By Stu EllisAudio Download
The 2008 Farm Bill expired at the end of September, and a replacement is caught up in the stalemate on the so-call “fiscal cliff” talks in Washington, which will dictate the extent of the safety net for US farmers over the next five years. However, the lack of detailed legislation has not prevented warning flags from being raised by ag economists that some of the commodity programs may get the US crossways with international trade rules regarding how developing countries are put at a disadvantage. In recent years, including the Brazilian victory over the US cotton program, other nations have been quick to file trade complaints alleging that US farm programs spur production and dampen prices. And the pending proposals in the House and Senate, even though there is no agreement on anything, are being touted as inflammatory to fair international trade.
A Swiss trade policy organization, the International Center for Trade and Sustainable Development, published the economic analysis of Bruce Babcock of Iowa State University and Nick Paulson of the University of Illinois. The chief executive of the organization says the recent development of Farm Bill proposals lacked a discussion on compliance with the World Trade Organization (WTO) rules, yet the US Farm Bill would have some of the largest spending on farm policy as any in the world.
STAX & Shallow Loss
The economists are quick to acknowledge that a new Farm Bill is still a work in progress, but the structure of the Senate bill’s Agricultural Risk Coverage program that allows a separate Stacked Income Protection program (STAX) for cotton producers, and the Supplemental Coverage Option (SCO) that is a “shallow loss program” in both the Senate and House proposals would potentially create detrimental economic impacts to foreign producers of cotton, and possibly wheat.
The “shallow loss program” essentially helps producers reduce their outlay for the deductible portion of crop insurance with a second insurance program, the SCO. Babcock and Paulson say the direct payment program, which was designed to move away from spurring production increases, succeeded in insulating US farm policy from WTO complaints. But eliminating a program that was not tied to production, and returning to programs that do have ties to production, will renew the international trade complaints. They say, “If US farmers begin to base their planting decisions on government support rather than on the basis of market signals, then it is possible that farmers in developing countries will receive lower prices than they otherwise would because of the supply-enhancing aspects of the new US farm bill.”
Interestingly, the economists note, “It is fair to say that there never has been a more complicated set of programs being considered at any one time by Congress. The complexity comes about both in terms of the payment formulas and because farmers are going to have to make a one-time choice about program options with a poor understanding of how the programs actually work.”
In cotton territory, farmers will likely increase cotton plantings say Babcock and Paulson because cotton payments will be much larger than any payments for corn, soybeans, rice or wheat, which they contend violates the WTO principles, “This demonstrates that the STAX program has the potential to increase cotton plantings at the expense of other crops.” The expansion is estimated at 4.36%.
Regarding wheat, the economists say the incorporation of a target price indicates the shallow loss coverage would boost wheat acreage by about 6% without the program in place. And they continue, “The results indicate that the 2012 farm bill programs will distort planting decisions of US farmers if prices drop significantly from Congressional Budget Office-assumed levels. U.S. cotton and wheat acreage would be significantly higher with the new farm bill programs than without. These higher acreage levels would result in lower world cotton and wheat prices. Developing countries that would be hurt by these lower prices are cotton and wheat exporters. Developing countries that export cotton include Brazil certain West African countries, and Central Asian countries. Developing country wheat exporters include Argentina and India."
However, the economists are not looking for the adverse impact to other countries to happen immediately. They say there is little chance of any price change in the first year or two of the new Farm Bill because the impact of the drought will keep prices high enough, and, “while it is possible that prices will decline to levels that would cause the proposed farm bill programs to negatively impact developing country farmers, it is not likely to do so until potentially the last three years of the five years to be covered by this farm bill.”
US farm policy is designed primarily to provide sufficient food quality and quantity to benefit US citizens and provide a safety net for US farmers that protects them from weather and undue outside market forces. However, it has to engage in a dance with other nations that also protect their producers from disadvantageous prices and production. While the Direct Payment program did that, its elimination and return to more traditional programs will put US farm policy at risk of being attacked by international trade complaints. Under the terms of farm policy legislation pending in Washington, support programs for US cotton and wheat could be found guilty of violating international rules, but if so, evidence would not show up for several years because the drought will influence prices for several years to come.