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.
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.
Inside Agricultural Trade Baseball
"Inside baseball" conveys the idea that experts worry about different
things from the average guy in the bleachers. The Minnesota Twins and
the Montréal Expos know all about inside baseball, and how it can
deal some teams in and some out of baseball's fortunes. These are the
issues that experts--baseball bankers, lawyers and owners--deal with
everyday. In agriculture and trade policy, there is a corresponding
group of insiders--commodity groups, lobbyists, investment bankers,
trade lawyers and trade bureaucrats in ministries and at the WTO.
Many of these insiders are now busy trying to rationalize U.S. and
European agricultural subsidies, which threaten to scuttle entirely
the Doha Round of global trade negotiations at the WTO.
From the U.S. side, two seemingly incompatible arguments are now
heard about agricultural subsidies. The first is that the Farm Bill
will give the U.S. "leverage" in the trade negotiations because it
can bargain away the most egregious provisions as the negotiation
proceeds. And in truth, the United States has tabled proposals in
Geneva to end many of its subsidies, proposals that are
inconveniently totally at variance with the current farm bill. The
second argument is that these subsidies are "GATT-legal" anyway.
There are a number of problems with both of these arguments. First,
the subsidy payments under the 2002 bill are largely set in stone;
they are entitlements most of which can be bargained away only with
congressional action. To bargain them away, Congress and the
President will need to deal with the likes of Kenneth Hood, chairman
of the National Cotton Council. Mr. Hood, whose Mississippi farm
received $750,000 in subsidies last year, will get even more under
the 2002 bill. Costs of cotton production in the Mississippi Delta
average $600 an acre. As Mr. Hood said in the June 26, 2002 Wall
Street Journal: "Maybe farmers in Africa should be the ones not
raising cotton. . . . The Delta needs cotton farmers, and they can't
exist without subsidies." Even if the subsidies are rolled back in
future years, for at least the next seven years they amount to legal
contracts with commodity growers. This destroys the credibility of
claims that they can be bargained away--as what we have already seen
in the Doha Round shows.
And if the subsidies are GATT-legal, why bargain them away at all?
Unfortunately, their supposed GATT-legality turns on claims and
language that also defy credulity. The issues (which are very inside
baseball) revolve around whether the subsidies are "decoupled" and
therefore "non-trade distorting", but more fundamentally whether they
are "product specific." While no generally recognized definition of a
non-trade distorting or "decoupled" measure exists in trade law, the
basic idea is that a decoupled subsidy does not induce greater
production at an individual level--that is, does not artificially
inflate supply.
But all three of the bill's subsidy components are likely to affect
production incentives and to distort trade. While the United States
argues that these are decoupled payments, they nevertheless encourage
farmers to maintain and increase the acreage of subsidized crops in
anticipation of opportunities to update their eligibility for crop
subsidies in the future. Marketing assistance loans, especially
during periods of low prices, create incentives to produce crops
eligible for the loan payments. By raising loan rates for wheat and
corn, the 2002 Farm Bill will shift plantings in their direction.
Finally, counter-cyclical income payments linked to updated
production over 2002-07 will affect current production decisions.
While all three forms of subsidy under the 2002 bill are neither
production nor trade neutral, whether the Bill literally violates
U.S. GATT obligations under the Uruguay Round turns on an even more
arcane issue: whether the subsidies are "product specific." Under the
1993 Uruguay Round Agreement on Agriculture, subsidies (called the
Aggregate Measure of Support, or AMS) are limited for the United
States to $19.1 billion. The question is: what subsidies count toward
the $19.1 billion limit? Subsidy payments that are 5 percent or less
of the value of a specific product are not counted against the AMS.
And any subsidy payments that are not product specific are also not
counted if their overall value is 5 percent or less of total
agricultural production per year. If these requirements are met, the
subsidies are not subject to the AMS binding.
Even at first inspection, all three types of U.S. farm subsidies
under the 2002 Farm Bill are based on acreages and yields in bushels
per acre of specific products: corn, wheat, soybeans, grain sorghum,
barley, oats, cotton and rice. This is true of all three subsidy
categories: direct payments, marketing assistance loans and
counter-cyclical income payments. Furthermore, certain specific
products such as fruits and vegetables are not allowed to be planted,
implying that other specific products not in these categories are
allowed. Within the class of these "program" commodities (such as
corn), farmers are free to choose what to produce. The subsidies, in
other words, are product specific in motivation and specific to a
narrow class of program crops in application.
The most intense debate surrounds the product specificity of the
counter-cyclical income support payments. With low prices, these
payments will balloon. Since the counter-cyclical payments replace
and institutionalize the "emergency" spending and market loss
payments during the last four years of the 1996 bill, the USDA
acknowledges that they related to (then) current prices, but it calls
them "non-product specific" because they were not tied to current
production. This claim, if sustained in relation to the 2002 bill,
would allow the new payments to be exempted from counting toward the
$19.1 billion AMS binding unless they amounted to more than 5 percent
of "total value", equal to about $10 billion.
But since the counter-cyclical payments are triggered by a gap
between market prices or loan rates and target prices (less direct
payments), there is no question that they relate to the current
prices of program commodities such as corn and wheat. When the USDA
reasons that this is not "product specific", in effect it argues that
the quantity of corn produced or demanded is unrelated to its
effective price, a claim that would surprise even most first-year
students of economics. The basis on which they make this claim is
that the payment does not require planting corn to receive a corn
payment. If this subsidy is not "product specific", we have entered
an Orwellian world in which the putative basis for calling a subsidy
"non-product specific" is that farmers might just plant another crop
in the restricted class of program commodities.
All three forms of U.S. subsidy payments are therefore subject to
challenge as product specific, and if the WTO recognizes them as such
it could put the United States well over the top of its AMS binding
and in violation of its Uruguay Round commitments. This is the inside
baseball game. But the real significance of the issues lie in its
wider implications for multilateral trade liberalization.
The Future of Trade Liberalization
Players of the farm subsidy game described above may find myriad
excuses to subsidize large landowners, just as the commissioner of
baseball may defend collusion and monopoly and nevertheless
characterize it as competition. But to the outside world, rich
countries struggling to rationalize financial transfers to large
landowners are as transparent as the collusion, venality and just
downright corruption of some baseball owners. Two distinctive
messages are sent by U.S. actions that belie its commitment to trade
liberalization--one to the EU, the other to developing countries.
To the EU, U.S. actions say that, despite a carefully constructed
U.S. negotiating strategy during the Uruguay Round that paired
reduced levels of domestic support through lower loan rates and
planting flexibility with pressure on the EU to move in a similar
direction, all bets are now off. In effect, we have rewarded those in
the EU (notably the French, of all people...) who have steadfastly
resisted internal reforms of the bloated Common Agricultural Policy
(CAP). We have also convinced many in the EU that this is yet another
form of U.S. unilateralism in which no account is taken of the
negative impacts of U.S. policy on the rest of the world. The French
historically termed the English "perfidious Albion." Perfidious
America is now an easy charge, helping the EU justify a continuation
of its own wildly excessive export subsidies.
To the developing countries, there is a double message. The first is
stark. For families in Africa, Asia and Latin America struggling to
survive on a dollar or two a day, the insulation offered from market
competition to U.S. producers may be literally lethal to them.
Returning again to the example of cotton, U.S. overproduction, driven
by expanded subsidies, has driven global cotton prices into the
sub-basement. In Mali, one of the poorest African states, cotton
prices have declined 10 percent in the last year alone. Mali is a
Muslim country where, despite U.S. foreign aid spending of $40
million on education and health, the decline in cotton prices has
imposed a $30 million deficit on the state cotton company,
effectively wiping out three-quarters of the value of U.S. aid. What
the United States gives to rich cotton farmers in the Mississippi
Delta thus takes away from the poor in a country like Mali. To these
disaffected Muslim farmers, the words of a farm union leader ring
true: "The Americans know that with their subsidies they are killing
so many economies in the developing world."
The second message is to developing country trade negotiators, who
six months before passage of the 2002 Farm Bill were told by U.S.
trade officials that the Doha Round of multilateral trade
negotiations would focus on developing country issues, including
agriculture. The reasons for this were not driven by any sense of
U.S. and European noblesse oblige, but the realization that the
developing countries now hold the keys to a successful round.
Therefore, the excuses proffered for protectionist backsliding in the
form of U.S. steel tariffs and the Farm Bill, which revolved around
the need to round up votes for fast-track authority, have been
overtaken by a sense that domestic U.S. concerns will always trump
cooperative multilateral trade liberalization. Over the next two
decades, this is likely to be a far more serious blow to U.S.
agriculture and to the overall U.S. economy than many people realize,
because growth in developing countries is a key to American export
growth itself.
U.S. Agricultural Competitiveness: Ready, Fire, Aim
A variety of recent studies have reconfirmed that whenever domestic
farm subsidies are raised, they are quickly capitalized into farmland
prices. In a 2002 study for the USDA, agricultural economists Terry
Roe and his colleagues concluded:
"Since direct payments are targeted to land formerly planted to
program crops, the cash rental rate that a tenant is willing to pay
for an acre of land is affected by the payment, and consequently, so
is the price of land."
The result of this insidious capitalization process is that a 20-25
percent expansion in domestic subsidy spending will only insulate
U.S. producers from global competition in the short run. Within a few
years, by bidding up land rents, it will raise production costs and
actually injure U.S. farm competitiveness. As the cost structure of
farming rises, profit margins will fall, spurring farmers to demand
yet higher subsidies. In other words, we will witness a vicious cycle
of cost-escalation and public spending that will push U.S. farmers
further and further away from the competitive edge.
The age distribution of these same farmers is rapidly changing. U.S.
farmers on average are old and getting older. The last solid data
available (comparing 1992 and 1997) shows that for all farms, the
number of farmers 65 and older rose from 478,000 to 497,000 and the
number who were 25-35 years old fell from 179,000 to 128,000. This
demographic shift will be aggravated by the cost barriers to entry
created by the capitalization process. Younger and poorer farmers
will be bid out of purchasing land and equipment at the entry level.
More ominously, farming will become ever more divided between those
who own the land and receive the subsidies and those who must rent,
often without any prospect of ownership. The landowning class will
increasingly be absentee owners who live off the farm (including many
widows or urban heirs), while those who do the actual work will be
tenants. The process of capitalization thus reinforces a farm
ownership structure in which land entitlements to subsidies flow to a
favored few, who then employ tenants to till their soil.
A third instance of self-injury resulting from trade restrictions
under 2002 agricultural policies arises from their many other
unintended side-effects. Consider one obscure but important
provision, introduced by members of Congress who thought they were
slowing up competitive imports of meat and other products from
Canada. On page 875 of the Senate version of the 2002 Bill,
requirements were imposed on imports of agrifood products sold at
retail--including beef, pork, lamb and fish, which stipulate "country
of origin" labels. The provision (Title X, section 10816) says that
by 2004, only meat from animals and fish born, raised and slaughtered
or harvested in the United States can be labeled "Product of USA."
The idea was to discourage feeder cattle or weanling pigs raised in
Canada or other countries from competing with the U.S. variety.
Hundreds of thousands of these animals are now born and reared for
the first months of their lives north of the border, and then raised,
fattened and processed in the United States. Under the new
provisions, any such products would become a "Product of Canada."
Ironically, whether or not a Canadian label is considered inferior by
U.S. consumers (the opposite may be true), these requirements have
bitten back hard. They have turned into a nightmare for U.S.
producers, especially packers and wholesalers, who realized too late
that they had imposed even greater burdens on themselves than on
Canadians. U.S. retailers must now validate and attest to the origin
of all of their products, proving that they originate in the United
States. These requirements shift costs up the supply chain from
retailers to wholesalers, processors to packers, and handlers to
producers, all of whom must verify U.S. origins. The American Meat
Institute's president, J. Patrick Boyle, called the provisions "the
most costly, cumbersome and complex labeling proposal in history."
There is also another phrase that comes to mind to describe Title X,
section 10816: thinking from the wrong end of a horse.
So it now appears that Canadian meat imports to the United States
will be treated under pre-existing country-of-origin laws, and that
the main hit will be taken by U.S. farmers and food firms. A
calf-rearing association, r-calf United Stockgrowers of America,
noted that the provision will impose a greater burden on domestic
producers than it does on importers. U.S. producers must maintain
records from birth to retail while imported products are not subject
to the same verification requirements. It is nonsensical for the USDA
to saddle U.S. producers with a more burdensome and complicated
verification system than is required of beef imports.
Indeed, because the provisions tilt the playing field against U.S.
meat production, multinational firms operating on both sides of the
border, such as Cargill's Excel Beef, may actually find it easier not
only to raise Canadian feeder cattle, but to fatten and process them
there, too, drawing investment and value-added meat processing jobs
out of the United States and into Canada. This provision was inserted
into the 2002 bill by a group of senators who promoted themselves as
defenders of the American family farmer. Nice work, fellas.
Conservation and Sustainability Issues
One of the leading questions during the 2002 Farm Bill debate was
over increased funding for conservation programs. Such programs were
championed by both Democrats, such as Senator Tom Harkin of Iowa, and
Republicans, such as Richard Lugar of Indiana. In the final bill,
baseline funding for conservation was expanded, especially to include
conservation payments for land already in production and livestock
facilities. The bill also expanded lands eligible for Conservation
Reserves and Wetlands Reserves. Total increases in authorized
spending for these and other conservation programs rose from $10.4
billion in 1996-2001 to $18.8 billion in 2002-07, an increase of over
80 percent.
Despite this apparent victory, many questions remain over whether
these programs will be effectively implemented. In a letter to the
administration in late 2001, Senators Harkin and Lugar pointedly
criticized the Office of Management and Budget for failing to
implement spending already authorized for technical assistance under
the Farmland Protection Program and the Wetlands Reserve Program.
"[W]e are concerned", they wrote, "that further delays in releasing
funding for conservation programs will hurt the ability of America's
farmers and ranchers to obtain the assistance they need to carry out
practices to conserve natural resources for future generations."
More broadly, there are serious questions as to whether these
conservation measures will be overwhelmed by the incentives created
by high subsidy payments to plant fencerow-to-fencerow. Since the
richest subsidies are paid to row crops such as corn, soybeans and
cotton, which are known to be highly erosive and consumptive of
higher levels of pesticides, the net result may be to aggravate soil
loss and water pollution problems. In the face of massive crop
subsidies, conservation will take second place. Subsidies to large
row crop producers don't follow a "polluter pays principle", but a
principle of paying the polluter.
America's farm trade policy has become a four-dimensional disaster.
It attempts to hide huge subsidy increases behind semantic claims of
"non-product specificity" in order to keep them GATT-legal,
effectively insulating U.S. producers from global markets. It sends
exactly the wrong signal to those in Europe and developing countries
who have struggled for trade liberalization, undercutting progress
made in the Uruguay Round to reduce protectionism and expand
agricultural markets for all farmers--notably U.S. farmers. Because
these huge subsidies will quickly be capitalized into farmland values,
U.S. producers will face higher costs, and younger and less landed farmers
will be denied entry, aggravating disturbing trends toward
an aging farm population and fueling division between a landed elite
and their tenants. And despite increases in authorized funding for
conservation, the massive infusions of subsidies to row crop
production are likely seriously to aggravate soil and water
degradation as the United States continues to pay the agricultural
polluter.
Best perhaps, in such depressing circumstances, to recall the
hallowed words of that 20th-century American philosopher who many
times said: "Well, it's a fine mess you've gotten us into this time."
Oliver Hardy please come home; you're needed on the farm.