The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand

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The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
The role of U.S., China, Brazil's agricultural
       and trade policies on global food supply and
       Simla Tokgoz                       FOODSECURE Working paper no. 19
       Danielle Alencar Parente Torres,                    February 2014
       David Laborde
       Jikun Huang

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
The role of U.S., China, Brazil's
    agricultural and trade policies on global
            food supply and demand

                                               January 7, 2014

    Simla Tokgoz (IFPRI), Danielle Alencar Parente Torres (EMBRAPA), David Laborde (IFPRI),
                                      Jikun Huang (CCAP)1

    With contributions from Lauren Deason (IFPRI) and Marcelle Thomas (IFPRI).

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
Brazil, China and U.S. play crucial roles in global food supply and demand system as consumers,
producers, and traders. Therefore, any agricultural and environmental policy tool of these 3
countries deserve special attention since their policy environment contributes to farmers’
decisions to plant and consumers’ decisions to buy. In an era of growing demand pressures, it is
more important than ever before to understand the impact of policies relevant to land and water
resources. This study attempts to identify and analyze these dynamics for these 3 countries in a
global context.

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
Table of Contents

Abstract ........................................................................................................................................... 2
1      Introduction ............................................................................................................................. 4
2      Agricultural Policy Environment............................................................................................. 4
    2.1       United States .................................................................................................................... 6
    2.2       Brazil ................................................................................................................................ 7
    2.3       China ................................................................................................................................ 8
4      Environmental Goals in Policy Environment ........................................................................ 10
    4.1       Water and Land in U.S. Agricultural Policy .................................................................. 10
    4.2       Water and Land in Brazilian Agricultural policy ........................................................... 14
    4.3       Water and Land in Chinese Agricultural policy............................................................. 19
5      The Role of US, Brazil, and China in Global Food Supply .................................................. 25
    5.1       Supply and Demand Conditions..................................................................................... 25
    5.2       Role of Irrigation ............................................................................................................ 28
6      Conclusions ........................................................................................................................... 29
References ..................................................................................................................................... 31

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
1      Introduction
    As part of Work Package 4 and Deliverable 4.2, this paper examines the significant role
Brazil, China and U.S. play in global agricultural markets. Since these 3 economies constitute a
significant part of the global demand and supply, their agricultural and environmental policies
impact global food supply and demand considerably. These policies take different forms, such as
trade policy, domestic support measures, and environmental policy among many others. All
contribute to how farmers make planting decisions and market their products, and how much
consumers buy and which products they buy.
    In an era of ever growing pressure on supply chains, it is crucial to understand the dynamics
of global agricultural markets, with an eye on the natural resource constraints. The impact of
policies on resources such as land and water needs to be identified and put in the context of
larger dynamics. Irrigation is a crucial investment for increasing supply, considering the natural
resource constraints in many countries.
    The aim of this paper is two-fold. The first is to identify the main policy pillars, categorize
them, and compare and contrast their reporting across different sources In the next part, we try to
discuss the role of these 3 countries in global markets, identify different long-term dynamics in
their respective markets, and link the policy environment to natural resource constraints.
    The report follows as below. In section 2, we discuss agricultural policy environment. To this
end, we discuss 2 main sources (OECD and WTO) and try to understand their categorization.
Next section analyzes the environmental goals in agricultural policy for these 3 countries with
specific attention paid to impact of policies relevant to water and land. Section 5 serves 2
purposes; to analyze supply and demand conditions in 3 countries and to understand the role of
irrigation. Finally, we conclude.

2      Agricultural Policy Environment
    Correct measurement of agricultural support is necessary for policy design, monitoring the
implementation of policy design, estimating impacts of polices and checking WTO commitments
of member states. Agricultural policy instruments are reported through various sources, the most
notable World Trade Organisation (WTO) notifications and Organisation for Economic
Cooperation and Development (OECD) estimates (see Mittenzwei and Josling (2012) for a
comparison). These sources use different categorizations and classifications for agricultural

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
policy instruments. The decisions on the reporting content and the utilized methodology
significantly affect the value of agricultural policy spending reported in these two sources.
     OECD categorizes different agricultural and environmental policies among 3 main
categories: Producer Support Estimate (PSE), General Services Support Estimate (GSSE), and
Consumer Support Estimate (CSE) (see OECD (2013)). OECD secretariat creates this database
based on member states’ data reports. PSE category consists of policies that transfer payments
from consumers and taxpayers to farmers. GSSE category consists of policies that support
general services for agricultural sector and financed by consumers and taxpayers. CSE category
consists of policies that transfer funds from consumers to producers and from taxpayers to
consumers (Mittenzwei and Josling (2012)).
   For domestic support measures, WTO uses categories like Green Box, Blue Box, and
Aggregate Measurement of Support (AMS). AMS is further divided into two: market price
support and non-exempt direct payments. Table 1 shows the calculated Agricultural Market
Support from WTO notifications for Brazil, China and U.S. for product specific and non-product
specific categories. WTO only provides a “technical cooperation handbook” for member
governments to use when providing notifications (WTO (2013)).
   OECD categorizations differ from WTO notifications in certain cases. For example, direct
payments for U.S. farmers are Green Box (measures exempt from the reduction commitment) in
WTO but as part of PSE computations in OECD as category E (payments based on non-current
A/An/R/I, production not required).
   Secondly, some agricultural policies that are considered “social policy” and not agricultural
support are out of the scope of OECD. An example is the set of agricultural policies directed
towards small holders in Brazil, which are reported in WTO notifications, but not in OECD
estimates (as seen in Figure 2b).
   Thirdly, using different quantifications (or formulas) for the same agricultural policy
indicator creates a wedge between OECD and WTO estimates, the most notable being “market
price support” definition and computation in the two sources (see Orden et al. (2011)). For
OECD, “market price support” measures the impact of any policy that creates a gap between
domestic price and world price. Thus, OECD estimates for “market price support” also include
the effects of trade policies through their price distortion effects. WTO notifications include
separate categories for “market access” and “export subsidies”.

The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
Different categorization of these policy variables can impact policy simulation in a modeling
framework. A policy interpreted as “market price support” will be incorporated into a PE or CGE
model differently than a policy interpreted as “GSSE” or “CSE”.
    WTO notifications also include agricultural policy support spending in local currency as well
as in US$. Exchange rate used in WTO notifications used to convert agricultural support to US$
from local currency is not always reported, so that results in some discrepancies among values
reported in different sources.
    Time period (calendar year vs. marketing year vs. fiscal year) of collection and reporting of
the data generates some of the discrepancies in value of agricultural policy spending reported as
well. OECD reporting of estimates are in calendar year, whereas WTO uses calendar year,
marketing year, and fiscal year.
    There is also aggregation of different agricultural policy categories together, especially in
WTO notifications, which makes the comparison between alternative sources difficult.
    Below is a more detailed comparison of OECD and WTO databases using two country
examples: U.S., Brazil, and China.

2.1      United States
         Table 2 compares the categorization of policy variables from OECD estimates and WTO
notifications. As seen in Table 2, it is not always possible to do a one-to-one mapping between
the two sources. Since U.S. agricultural policy variables are well-documented and reported in
detail, this mapping is done to a better extent than other countries.
         Figure 1 shows the data from OECD estimates and WTO notifications for 2008 in million
US$. There are some discrepancies between the values from the two sources due to multiple
factors. Due to different time periods being used for data reporting, WTO data was converted to
calendar year to compare with OECD estimates, which explains some of the differences.
      Assumptions used in reporting of the policies affect the reported value significantly.
Domestic Food Aid in the U.S. includes Food Stamp Program. In WTO notifications, this is
reported directly in spending amount. In OECD, this spending is multiplied by 0.36 (farm value
per dollar of retail food expenditure of food stamp households) to express it at the farm gate
level. This generates a significant difference between two data sources for the same agricultural
policy. Since Domestic Food Aid is a large part of the Green Box notifications for U.S., the
relative value of this policy in the two data sources is critical.
The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
Choice of the formulas and the historical data to report the policy creates another
discrepancy. For “market price support” computation, WTO uses “applied administered price”
vs. “external reference price” series at a fixed base period. These price series do not change
annually and the gap is always positive between the two price series. This positive gap makes the
estimate of “market price support” always a positive spending amount in WTO notifications
whether there is an actual support or not. There does not need to be a direct link between the
administrative price and the border protection measures for WTO notifications (Mittenzwei and
Josling (2012)).
      For “market price support” estimates, OECD uses “producer price (at farm gate)” and
“reference price (at farm gate)” series whose values change annually. Thus, “market price
support” estimates rely on the historical data series chosen for prices to a significant extent. For
example, dairy price support program amount for 2008 in OECD estimates is 0, but
approximately $2,900 million (calendar year) in WTO notifications.

2.2      Brazil
         Table 3 compares the categorization of Brazilian agricultural policy variables from
OECD estimates and WTO notifications. It is not always possible to map some of the policies to
OECD or WTO categories. For example, there is no specific OECD category for the policies
reported in WTO. These are “PRONAF - Input Subsidies”, “PRONAF - Production Credit”,
“Production and marketing credits”, “Food Aid – Domestic”, “Risk Minimizing Agribusiness
Programme” since in Brazil some policies are for small holders (family farms). These policies
will be out of OECD scope as they are considered "social policy", not agricultural support.
         Figure 2a and Figure 2b show the data from OECD estimates and WTO notifications for
2009 in million US$. There are some discrepancies between the values from the two sources due
to various factors such as exchange rates, time period of reporting, and conversion to calendar
         Assumptions used in reporting of the policies affect the reported value significantly. For
example, “AGF-Federal Government Purchase” and “Public Option-Sale Option Contract” are
both added as “market price support” in WTO table titled “Product-Specific Aggregate
Measurements of Support: Market Price Support”. In OECD, AGF is added as “General Services
Support Estimate (GSSE)”, not as “market price support”. There is a separate “market price
support” category in OECD which we interpreted to be comparable to “Public Option-Sale
The role of U.S., China, Brazil's agricultural and trade policies on global food supply and demand
Option Contract”. Figure 2a shows that for these two categories the reported value is very
        More than the reported value, different categorization of these policy variables can
impact policy simulation in a modeling framework. Thus, a policy interpreted as “market price
support” will be incorporated into a model differently than a policy interpreted as “General
Services Support Estimate (GSSE)”.
        Reporting category makes a difference as well. In WTO notifications, we have
“Investment Credit Programs” reported as aggregates. In OECD, these are divided into two:
“Preferential interest subsidy on investment credit - General lines” & “Preferential interest
subsidy on investment credit - PRONAF”.
        One significant assumption in OECD tables is the fact that they added “PEP” and
“PROP” policies of Brazil as a CSE (Q. Transfers to consumers from taxpayers Q.1.Commodity
specific transfers to consumers). However, “PEP” and “PROP” are domestic support policies and
specifically “Product-Specific Aggregate Measurements of Support: Other Product-Specific
Support” in WTO which is a producer support program, not exactly a consumer support

2.3     China
    Table 4 compares the categorization of Chinese agricultural policy variables from OECD
estimates and WTO notifications. It is not always possible to map some of the policies to OECD
or WTO categories. For example, there is no specific OECD category for the policies reported in
WTO such as “interest subsidy” that is reported under non-product specific AMS. At the same
time, although agricultural insurance premium subsidy is included in OECD, it is not reported in
WTO notifications.
    Aggregation also plays a role when mapping policies to each category. In WTO notifications,
agricultural input subsidies are reported in aggregate terms in non-product specific AMS. In
OECD, we see that input subsidies for machinery and for fertilizers are added separately. One
reason for this is that the “Input subsidy program (price subsidies to fertilizers, chemical and
other input)” is part of PSE as “B. Payments based on input use, B1. Variable input use”,
whereas “mechanization of farming” is part of PSE as “B. Payments based on input use, B2.
Fixed capital formation”. In Figure 3a, we can see that the category named input subsidies is
78,750 million RMB in WTO and 40,208 million RMB in OECD. These aggregation subsets
affect the amount of spending being reported as it is not easy to decipher where the discrepancy
rises from.
   Another example for aggregation problem is the “Subsidy for breeding productive sows”
program which is added as a single payment item in WTO as part of “other product-specific
support”. In OECD estimates, we have 2 separate categories “Advanced Hog Breed Nurturing
program” and “Advanced hog breed subsidy” which are interpreted to be part of the same
“Subsidy for breeding productive sows”. Still the same discrepancy in values being reported
arises for this subsidy: 5,233 million RMB in WTO and 2,335 million RMB in OECD.
    Even for policy programs where categorization issues do not arise, OECD and WTO reports
significantly different numbers despite the fact that both data are in calendar year and in RMB.
For direct payments, WTO notes the spending to be at 23,607 million RMB in 2008 and OECD
reports this number to be 15,100 million RMB.
   One significant difference between OECD and WTO is their interpretation of “market price
support”. In WTO, MPS computation includes on wheat and rice, which both have negative
values since applied administered price is less than external reference price for all years.
Although applied administered price reported in WTO notifications changes from year to year,
external reference price is fixed at base year (average 1996-1998) world prices. Since China uses
a different base year from other countries in WTO (average 1986-1988), where world prices
were very low, “market price support” computations for China is negative in WTO notifications.
The other issues regarding the computation of “market price support” is the value of eligible
production used. Cheng (2008) discusses the ambiguity regarding the quantity eligible for this
computation; whether it is total production or the surplus sold in the market or the quantity
bought by the government. Although the value of applied administered price and external
reference price makes MPS negative and thus the computation always negative, change in
market prices and therefore applied administered price may bring this use forward in future
discussion in WTO.
   In OECD estimates, MPS is computed for a larger set of commodities: wheat, maize, rice,
sugar cane, rapeseed, soybeans, milk, beef and veal, sheep meat, pig meat, poultry, eggs, apple,
cotton, peanuts, and other. MPS takes both negative and positive values over the years for the
commodities included based on the value of the market price differential (which equals producer
price at farm gate minus reference price at farm gate). For the year 2008, total MPS was

computed as -139,351 million RMB and -213,106 million RMB for wheat and rice. Figure 3b
compares the total MPS from OECD with the wheat and rice MPS from WTO. As discussed
previously, definition of MPS across OECD and WTO differ widely and lead to very different
reported estimates. Thus, any agricultural policy modeling exercise needs to carefully consider
the assumptions, data process, and coverage of any policy value being reported in any source.

4      Environmental Goals in Policy Environment
4.1    Water and Land in U.S. Agricultural Policy
    US land area covers nearly 2.3 billion acres, with the proportion of agricultural area declining
from 63% in 1949 to 51% in 2007 (Nickerson and Borchers, 2012). Many factors impact land
use for agricultural purposes, such as agricultural commodity prices, technological change, and
agricultural policy environment. These factors also impact how much water is used in agriculture
as well.
    U.S. agricultural policy has changed significantly over the decades and now encompasses
environmental goals, such as conservation, water quality, and soil fertility among many others.
These programs affect the utilization of natural resources by affecting the relative prices among
factors of production. At the same time, there are also more direct effects of these programs
through regulatory framework or generation of markets for environmental purposes.
    Table 5 presents funding allocated to these programs between 2008 and 2011. Total funding
for these programs are approximately US$4.8 to 5 billion and do not show much variation over
time. Below is a summary of these programs and their impact on water and land quality in the
United States.
    The first critical program is the U.S. Conservation Reserve Program (CRP), an important
contributor to environmental goals. With CRP, land is removed from agricultural production for
at least 10 years when a farmer is enrolled in exchange for payments. In later years after the
program was introduced, U.S. Department of Agriculture (USDA) introduced Environmental
Benefit Index as a targeting mechanism for CRP enrollment to increase its efficiency. Yang et al.
(2004) notes that this shift has been beneficial for achieving the goals of the program. CRP
program dominated U.S. conservation spending for a significant period of time. However, Food,
Conservation, and Energy Act of 2008 reduced the CRP acres to a maximum of 32 million acres.
The farmers’ participation in the program also depends on agricultural commodity prices. Thus,

in an environment of high prices, farmer participation declined. However, “continuous signups”
and specifically land in Conservation Reserve Enhancement Program have increased (Osteen,
Gottlieb, and Vasavada (2012)).
    The Wetlands Reserve Program (WRP) is set up at the same time as CRP and keeps the land
that is classified as wetlands out of crop production by offering cost-sharing and/or long-term or
permanent easements on wetlands. The WRP is implemented by the USDA’s Natural Resources
Conservation Service (NRCS). Clean Water Act defines wetlands as "those areas that are
inundated or saturated by surface or groundwater at a frequency and duration sufficient to
support, and that under normal circumstances do support, a prevalence of vegetation typically
adapted for life in saturated soil conditions”.
    CRP and WRP act as voluntary incentives to remove land from production and have impacts
on water and air quality, wildlife habitat, and soil fertility since there is less water used for
irrigation and less fertilizers and pesticides used for crop production. These provide longer term
benefits for the environment.
    Environmental Quality Incentive Program (EQIP) promotes environmental quality on
farmland under production. A significant part of EQIP funding is geared towards agricultural
water enhancement program, which is focused exclusively on enhancing water quality and
improving water conservation on working farmland. EQIP provides cost-share and (optionally)
incentive payments for producers to initiate and maintain conservation activities on working
lands, with a specific focus on mitigating water pollution (OECD 2011).
    According to Osteen, Gottlieb, and Vasavada (2012), more than half of the farms receiving
public assistance for irrigation investment benefited from EQIP. Nationally, approximately 25%
of EQIP cost-share funding obligations was for irrigation practices from 2007 to 2010. There are
other resource concerns addressed through EQIP. Osteen, Gottlieb, and Vasavada (2012) reports
that on average between 2008 and 2010, 20% of EQIP contract obligations were distributed to
water quality. This share is 16% for water quantity, 18% for plant condition, 13% for soil
erosion, 7% for soil condition, 10% for fish and wildlife, 10% for domestic animals, and 6% for
air quality.
    Conservation Stewardship Program (CSP) is designed to reward farmers’ overall
conservation performance across entire operations (Mercier 2011). Farmers can participate only
if they are already meeting a specified level of conservation for a key natural resource area, such

as water quality or soil erosion, and if they agree to maintain existing conservation practices as
well as add new ones.
   EQIP and CSP act as voluntary incentives to encourage farmers to adapt desirable
conservation practices by providing payments that offset the cost of adopting specific
management practices. These management practices include nutrient management, conservation
tillage, integrated pest management, field-edge filter strips, and fences to exclude livestock from
   Emergency Watershed Program (EWP), provides funding to assist in the cleanup of
widespread flood damage, and can also be used to purchase easements on frequently flooded
cropland to divert it from agricultural use. EWP is run by the USDA NRCS for damages on
private lands and the USDA Forest Service for damage to lands in the National Forest Service
   Conservation Technical Assistance (CTA) provides technical assistance to farmers who seek
to improve the environmental performance of their farms, such as inventory and evaluation of
soil, water, animal, plant, air, and other resources.
   There are also compliance mechanisms associated with agricultural programs where
standards for environmental performance are set and payments are not released without
requirements being met. Thus, agricultural programs ensure environmental goals to be reached.
The compliance mechanisms include Highly Erodible Land Conservation (Sodbuster and
Conservation Compliance) and Wetland Conservation (Swampbuster) provisions (ERS 2013).
Farmers who receive direct payments, counter cyclical payments, and marketing loan benefits
must implement soil conservation practices on highly erodible land and must refrain from
draining wetlands. Claasen (2012) notes that in an era of high commodity prices (where many
program payments are not done) and in an environment of discussion of elimination of direct
payments (in the next Farm Bill), compliance mechanisms currently in place may not work.
Claasen (2012) estimates that, in 2010, 448,000 farms (approximately 283 million acres of
cropland) received direct payments and were under compliance mechanisms. Among these
farms, 126,000 farms also receive conservation payments. Thus, these farms will continue to be
under compliance regulation even if direct payments are discontinued. Thus, Claasen (2012)
proposes compliance mechanism to be extended to farms who register for crop insurance. This

example shows the central role that agricultural can play in reaching multifaceted environmental
    U.S. regulatory framework also focuses on creating markets for environmental services. One
of the important one is the creation of Water Quality Trading Market. EPA (2004) defines water
quality trading as “… involves a party facing relatively high pollutant reduction costs
compensating another party to achieve less costly pollutant reduction with the same or greater
water quality benefit”. These markets allow agricultural sector to supply offsets to regulated
firms that are required to reduce their pollutant discharges (ERS 2013). The markets are
generally for nitrogen and phosphorus and are geographically defined by watersheds. These
markets are useful tools for increasing water quality and for encouraging farmers to adopt
pollutant prevention techniques.
    Another regulatory framework allows generation of Wetland Mitigation Banks to create and
preserve wetlands. Through Clean Water Act, landowners can sell wetland services created
through wetland restoration in a market. Any wetland service that is lost needs to be offset by
creation of a new one. The mitigation bank allows this exchange of credits to take place.
    Table 6 categorizes application of policy instruments to U.S. conservation problems. This
Table is a summary of a more detailed and comprehensive categorization provided by ERS
(2013). As seen in this table, the agricultural policy environment is expected to prevent soil
erosion, reduce greenhouse gas emissions, and protect wetlands, water quality, and wildlife
    Have these programs been effective in reaching their goals? Osteen, Gottlieb, and Vasavada
(2012) report that, in recent decades, on farm irrigation efficiency has increased. Furthermore,
since 2000, corn, cotton, soybean, and wheat acreage under conservation tillage has increased.
This is expected to reduce soil erosion and water pollution, but increase pest management costs.
It is also reported that erosion control structures and conservation buffers are more highly used
on highly erodible land than on other land.
    OECD (2010) includes a case study for U.S. regarding the comparison for economic and
environmental performance of various policy tools. Specifically, they compare conservation
auctions vs. traditional agri-environmental policy measures. They include land retirement, no till
and conventional tillage as 3 different land use types. The study utilizes 8 different
crop/tillage/erodibility combinations and runs 10 policy scenarios relative to a private optimum

baseline. The study concludes that in terms of environmental benefits, no-till provides benefits
through lower soil erosion and nitrogen runoff. At the same time, phosphorus runoff increases.
The regulation mandating the allocation of 25% of land along watercourses as vegetated buffers
reduces sediment and nutrient runoff with low adoption costs for farmers. Adding a fertilizer tax
to mandatory buffer increases environmental benefits very little. However combining mandatory
buffer with nitrogen application standard is more effective.
   Another study by Goodwin and Smith (2003) analyzes the impact of various agricultural
policy tools on soil erosion for United States using county-level data. They find that CRP
reduced soil erosion, but that half of this reduction was offset by the increased soil erosion
generated by the income-supporting programs. The impact of crop insurance and disaster relief
programs on soil erosion was found to be low. This study highlights the importance of the
interaction among different agricultural policy tools when analyzing the environmental
consequences of farm programs.
   Yang et al. (2004) analyzes the effectiveness of the Illinois CREP program in a specific
watershed utilizing an economic and hydrological model with detailed GIS data. CREP is set up
to target specific geographic areas with numerically defined environmental goals. Yang et al
(2004) notes that for Illinois, this includes off-site sediment loadings, nutrient loadings,
population of certain species. They find that “… the actual enrollments in CREP in the Lower
Sangamon watershed contributed to a 12% reduction in the sediment generated by a five-year
storm event, which is below the program’s goal of 20%. Moreover, it does so at a much higher
cost compared to the least-cost solution for the same sediment reduction.”

4.2    Water and Land in Brazilian Agricultural policy
   Brazilian environmental policies related to water and land are managed and implemented
primarily by the Ministry of Environment. Table 7 presents the spending for these purposes for
various years: R$ 1.3 billion in 2008 and R$ 1.9 billion in 2011. The Ministry divides its
programs into two types: management programs and specific environmental programs.
   There are three management programs, first one that coordinates, plans, develops and
evaluates environmental programs and it is called Management of Environmental Policies. A
second program, the Management of the National Water Resources, that coordinates plans,
develops and evaluates the National Policy of Water Resources. The third program is the
Brazilian Agenda 21, which is an instrument for planning Brazilian sustainable development.

The National Agenda was constructed through consultation with the Brazilian society. Currently
the program is focused in helping to develop local agendas that can be constructed at the
municipality level, at the basin level or with a consortium of municipalities.
   There are four specific programs related to land: Desertification Combat Program;
Conservation and Recovery of Brazilian Biomes Programs; National Forest Program; Prevention
and Reduction of Burnings and Forest Burnings Program; and Economic- Ecological Zoning
   The Desertification Combat Program’s main objective is to identify the factors that
contribute to desertification and to determine the necessary actions to reduce and to mitigate the
effects of droughts. This program also establishes the role of government, local communities and
land owner as well as the resources available to prevent desertification. Altogether, the object of
the action of the PAN-Brazil, represents 1,338,076 km2 (15.7% of the Brazilian territory) and
includes a population of more than 31.6 million inhabitants (18.6% of the population of the
country), its space consists of a single biome, the Caatinga.
    The Economic-Ecological Zoning (ZEE) Program is an instrument for gathering information
to subsidize public policies related to land use and occupation. This program intends to integrate
social, economic and environmental characteristics to manage the Brazilian territory. The main
objectives of ZEE are: to identify opportunities of natural resources use and to establish the basis
for its use; to identify and analyze environmental problems, such as degraded areas and to
propose legal guidelines and conservation and sustainable development programs. From the
supply side, the ZEE Program attempts to identify opportunities of using natural resources in a
sustainable way and to establish the basis for its use.
   The National Forest Program was created in 2000 to promote sustainable development and to
reconcile forest conservation and use. Within the program projects are developed and
implemented with the participation of the Federal, State and Municipality Governments jointly
with Brazilian society. The specific objectives of the program are: to stimulate the sustainable
use of native and planted forests; to promote reforestation activities, especially in small
properties; to recuperate permanent preserved forests, legal reserves area; to support social and
economic activities of the populations that live in the forest; to prohibit illegal deforestation; to
support forest based industries; to promote biodiversity protection. Another program related to
forest is the Prevention and Reduction of Burnings and Forest Burnings, which has as main

objective as its name says to prevent burnings, in general, and also in forests in all Brazilian
   The two main water programs in the Ministry of Environment are Probacias – Conservation
of Hydrographic Basins Program and The Program to Restore Hydrographic Basins. The first
program intends to implement an integrated system to manage water resources and to promote
basin conservation. The second program main objective is to recover and to preserve basins that
are in vulnerable situation or degraded. In order to accomplish this goal, long-lasting actions to
promote the sustainable use of natural resources are established and actions to improve quantity
and quality of available water for different uses are developed. Currently, this program
comprises the river basins of São Francisco, Tocantins-Araguaia, Paraíba do Sul e Alto Paraguai.
   It is important to mention that, in 1997, Brazil has approved a National Policy of Water
Resources. This policy created a new institutional structure and a new system of management of
water resources through the establishment of hydrographic basin committees and water agencies
and the definition of river basin as the territorial unit for water resources planning. Furthermore,
the National Policy of Water Resources determined five instruments of management: the national
hydrographic plan at the national, state and basin level, which defines management, actions,
projects and investments that have priority for the basin; a system for classification of water
bodies according to their preponderant use; water rights; water usage charges, with the revenue
to be invested in the basin and the Water Resource Information System.
   After 16 years of its approval, major progress has been achieved, with river basin committees
and water agencies and instruments established in the Southeast, South and Northeast of the
country. More specifically, the river basins located in the Atlântico Sudeste, Paraná and São
Francisco are the ones where most of the instruments and institutional framework have been
implemented. On the other hand, seven other hydrographic regions did not establish any
institutional bodies or any management instruments. This difference is explained because priority
was given to more developed areas that are subject to more water issues and in more problematic
regions. Veiga and Magrini (2012)’s evaluation of the Brazilian National Water Resource Policy
emphasized the need to implement the model in the other hydrographic regions.
   Besides the Ministry of Environment programs, the Ministry of Agriculture Livestock and
Supply coordinates jointly with the Ministry of Agrarian Development, the Low Carbon
Agriculture Plan (The ABC Plan), whose main objective is to reduce carbon emissions and to

increase C fixation in soils by promoting best practices in agriculture through a credit line. The
plan defined seven actions as the basis for overcoming the weaknesses of part of the agricultural
production in the country. Among the actions are: recuperation of degraded areas; integration of
crops, livestock, and forest; no till agriculture; biological nitrogen fixation; planting of
commercial forests; treatment of animal residues and adaptation to climate change. The program
was created during the 2010-2011 harvest with R$2 billion available, the next season the amount
available was equivalent to R$3.15 billion, the 2012-2013 season increased to R$3.4 billion and
the 2013-2014 the amount reached R$4.5 billion. It is important to mention that the full amount
of resources available was not used.
   A recent report from the Getulio Vargas Foundation about The ABC Plan (GV Agro, 2013)
suggests that there are many actors, interactions among them and processes as well as definition
of responsibilities involved in this plan. The result is that it requires a better governance of the
program. Moreover, the report advises that financing agencies of the plan, state managers of the
program and the National Committee should be working more closely in order to increase
farmers’ participation in the plan.
   Another critical program is the Brazilian Forest Act (FA) that is expected to have influence
on land and water use. Sparovek et al., 2010 summarizes FA as follows: rural private land is
divided into productive land and land dedicated to preservation. Legal Reserves Areas (LRA) are
part of this land under preservation, i.e. private farm land that is reserved for conservation.
Permanent Preservation Areas (PPAs) are an additional part of preserved land. PPAs are
established for protecting freshwater resources and their release areas. It includes areas that are
along rivers and water bodies, steep slopes, high altitude areas and hilltops. PPAs cannot be used
for agricultural activities, forest extraction or recreation. They need to be maintained with the
original native vegetation. For the other requirement, Legal Reserve Areas (LRAs), land owners
have to maintain part of the natural vegetation in order to conserve biodiversity. The size of
LRAs varies geographically; it can reach a maximum of 80% and a minimum of 30% in the legal
Amazon, whereas in areas outside the Legal Amazon, LRAs correspond to 20%. Different from
PPAs, in LRAs areas, it is possible to use the land for some productive activity, but without clear
   Are these requirements met? According to Sparovek et al., 2010, effectiveness of protection
varies greatly. They estimate that full compliance with this law requires 254 million ha of land to

be protected as legal reserve. The deficit is estimated at 36 million ha, with deficit varying
among regions. They also found that part of the natural vegetation in areas with agricultural
expansion is not protected, estimated at 92 million ha.
   Regarding revision of FA, Sparovek et al. (2011) discusses multiple reasons. The new FA
was approved by the Brazilian House of representatives and Senate and is currently being
reviewed by Brazil’s Supreme Federal Court. The main differences between the new FA and the
one that was approved are as follows:
• reduction of legal requirements for both PPAs and LRAs in properties with size smaller than
four fiscal modules;
• reduction of preservation and conservation in riparian areas of PPAs;
• inclusion of PPAs in the calculation of LRAs;
• compensation of LRAs can be made in other property in the same biome;
• creation of the Rural Environment Registry, which is a public registry for environmental
information concerning rural properties that will be managed by the Ministry of the Environment
and Programs for Environment Regulation;
• exotic species can be used between native species to reconstruct LRAs (up to 50% of the area).
   Sparovek et al. (2011) used the Agricultural Land Use and Expansion Model - Brasil
(AgLUE-BR), which employs rule-based processing spatial explicit information, to simulate
different scenarios of the FA. Table 8 shows information about the PPA and LRA requirements
and current deficits of the old FA, and three scenarios based on the new FA. When analyzing the
old FA, they concluded that 100 million ha would be necessary to comply with the PPAs and 236
million ha for LRAs. However, part of the requirement can be balanced with the existent natural
vegetation, thus the deficit was equivalent to 43 million ha and 42 million ha, for PPAs and
LRAs, respectively.
   The three new FA scenarios are: 1) a scenario where properties with less than four fiscal
modules are exempted of complying with Legal Reserves; 2) the possibility of compensating LR
in PPAs, and 3) compensation of the LRAs in the biome. Simulations results showed that in
scenario 1 the deficit in LRAs will be equivalent to 15 million ha, while in scenario 2 it will be
equivalent to 35 million ha and in scenario 3, equivalent to 13 million ha.

Sparovek et al. (2011) results (Table 8) showed that the new FA will most likely mean that
the amount of land necessary to comply with Legal Reserve will be less than the 42 million of
hectares necessary from the old FA, which means there is more land for food production.
   Two other studies applied to two Brazilian states, with a strong agricultural sector, were
Padilha Júnior (2004) and Rigonatto (2009). The first one assess the economic impacts of
complying with LRAs (old FA) in Paraná state. They used regional data in the state and
established the amount of land necessary for fulfilling the FA. Results showed the need of setting
aside 3.2 million ha. Rigonatto (2009) measured the costs to comply with environmental
legislation for Goiás state. He found that after complying with environmental requirements, there
would be 20.88 million ha available, compared to 23.59 million ha being used in 2009. Thus, to
conform to legislation, it would be necessary to reduce area by 2.7 million ha.
   From the studies presented, it is possible to conclude that in order to comply with the new
FA, it will be necessary to reduce land use. The fact that producers will be required to register in
the Rural Environment Registry means that it will be easier to track land use and to enforce the
new FA and the expectation is a decrease in land availability. At the same time, this means an
increase in conservation, and better land quality. As Sparovek et al. (2011) presented, there are
alternatives to compensate the decrease in land availability, and an important one is to increase
livestock productivity releasing land for food production. The challenge for the government is to
put incentives in place, to inform producers about alternatives and to make them to adopt
technologies that will intensify livestock production and release area for crop production.

4.3    Water and Land in Chinese Agricultural policy
   Natural resource constraints, particularly scarcity of water and land, will be one of the major
factors challenging China’s ability to feed its growing population with rising income in the
future. China possesses 21% of the world population, but only 10% of the world’s arable land,
and water resources per person are only a fourth of the world average (OECD 2005; Xie et al.
2009). The rapid industrialization and urbanization have affected not only total amount of water
and land resources used in agriculture but also lowered water quality due to water pollution and
average land productivity due to shifting better farming land to non-agricultural uses. While
economic and population growth is generating rising demand of these scarce resources,
agriculture remains the largest user.

In facing the challenges of water and land constraints, China has implemented a number of
major policies to improve its national food security and sustainable agricultural development.
Some of the major changes in agriculture policies over the past thirty years have included land-
tenure reform that extended land-use rights of farmers (HRS), the liberalization of output and
input markets, and more recently the abolition of the myriad of rural fees and taxes and the
introduction of subsidies to farmers and agricultural production (Chen 2009; ERS 2012). The
implications that these reforms may have had on land and water are the subject of this section.
   China is dangerously short of water. China’s naturally available water flow per annum of
2,206 m³/person in 2004 is one of the lowest levels in the world, one-third of the average of the
developing countries (7,762 m³/person), one-fourth of the world average (8,549 m³/person), and
almost one-fifth of the U.S. average (10,332 m³/person) (Shalizi 2006). Rainfall is unevenly
distributed and the configuration of China’s river basins mean that 80% of China’s water is in the
south, while 46% of the population and two-thirds of the farmland are in the north (Chinafolio,
June 16, 2012).
   In addition to the scarce water resources, the quality of water is deteriorating because of
pollution, thereby aggravating existing water shortages (Shalizi 2006). While the growth of
urbanization and industrialization have contributed greatly to China’s water and land use
situation (Lohmar et al. 2009; Carter, Zhong, and Zhu 2012), agriculture is credited with the
inefficient consumption of water. Over-withdrawal and inefficient use of water in agriculture is
evidenced by the average crop productivity of water of 1 kg/m3, only half of the level of
developed countries (Xie et al. 2009).
   Investment in water infrastructure has been the primary expenditure of Chinese government
and irrigation has played a critical role in increasing the agricultural productivity. The proportion
of cultivated area under irrigation increased from 16 million ha (or 18% of cultivated land) in
1952 to 61.7 million ha (about 50% of cultivated land) in 2011 (NSBC 2012). Prior to the
economic reforms in 1978, the state mostly focused its efforts on building dams and canal
networks. Its surface water management is advanced and flood control is being maintained
studiously. After the 1970s, greater focus was put on increasing the use of China’s massive
groundwater resources (Wang et al., 2005). By 2005, China had more tube wells than any
country in the world, except possibly India. Although, initially investment was put up by local
governments with aid from county and provincial water bureaus, by the 1990s, the government

was encouraging the huge shift in ownership that was occurring as pump sets and wells and other
irrigation equipment went largely into the hands of private farming families (Wang et al., 2009).
The main policy initiative after the mid-1990s in the surface water sector was management
reform (with the goal of using water more efficiently).
   Recent policies have called for further substantial investment in water in agriculture. Despite
steady expansion of irrigation, rising demand for domestic and industrial water is expected to
pose a serious constraint to irrigated agriculture, and increasing water scarcity has come to be
seen as one of major challenges to China’s future food security, especially in the northern region
(Huang and Rozelle, 2010). Recognizing the challenge, China put food security more firmly at
the top of its list of concerns in 2011 by making an important policy decision on investing four
trillion RMB (about US$630 billion) in water conservancy in the next 10 years to combat
increasing water scarcity.
   Besides investing in water infrastructure to increase water supply, China’s leaders have
started to recognize the need to stem the rising demand for water in agriculture by increasing
water productivity through water management and policy reforms. The investment in water,
particularly in groundwater, is really a tale of good news and bad news. Today, China’s
groundwater in many places is in a crisis. Groundwater tables are falling, and many wells are
being pumped dry (Wang et al., 2009). To improve water productivity, in 2009, the Ministry of
Water Resources proposed to implement water demand management through setting up “Three
Red Line” for the most stringent water management institution. Three red lines refer to the total
water use, efficiency and dirt holding capacity toward 2030. In 2013, the State Council further
issued the Assessment Method for Implementing the Most Stringent Water Management
Institution. In order to promote adoption of water saving technology, the Chinese Government
has announced to allocate US$6.03 billion to support the adoption of water saving technology on
2.53 million hectares of land in 2012-2020.
   While it is not developed for agricultural water use, the South–North Water Transfer Project
(SNWTP) is worth mentioning. This project is aimed to mitigate water shortage issue in North
China and has been implemented in the past more than 10 years. According to the plan, this
project will divert 4–5 billion m3/yr from the Yangtse basin to the North China plain, alleviating
water scarcity for 300–325 million people living in what even then will be a highly water-
stressed region. A World Bank study suggests that the project is economically attractive (World

Bank, 2000). However, the World Wildlife Fund (now the Worldwide Fund for Nature) (WWF,
2001) questioned its need, justification and huge costs.
   The government water conservation policies, such as raising water prices, conflict with
government goals to raise farmers’ income. Water is owned by the state, and water prices are
fixed by economic planners giving farmers little incentive to conserve water especially in water-
scarce northern China (Gale, Lohmar, and Tuan 2009). Huang et al. (2008)’s analysis of
irrigation water pricing policy shows that often there is a large gap between the value of water
and the current water cost. Pricing policies that would take into account this gap could generate
larger water savings although raising water prices would adversely affect farmers’ income.
   The availability of water and consequently the quality of land varies across China. The loss
of high quality arable land has been prevalent in the Coastal region, considered the most
productive region but where agriculture must compete with increased urbanization and
industrialization for land and water. Instead agricultural production has been shifting to Northern
China, which is inadequate in water supply and where the expansion of irrigated cropland has
contributed to the extensive and unsustainable exploitation of groundwater (Carter, Zhong and
Zhu 2012; Qu et al. 2011).
   As water scarcity is increasing and will constrain climate change mitigation strategies for
some farmers, the challenge will be to determine how to increase water use efficiency (Wang,
Huang and Rozelle 2010; Li et al. 2013; Rousset 2007).
   China could address its water scarcity problem through a greater focus on demand
management (Xie et al. 2009). It is estimated that water productivity of $3.60/m3 in China is
lower than the average in middle-income countries ($4.80/m3). It is also estimated that only 50%
of water from primary canals is actually delivered to fields and once in the field, 20 to 30% is
wasted. Some of the recommendations to improve demand management include using a more
aggressive water pricing policy, for example, as well as water-saving and pollution control
technologies given that the cleanup of pollution has been shown to make additional surface water
available for consumption (Xie et al. 2009).
   Maintaining self-sufficiency in grains to satisfy growing demand can contribute to continued
pressure on land and water (Carter, Zhong, and Zhu 2012). To increase food production levels
given the scarcity of land, China has relied on increased use of fertilizers, which has become a
significant contributor to water pollution. Application rates in China are well above world

averages for many crops; fields are so saturated with fertilizer that nutrients are lost because
crops cannot absorb any more (Wang, Huang and Rozelle 2010; Li et al. 2013).
    There is growing concern on gradual loss and worsening quality of cultivated land. Official
data show that cultivated land had decreased from 12.71 million ha in 2001 to 12.17 million ha
in 2008 (the latest year reported by China’s government), declined by about 4% in 2001-2008.
However, there is a long debate on amount of actual cultivated land (e.g., Crook, 1993; George
and Samuel, 2003). Most scholars believe that the current cultivated land is in a range of 13.3 to
14 million ha. Deng et al. (2006) also showed that China indeed did not record a decline in total
cultivated land from the late 1980s to the late 1990s though average potential productivity of
cultivated land (or bioproductivity) declined by 2.2 percent over the same period. A large decline
in cultivated land was recorded after the late 1990s due to industrial development and urban
expansion (Deng et al., 2010) as well as Grain for Green program (farmers cease cultivation of
environmentally fragile land in exchange for in-kind payment of grains). Environmental stresses
have also been occurring as evidenced by soil erosion, salinization, and decline in land quality
(Huang and Rozelle 1995; Seto et al., 2000).
    Nearly thirty years ago, China enacted the Household Production Responsibility System1,
which gave farmers contractual land-use rights and contributed significantly to increased
productivity and reduction of China’s rural poverty. Yet, some studies have shown that these
successes may not be sustainable. The practice of allocation and reallocation of land among
farmers coupled with vaguely defined land rights render difficult for farmers to plan ahead, make
long-term investments, or to adopt environmentally sound farming practices (Lohmar, Somwaru,
and Wiebe 2002; Gale, Lohmar, and Tuan 2009).
    Land current tenure practices and water management in China are lagging behind the
enormous changes in China’s economy and agricultural development (Lohmar et al. 2009). The
privatization of land use rights is associated with generating small farm structures (Carter,
Zhong, and Zhu 2012). While the share of the labor force has seen a sharp decline from 70% in
1978 to 38% in 2009, the number of agricultural workers has actually increased, shrinking the
average farm size (on average around 0.6 ha.).

 The HPRS gave rural households the right to receive 15-30 year contracts to their land, and to rent and hire labor,
while the collective (village or xiaozu) maintains ownership and the right to reallocate land among households.

The “atomistic production structure raises the cost of production and of aggregating land for
more commercial agriculture” (Lohmar et al. 2009). The uncertainty over long-term rights to the
land also encouraged farm households to rely on short-term productivity measures such as
chemical fertilizers and pesticides that both affect land and water health (Lohmar et al. 2009).
   A major land policy is the Red Line for cultivated land, which has been implemented since
2009. This is the most stringent land policy so called “18 Yimu Gendi Hongxian” (1.8 billion mu
Cultivate Land Red Line, or 12 million ha). If the official data on cultivated land would be
correct, China is approaching its Red Line for the cultivated land. There is a discussion as to
whether Chinese government will publish its new data on the cultivated land after 2008. If this
will occur, it is expected that the amount to cultivated land will increase to a level of 13-14
million ha. What will be the implication to the Red Line policy or whether China will change
the level of its Red Line for cultivate land is an issue that could have significant implications to
China’s food security in the future.
   Other major policies related to land development and conservation are listed in Table 7. Of
them, the most significant policy is the Grain for Green program (also known as Sloped Land
Conversion Program), a cropland set-aside program to increase forest cover and prevent soil
erosion on sloped cropland. The Grain for Green is one of the world’s largest conservation
projects, covering vast tracts of China, planned to set aside nearly 15 million hectares of
cropland in 1999-2010, and affecting 40 to 60 million rural households. When available in the
community, farmers set aside all or part of certain types of land and plant seedlings to grow
trees. In return, the government compensates the participants with in-kind grain allocations, cash
payments and free seedlings. Initially, there was concern on the effects of the program on
China’s food security. However, Xu et al. (2006) showed that Grain for Green has only a small
effect on China’s grain production because the productivity of retired land was very low and
when grain price rose due to the reduction of production, farmers respond by increasing
production intensity. As a result, the direct reduction in sown area is mitigated and the program-
initiated rise in yield is enhanced. The restoration programs that converse sloped farmlands into
forests, shrub or grassland are credited for increasing the proportion of forest and grassland to
total land: annual afforested area increased from 0.38 million ha in 1999 to 3.08 million hectares
in 2003 (Liu and Wu 2010). In spite of its success in reducing soil erosion, the program has
resulted in decreasing cultivated area, and although the decline is mostly restricted to fragile and

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