The United States Geography
The major areas of population are now concentrated in the 'horseshoe' round the Great Lakes, the Eastern seaboard, the West Coast, and Florida and the Gulf coast. Average farmland prices by region in the US show the basic patterns of settlement (high value of land for living and working) and the inherent value of land as an agricultural resource.
Farm Land Prices in the US
Given the non-agricultural demand for land in the Northeast, Pacific, Appalachia and Southeast regions, the key farm areas in the US can be roughly identified from this picture as the Lake States, the Corn Belt and the Delta States.
In ridiculous brevity, a Con-Federation of 'nation states', born of the War of Independence from British rule of the New England states, and successive purchases of territory from, inter alia, France and Spain. Each of the States have all the residual and unidentified powers and responsibilities not explicitly ceeded to the Federal Government under the written constitution. The Constitution separates the Legislature (the Congress, made up of the House of Representatives (elected in proportion to population) and the Senate (elected by land area, roughly), from the Executive (the Administration headed by the President), and from the Judiciary (the Surpeme Court, which guards and interprets the constitution). The birth of the Federation was an explicit reaction to the supression of individual freedoms and democratic rights from which the founding fathers had escaped in Europe. Freedom and organised (self-balancing and checked) democracy is thus at the heart of US governance.
Settlement of the US by the 'modern' invaders tended to happen from the fringes and along the major transportation routes (rivers), and occured over a relatively long period (from 1492, effectively). Settlement of the major farming areas, the grain states, occurred against a "circular and spoked" geography. The Mississippi/Missouri river system provided a natural and cheap transport system for bulk commodities (though the continual dredging and maintenance of navigable channels is not free to the state - provided through the US defence budget being carried out by the US Marine Corps engineers - it is largely free to the trade), while multiple rail links to the Lakes and the west and east coasts had developed early and provided valuable competition to the river system.
The farming system developed, first, to satisfy local domestic demands, but quickly developed as a major exporter of grains and of grain-fed livestock (especially beef and pork). The Iowa corn (maize) hog systems, the Kansas wheat plains and the Texas beef feed lots were early and persistent exporters. The development of farming in California, heavily dependent on subsidised water (as too is Arizona) concentrated on high value fruits, vegetables and wines, as did Florida (with subsidised draining of the swamps). These, too, were sufficiently productive to become exporters. Cotton and tobacco (and peanuts - high protein) grew well in the southern plantations, founded on cheap (slave) labour, whose outlawing after the American Civil War encouraged mechanisation of these crops as had already occured with grains.
Major Instruments: [Think, before you read on. What sorts of policy instruments would you expect such a country, culture and society to generate to assist the farm sector? Remember that the farm sector has no substantial subsistence or peasant sector (that had been killed off with the western invasion), but consisted largely of commerical farmers seeking to sell farm products to non-farm end users, many of whom were foreigners.]
You should have got such things as:
We are in the 1930s. We have a set of collapsed markets, suffering a major crisis of confidence. We have unsold stocks building up on farms, disastrously low prices, but large numbers of unemployed and hungry people in the towns and cities. Demand has collapsed. Supplies threaten to collapse in response. How can we 'kick-start' the contract and trade system again?
Answer 1: put people to work on public goods - building dams, water systems, dredging the rivers, building roads etc - the classical Keynesian remedy for demand-led depressions. These public works provided a major infrastructure for agricultural development (among other things).
Answer 2: put a safety-net underneath farm markets, to provide security of returns and confidence in ability to sell the crop which would in turn provide the confidence the grow the crop. How?
What further problems can you imagine stemming from this policy? Think before you read on.
The US is important in setting the world price for cereals as a major supplier - especially in a world (1950 - 1990) where a large part of the world is insulated and protected from the world price (USSR, China, Western Europe).
So what? So, in attempting to underwrite the market price through the loan rate/set-aside system, the US is effectively under-writing the world market price and acting as the major stockholder and stabliser of the world market.
In attemtping to stabilise world prices, the temptation is to set the loan rate too high and build up stocks, and increase set-aside areas as well, thus further depressing the world prices - the late 1960s and early 1970s being the classic case. The history of the policy is well illustrated in the following figure (Source: B. Gardner, (1987) - Reproduced from D.R.Harvey, Inaugural lecture.Food Mountains and Famines)
The New Deal instituted considerable set-aside to buoy up the depressed market, which became unecessary as the world moved into WWII and Britain needed the food supplies. The late 50's saw world supplies growing at a faster rate than effective world demands (needs backed up with purchasing power and the freedom to buy on world markets). Prices on the world market began to fall, and stocks built up, needing greater areas of set-aside to control supplies. The increase in US farm policy spending per farm (in real terms) over the 1960s reflects a number of supplementary payments and payments for non-programme crops, and also export subsidies, all growing over this period of depressed world prices to try and maintain farm returns, and increasing at more than the (then rather low) inflation rates in the US economy. Furthermore, the effect of depressed world prices was made worse in $ terms since the US $ was becomming increasingly overvalued throughout this period, as productivity rates elsewhere in the world caught up and overtook the US - so the US crops became more uncompetitive.
1971 saw the devaluation of the $ - the era of floating exchange rates and depreciating dollar - and rapid inflation in much of the world but depreciation of the $ saw US prices become more competitive.
1972/73 saw major Soviet grain purchases (prompted by very cheap grain, US export subsidies, high gold prices (of which the USSR has large stocks), high oil prices from restricted OPEC oil production and sales, and thus lower rates on bulk shipping). The 25 million tonne grain purchase by the USSR (compared with an anticipated 5 million tonne order) was sufficient to drive world grain prices up, causing panic amongst some that the world was running out of food. Set-aside was no longer necessary, the loan rate became ineffective as market prices increased well above the loan rates and world (i.e. US) grain stocks fell dramatically.
The target price - deficiency payment (DP) system was introduced in 1973 and developed in the Food and Agriculture Act, 1977, and estimated on the basis of costs of production, as an attempt to secure grain production against 'temporary' depression of world prices against what was thought to be a longer-term trend of demands outpacing supplies in the world. Secure US production would ensure their retention of world market share and export competitiveness. Local (domestic) political pressures to secure farm returns and incomes increased the pressure for the use of DPs.
US farm policy is reviewed and re-enacted as Acts of Congress (US Federal Law) every five years. Leading up to the review and re-enactment, the Administration (Secretary of State for Agriculture and the USDA - US Department of Agriculture - under the President) proposes a new Agriculture Act as a Farm Bill to the Congress. Congress (House of Representatives and Senate, though its Agric. Committees) also prepare their own versions of the Farm Bill, typically as amendments to the Administration's proposals. The final Act has to be agreed by Congress and finally enacted by signature of the President.
Failing agreement to a new Farm Act, the legislation underlying the farm policy requires that farm policy revert to its 1930's base levels set in the 1939 Agricultural Adjustment Act, ammended in the 1945 Agriculture Act, which established 'parity prices' as the indicative prices for farm products across the board so as to maintain the ratio of farm to non-farm prices at a pre-set level. This parity price provision of the base legislation becomes a powerful incentive to reach agreement on a new farm bill every five years. Why? Again, think before you read on.
Because, as economic growth proceeds, so farm prices automatically decline relative to other prices in the economy - proportionately less of total income is spent on food, but food production remains the same, so relative prices of food have to decline. Hence the 'parity price' base becomes increasingly irrelevant to the sensible setting of farm support prices as growth happens. Thus, any attempt to re-instate the historic parity would prove enormously expensive in terms of subsidy between realistic market prices and the 'parity price'. National budgets are limited and subject to many counter-claims for their use within congress and the administration - hence agreement on some form of farm bill every five years becomes both an economic and political imperative, despite the legislation proividing for failure. Farmers might be over-joyed if the farm bill failed, but the rest of the population would be dismayed.
Mechanics and Evolution of US Grains Policy
The 1985 Farm Bill (leading to the Farm Security Act, 1985): The story (as told here) starts with the pressures leading up to the 1985 Farm Bill. The 1980 farm act had proved very expensive - especially because of deficiency payments. Budgetary spending in the US was threatening to get (or already had got) out of control, and a budget limitation act had already been virutally agreed to limit Federal Government budget spending (The Gramm- Rudman- Hollings Bill). Farm policy, once set in the five-year Act, allowed the Agriculture Secretary limited discretion to reduce spending from that mandated under the ruling act, so it was important to get the Act right - to control farm policy spending.
Declining exports were largely due to the relative strength of the dollar, as well as subsidised competition emerging from the EU, which turned into a net exporter in the early 1980s. Depressed US prices were depressing the farm sector and exacerbating farm debts and bankruptcies. The farm lobbies and their supporters in Congress and the administration needed a farm bill which provided some support, but could not afford a farm bill which allowed this spending to get out of hand. A full insider's account of this negotiation and outcome can be found in: Thompson, R.L., 1986, "Recent developments in United States Agricultural and Food Policy", Journal of Agricultural Economics, 37, 3. [Bob Thompson was the chief agricultural economist with the USDA at the time of this Act.]
Squaring the circle of providing support but limiting the exposure of the budget over the time period of the Act was the key policy puzzle to be solved in this Act. How can Target prices be reduced, or defficiency payments be limited, while still satisfying the insistent demands for farm support? What else could be done to limit budget spending?
One trick had already been performed during the course of the 1980 Farm Act, to limit escalating budget exposure and help stabilise grain markets:
Payment In Kind -PIK. In 1983, CCC stocks were at an all time high, while budgetary spending was increasing dramatically. In an attempt to solve both problems simultaneously, the PIK programme was introduced. This was the largest acreage control programme ever, with 77million acres (20% of US crop land) enrolled as set-aside. Under the programme, 10 to 30% of base acreages could be added to existing diverted acreages, with payment being made in the form of stocks of commodities - in effect farmers were paid in grain for not planting acres - supplies to the market were maintained by reducing stocks rather than growing it - a straight substitution of accumulated stocks for that year's production. Prices rose because of the reduction in the stock overhang on the market. $9.4billion worth of stocks were released under this programme - which did not enter the normal budget spending head since stock release counts as a capital , not a current, transaction as far as the budget is concerned - the trick of the 'light'. This neatly "squared the circle" of what to about low prices and high budgetary costs, at least temporarily.
The major pressures on the formation of the Bill, and the outcome, are shown in the following diagram.
The FSA, 1985, managed to square the circle - just. The five key steps taken are shown in the box at the bottom of the diagram.
In summary, the 1985 FSA changed the basic support systems for US grains (programme crops) as shown in the following diagram.
By the time of the 1990 Farm Bill negotiations, the GATT talks were dominant in the thinking of the farm policy makers, although the talks themselves were stalled in an impasse between the US and the EU. AJAE, 70 (5), December 1988, p 1027-10935: Two articles by J B Penn and Bob Thompson respectively deal with the Democratic and Republican approaches to the 1990 Farm Bill.
The Bush administration keen to reduce levels of support (the 1985 FSA turned out to have cost $ 85 billion over five years) - and to decouple as far as possible from the production decisions and let market forces work, in line with the US position in the GATT negotiations - making the Budget costs and Trade Talks the major concerns as far as the administration is concerned. Following the fiasco prior to the FSA (1985), when the Regan administration presented a fully detailed proposal to Congress to get government out of agriculture, and then watched as Congress (The Hill) completely re-wrote the bill; there was considerable reluctance on the part of the Bush administration to spell out its proposals prior to the drafting of the bill in Congress in 1990.
There had been an American version of the EU supply control - market management alternative to the free-market position of the US, which some thought might get some support in Congress: The Harkin-Gephardt proposal (1986/7) to eliminate target prices (and DPs); increase loan rates to 71% of parity by 87/88 and by one point thereafter to reach 80% by 95/96; maintain market prices at loan rates through mandatory set-asides (subsidise livestock feeders on temporary basis until prices increase); set-asides larger for larger farms; any additional supply control (over 15-30% in bill) to be achieved through mandatory paid diversion. Premised on export sharing cartel at international level to maintain trade shares at at 86/87 levels. Import tariffs to protect parity prices. This proposal was alive at the beginning of the discussions surrounding the 1990 bill but died. The mood was clearly against market or supply control and market sharing.
There was great pressure to reduce the federal spending on agriculture, which could have meant reduction in the voluntary nature of many control programmes (where encouragement to participate is provided through paid support to those who do) with compulsory programmes. The Gramm/Rudman/Hollings balanced budget law dictated that the US Budget deficit should not exceed $64 bn in 1991 fiscal year and should be zero by 1993 (though obviously subject to considerable escape clauses).
Since the Farm Bill was enacted before the end of GATT, there was the suggestion that the 1990 legislation should include some provisions which would be triggered if the GATT talks failed - such as protection/supply management etc. and also some talk about making the 1990 bill a one-year Act, pending the completion of the GATT round. However, these ideas were mostly rejected.
There was considerable emphasis on environmental protection - ground water, and food safety, plus a desire by some to increase "planting flexibility" - to extend the "50-92" provisions of the 1985 FSA: allows farmers to participate in the support programmes (DPs) and receive 92% of the payments (ie, their programme acreage is set at 92% of their base acres), so long as they plant between 50 and 92% of their programme acreage and set-aside the rest. This was intended to encourage farmers to set-aside more than the minimum acreage (since they avoid the costs associated with planting and harvesting but are still entitled to receive 92% of support payments) - thus increasing the decoupling of support from the production decisions. In addition, there were arguments to allow planting market based crops (especially oilseeds) on set-aside acres (previously forbidden).
The outcome of the negotiations is summarised in the following diagram
The main provisions of the FACT Act.
a) fixed target prices for the duration of the act, continuing the trend of FSA85.
b) loan rates which again continue the FSA85 trend of explicit links with world (market) prices and further discretionary reductions linked to "stock to use" ratios, rather than to price ratios as under the FSA;
c) most importantly the Triple Base: under FACT, deficiency
payments
are made on a 'payment base' which is determined as 85% of the
permitted
acreage. The remaining 15% is termed the flexed acreage. No deficiency
payments are payable on this flexed acreage but nor are there any
restrictions
on what may be done with this acreage - hence the term "flexed", which
implies more flexibility for producers to produce what they like based
on market conditions. The production on this flexed acreage is still
eligible
for loan rate programmes.
In effect this Triple base programme reduces the deficiency payments
bill by about 15%. In addition to the 15% mandatory flexed acreage for
participants, there is the provision for producers to voluntarily add a
further 10% to their flexed acres (or triple base) on the same
conditions
- allowing those who wish to opt out of the DP/set-aside programme with
a greater proportion of their acreage. Producers in the Great Plains
(predominantly
wheat) argue that this additional flexibility is of little help to them
since they do not have alternative crops which they can grow.
d) from 1994, the DP is calculated on the basis of 12 month average market prices rather than on a 5 month average as at present. Since the 12 month average will be lower than the 5 month average currently used, this will further reduce the deficiency payments.
e) Starting in 1992, a pilot programme has been introduced in some counties of two states under which producers are allowed to participate in the DP programme by nominating a fixed level of grain marketings for eligibility, and then will not be required to set-aside land under the ARP system. This is also intended to increase farmers' flexibility in their decisions.
Other provisions of the FACT Act look very similar to many of the provisions of Agenda 2000, though with a clear US colour:
Conservation Policies: The FACT Act included major titles concerned with Forestry (for the first time); Conservation and Environmental Measures, which were seen as consolidating and tightening up previous provisions, combining the Conservation Reserve Programme (CRP), the Wetlands Reserve Programme (WRP) and the Water Quality Incentive Programme (WQIP) in a single Agricultural Resources Programme to idle up to 56 million acres of the most environmentally sensitive land. CRP cannot be less than 40 million acres by 1995, which is expanded to include environmentally sensitive land, shelterbelts, and marginal pasturelands; WRP - a voluntary programme for 1 million wetland acres into paid 30-year diversions; WQIP covers 10 million acres for five years, with assistance to approved management plans. "Sodbuster" provisions, which deny programme benefits for cropping land that is cultivated from permanent pasture or the like, are tightened, as are the equivalent "swampbuster" provisions for wetlands, with increased penalties for illegal cropping added.
Research and Development: Research and development funding is increased under FACT and targeted towards sustainable agriculture (Low Input Sustainable Agriculture - LISA); integrated resource management, water quality, climate and environmental change, and new products from farm commodities, plus increased funding for the Land Grant Colleges - now the major agricultural universities.
Credit and Rural Development: FACT also switches credit support under the Farmers' Home Administration (FmHA) from provision of credit to loan guarantees, and provides for the amalgamation of several rural development activities, including much of the FmHA, though not its credit operations, into a new Rural Development Administration.
Major Implications of the 1990 FACT Act
The set-side (ARP) condition involves long run costs associated with being required to use a larger land area (including set-aside) and/or produce a smaller output than would be the case without the programme. If the current output level by the participants (Qa) is taken as being the result of a fully adjusted sector to the provisions of set-aside, then we would expect that, at the margin, the benefits of belonging to the programme (the entitlement to the limited deficiency payment) are just offset by the costs of participating (the additional costs associated with the set-aside requirements). Thus area C should be equal to area A. The shaded area C now represents the opportunity cost of the set-aside provisions, while A represents the benefits of participating in the programme.
The resulting calculation can be taken as identifying the position of the underlying "no-programme" supply curve (So), from which can be calculated the actual costs of set-aside, assuming that the set-aside provisions result in a pivotal shift upwards of a linear supply curve.
As an illustration of the above, consider the following approximation to the 1991 programme: Pt = $4.00/bu; Pw0 = $2.66/bu. (actually likely to be greater than this) Qp = 85% of Programme yield (105 bu/ac., 1986) times Permitted area (0.053bn. ac., 1986) = 5.56bn. bu. Qa = (in this illustration) permitted area times actual yield (119.3 bu/ac., 1986) = 6.32 bn. bu.
Thus, according to these calculations, US farmers participating in the Corn programme are better off by the rent earned through participation by $1.26bn. (which is a small return on the Federal Government payment of $6.34bn. (which in this case would be the PSE)- a "transfer efficiency" of just under 20%, with the wastage occurring through the costs of set-aside. However, given that the loan rate incurs no losses for the CCC and no increase in price to users or consumers, there is no consumer or further taxpayer costs as there where under the previous versions of the programme under which the loan rate supported the farm price above the market price and under which the deficiency payment encouraged greater production.
However, US corn farmers would be even better off under a "free trade" deal which involved elimination of the programme altogether in return for a market price increase to $3.00/bu. (a 12.8% increase - implying a substantial reduction in trade-distorting support elsewhere in the world), since they would lose the programme rent ($1.26bn.) for a gain from free trade of $5.56bn. - a net gain of $4.4bn.
In fact, this analysis shows that prices would only need to rise by just over 11¢/bu (a 4% increase) for farmers to be better off under free trade than the present programme, while the US taxpayer would gain the current DP spending, $6.34bn. US consumers and corn users would be worse off as a result of the market price increase, but given the producers gain (in an exporting country) and the taxpayers gain, the net gain to the US would be substantially positive. On this basis, one can understand Secretary of State EsbyÕs enthusiasm for the GATT agreement, and his conviction that (at least the corn) farmers lobby can be persuaded of the benefits of the agreement. In addition, it is little surprise that the Corn Growers are in favour of the "Freedom to Farm" Bill (one option for the 1995 discussions). (See Choices, Second Quarter, 1995, p 38 - 39).
However, this expectation suffered a major upheaval on November 8th 1994 - the massive Republican election victory in the House and Senate elections - both houses now have Republican majorities for the first time in living memory (Congress has typically been characterised by a Democratic majority). The Republican victory was based on a platform of a "Contract with America" - requiring a balanced budget by 2002. This could require federal spending cuts of up to $1.2 trillion from current levels - or as much as $1.6 trillion if the middle class tax cuts of $450billion are also to be delivered - amounting to cuts of $236 billion per year each year to 2002. This reduction in spending is supposed to occur without touching either defence of social security - a truly massive (if not impossible) task.
Although the 1995 Farm Bill was supposed to be enacted by December, 1995, the draft legislation became entangled in the White House/Congress fight over the Budget Appropriations Bill, in which the Republican Congress was determined to pass a bill with substantial spending cuts in order to achieve its balanced budget objective by 2002, but which Democratic President Clinton was equally determined to moderate. This clash resulted in three "extensions" to the loan facilities for the US Federal Government in order that it could continue to pay its work-force, and three temporary shut-downs on the Federal Government - where govt. employees are sent home with no pay!
The following diagram highlights the key factors which appeared (Feb., 1996) to be shaping the 1995 Farm Bill. As far as other countries are concerned, the outcome could be extremely significant. There are currently 36.4 million acres in the Conservation Reserve Programme, much of which is not demonstrably environmentally vulnerable and could be released to production. There are 15 - 20 million acres in the ARP, which is generating considerable antagonism amongst commercial farmers (cf. the similar response in the EU), though most of these ARP acres are not currently being idled becuase of the high prices and low stocks. Combined, these areas amount to some 25% of major crop areas. Substantial programme reductions could be "bought" through major reductions in the CRP and ARP requirements, releasing major production potential. The "Freedom to Farm" Bill emerged through the processes of the House and Senate committees, a version being passed by both Houses, into the "Conference Committee" of both Houses and the final compromise bill passed both Houses, though signature by the President, was delayed until April, 1996, because of budgetary disputes between the Administration and the Legislature.
The Outcome
The Deficiency payment system is suspended (not completely eleiminated from the legislation yet), and a fixed payment per farm up to the year 2002 is substituted - known as the Production Flexibility Contract and Transition Contract Payments. The budgetary circle is thus squared by fixing the amount paid and promising to eliminate this payment entirely by 2002 (the terminal date for the reduction in the budget). Farmers are free to decide what to plant (within limits). The details:
Production Flexibility Contracts. Eligible producers can enter in seven-year "production flexibility contracts" between 1996 and 2002. The deadline for entering into the contract is April 15, 1996. Payments will be made on Sept. 30 each year, starting in 1996. Farmers will also have the option of receiving half of the annual payment by Dec. 15 of the previous year.
Transition Contract Payments "TCP" (so called because they are to provide for transition to a pure market system) are made on 85% of a farm's contract acreage (= base acreage as established for the base year (1996) adjusted for expiring CRP acreas). On this acreage, growers are free to plant any program crop, oilseed, industrial or experimental crop, beans, lentils, or dry peas (full flexibility). Planting of fruits and vegetables is prohibited on the payment acres, and haying and grazing in the five principle growing months is not allowed. Forage can be grown on the acreage, but no payments will then be made on these acres. The remaining 15% of acreage is free from any planting restrictions. However, contracting farmers have to comply with existing conservation reserve programmes. The crop payment rates are based on theformula: contract acreage base x program yield x 85% x USDA payment rate per bushel.
Payments per bushel calculated as follows: total TCP for all programme commodities in bn.$ is allocated to each commodity on basis of projected share of old deficiency payments (thus taking account of actual gap between market and target prices, although the latter are otherwise irrelevant to the new scheme). Resulting Commodity TCPs are then shared amongst contracting farmers on the basis of their contracted programme production - i.e. [contract acreage base x program yield x 85%]. Thus, the payment rate per bushel (tonne) is the result of dividing the total TCP amongst contacting farmers, rather than set as a programme parameter, and the fixed total spend is ensured. These have been set as shown in the following figure (though on what precise basis other than projected deficiency payment levels, I do not know).
In effect, farmers signing up for the scheme get a fixed annual payment until 2002. After that, they are supposed to be on their own.
Nonrecourse marketing assistance loans. Loan rates continue at 85% of the modified 5 yr. moving average. Maximum loan rates are as at 1995 (FACT set.): Corn, $1.89 per bushel; soybeans, $4.92 per bushel; wheat, $2.58 per bushel; cotton, 51.92 cents per pound; rice, $6.50 per cwt. (grain sorghum, barley and oats rates are set relative to corn). The Secretary of Agriculture continues to have authority to lower wheat and feedgrains loan rates based on a stocks-to-use formula. Cotton and rice loan rates can't be lowered but are frozen.
Payment limitations. The $50,000 payment limit per person is reduced to $40,000. Marketing loan gains and loan deficiency payments are limited to $75,000 per person per year.
Program elimination. Acreage reduction program (set-aside) authority is repealed.(suspended) Also, the Farmer Owned Reserve and the Emergency Livestock Feed Assistance Program are ended.
Conservation. The Conservation Reserve Program is capped at the current level of 36.4 million acres. Also, CRP contract holders will be given an "early- out" option that allows them to terminate their contracts.
Crop insurance. The bill eliminates the mandatory nature of catastrophic crop insurance. But if producers don't purchase crop insurance, they waive their right to any federal disaster assistance. Seed crops are added to the Federal Crop Insurance Act.
CCC interest rates. The interest rate charged on all CCC loans is increased by 1%.
Export Enhancement Programme (EEP): Annual expenditures capped, with maximum levels more than $1bn. below the limits set in GATT UR (base period less 36%)
Unresolved Issues: Dairy programme - earlier proposals were for a substantial cut ($0.8bn.) Original Freedom to Farm would have substituted the transition payments scheme for the present programme, terminating State marketing orders and price support, though the Senate bill would have retained these though reduced the support prices. CRP still needs to be resolved in terms of eligibility, rental (compensation) rates and total spend. In addition, research, trade credit, crop insurance, rural development, conservation and water issues require separate and future legislation.
US Historic and Projected Commodity Programme spending
Also, as should have been anticipated - US administrators found it politically necessary to increase the direct payments to offset the depression in world agricultural markets during the late 90s. The FAIR ended up paying out $28bn. more between 1997 and 2001 than provided for in FAIR: (See Picture from Aligning US Farm Policy with WTO Commitments - ERS, Jan/Feb 2002):
Notwithstanding the now traditional over-spend of the programme compared with forecast, and despite the clear intention of the FAIR Act that these payments would cease in 2003, there was little sign in the early discussions surrounding the 2002 Farm Bill that this intention will be adhered to. Much discussion was about how to make these payments WTO compliant, rather than getting rid of them. In fact the early signs were that the direct and decoupled payments would continue - though there were some signs of domestic pressures against such transparent and apparently both ineffective and inequitable payments (see, e.g, the Policy Chapter of the FAP Review, 2001):
Congress set the framework for the Bill through its Budget resolution in 2001, which set aside an additional $73.5bn. over 10 years for the agricultural budget - the US seemed determined to spend more than before on farming, or at least to provide itself with the budgetary headroom to do so if needs be. This step was encouraged by, first, the emergence of a substantial federal budget surplus, and second, as this surplus disappeared, especially post 9/11, with the economic downturn, by a determination to avoid serious depression through deficit spending. The traditional budget ceiling on farm spending was thus substantially lifted.
As of March, 2002, the current state of the Farm Bill debate can be summarised under the headings of the three main proposals, each of which is designed to spend this additional budget. The House of Representatives has passed its own bill in October, 2001, and the Senate passed its version in late Feb. 2002. The Administration has indicated its support for a third proposal - under the sponsorship of Senators Cochrane and Roberts (though the Senate has already rejected this proposed bill). Congress now moves the farm bill debate into joint session - Conference Committee - to produce a compromise bill for submission to the administration.
The House Bill: (for period 2002 - 2011):
This
chart shows the US Aggregate Measure of Support (AMS) spending under
the
Amber Box in billion $, both for the history of the FAIR Act (to 2002)
and for the current proposed bills (House of Representives, Senate, and
Administration (Cochrane/Roberts).
This spending excludes Green Box programmes, - with some $17bn.
per year being spent of the Food Stamp programme, another $15bn. on
other
forms of domestic food assistance, and $7bn. per year on research,
extension,
information, inspection, and adminstration services, and on natural
disaster
relief and conservation reserve programmes. Production
Flexibility
Contract PFC payments under FAIR are shown here, though count as green
box, since they are fixed payments, since each of the three Farm Bills
include extension of these payments.
The history clearly shows the effects of the ad hoc assistance payments
made since 1998 - to offset poor market prices, and called Market Loss
Assistance (MLA) payments, which have been made on the same basis as
the
PFC payments, but which are triggered by low market prices and hence
registered
as amber and not green box.
The New Farm Bill proposals all result in an increase in spending - and thus support - on US farmers, to match levels reached during the late 90s. Each tries to build in the apparent spirit of the MLA payments into countercylical packages, but both the House and Senate versions result in considerably greater expenditure than the C-R bill being counted as Amber. There is, apparently, some considerable risk that the US will exceed present URAA limits on Amber spending under the future farm bill. It is also pretty apparent that the US is not yet able to give up supporting farmers, whatever its rhetoric in the Multilateral Trade Negotiations may say. However, a decline in the Federal budget balance coupled with a recovery of world markets could change all that.
Source: US Farm Policy and the
WTO:
How do they match up?, Hart & Babcock, CARD, Iowa State,
Feb.,
2002.
See, also, David Orden, on the state
and implications of the 2002 Farm Bill development.
" Too often and in too many countries, the production and marketing decisions farmers make are still driven by government programs rather than market conditions, leaving the world with an agricultural market still far from the WTO objective of a fair and market oriented system. All of these distortions are especially burdensome for developing countries, and particularly least developed countries, many of whom depend on agriculture for income and employment and who look to trade opportunities to generate economic growth and who depend on the free flow of agricultural products for food security. " From the US Proposal for Comprehensive Agricultural Trade Reform to the World Trade Organization, 23 June 2000.
For the past fifteen years, the United States has led the drive for agricultural trade liberalization. Less than 18 months ago, the United States was still viewed as the leading advocate for agricultural trade reforms. And, arguably, without strong US leadership, the Doha Round would not have been launched last fall. Now, in the words of an agricultural trade counselor whom I met recently in Geneva, " The US farm bill has taken away US leadership on trade reform and trade liberalization, and it is the European Union that has a good story to tell."
In March- the same month the Doha Round agricultural trade talks began in Geneva, the United States Congress began to reconcile two differing farm bills, both of which would nearly double the assistance to US agriculture over the next ten years. The signal this sends to the rest of the world is unmistakable: the United States is not serious about agricultural trade reforms, and it is not serious about agricultural development in less developed countries.
In the beginning of the Uruguay Round, the United States understood that the problems in world agricultural markets?unrestrained export subsidies and high import barriers?were the flip side of trade-distorting domestic policies. The United States knew that unless domestic policies were reformed, neither export subsidies nor high tariffs could be addressed. That understanding led to the Uruguay Round Agreement on Agriculture, which brought agriculture under global trade rules and disciplines for the first time, and began reducing trade-distorting domestic supports, export subsidies and import barriers in tandem.
Unfortunately, the bills passed by the US House and Senate could reverse this progress. The authors of these farm bills maintain they are well within the United States' World Trade Organization obligations on " trade-distorting" support. And, if not, both bills contain an " escape clause" allowing any brave Secretary of Agriculture to reduce supports to farmers in the event of an over-shoot.
However, both bills re-establish the link between domestic supports and current production, which will increase trade distortions, even more than existing policies. The Senate bill significantly raises support prices, and both bills establish "counter-cyclical" support systems predicated on high target revenues. The bills allow farmers to reconnect subsidies to annual planting and production decisions. And, by creating wealth and reducing risks, both bills would result in artificially higher production, and artificially lower world market prices, than would otherwise be the case.
While some of the support provided to US farmers in these bills falls in the "Green Box" of so-called non-trade distorting measures, this is a distinction without a difference for many farmers outside the United States. In meetings last month in Brussels, I was told time and again that the US farm bill was making it difficult for the European Union to continue to move away from price supports and towards direct payments. Not only are European farmers jealous of US farmers' subsidies, they are asking why they should be required to live without high price support when US farmers cannot.
This message has not been lost on developing countries, either. Many less developed countries are torn. They know they need to export and to develop their agricultural sectors, but they cannot expose their subsistence farmers to heavily subsidized competition from the United States and the European Union. So, developing countries ask why they should open their markets and expose their farmers to market forces, when developed countries are unwilling to do the same for their farmers. Yet, without improved access to developing country markets, US trade negotiators say they will have a hard time selling any WTO agreement to Congress.
And, while developing countries like the cheaper food that has resulted from production subsidies in wealthy countries, they know only too well that their farmers suffer as a result. In countries where 70 percent of the population is engaged in subsistence farming and lives on less than two dollars per day, low crop prices perpetuate poverty. Poor countries do not have the luxury of compensating low prices with higher government subsidies. Their only option is to impose high import tariffs, increasing food costs for poor consumers.
The ultimate irony of the proposed US farm legislation is that it will make the US less competitive. Instead of investing money in research, food safety and infrastructure, which would make US farmers more competitive on world markets, direct income supports are capitalized into land values, raising the cost of US farmland, and eventually the cost of US agricultural production In other words, both bills make trade reform more difficult to achieve abroad, and less attractive at home.
For fifteen years, the United States has chastised other countries
for
insulating their farmers from world markets. Now, the United States is
essentially telling other countries "do what we say and not what we
do."
The US government knows that liberalizing trade is critical to US
agriculture
and to farmers and consumers in less developed countries. And, the
government
knows that continued US leadership is critical to the success of the
Doha
Round. As currently drafted, the farm bills under discussion in
Washington
will make it difficult, if not impossible, for the United States to
lead
in Geneva. The United States would be well advised to simply extend the
current farm bill another year, and then craft a farm policy that is
consistent
with its international trade agenda."
This
figure
summarises the pressures and outcome of the 2002 Farm Bill. The
conjunction
of a considerably relaxed budget ceiling (especially c.f. the 1996 FAIR
act circumstance) with a collapse of farm prices (low world prices and
a strong dollar) provided the base for the political negotiations
surrounding
the bill.
The politics were now also quite different from FAIR. The Republican White House was weak (at least until 9/11), while the Senate was initially only marginally (by one seat) Democrat. Mid term elections were due (Nov. 2002) - so the scamble was on to retain both house and senate seats. The farm sector was noisy - falling returns. The precedent for government support had already been set with the emergency assistance payments, (decoupled, to the extent that they were based on the DP area and yield bases, which more than doubled the PFC payments) and the willingness of government to pay had been established through the budget resolution of 2001. Initial and rather mild liberalisation support from the administration (the White House) quickly evaporated, leaving the Hill (Senate and Congress) in charge. The outcome, with the benefit of hindsight at least, was inevitable - a strengthened and much more generous level of government support and increased protection (distortion) - the FSRIA, 2002, in effect for 6 years.
FAIR versus FSRIA Payments (major crops)
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Direct Payments (PFCs): Continued from FAIR at revised (mostly increased) rates, payed on 85% of base areas as before, BUT:
Loan Rates: Continued, mostly at increased rates, from FAIR. These are coupled payments, effectively setting a floor in the per unit revenues for all participating producers. Since the payments are made through Loan Deficiency Payments (LDPs - the difference between the market price (adjusted world price) and the loan rate) rather than through the traditional method of the CCC taking ownership of the unsold crop, the programme does not actually support market prices - producers are encouraged to sell their crops, whatever the market price, and simply claim the LDP.
Planting Flexibility: Continued as under FAIR - farmers may grow as much or as little as they like, and still remain eligible for all subsidies.
Base Area and Yield Updating: Both area and yield bases can be updated - though updated yield bases do NOT affect the PFC payments, they do affect the others - the LDPs and CCPs.
Payment Limits: Under FAIR, no producer could claim more than $230,000 per year (made up of specific limits under each programme). These limits are revised upwards under FSRIA to a total of $360,000. Furthermore, there are loopholes which allow many large producers to side-step even these limits: by organising partnerships, with each partner claiming the full limit; using commodity certificates to claim outstanding loan payments, rather than taking the cash, which avoids the cash limit on loan payments.
Export and Food Aid Programmes: FSRIA re-authorises these programmes, and in many cases increases the subsidy levels
Conservation Programmes: FSRIA considerably expands these from FAIR:
Until 2002, there was an apparent economic logic to the development of US farm policy. FSRIA raises serious questions about this logic for the development (or complete elimination) of farm policy in the US in the future. These notes have concentrated on the programme crops (mainly the grains sector) in the interests of simplification and brevity. Other products present different character and hence different policy. The essential elements, however, are a predisposition towards free markets and towards export competitiveness, coupled with serious concerns about stability and sustainability of commercial agriculture in the face of variable markets and climatic conditions. The US is a "natural exporter", as a consequence its policy is typically concerned to maintain links with the world market rather than indulge in the importer practice of insulation from the world market. However, as a large player in the world market, the US has come to realise that its own policies cannot help but influence the world market, and has had to wrestle with the problem of trying to stabilise its own markets rather than act as the world market arbiter. In addition, the checks and balances built into the US democratic system have tended to delay and buffer otherwise rational economic policy responses, as with most other countries. Nowhere is this more apparent than in the 2002 Farm Bill.