The U.S. Farm Bill & the WTO
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Transcript of The U.S. Farm Bill & the WTO
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The U.S. Farm Bill & the WTO
Bruce A. Babcock
Center for Agricultural and Rural Development
Iowa State UniversityPresented at the NCGA Trade School, Chicago IL, Jan 27, 2006
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Outline of a Grand WTO Deal
• U.S. gives up some domestic subsidies in exchange for increased market access and a drop in domestic subsidies in the EU
• U.S. proposal would require changes in current program support levels
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Key Questions
• How much change in U.S. farm programs would be required?
• How much “safety” would still be provided by the program?
• Would a redesign of farm policy better fit the proposed restrictions in support?
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Illustration of U.S. Proposal
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Amber box Blue NPS de min PS de min
$ bi
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Current limits
New limits
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How the U.S. Met Its AMS Limits
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1996 1997 1998 1999 2000 2001
Year
AMS Before De MinimisDe Minimis ReductionsActual AMS
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Expenditures on Current Safety Net
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ B
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AMSU.S. Limit on AMS
Note: Direct and AMTA payments follow current USTR designation as being amber box following cotton case.
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First Result
• With no change in policy, the probability of exceeding Amber Box limits is 70% in 2006.
• Culprits are dairy, sugar, LDPs and CCPs.
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Structure of Program Paymentsfor Corn
Target PriceDirectPayment
Loan Rate
Counter-CyclicalPayment
Loan DeficiencyPayment
NotTiedTo
Prod
ProdReq.
$2.63
$0.28
$2.35
$1.95
RegardlessOf Market
Only if price is here
“Effective”Target Price
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What to Change?
• Eliminate dairy program?– $4.5 billion
• Eliminate sugar program?– $1.2 billion
• Cut effective target prices?– Could hold target price constant
• Cut loan rates?– Would increase CCP
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Is There Room to Cut?
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1999 2000 2001 2002 2003 2004 2005
$ B
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$ B
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Value of Ag. Production Direct Government Payments
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Total Iowa Corn Revenue with Payments(Assuming current program in place since 1985)
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1,000
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1980 1985 1990 1995 2000 2005 2010
$ m
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Market plus government revenue
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How Much to Cut to Meet Proposed Limits?
• No way to know for sure– Future payments depend on future price and
production levels• Two methods
– Simulate “many” future outcomes and count the proportion of outcomes where proposed limits are exceeded
– Simulate performance of programs over historical outcomes and count the proportion of years where proposed limits would have been exceeded
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Forward Looking Method*
• Put the CCPs into Blue Box• Cut loan rates and dairy support prices
proportionately until 5% of outcomes exceed proposed Amber Box limits
• Cut effective target prices until 5% of outcomes exceed Blue Box Limits
*Potential Impacts on U.S. Agriculture of the U.S. October 2005 WTO Proposal FAPRI-UMC Report #16-05 December 15, 2005.
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Backward-Looking Method*• Put the CCPs into Blue Box• Allocate dairy and sugar $750 million of the Blue
Box and $1.04 billion of the Amber Box• Calculate what support levels would have been
from 1980 to 2004• Cut loan rates and dairy support prices
proportionately until 4% of years (one year out of 25) would have exceeded proposed Amber Box limits
• Cut effective target prices until 4% of outcomes would have exceeded Blue Box limits
*Babcock and Hart. “How Much “Safety” Is Available under the U.S. Proposal to the WTO?” CARD Briefing Paper 05-BP 48 November 2005.
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Forward-Looking Results
Current NewCorn absolute percent Loan rate 1.95 1.74 -0.21 -11.00% Target price 2.63 2.45 -0.18 -7.00%Soybeans Loan rate 5.00 4.45 -0.55 -11.00% Target price 5.80 5.39 -0.41 -7.00%Wheat Loan rate 2.75 2.45 -0.3 -11.00% Target price 3.92 3.65 -0.27 -7.00%Cotton Loan rate 52.00 46.28 -5.72 -11.00% Target price 72.40 67.33 -5.07 -7.00%Rice Loan rate 6.50 5.79 -0.72 -11.00% Target price 10.50 9.77 -0.73 -7.00%Raw sugar loan ($/lb) 18.00 15.12 -2.88 -16.00%Milk support price ($/cwt) 9.90 8.81 -1.09 -11.00%Sugar non-NAFTA TRQ (mmt) 1,229 1,984 755 61.50%
Change
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Impact on Corn Income
Baseline Unilateral
$/acre No compensation No compensation Compensated
Market Gross Returns 373.18 0% 4% 4%
Marketing Loan Gains 12.63 -76% -86% -85%
Counter-cyclical Payment 13.80 -53% -67% -67%
Direct Payment 24.37 0% 0% 66%
Gross Returns with Payment 423.97 -4% -1% 2%
Net Returns with Payment 241.70 -6% -2% 4%
Multilateral
Change from Baseline
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Backward-Looking Results
Crop Current Loan Price Required Loan PriceBarley ($/bu) 1.85 1.68Corn ($/bu) 1.95 1.77Cotton ($/pound) 0.52 0.47Oats ($/bu) 1.33 1.21Peanuts ($/pound) 0.18 0.16Rice ($/hundredweight) 6.50 5.92Sorghum ($/bu) 1.95 1.77Soybeans ($/bu) 5.00 4.55Wheat ($/bu) 2.75 2.50
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Backward-Looking Results
Crop Current Target Price Required Target PriceBarley ($/bu) 2.24 2.02Corn ($/bu) 2.63 2.37Cotton ($/pound) 0.72 0.65Oats ($/bu) 1.44 1.30Peanuts ($/pound) 0.25 0.22Rice ($/hundredweight) 10.50 9.45Sorghum ($/bu) 2.57 2.31Soybeans ($/bu) 5.80 5.22Wheat ($/bu) 3.92 3.53
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Some Observations
• Lower trade barriers makes the world and the United States wealthier
• Agricultural tariffs and subsidies are seemingly the largest roadblock to lower trade barriers
• U.S. agriculture net beneficiaries of lower trade barriers
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More Observations• Cuts in loan rates and target prices reduce value
of LDPs and CCPs– Direct payments could compensate– Moving to programs that target revenue could
compensate: Replacing LDPs and CCPs with county-triggered
revenue program would increase average payments by 23% while meeting proposed Amber and Blue Box limits.
• Would lower price supports really damage farmer interests?