Agri-vation: The Farm Bill from Hell

June 1, 2003 Topic: Economics Tags: Cold War

Agri-vation: The Farm Bill from Hell

Mini Teaser: The 2002 Farm Bill is a four-fold disaster, replete with domestic and foreign policy costs. An experienced farm hand shows how.

by Author(s): C. Ford Runge
 

United States agricultural and trade policies have huge impacts on
world markets. Indeed, as a leading agricultural exporter, American
actions set the tone for much of international food policy. The
United States has done much good in this role; for example, it helped
lead agriculture toward more open markets in the Uruguay Round
negotiations (1986-93). But the centerpiece of current U.S.
agricultural policy, the 2002 Farm Bill, is an outright disaster in
four acts. First, it upends U.S. commitments in the World Trade
Organization (WTO) to more open agricultural trade, from which U.S.
farmers would be the largest beneficiaries. The failure of the latest
Doha Round negotiations to make any real progress is testimony to the
fact. Second, it sends exactly the wrong message to our trading
partners in Europe and the developing countries. Third, less
obviously but not less importantly, it undermines the long-term
competitiveness of U.S. agriculture itself. Fourth, it is contrary to
conserving American agricultural resources and the sustainability of
U.S. agricultural production systems.

On all four fronts, recent U.S. actions represent backsliding toward
protectionist policies that will materially harm U.S. trading
partners, especially developing countries, as well as U.S. farmers
themselves. How could such a disaster have happened?

Paying the Bill

In domestic political terms, the 2002 U.S. Farm Bill that now reigns
over U.S. agriculture policy represents an inversion of Dr. Johnson's
comment on a second marriage: "a triumph of hope over experience."
The Farm Bill is rather a triumph of experience over hope. U.S. farm
interest groups are experienced at securing subsidies from compliant
and parochial members of Congress. By focusing intense pressure on
the House and Senate subcommittees (and their staffs) responsible for
setting farm subsidy levels, these commodity groups can extract major
transfers of wealth for their producers. Because these subsidies are
generally based on per acre or per unit "base" production, the bigger
the farm, the bigger the subsidy. Payment threshold limits are set so
high, and enforced so poorly, that they affect no more than a handful
of large farms.

Farm subsidies have been subjected to overall limits under the terms
of the Uruguay Round Trade Agreement (URA) of 1993. But these limits
have led, unfortunately if not inevitably, to various maneuvers to
slip around them. One such maneuver is to define subsidies as
"non-product specific"--described just below--allowing the U.S.
government to maintain that its grossly expanded farm payments are
"GATT-legal." The reality is that the new subsidies, even though they
do not generally restrict imports (apart from peanuts, dairy and
sugar), nonetheless insulate U.S. producers from global competition
and world markets. They do so in ways that are substantially
equivalent to the EU's grossly inflated border protections, and the
international distortions they create will erode the base of American
production by artificially inflating domestic U.S. land values,
raising costs of production and harming U.S. competitiveness. While a
small number of large operations will profit handsomely, the
subsidies thus represent a form of domestic self-injury to the
country as a whole.

The greatest injury, however, will be visited upon poor farmers in
developing countries, and to farmers in developed countries without
comparable levels of largesse, such as Australia and to a lesser
extent Canada. We know this because we have examples of such
phenomena from years past plainly before us. Consider cotton.

Cotton prices have fallen by two-thirds since 1995, to around 40
cents a pound. The reason for this is simple enough: there was excess
supply at the same time that demand was falling. The fall in demand
was mostly the consequence of the collapse of Russia's textile
industry. The excess demand was abetted by the $3.4 billion in
subsidy checks that U.S. cotton farmers received under the last year
of the 1996 Farm Bill, which encouraged surplus production. There are
approximately 25,000 U.S. cotton farmers, with average assets of
$800,000. Under the 2002 program, cotton farmers will receive direct
payments of 66 cents a pound, a loan rate of 52 cents and a target
price of 72 cents--all well above global prices. (Across the ocean in
Africa, meanwhile, cotton farmers in Mali will receive about 11 cents
a pound this year.) U.S. cotton farmers are not required to leave any
acres idle to receive these subsidies. In effect, U.S. farmers are
insulated from global competition by individual payments averaging
hundreds of thousands of dollars. The World Bank and IMF estimate
that eliminating U.S. cotton subsidies would raise revenues to west
and central African countries by $250 million--not much money by some
standards, but significant in many African economies.

If cotton were the only problem! To grasp the scale and breadth of
the disaster the Farm Bill represents requires a review of the Bill
itself. Even a cursory summary is complicated, however. The bill,
whose lifespan is seven years, has ten titles, totaling more than
1,000 pages. For our purposes, the three most important are Titles I
(Commodity Programs), II (Conservation) and III (Trade).

The Commodity Programs span a wide range, but give most of the
subsidies to growers of feed grains (mainly corn), wheat, rice,
soybeans and cotton. The 2002 legislation has three categories of
subsidy under Title I. The first are "fixed payments", which are
carried over from the 1996 legislation, but generally at higher
levels. The second are non-recourse marketing assistance "loans",
which provide funds to lock in minimum price guarantees. These are
also carryovers from previous policies. The third category of
subsidy, new in the 2002 Farm Bill, is the "counter-cyclical income
payment." In essence, these payments represent the new subsidy levels
resulting from the "emergency assistance" and supplementary payments
that were added under the 1996 legislation by year-to-year
Congressional action during 1998-2001. These "topping off" subsidies
are institutionalized in the 2002 bill as counter-cyclical payments,
but will ebb and flow as prices rise and fall.

To get a sense of the magnitude of these payments, consider the
record from 1996-2001 under the 1996 Farm Bill. U.S. agricultural
production is accounted for by about 2.1 million farms. But this
includes a multitude of hobbyists, part-timers and absentee landlords
who have placed acreage in conservation easements. In reality, about
85 percent of U.S. production is accounted for by no more than
400,000 producers, who are technologically and politically
sophisticated by any standard. It is these 400,000 who receive nearly
90 percent of all subsidy payments. Under the 1996 legislation, total
direct subsidy payments totaled $7.3 billion in 1996, $7.5 billion in
1997, rose to $12.4 billion in 1998, $21.5 billion in 1999, $22.9
billion in 2000 and $20.0 billion in 2001. That amounts to a whopping
$91.58 billion over six years, an average of $15.3 billion a year.
The reason that subsidy payments rose almost three-fold from 1996 to
1999 and stayed at or above $20 billion through 2001 was that
Congress topped off the fixed payments mandated under the 1996 Farm
Bill with "emergency assistance" and "loan deficiency payments",
adding $13.7 billion in these two categories in 1999, $14.9 billion
in 2000, and $13 billion in 2001.

As noted just above, under the new farm bill, what used to be
"emergency" funding has become the new status quo. Fixed subsidy
payments, the first category, mandate an increase in direct payment
rates per bushel of corn from 26 cents in 2002 to 28 cents. Wheat
rises from 46 cents to 52 cents. Soybeans are granted a direct
payment of 44 cents for the first time. The price floor established
by the marketing assistance loans also increases from $1.89 per
bushel to $1.98 in 2002-2003 for corn, from $2.58 to $2.80 for wheat,
and decreases from $5.26 to $5.00 for soybeans, which were thought to
be getting too far out ahead of corn. The loans can be repaid by
giving the crop to the government, repaying the loan at the stated
price if prices are below the loan rate, or by accepting a loan
deficiency payment if the local price is below the loan rate.

The third category of subsidy, the counter-cyclical income support
payment, is to be made whenever the "effective" price is less than
the target price. Counter-cyclical payments, together with marketing
assistance loans, will vary inversely and unpredictably with market
prices (while direct payments will not). Therefore, since no one
knows for sure what future prices will be, the total levels and costs
of this subsidy can only be guessed. The Congressional Budget Office
(CBO) estimated in 2002 that total direct spending would come to $45
billion under all provisions of the bill (including food stamps) in
2002, and would total $293 billion from 2002-07, or somewhat over a
quarter of a trillion dollars. Another estimate, by the Food and
Agricultural Policy Research Institute (FAPRI) weights these numbers
by probabilities of price movements, and concludes that total
spending will be about 6 percent higher than the CBO numbers.

Using the lower CBO estimates, how much more in subsidies will likely
be paid out under the 2002 bill compared with the 1996 bill,
including the emergency assistance from 1998-2002? Comparing the
figures for direct government payments for the six years 1996-2001
with projected payments from 2002-07, the six-year average from 1996
to 2001 is approximately $15.27 billion, compared with $19.53 billion
from 2002-07, an increase of 22 percent. If the FAPRI estimates are
used, this increase could be 23 or 24 percent.

Essay Types: Essay