OSU Economists: Radical Changes for New Farm Bill

October 18, 2005

COLUMBUS, Ohio -- A recent U.S. proposal to reduce farm subsidies to enliven World Trade Organization (WTO) negotiations may have implications for the 2007 Farm Bill, say Ohio State University agricultural economists.

 

The extent of the impact hinges on whether or not the proposal is accepted, what programs are reduced, and to what extent they are reduced, or even possibly eliminated.

Whatever happens, farmers and agribusinesses are being encouraged to evaluate how they will manage the impact of reduced supports.

"The administration would very much like to cut farm programs, and one of the principal points of leverage in changing farm commodity programs will be this Doha round (of WTO negotiations)," said Luther Tweeten, an Ohio State agricultural economist and professor emeritus for the Department of Agricultural, Environmental, and Development Economics (AEDE). "The Bush administration wants to use these negotiations as leverage to go to Congress and say here's what the rest of the world would do, here's what we have to do, and then Congress would be asked to go along with these changes in farm commodity programs with the idea that any cuts in payments and protections to farmers would be more than offset by greater access to markets abroad."

The current proposal calls for the United States to reduce its domestic farm programs — those that distort farm production and international trade — by 60 percent. If such a proposal were to be approved, the potential exists for a radical change in the 2007 Farm Bill.

"If the administration gets an agreement that substantively constrains U.S. farm policy, then we will be writing this next farm bill with a constraint that has never before existed," said Carl Zulauf, also an Ohio State agricultural economist with AEDE.

Basing the new Farm Bill on WTO negotiations is a growing concern because the move could substantially rewrite farm policy by shifting programs, reducing programs or eliminating programs to stay within the boundaries of WTO limits.

"I refer to it as box management. You've got the amber box, you've got the blue box, you've got the green box," said Zulauf. "And it's managing those boxes of the WTO that is going to become very critical. In the past we either did not have these boxes or the limits on these boxes were so large relative to what we were spending that we didn't have to worry about them. That's not going to be true in 2007."

The WTO uses the "boxes" for classifying trade subsidies.

Green box programs, for example, are environmental and conservation programs, research funding, inspection programs and disaster relief. Green box programs are government funded and are not restricted by WTO trade agreements because they are not considered trade distorting.

Amber box programs are support programs, such as crop insurance, loan deficiency payments and countercyclical payments that are considered to distort production and trade.

Blue box programs are those that are direct payments under a production-limiting program, payments not tied to prices and production, and payments that do not fall into the amber box.

"The U.S. must report to the WTO how it classifies each of its programs and not exceed its expenditures to maintain those programs," said Zulauf. "If you exceed the box limit then other countries can claim you are in violation of the WTO agreement and can seek damages because of that. The boxes are really an accounting process."

U.S. Deparment of Agriculture Secretary Mike Johanns insists that the logistics behind the next Farm Bill will be left up to Congress and not what transpires with international trade.

"Congress will write a Farm Bill. We'll offer input and then the president makes a decision as to what to do with the Farm Bill," said Johanns during a recent tele-news conference in Geneva, Switzerland. "I will always advocate we should support agriculture. I just think it's good federal policy. And we can continue to do that, notwithstanding what happens at the WTO."

Tweeten speculates that changes will occur with the 2007 Farm Bill, whether or not it's written based on WTO events.

"There's a direct payment program feature that's a constant payment per bushel of wheat or bushel of corn that is considered to be decoupled (green box), or nontrade-distorting. That will probably continue, and probably what we are going to see is a shift more to that kind of payment and away from the coupled programs, or trade distorting programs," said Tweeten. He added that a problem with constant direct payment programs is that they don't address the instability of peaks and valleys in farm income, which Tweeten considers the No. 1 economic problem facing farmers.

If programs in the amber box are reduced, loan deficiency payments, countercyclical payments and dairy and sugar supports will likely be impacted.

"Somebody's going to lose something if we cut domestic amber box programs. Either someone is not going to get as much money as before, or you are going to shift spending programs to green box programs," said Zulauf. "But if you pay farmers for conservation reasons, what criteria do you use? It's got to meet the minimally trade distorting criteria and the benefits from conservation programs are not likely to be distributed among farmers in the same way as benefits from the current production-related programs."

Added Tweeten, "With or without Doha we are probably going to do away with what we call the Step 2 program for cotton which is basically a subsidy to make American cotton cheaper to our domestic mills so that our mills use domestic cotton and not foreign cotton. The WTO, based on an item brought up by Brazil, has ruled against us and says we have to cut that out. And Brazil has threatened to seek damages if we don't."

Whether or not the bold changes being proposed surrounding the 2007 Farm Bill happen is another story. But both economists believe that it's smart for farmers and agribusinesses to prepare for a change.

"Growers have to be prepared for the possibility that the level of farm supports would be cut somewhat, but it wouldn't be terribly drastic and it'd be a gradual change, probably over a period of several years," said Tweeten. "Approximately 20 percent to 25 percent of the current land price is dependent on current commodity programs, so there would be some adjustment in farm prices for land because of the change in the programs. Also any changes in programs tend to show up rather quickly in farm rents. So that's something farmers would have to recognize."

Added Zulauf, "The implication for farmers and businesses is that they need to be thinking about the question, ‘What do I need to do to put myself in a position to be able to deal with the changes that may occur?' You can't afford not to start thinking about this question."

Author(s): 
Candace Pollock
Source(s): 
Carl Zulauf, Luther Tweeten