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 IFPRI Seminar, November 21, 2002 Rhetoric and Reality of U.S. Domestic and Trade Policies forAgricultureDavid Orden, Virginia Tech: 

IFPRI Seminar, November 21, 2002 Rhetoric and Reality of U.S. Domestic and Trade Policies for Agriculture David Orden, Virginia Tech

Domestic and Trade Policies forAgriculture: 

Domestic and Trade Policies for Agriculture Historical Perspective From the New Deal to 1996 Freedom to Farm 2002 FSRIA Why We Got It? What Does it Do? Consequences and Implications?

Domestic Ridicule: 

Domestic Ridicule “the worst possible form of political hypocrisy…” Joseph Stiglitz, June 9, 2002   “If you’re like most American taxpayers, you probably wake up in the middle of the night in a cold sweat and ask yourself: ‘Am I doing enough to support mohair producers?’ ” David Barry, June 23, 2002

International Criticism : 

International Criticism “It’s holding down the prosperity of very poor people in Africa and elsewhere for very narrow, selfish interests…” Mark Brown, Head of UN Development Program, July 5, 2002   “the worst feature of the U.S. farm bill is the way it limits the capacity of the U.S. to take a stronger leadership role in Doha in trade negotiations”  Warren Truss, Australian Agriculture Minister, May 30, 2002

Met by Equally Sharp Defense: 

Met by Equally Sharp Defense “The final bill adheres to congressional budget guidelines available at the time of the conference, advances our international trade commitments, and protects the fundamental reforms in the 1996 Freedom to Farm legislation”  Larry Lindsey, National Economic Council, May 14, 2002  

House Agriculture Committee: 

House Agriculture Committee “Myth #4: US farm policy is nothing but corporate welfare benefiting only those receiving direct help”  “FACT#4: U.S. farm policy is important to national security, ensuring a safe, abundant, and affordable domestic food supply, and vital to a strong rural and urban economy, with the food and fiber industry creating 25 million jobs, producing $3.5 trillion in output, and accounting for 15% of U.S. Gross Domestic Product.” “Critics of U.S. farm policy would cede our food production to unstable places like the Third World, but in these times does any American want to depend on the Third World for a safe and abundant supply of food and fiber?”

Why the Disparate Views?: 

Why the Disparate Views? The New Farm Bill: raises expenditures compared to 1996 legislation but not compared to actual 1998-2001 outlays maintains planting flexibilty but undermines decoupling of payments from production and extends support to new crops violates spirit of U.S. trade liberalization rhetoric, but probably not the letter of U.S. WTO commitments continues OECD policies that collectively distort production and world prices, but may only marginally worsens these effects  

New Deal Commodity Policies: 

New Deal Commodity Policies 1938 Act: Six “Basic” Commodities (wheat, corn, cotton, rice, tobacco, peanuts) Four Price Support Policies (conservation, acreage allotments, marketing quotas to limit supply, loan rates to set price floor) 1938-46: Price Supports Increasing Percent of Parity 1949 Act: “Locked In” Price Support Programs

Alternative Reform Strategies: 

Alternative Reform Strategies

Post-War U.S. Farm Policy: 

Post-War U.S. Farm Policy

Post-War U.S. Farm Policy: 

Post-War U.S. Farm Policy Direct Payments as Percent of Farm Income 1950-54: 1.9% 1955-59: 6.0% 1960-64: 17.9% 1965-69: 25.8% Still Reliant on Acreage Controls 1960-69: over 40 million acres idled annually

1985 Farm Bill: 

1985 Farm Bill Acreage Reductions Program (ARPs) Conservation Reserve Program (CRP) Lower Loan Rates and Higher Cash Payments Expenditures Peaked ($25.8 Billion) in 1986 Idled Acreage Peaked (77.7 Million) in 1988

Uruguay Round:Shift to International Negotiations : 

Uruguay Round: Shift to International Negotiations “We must reject the ‘go it alone’ approach, and move toward a global solution. The new round of trade negotiations is a major opportunity for making that move… The international bargaining table is where the solution lies.” Daniel Amstutz Undersecretary of Agriculture, 1986

1990 Farm Bill and UR Agreements: 

1990 Farm Bill and UR Agreements 1990 Bill Policy Continuation, Flex Acres, EEP and LDPs UR Agreements Amber, Blue and Green Boxes Limited Trade Liberalization or Subsidy Constraint Strengthened WTO Dispute Settlement Process

Partial Reform in 1996 FAIR Act: 

Partial Reform in 1996 FAIR Act Planting Flexibility End of Annual Acreage Idling (ARPs) Fixed and Declining Direct (AMTA) Payments Capped Loan Rates Less Reform for Import-competing Commodities Extension of CRP Permanent Farm Program Legislation Retained

Long-run Impacts of FAIR Act Uncertain from the Outset: 

Long-run Impacts of FAIR Act Uncertain from the Outset Continuation of 1960-1990 “Cash Out” FAIR Outcomes Reflected: Republican Control of Congress Rising Farm Prices Budget Capture, not Constraint Continued Control by the Farm Policy “Establishment”

Slide19: 

U.S. Agricultural Trade Weighted Real Exchange Rate and Real Agricultural Exports and Imports Year Index Billion Dollars (monthly) Year Imports Exports 00 95 90 85 80 6 4 3 5 2 1 Agricultural Trade Weighted Real Exchange Rate

1998-2001 Prices and Acreage : 

1998-2001 Prices and Acreage Crop Prices Fell Substantial Acreage Shifts Some Adjustment of Total Acreage

Slide24: 

Projected and Actual Acreage

Slide26: 

Projected and Actual Acreage

Sustained Support in 1998-2001 : 

Sustained Support in 1998-2001 Loan Deficiency Payments (LDPs) Double PFC Payments Crop Insurance Subsidies and Disaster Relief House Agriculture Committee Becomes Venue for Lobbying to Restore Counter- cyclical Payments as a Third Tier of Farm Support

Farm Income 1991-2001(billion dollars): 

Farm Income 1991-2001 (billion dollars)

Government Payments to Farmers (million dollars): 

Government Payments to Farmers (million dollars) Source: USDA. * Includes small miscellaneous not shown

Slide30: 

Price   D1 S1 D2 Effects of a Safety Net Quantity Safety Net Price Market Price with Safety Net A B

Slide31: 

Price   D1 S1 D2 Effects of a Safety Net Quantity Safety Net Price Market Price with Safety Net A B

Slide32: 

Price B   D1 S1 D2 Effects of a Safety Net Quantity Safety Net Price Market Price with Safety Net S2 C A 

Slide33: 

Effects of Loan Rates FAPRI and USDA: Small Effects on Planted Acreage Mullen Model: Larger Output Effects Risk Averse Farmers Subsidy, Wealth and Insurance Effects Effects of Loan Rates in 1998 Increase Expected Price from $3.45 to $3.63 Reduces Price Variance from $1.11 to $0.65 For Risk Neutral Farmers: Raises Output by 7.7 Percent For Risk Averse Farmers: Raises Output by 33 Percent

Cautionary Notes on Safety Net Policies : 

Cautionary Notes on Safety Net Policies Some of the Payments Simply Offset Lower Income Derived from Markets as a Result of the Safety Net Intervention Supply Effects may be Underestimated in Common Models Additional Income from Safety Net Payments becomes Reflected in Land Values

The 2002 FSRIA:Re-institutionalizing HigherFarm Support: 

The 2002 FSRIA: Re-institutionalizing Higher Farm Support 2001 Congressional Budget Resolution $5.5 Billion Additional for 2001 Support $73.5 Billion Additional Budget Authority in “Reserve Fund” for 2002-2011 (ten year) Farm Bill

Initial House Farm Bill: 

Initial House Farm Bill Familiar Instruments and More Support Guarantees Continued Fixed Payments Lower Soybean Loan Rate, not Higher Other Rates Crop-specific Target Prices/Counter-cyclical Payments Fixed and Counter-cyclical Payments Still Based on Past Production Planting Flexibility Retained Optional Base Acreage Updating Oilseed Fixed and Counter-cyclical Payments Added “Cash out” for Peanuts; Supply Controls for Sugar

Challenges to Farm Subsidy Renewal: 

Challenges to Farm Subsidy Renewal Budget Deficits September 11, 2001 WTO Disciplines Conservation and the Environment Payment Structure

Initial Senate Farm Bill: 

Initial Senate Farm Bill Higher Loan Rates Counter-cyclical Payments (including dairy) Option for Base Acreage and Yield Updating Higher Conservation Spending Frontloaded Expenditures in 2002-2006 Phased Out Fixed Payments Tightened Payment Limitations Packer Ownership Limitation Country of Origin Labeling

Farm Security and Rural Investment Act of 2002 : 

Farm Security and Rural Investment Act of 2002 Six-Year Bill (2002-2008) Basic Commodity Provisions (Loan Rates, Fixed Payments, Target Prices and Counter-cyclical Payments, Acreage/Yield Updating) Sugar and Peanuts Conservation (Shift in Expenditures toward Working Operations) Trade

Three Forms of Government Support(example: cotton): 

Market Receipts CCP MLG/LDP Three Forms of Government Support (example: cotton) Revenue per Pound Target Price $0.724 Loan Rate $0.52 Fixed payment – $0.0667 } Decoupled (do not have to produce to receive payment) Coupled (do have to produce to receive benefits from marketing loans gains or LDPs) Market Price Reflects payments not on full production (payment acres = .85 x base acres) Source: Joe Outlaw, Texas A&M University

Loan Rates: 

Loan Rates .

Direct Payments: 

Direct Payments

Target Prices: 

Target Prices

Base and Yield Updating: 

Base and Yield Updating Base Acreage Can Add Oilseeds Acres to Pre-2002 Bases or Update using Actual 1998-2001 Acreages Payment Yields No Updating for Fixed Payments Yield can be Updated for Counter-cyclical Payments (for part of increase from early 1980s to 1998-2001)

Peanuts….: 

Peanuts…. FAIR Act Lower Domestic “Edibles” Loan Rate (to $610/ton, still well above world price) Minimum National Quota Eliminated Trade Restrictions Unchanged Additionals Loan Rate $132/ton FSRIA Traditional Peanut Program Replaced with “Cash Out” Similar to Other Supported Commodities Buyout of Quota Rights

….Versus Sugar: 

….Versus Sugar FAIR Act Loan Rates Fixed Above World Prices Marketing Allotments Suspended Forfeiture Penalty Loans “Recourse” if TRQ Imports Below 1.5 Million Tons FSRIA Loan Rates Unchanged Program to be No Net Cost to Government Payment-in-Kind and Marketing Allotments Marketing Allotments Suspended if Imports Above 1.5 Million Tons

Conservation: 

Conservation FSRIA Conservation Land Idling Authority Increased (CRP to 39.2 Million Acres) New Emphasis on Working Operations Increased EQIP Funding Conservation Security Program

Slide48: 

Conservation Program Expenditures 0.0 1.0 2.0 3.0 4.0 5.0 1997 1999 2001 2003 2005 2007 2009 2011 Fiscal Year Billion Dollars Conservation Reserve Other Conservation Source: FAPRI, July 2002 Baseline

Trade: 

Trade Trade “Promotion” Programs Retained EEP, Food Aid Re-authorized Uruguay Round Compliance “Circuit Breaker” Country of Origin Labeling

Empirical Assessments: 

Empirical Assessments There are now numerous model-based assessments of the effects of U.S. and other country’s domestic and trade policies for agriculture. The results: Are generally indicative of the increased production and reduced market access induced by these polices and consequent price reducing effect in world markets Depend in magnitude on model formulation and on benchmark versus counter-factual scenarios being compared, both in broad terms and with respect to numerous detailed aspects

Representative Analysis: 

Representative Analysis Of the 2002 U.S. farm bill: Gardner, Sumner, Green, FAPRI, USDA, OECD,…. Of farm policies among developed countries: USDA, IFPRI (Diao et al), CARD (Beghin et al), IMF,….

U.S. Farm Policy Results: 

U.S. Farm Policy Results USDA: “Formula” versus fixed loan rates and CRP effects; 8-crop production increases at most 2%; small price decreases (larger for cotton) Gardner: Loan rates, decoupled payments and crop insurance added about 4% to 1998-2001 production; prices decreased about 6%; CRP has offsetting effects; modest marginal effects of 2002 bill

Looking Forward: 

Looking Forward Emergency Aid in 2002? Farm Bill Rewriting in 2003? The Doha Round Bilateral and Regional Free Trade Agreements

Farm Income 2001-2002(billion dollars): 

Farm Income 2001-2002 (billion dollars)

Government Payments to Farmers (million dollars): 

Government Payments to Farmers (million dollars) Source: USDA. * Includes small miscellaneous not shown

The U.S. Doha Proposal(the “zero option” again?): 

The U.S. Doha Proposal (the “zero option” again?) Export Subsidies: Eliminate over 5 years Tariffs: Swiss Formula reduction to 25% maximum over five years and “eliminate all tariffs by a date to be established in these negotiations” Domestic Support: simplify into exempt (minimally distorting) and non-exempt (AMS and blue box); limit non-exempt to 5% of value of total agricultural production and “agree to eliminate all non-exempt domestic support by a date to be established in these negotiations”

Conclusions: 

Conclusions Neither budget constraints nor WTO commitments have proven effective in restraining re-institutionalization of farm supports in the United States The United States continues to exercise substantial supply restraint because of the CRP. Whatever the economic merit of this land idling, the CRP is the type of WTO Green Box policy to which trade partners tend not to object

Conclusions: 

Conclusions Some provisions of the 2002 FSRIA can be argued to continue planting flexibility and decoupling of payments FSRIA looks more like a cash “in” than “out” Impacts of various support policies on supply are not certain, and high levels of expenditures merit suspicion by trade partners Modest liberalization is attainable in the Doha Round, despite the new U.S. farm bill

References: 

References Policy Reform in American Agriculture: Analysis and Prognosis University of Chicago Press, 1999 (www.amazon.com) “Reform’s Stunted Crop: Congress Re-Embraces Agricultural Subsidies” Regulation, Spring 2002 (www.cato.org/pubs/regulation/regultn-arch.html) Liberalizing Agricultural Trade and Developing Countries Carnegie Endowment for International Peace, November 2002 (www.ceip.org/files/pdf/Agricultural-Liberalization-IssueBrief.pdf)