway.

Figure 4:	Revenues and costs (1998) on a dairy farm with 23 cows in Eastern Norway (2.5 man years)
Source: Reference farm, number 15, Norwegian Budget Committee for Agriculture (world prices from the OECD). Data compiled by the Norwegian Agricultural Economics Research Institute and the Ministry of Agriculture, Norway.

Figure 5:	Revenues and costs (1998) on a sheep farm with 122 ewes (1.2 man years)
Source: Reference farm, number 19, Norwegian Budget Committee for Agriculture (world prices from the OECD). Data compiled by the Norwegian Agricultural Economics Research Institute and the Ministry of Agriculture, Norway. 

the long run. This conclusion seems to be in accordance with results obtained by running the Jordmod model operated by the Norwegian Agricultural Economics Research Institute.
26.	Second, whereas, as an alternative to production-related support, it has been suggested to target Green Box measures directly to a number of NTC-related criteria in order to safeguard NTCs, extensive detailed targeting is probably not practically feasible. More importantly, such targeting will most likely involve very high administration and control costs, especially in areas where the agricultural sector consists of a large number of small-sized farmers. Maximum targeting of policies is of course desired. However, there is certainly a trade-off between precision, on the one hand, and administration and control costs, on the other hand. Therefore, while a certain degree of targeting should be pursued in national policy design, too extensive and detailed targeting does not seem to be feasible. Further research on this issue should be undertaken.
27.	NTCs are under pressure in Norway, for a number of reasons. For instance, during the period 1985-98, more than 26 % of the active farms disappeared, down from 105 000 in 1985 to 77 500 active farms in 1998. Also, at present, around 12 % of arable land in Norway is abandoned. In certain regions the degree of abandonment is far higher. It is not possible at this stage to determine with exactitude the optimal policy measure combination that would be needed to safeguard NTCs. However, it seems clear that, in Norway, most NTCs can only be safeguarded in an appropriate way through a policy measure combination that includes extensive use of production-related policy measures.