Agricultural subsidies are one of the great paradoxes of public policy. Worth more than US$800bn a year globally and a vital mechanism for supporting farmers, they can—when poorly designed or targeted—cause deadweight losses, damage the environment and distort markets.
Today, the majority of subsidies are concentrated in some of the largest economies. China accounts for more than a third of subsidies and other public support, and the United States, India and European Union each represent between 13% and 15% of overall subsidies.
Meanwhile, public finance for agriculture in developing and emerging economies accounts for a small but increasing proportion of support to farmers. Millions of poor smallholders rely on subsidies and other programmes for critical inputs like fertiliser, electricity or water, and depend on market-price support schemes to protect incomes. While small in real terms compared with the global total, some countries in Africa have spent more than half of their public agriculture budget on input subsidies in recent years.
The problem is not public support itself, but how it is designed and implemented. Well-targeted subsidies can protect incomes, strengthen food security and help farmers manage shocks; poorly targeted support can absorb scarce public resources without building the productivity and resilience farmers need over the longer term.
Currently, farmers typically see just 35 cents of value for every dollar, representing an inefficient use of public finance that also perpetuates dependence on environmentally harmful practices. This highlights the considerable scope to improve how subsidies are designed and targeted to address the challenges farmers face today.
Part of the challenge is that subsidies often target specific and immediate constraints, while smallholder farmers face a much broader and interconnected set of risks. These range from volatile input prices and supply-chain disruptions to climate shocks and limited access to finance and markets, all of which can undermine livelihoods and productivity beyond a single harvest.
Many subsidies are premised on the idea that support for yield-boosting inputs such as fertiliser and pesticides will increase food production, raise farmer incomes and support rural communities. However, input subsidies alone cannot insulate farmers from external shocks. They cannot, for example, prevent conflict from disrupting fertiliser supplies through the Strait of Hormuz or mitigate the impact of climate events such as El Niño. This underscores the limits of relying on input support alone to address the increasingly complex risks farmers face, especially in developing countries.
Smallholder farmers, many of whom operate within narrow margins and remain exposed to climate and market shocks, also need investment in long-term resilience that extends beyond the next harvest.
First, governments can make subsidies more flexible and responsive to farmers’ needs.
Rather than tying subsidies to specific crops or high-emitting inputs like fertiliser, more flexible forms of support can give smallholder farmers greater agency over how public support is used. Untied cash transfers, for example, can allow farmers to make decisions based on their specific circumstances, challenges and needs. The appropriate form of public support may vary by country and context according to their needs and the resources available.
Delivering such support requires updated administrative data and targeting strategies, including voucherschemes as a pathway towards cash transfers. Digitally enabled voucher schemes that use farmer registries and electronic tracking help to reduce leakages and improve transparency. Cash transfers may also contribute to improved nutrition by increasing households’ purchasing power and access to a wider variety of foods. For example, a study in Malawi found that households receiving food or cash transfers saw improvements in food consumption and dietary diversity that were not observed with investments in irrigation or input subsidies.
Second, subsidy reform can be complemented by longer-term public investment in the systems that support agricultural productivity and resilience. This includes investment in infrastructure, food processing and market access.
More targeted and time-bound public support can also help address specific production needs, including through locally adapted seeds and soil-specific fertiliser blends, while supporting longer-term resilience and sustainability. Ethiopia’s input voucher-credit model and Nigeria’s incentives for local fertiliser blending show the direction of travel: use subsidy budgets to build markets, crowd in private delivery and reduce import dependence, rather than simply lower prices for one season.
Third, repurposing public support can help mobilise more investment for smallholder agriculture, including through blended finance.
Multilateral development banks (MDBs) currently face the same criteria for their credit rating as commercial institutions do. This means Fitch, S&P Global Ratings and Moody’s rate an organisation like the UN’s International Fund for Agricultural Development (IFAD) in exactly the same way as they treat Citibank, with MDBs seeking the same AAA credit rating as commercial banks. The need to maintain strong credit ratings can constrain MDBs’ appetite for higher-risk investments, including in small-scale agriculture, where long tenors, seasonality and cyclical risks can make projects less attractive to conventional investors.
Refining credit-rating methodologies to better account for MDBs’ unique mandates, track records, development impact and financial strength could give them greater scope to take on such risks and mobilise private capital. This, in turn, could create more opportunities for blended finance to support smallholder farmers.
With informal employment accounting for more than 90% of agricultural employment in many countries, leaving workers with limited access to social and legal protections, public investment remains important for supporting more inclusive and resilient agricultural systems.
Smallholder farmers are the backbone of global food systems. Rethinking how public support is delivered at every level, from MDBs down to the farmer, is crucial to realising the potential of small-scale agriculture and supporting the transition towards more inclusive, resilient and environmentally sustainable food systems.
Public support is one of the largest financial levers in food systems; repurposing it can help strengthen smallholder resilience and deliver more sustainable, inclusive outcomes.