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ROBERT L. THOMPSON

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ROBERT L. THOMPSON Powered By Docstoc
					     The 2007 Farm Bill:
   Key Drivers & Prospects

        Robert L. Thompson
Gardner Professor of Agricultural Policy
         University of Illinois
         September 9, 2005
“Something Has to Be Done About
   the Federal Budget Deficit”
   Implications of Budget Deficit
• Remember that the 2002 Farm Bill was written
  under unrealistic Federal budget expectations
• Many more people are concerned about AMT
  relief, local schools and prescription drugs
  under Medicare than sustaining farm programs.
• There’s little public goodwill towards a farm
  program that gives most of the benefits to
  largest producers and land owners
• However, political support for agricultural
  spending is such that some Congressmen this
  year suggested taking proposed cuts out of food
  stamps instead of payments to farmers!
    FY 2006 Budget Resolution
• $2.6 trillion budget resolution was passed by
  Congress on April 28, 2005.
   – Most “savings” came out of Medicaid.
   – Federal debt grows by over $600 billion in each of
     next 5 years. (So much for deficit reduction!)
• “Cuts” farm program spending (relative to
  baseline) by $3 billion over 5 years, with all but
  $173 million put off until 2007, when the next
  farm bill is written, and beyond.
• Despite many anti-farm subsidy editorials,
  agricultural spending was not asked to make
  any meaningful contribution to deficit reduction.
Agricultural Solidarity Fragmenting
 • Many farm group leaders recognize that there will be
   less budget authority for agriculture in next farm bill.
 • Large differences among program crops and regions in
   support per farmer and per acre are creating “subsidy
   envy”
 • Profitability of the 2/3 of agriculture not producing
   program crops is calling into question what the programs
   accomplish
 • Traditional solidarity among commodity groups and
   among commodities in general farm organizations is
   starting to show cracks
    – North vs. South
    – sugar vs. the rest
    – fruits and vegetables vs. program crops.
  Generous Campaign Contributor
• Congressional and Presidential elections are
  extremely expensive in the United States.
• Little real campaign reform has been achieved.
• The farm, food and agribusiness sectors are
  generous campaign contributors (see tables that
  follow)
• Agribusiness and the food industry (including
  fast food) sat out the last farm bill debate and
  are “committed not to make that mistake again.”
• Many promises made on campaign trail are also
  expensive, e.g. MILC program extension for at
  least two more years.
   Food & Agricultural PAC Contributions to
   Federal Candidates, 2004 Election Cycle
            Sector                       Contributions ($ million)
Agric Inputs & Services*                              3.2
Food Processing/Sales                                 2.7
Sugar growers/proc’ors                                2.4
Tobacco companies                                     2.1
Crops other than sugar                                2.0
Dairy                                                 1.8
Other livestock & poultry                             0.7
Vegetables, fruits & nuts                             0.6
•Machinery, pharmaceuticals, credit, insurance, fertilizer, seeds, ag chems, etc.
 Source: Center for Responsive Politics (FEC data)
    Ag Commodity PAC Contributions to
  Federal Candidates, 2004 Election Cycle
  Commodity                               Contributions ($ 1,000)
Sugar                                            2,375
Dairy                                              1,757
Cotton                                               479
Rice                                                 283
Peanuts                                               218
Citrus                                                167
Wheat                                                 100
Potatoes                                               57
Corn                                                   37
Soybeans                                               17
Source: Center for Responsive Politics (Federal Election Commission data)
U.S. Producer Support, 2001-2003
                 (Percent of revenue)
 Sugar                              58
 Milk                               44
 Rice                               44
 Sorghum                            37
 Wheat                              34
 Barley                             30
 Corn                               20
 Soybean                            19
 Wool and lamb                      17
 Pork, beef and broilers             4
 Overall                            19
 Source: OECD PSE database
        CCC Outlays, by Commodity
                    (millions of dollars)
Commodity            2002     2003      2004       2005E
Corn                2,959    1,415     2,504      7,683
Wheat               1,190    1,118     1,173      1,495
Rice                1,085    1,279     1,130        586
Upland cotton       3,307    2,889     1,372       4,721
Soybeans            3,447      907          595    1,563
Dairy                 622     2,494         295      633
Total               15,680 17,425 10,575          24,065
 Source: USDA CCC
                   Politics
• Don’t forget that rural America reelected George
  Bush!
• The Congress & the White House are now
  extremely politicized: there is no bipartisan
  cooperation among either ag committee
  members or their staffs. Each party is doing
  everything possible to make the other look bad,
  even it means Congressional paralysis.
• We won’t know the Republican-Democrat split in
  the Senate and House which will write the next
  farm bill until Nov. 2006.
• Farm bills are best written in odd-numbered
  years
 Who Reelected President Bush?
        Rural America




Source: Univ. of Michigan
Source: ERS
  Importance of Exports to U.S. Ag
• American agriculture exports ¼ to 1/3 of its
  production of many commodities
  – without exports, farm sector would have to downsize
  – significant contribution to balance of trade.
• Exports can grow by expanding the total size of
  the market or by increasing market share.
  – Need econ. growth in LDCs to increase size of market
    (consumption growth will outstrip prod’n potential)
  – preserve competitiveness to protect market share
• Capitalization of farm program benefits into land
  values undermines long-term competitiveness
  – Farm land price rise driven more by 1031 exchanges
• Continued drop in U.S. dollar exchange rate will
  facilitate U.S. agricultural exports
U.S. Farmers’ Changing World View
• Losing confidence in their international
  competitiveness (benefits of Uruguay Round
  Agreement on Agriculture (URAA) oversold)
• Think URAA was unfair in that allowed EU and
  Japan much higher AMSs
• See world market as a zero-sum game (If you
  increase your exports, I have to reduce mine.)
• Don’t recognize potential growth in LDC markets
• Reluctant to accept that being a large exporting
  country constrains our freedom of action in
  domestic policy making. You cannot have it both
  ways.
   Implications of Cotton Decision
          for 2007 Farm Bill
• Congress heeded the URAA AMS cap when it
  wrote the 2002 farm bill, but it ignored the fact
  that marketing loans work as export subsidies
  and can depress world market prices.
• Need to change marketing loan, LDP and CCP
  provisions for cotton and other program crops.
• The fruit and vegetable production exclusion in
  qualifying for direct payments needs to be
  changed. This will bring huge political opposition
  from fruit & vegetable growers, esp. Calif. & Fla.
• Note: The U.S. cannot claim any credit in the
  Doha Round agreement for changes it makes in
  policies found to be in violation of the URAA.
  Farm Bill & WTO Timetable
• 2005:
   – Extend Trade Promotion Authority (“fast track”) &
     decide to stay in the WTO [done]
   – WTO negotiations to put meat on the skeleton of
     the 7/31/04 Framework Agreement (Hong Kong
     Ministerial to assess progress in Dec. 2005)
   – Modest farm policy changes to accommodate
     WTO cotton decision and budget deficit reduction
• 2006:
   – Serious offers & requests in WTO negotiations
• 2007:
   – Congressional approval of new WTO Trade
     Agreement and signing before TPA expires (6/07)
   – 2007 Farm Bill
   Doha Round Agricultural
Agreement: What Is Possible?
            Domestic Support
• Present: Categorizes all support policies in one
  of three boxes, with only amber box total
  (“aggregate measure of support (AMS)”)
  capped.
• Proposed:
  – Impose product-specific caps
  – Cap sum of amber box + blue box + trade-distorting
    de minimus policies.
     • This would significantly increase maximum allowed support
       in US and EU! Net effect depends on depth of cuts.)
                  Green Box
• Present: No cap.
• Doha Round likely to encourage shifting as
  much money as possible from amber to green
  box payments.
• Cotton case affirmed that direct payments are
  “green” only if there are no constraints
  whatsoever on what can be grown on land
  receiving payments.
  – U.S. must either delete fruit & vegetable exclusion or
    include direct payments in amber box
• Open issue: Tighten definition of “minimally
  trade-distorting”
                  Amber Box
• “Substantial reduction in the overall level
  of its trade-distorting support from bound
  levels”
• Open issues:
  – Add product-specific caps?
  – Highest levels of support reduced the most?
     • rice, cotton, sugar; dairy in the U.S.
                    Blue Box
• Present: Trade-distorting policies that have
  measures that offset their production-inducing
  effect, e.g. set-aside or quota on production or
  sales. No cap at present.
• Tentatively Agreed:
  – Broaden to include “direct payments that do not
    require production,” e.g. counter-cyclical payments
    [no link to current production, but per unit payment is
    based on current market price; therefore, not green
    box].
  – Cap at 5% of total value of all national ag production
    (including non-program crops).
            Export Subsidies
• Present: Cap on volume and value of export
  subsidies on agricultural policies.
• Conditionally agreed: Eliminate all direct
  agricultural export subsidies by a (yet to be
  agreed) date certain
• WTO Cotton Case mandated that the U.S. must
  eliminate subsidy component in export credits
  and export credit guarantees
• Conditions yet to be agreed:
  – U.S. food aid should be on only a grant basis
  – Mode of operation of state-trading enterprises (STEs),
    e.g. Canadian Wheat Board, must preclude possibility
    to subsidize exports.
                Market Access
• The most difficult pillar on which the least has
  been agreed to date
• Framework Agreement says:
   – Substantial increase in market access though tariff
     cuts or tariff rate quota (TRQ) expansion
   – Categorize all tariffs into “bands,” each with a different
     reduction formula, with the highest tariffs to be
     reduced the most.
   – Allow each country to designate an “appropriate
     number” of (politically) “sensitive products” on which
     smaller cuts can be made.
   – Make cuts from bound rates.
   – Allow developing countries to use “special safeguard”
      Market Access (cont’d.)
• Proposed:
  – Increase tariff-rate quotas (TRQs) on
    “sensitive products” on which tariffs are cut
    less than formula would otherwise require.
     • U.S. has TRQs on sugar, dairy, cotton, peanuts,
       and beef.
  – Set a maximum allowable tariff rate.
  Special & Differential Treatment
     of Developing Countries
• Allow smaller cuts phased in over a longer
  period
• Allow each developing country to designate a
  (yet to be defined) number of “special products”
  that can be protected
• Exempt LDCs completely from adjustment
• There remains politically divisive issue of
  definition of “developing country” (as opposed to
  a least developed country (LDC)).
     Minimalist Outcome Possible
• Tariff cuts from bound, not applied, tariffs (& no cap)
• No increase in minimum market access
• Cuts in domestic ag supports smaller than presently
  unused “capacity” (or increase the cap!)
• Cuts to be made from product aggregates, not individual
  products
• Redefine blue box to include countercyclical payments
• Everyone’s most-subsidized commodities avoid cuts by
  being categorized as “special products”
• Developing countries overuse new “sensitive products”
• LDCs don’t have to do anything
   WTO Ag Negotiations Hung Up
       on Who Goes First
• U.S. has proposed reducing our ag subsidies
  substantially, but only if other countries provide much
  greater access to their markets.
• Developing countries won’t open their markets as long
  as world market prices are depressed by ag subsidies in
  OECD countries (and they have more than half of the
  votes)
• Despite encouraging words at July 2005 G-8 Summit, no
  more progress in WTO ag negotiations occurred this
  summer.
• After CAFTA-DR vote, other countries doubt U.S. ability
  to deliver on commitments.
• Unclear that U.S. negotiators have authority to strike
  deals
 Recognition that Farm Programs
Aren’t Achieving Stated Objectives
• Low farm family income
   – Most payments go to larger producers whose family incomes &
     wealth are well above average
   – Low income farmers receive very little from programs
• Variability of farm income
   – Farmers have income averaging and cash accounting
• Increase competitiveness
   – Capitalization of payments into land values raises U.S. cost of
     production and undercuts international competitiveness
   – Public investments in ag research declining
• Food security
   – Not a credible problem when U.S. ag grows 1/3 more than we
     use domestically
• Rural development
   – Payments facilitate consolidation; don’t create more jobs
Size Distribution of U.S. “Farms,” 2003
 Size in $     Thousand % of all   % with    Ave $/ pay
 thousand       farms   farms      payment   farm (000)
 <10            1,227      58        20         2
 10-49               398    19       53         6
 50-99               172     8       71        10
 100-249             165     8       78        19
 250-499              86     4       78        34
 500-999              45     2       70        55
 >1000                29     1       56        82
 All                2,123   100      39        13
 Source: USDA ERS
   What Role Will Environmental
   Groups Play in 2007 Farm Bill?
• 1985 Farm Bill was first in which environmental groups
  were a real player
   – Long-term conservation reserve
   – Conservation compliance
   – Swamp buster and sodbuster.
• All budget cuts from agriculture since 2002 have come
  out of conservation programs.
• The Environmental Working Group has increased
  transparency of who gets most farm program payments
  (http://www.ewg.org/farm/)
• Mobilizing LDC opposition to OECD farm subsidies
• “Doubly green”* payments (decoupled payments for
  conservation that fit in the “green box”) are a likely
  winner in the WTO ag negotiations.
   *To paraphrase Gordon Conway’s Doubly Green Revolution book
Other Issues Driving 2007 Farm Bill
• Food safety and bioterrorism
• Rural development: Acknowledgment that ag commodity
  programs make weak rural development policy.
• Science: Implications of shifting investments in ag
  research from public to private sector are being
  recognized.
• Food aid: when is it an export subsidy?
• Concerns re structure of agriculture.
• Future role of ethanol and bio-diesel in U.S. energy
  policy
• Crop insurance: would Congress keep hands off to allow
  an actuarially viable approach to function?
• Gross revenue insurance to replace disaster payments,
  crop insurance, marketing loans, LDPs, and CCPs?
    2007 Ag Market Conditions
• Every farm bill is influenced disproportionately
  by the current economic condition in the farm
  sector and commodity markets at the time the
  bill is written (myopic future expectations)
• While one cannot predict how crop conditions
  here and around the globe will evolve between
  now and 2007, we can predict with some
  assurance that whatever they are will affect the
  content of the next farm bill.
• The big jump in farm program payments from
  2004 to 2005 will not go unnoticed. 2006?
                 Conclusion
• Most likely outcome in 2007 Farm Bill is only
  modest changes from 2002 Farm Bill
• BUT, there are just enough forces for change
  that you should be prepared that bigger change
  is possible
  – Federal budget deficit
  – WTO trade negotiations
  – Public perception that farm programs are not
    achieving their objectives
• The most-discussed alternatives are
  – Some forms of subsidized gross income insurance
  – Payments for conservation or environmental services
  – Rural infrastructure investments
     Direct Government Payments
USDA Forecasts for FY 2004 and 2005 ($ billions)
Total direct payments        14.5        24.1
Fixed direct payments         5.3         5.3
Counter-cyclical payments     2.0         6.0
Loan deficiency payments      3.2         4.8
Marketing loan gains          0.5         0.8
Milk income loss payments     0.2         0.5
Conservation payments         2.6         2.8
Ad hoc & emerg. payments      0.7         3.9

Source: USDA
     2002 Farm Bill Had 10 Titles
•   I. Commodity Programs
•   II. Conservation
•   III. Agricultural Trade and Aid
•   IV. Nutrition Programs
•   V. Farm Credit
•   VI. Rural Development
•   VII. Research
•   VIII. Forestry
•   IX. Energy
•   X. Miscellaneous

				
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