Legislative Issues, WTO, & U.S. Legislative Issues, WTO, & U.S. Farm PolicyFarm Policy

Presented by Chip ConleyPresented by Chip Conley

Democratic Economist Democratic Economist

House Agriculture CommitteeHouse Agriculture Committee

International Agreements and US International Agreements and US Farm PolicyFarm Policy

Uruguay RoundUruguay Round– Reduction CommitmentsReduction Commitments– Policy ChangesPolicy Changes– How we got thereHow we got there

Doha RoundDoha Round

-Framework Agreement-Framework Agreement

-Deficit Reduction-Deficit Reduction

-Policy Implications-Policy Implications

US Farm Policy AMS Base: US Farm Policy AMS Base: Cut by 20% 1995-2000 Cut by 20% 1995-2000

Billion US$Billion US$ 1986-88 Avg1986-88 Avg

TotalTotal 23.923.9

CornCorn 7.27.2

DairyDairy 5.35.3

WheatWheat 3.43.4

CottonCotton 1.71.7

SugarSugar 1.11.1

SubtotalSubtotal 18.7 (78%)18.7 (78%)

How Did We Get There?How Did We Get There?

Deficit reduction requirements cut farm program Deficit reduction requirements cut farm program spending.spending.

1985 Farm Bill, $4.5 billion, 1986-881985 Farm Bill, $4.5 billion, 1986-88

1987 Reconciliation Act, $3.2 billion,1988-90.1987 Reconciliation Act, $3.2 billion,1988-90.

1990 Farm Bill, $4.5 billion, 1991-95.1990 Farm Bill, $4.5 billion, 1991-95.

1993 Reconciliation Act, $3.2 billion,1994-98.1993 Reconciliation Act, $3.2 billion,1994-98.

1996 Farm Bill, $12.8 billion, 1996-2002.1996 Farm Bill, $12.8 billion, 1996-2002.

Rising commodity prices from 1986-88 reduced Rising commodity prices from 1986-88 reduced direct payments.direct payments.

Farm Program Policy ChangesFarm Program Policy ChangesLoan Rates, $/buLoan Rates, $/bu

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1985 1988 1991 1994 1997 2000 2003

Wheat Corn

Farm Program Policy ChangesFarm Program Policy ChangesCotton Loan Rate, cents/lbCotton Loan Rate, cents/lb

46

48

50

52

54

56

58

1985 1988 1991 1994 1997 2000 2003

Farm Program Policy ChangesFarm Program Policy ChangesMilk Support Price, $/cwtMilk Support Price, $/cwt

9.00

9.50

10.00

10.50

11.00

11.50

12.00

1985 1988 1991 1994 1997 2000 2003

Doha Round Framework: Doha Round Framework: Domestic SupportDomestic Support

““Substantial reductions” for developed Substantial reductions” for developed countries’ aggregate measure of support countries’ aggregate measure of support (AMS) TBN. (AMS) TBN. Reductions in overall AMS (Amber, Blue, Reductions in overall AMS (Amber, Blue, de minimis) and in 1) Amber box and in 2) de minimis) and in 1) Amber box and in 2) de minimis.de minimis.De minimis capped at 5% of value of De minimis capped at 5% of value of overall production and to be reduced by overall production and to be reduced by amount TBN.amount TBN.First year 20% cut in overall AMS.First year 20% cut in overall AMS.

11stst Year 20% Down payment, U.S. Year 20% Down payment, U.S.

Billion US$Billion US$ PermittedPermitted 20012001

TotalTotal 49.149.1 21.521.5

Amber BoxAmber Box 19.119.1 14.414.4

De minimisDe minimis

Non-product specificNon-product specific

Product specificProduct specific

1010

1010

6.66.6

0.20.2

Blue Box (CCP)Blue Box (CCP) 1010 NA (5.0)NA (5.0)

Green BoxGreen Box 50.750.7

With 20% reductionWith 20% reduction 39.239.2 21.521.5

How Do We Get There?How Do We Get There?

DEFICIT REDUCTION- while agreement DEFICIT REDUCTION- while agreement is being negotiated.is being negotiated.

Farm Bill in 2007.Farm Bill in 2007.

Attention to what will result in reductions to Attention to what will result in reductions to various boxes and likely commitments.various boxes and likely commitments.

Taxpayer supported-products vs. Taxpayer supported-products vs. consumer supported-products.consumer supported-products.

Selection of base period.Selection of base period.

Budget OutlookBudget Outlook

Budget situation and outlook has Budget situation and outlook has determined outlook for farm policy.determined outlook for farm policy.

Federal deficits from 1981 to 1995 have Federal deficits from 1981 to 1995 have led to cuts in agriculture spending in deficit led to cuts in agriculture spending in deficit reduction legislation.reduction legislation.

Resulted in lower price and income Resulted in lower price and income supports while Uruguay Round agreement supports while Uruguay Round agreement was being negotiated.was being negotiated.

Budget OutlookBudget Outlook

Federal surpluses in 1998 through 2001 Federal surpluses in 1998 through 2001 have provided funding for emergency have provided funding for emergency market loss and crop loss assistance and market loss and crop loss assistance and the Agricultural Risk Protection Act.the Agricultural Risk Protection Act.

2001 projected 10-year federal surplus of 2001 projected 10-year federal surplus of $5.6 trillion provided $79 billion additional $5.6 trillion provided $79 billion additional funding to write 2002 Farm Bill, along with funding to write 2002 Farm Bill, along with $1.3 trillion tax cut. $1.3 trillion tax cut.

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)CBO March 2005 BaselineCBO March 2005 Baseline

-500

-400

-300

-200

-100

0

100

200

$ b

illio

ns

2004 2006 2008 2010 2012 2014

2006 Congressional Budget 2006 Congressional Budget Resolution, $ BillionResolution, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

Tax CutsTax Cuts -18-18 -106-106

Entitlement CutsEntitlement Cuts 11 3030

Iraq Supp 2005 & 2006Iraq Supp 2005 & 2006 -62-62 -99-99

Net Discretionary ChangeNet Discretionary Change -2-2 4444

Additional Debt ServiceAdditional Debt Service -3-3 -36-36

TotalTotal -84-84 -167-167

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/CBRResulting Deficit w/CBR

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Budget Outlook, $ BillionBudget Outlook, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

CBO 2005CBO 2005

March BaselineMarch Baseline

-298-298 -980-980

Cong. BudgetCong. Budget

Resolution 2006-10Resolution 2006-10

-84-84 -167-167

Extend CBR 2011-15Extend CBR 2011-15 00 -1,685-1,685

Resulting DeficitResulting Deficit -383-383 -2,493-2,493

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/ CBR ExtendedResulting Deficit w/ CBR Extended

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Expected Additions to DeficitExpected Additions to Deficit Omitted Items, $ Billion Omitted Items, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

Further Cost of Iraq WarFurther Cost of Iraq War -18-18 -334-334

AMT RepairAMT Repair 00 -612-612

Additional Debt ServiceAdditional Debt Service -0-0 -224-224

Resulting DeficitResulting Deficit -401-401 -3,827-3,827

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/Omitted ItemsResulting Deficit w/Omitted Items

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Magnitude of Future Deficit Magnitude of Future Deficit Reduction, $ BillionReduction, $ Billion

Fiscal YearFiscal Year 20042004 20052005 2004-132004-13

Resulting DeficitResulting Deficit -412-412 -398-398 -3,776-3,776

House-passed House-passed Budget 2003Budget 2003

-324-324 -230-230 -1,021-1,021

ReconciliationReconciliation -88-88 -168-168 -2,775-2,775

Comparison to 2004 House BudgetComparison to 2004 House Budget$ Billion$ Billion

Fiscal YearFiscal Year 20042004 2004-132004-13

ReconciliationReconciliation -88-88 -2,775-2,775

House-passed House-passed Reconciliation ‘03Reconciliation ‘03

-7-7 -259-259

Multiple of Multiple of House-passedHouse-passed

1313 1111

Comparison to 2004 BudgetComparison to 2004 BudgetReduction for Ag, $ BillionReduction for Ag, $ Billion

Fiscal YearFiscal Year 20042004 2004-132004-13

House-passed Ag House-passed Ag Reconciliation ‘03Reconciliation ‘03

-0.6-0.6 -18.6-18.6

Agriculture’s share Agriculture’s share of Reconciliationof Reconciliation

9%9% 7%7%

Future Agriculture Future Agriculture ReconciliationReconciliation

-8-8 -193-193

Policy ImplicationsPolicy Implications

How to reduce farm program spending.How to reduce farm program spending.

WTO compliance by category (Amber, WTO compliance by category (Amber, Blue, Green boxes).Blue, Green boxes).

Fruit and vegetables, specialty crops, Fruit and vegetables, specialty crops, planting prohibition.planting prohibition.

Land values.Land values.

Policy Implications:Policy Implications:How to Reduce Ag SpendingHow to Reduce Ag Spending

Farm Commodity Programs are now direct Farm Commodity Programs are now direct payment programs.payment programs.Few efficiencies to be gained as in 1990 Few efficiencies to be gained as in 1990 Flex Acres 15% reduction in deficiency Flex Acres 15% reduction in deficiency payments.payments.Reductions likely to be in commodity Reductions likely to be in commodity (A/B/G), conservation direct payments (A/B/G), conservation direct payments (Green), crop insurance premium (Green), crop insurance premium subsidies (de minimis).subsidies (de minimis).

CCC Outlays by Payment TypeCCC Outlays by Payment Type

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

$ m

illio

ns

2005 2007 2009 2011 2013

Total

Payments

Net Lending

Price support

Export

GSM

Policy Implications: Policy Implications: WTO DimensionWTO Dimension

Policymakers must consider trade negotiation Policymakers must consider trade negotiation proposals in deficit reduction.proposals in deficit reduction.

Previous US proposal to reduce AMS to 5% of Previous US proposal to reduce AMS to 5% of value of Ag production implied Amber Box limit value of Ag production implied Amber Box limit of $9.5B, 50% less than $19.1B. of $9.5B, 50% less than $19.1B.

Current “Substantial Reduction” is suggested to Current “Substantial Reduction” is suggested to mean 40-50% reduction. Amount TBN.mean 40-50% reduction. Amount TBN.

Dairy and sugar pose major challenge: small Dairy and sugar pose major challenge: small budget impact, significant AMS impact.budget impact, significant AMS impact.

Commodity Program Costs Commodity Program Costs 1999-01 Avg1999-01 Avg

0

5,000

10,000

15,000

$m

illi

on

BudgetCosts

AMS

Sugar Dairy

All other

Meeting WTO AgreementMeeting WTO Agreement

Dairy and Sugar must be considered in Dairy and Sugar must be considered in AMS reduction, if not budget reduction.AMS reduction, if not budget reduction.

These are not just Market Access issues.These are not just Market Access issues.

Cutting AMS will have disproportionate Cutting AMS will have disproportionate impact on farm income vs. budget cuts.impact on farm income vs. budget cuts.

How reductions are made has broad policy How reductions are made has broad policy implications.implications.

Specialty Crop IssuesSpecialty Crop Issues

WTO panel ruled Direct Payments may WTO panel ruled Direct Payments may not be Green Box because of fruit and not be Green Box because of fruit and vegetable planting prohibition.vegetable planting prohibition.Specialty crop interests seek CCC funds in Specialty crop interests seek CCC funds in Ose-Dooley bill, mostly Green box. Likely Ose-Dooley bill, mostly Green box. Likely accommodation in next farm bill.accommodation in next farm bill.Shifting funds from program crops to Shifting funds from program crops to specialty crops while reducing overall specialty crops while reducing overall spending.spending.

Land ValuesLand Values

Values/ rental rates have kept rising Values/ rental rates have kept rising through low price years 1998-2002.through low price years 1998-2002.

Farm bill continued policy that resulted in Farm bill continued policy that resulted in farmer incomes being higher when prices farmer incomes being higher when prices are low.are low.

International competitive issue: US vs. International competitive issue: US vs. Brazilian soybeansBrazilian soybeans

Real Estate Values vs. Prices Real Estate Values vs. Prices Received, 1990-92=100Received, 1990-92=100

0

200

400

600

800

1,000

1,200

1,400

1,600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$ p

e A

cre

0

20

40

60

80

100

120

140

Ind

ex, 1

990-

92=

100

Real Estate Value Prices Received

Real Estate Values vs. Prices Real Estate Values vs. Prices ReceivedReceived

0

20

40

60

80

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$ p

er

Ac

re

0

20

40

60

80

100

120

140

Ind

ex

, 1

99

0-9

2=

10

0

$Change/A Prices Received

Land Values & U.S. Land Values & U.S. Competitiveness: US$/buCompetitiveness: US$/bu

USUS

HeartlandHeartland

BrazilBrazil

Parana/MGParana/MG

ArgentinaArgentina

ProductionProduction 5.115.11 4.16/ 3.894.16/ 3.89 3.933.93

VariableVariable 1.711.71 2.78/3.172.78/3.17 1.901.90

FixedFixed 3.403.40 1.38/0.721.38/0.72 2.022.02

Internal transportInternal transport 0.430.43 0.850.85 0.810.81

Freight to Freight to RotterdamRotterdam

0.380.38 0.570.57 0.490.49

Price at RotterdamPrice at Rotterdam 5.925.92 5.58/5.805.58/5.80 5.235.23

Source: Economic Research Service, USDASource: Economic Research Service, USDA

Summing UpSumming UpFramework agreement models Uruguay Framework agreement models Uruguay Round but with pressure for greater overall Round but with pressure for greater overall reductions, especially domestic supports, reductions, especially domestic supports, perhaps 40-50%.perhaps 40-50%.

Deficit reduction pressure will likely Deficit reduction pressure will likely continue for several years, continued cuts continue for several years, continued cuts in agriculture programs.in agriculture programs.

Policymakers must be mindful of how cuts Policymakers must be mindful of how cuts are effected to reflect WTO commitments.are effected to reflect WTO commitments.

Summing UpSumming Up

Price support levels (Amber) likely to be cut Price support levels (Amber) likely to be cut the most, CCP’s (Blue) some, Direct the most, CCP’s (Blue) some, Direct payments (Green) less.payments (Green) less.

Dairy and sugar programs will need to be Dairy and sugar programs will need to be addressed carefully.addressed carefully.

Specialty crops and planting prohibitions Specialty crops and planting prohibitions will likely need to be addressed.will likely need to be addressed.

Summing UpSumming Up

Land values will likely decline, both as a Land values will likely decline, both as a result of reduced gov’t assistance and to result of reduced gov’t assistance and to meet competitive challenge with other meet competitive challenge with other countries.countries.