Inside US Trade | May 3, 2002
The farm bill that is now headed to the Senate floor after being passed by the House yesterday (May 2) would dramatically increase domestic support for farmers through a new system of payments that critics say will put a chill on efforts to negotiate international disciplines on farm subsidies, and cause the U.S. to violate its negotiated domestic subsidy limits in the Agriculture Agreement of the World Trade Organization.
The legislation would let producers of commodities like corn, sorghum, barley, oats, wheat, soybeans, oilseeds, cotton and rice to receive payments in three different ways. Those include direct payments based on farmers' historical acreage, and two types of subsidies which increase as commodity prices decrease.
Each of these support methods raises questions about how high the cost will be to the government, and how payments will be counted in the WTO framework, which limits subsidies linked to production as trade-distorting.
Specifically, critics of the new farm bill, including House members who pushed for tighter limits on domestic support, claim that some of the changes will require the U.S. to count payments toward its limits on trade-distorting support that it has previously counted as green-box support, or non-trade distorting.
The final conference deal also retained a controversial requirement that retailers within two years must begin labeling meat, fruits and vegetables to show country-of-origin, a provision that has drawn the ire of trading partners including Canada and could be challenged by WTO members.
Despite previous objections from the Bush Administration that support levels being proposed by the Senate were too high, President Bush announced May 2 that he would sign the bill. Bush praised the final deal, saying its provisions are consistent with America's international trade obligations, which will strengthen our ability to open foreign markets for American farm products.
The final farm bill raises direct per-bushel payments over the next six years for all of the above commodities, which are calculated according to a baseline of acreage for each individual producer. In the past, the U.S. has been able to claim these direct payments as green-box, and thus exempt from WTO limits, because they are not linked to production in any given year but to a fixed baseline of expected yields.
But the new legislation allows farmers to update that baseline to reflect 1998-2001 yields. Some observers this week said that this change might take the direct payments out of the green-box category and into the amber box of support that is linked to production. This is because farmers might be induced to plant more in the expectation that their direct payments will increase when the baseline is updated again in future legislation.
If the U.S. is required to notify these supports under the amber box, it could lead to a situation in which the U.S. exceeds its limit on this kind of support, which is currently $19.1 billion per year.
Supporters of the bill contradicted that reading. This update is a one-time deal and hasn't been done for twenty-plus years, said one agriculture source. We don't think this would shove them into the amber box.
The bill also for the first time provides for direct payments for soybeans, informed sources said. Soybean producers have until recently not sought to benefit from the direct subsidies that producers of grains have long enjoyed, according to these sources.
An even greater impact in dollar terms is expected to come from a subsidy program that was eliminated in the 1996 farm bill but was resurrected in a slightly different form. This is a system of countercyclical payments aimed at guaranteeing a minimum per-bushel price for commodities through paying producers the difference between the market price and a target price set forth in the legislation.
The countercyclical payments would be reduced by the amount of direct payments that farmers receive, one source familiar with the bill said.
The Congressional Budget Office in a preliminary estimate has set the cost of the countercyclical program over six years at $29.385 billion. It estimated the cost of direct payments authorized by the bill at $9.947 billion. The total cost of the bill is around $71 billion, according to an informed source who cautioned that those figures would change as CBO finalizes its estimates on the post-conference version.
The legislation also continues a system of loan deficiency payments similar to the countercyclical payments, and for most commodities bumps up the loan rates that determine the size of the payments farmers receive when commodity prices drop. As with the countercyclical payments, the LDPs are determined based on the difference between a pre-determined loan rate and the market price.
The loan rates in the final bill are lower than had been proposed by the Senate, which had drawn criticism from the Agriculture Dept. that these could cause the U.S. to exceed its WTO commitments.
The loan rate on corn will increase to $1.98 per bushel in the next two marketing years from its current level of $1.89. Increases were also seen in sorghum, wheat, barley, cotton and rice. The loan rate for soybeans decreased from $5.26 to $5.00, but that decrease would be more than offset by the new benefits in direct and countercyclical payments, an informed source said.
The decrease in loan deficiency payments for soybeans was driven by a desire to correct an imbalance in the program that had caused farmers to shift to soybeans from other commodities in recent years, sources said.
The bill also for the first time authorizes LDPs for chickpeas, peas and lentils, a provision that drew criticism this week from Canadian Agriculture Minister Lyle Vanclief, according to an April 30 statement. Canada is an important exporter to the U.S. of these so-called pulse crops.
The countercyclical payments and LDPs will both count toward WTO limits on amber-box support, but sources familiar with the new farm bill disagree over whether the former will have to count toward the $19.1 billion annual limit on commodity-specific support, or whether it can be counted as non-commodity specific support. Non-commodity specific support is exempt from the limits provided it stays below a de minimis threshold of five percent of total production, or around $10 billion.
The last time the U.S. notified domestic support payments to the WTO, Agriculture Secretary Ann Veneman classified a chunk of amber-box payments as non-commodity specific in order to avoid breaking the $19.1 billion cap. That cap is in effect until new agriculture negotiations in the WTO set new limits.
Some proponents of the legislation say the bill was written in a way that allows the countercyclical payments to be exempted as de minimis, non-commodity specific support. This is because even though the legislation sets up individual target prices for specific commodities, the payments will not influence planting because they do not change even if farmers switch their planting to a different commodity, informed sources said.
For example, if a producer planted 100 acres of corn in the baseline period, he would receive countercyclical payments for the life of the program based on the market price of corn times his baseline yields. If he switches 50 of those acres to soybeans mid-way, he will still receive payments based on the price of corn, these sources said.
The U.S. could therefore argue that the support is non-commodity specific and therefore exempted from the $19.1 billion limit.
Also, the final bill language includes a provision added by Sen. Chuck Grassley (R-IA) that allows the Secretary of Agriculture to adjust payment levels -- subject to a resolution of disapproval by the Congress -- if she determines it is necessary to avoid exceeding WTO limits. But several sources raised serious doubts about whether any agriculture secretary would take such a politically unpopular step (Inside U.S. Trade, Feb. 15, p. 3).
It is difficult to project whether the new programs will push the U.S. over its WTO commitments on domestic agriculture support, because the amount the government actually pays farmers depends on price fluctuations of the commodities. But Reps. Cal Dooley (R-CA) and John Boehner (R-OH) this week issued a statement saying there was little doubt that we will exceed these limits.
Dooley and Boehner called the bill a giant leap backwards in federal agriculture policy. The high loan rates will stimulate overproduction, lead to lower prices and force excessive government outlays, they charged.
Agricultural exporters that trade with the U.S. also roundly condemned the measure. EU trade commissioner Franz Fischler said the bill marks a blow for the credibility of U.S. policy in the WTO, where the U.S. has presented a trade-oriented agenda wholly inconsistent with the new bill.
He called astonishing claims by members of Congress that the new support programs would not count against WTO commitments. The April 30 statement from the EU said Commission experts found it likely that those limits would be breached. Fischler said the U.S. was heading in the opposite direction from a global move toward reducing export subsidies and trade-distorting support.
The final bill includes a requirement, effective after two years, that retailers label meats and produce with their respective country-of-origin. Only products that are born, raised and slaughtered, hatched, raised and harvested, and processed and produced in the U.S. can be designated as U.S. origin.
This is much more restrictive than the NAFTA rule for meats, which confers origin on a product according to the country where it is slaughtered. But that rule-of-origin requirement pertains to tariff treatment, not to labeling concerns.
That provision was opposed by a range of industry groups including the American Meat Institute, the Grocery Manufacturers of America and the National Food Processors Association. Cattlemen were split over the provision, with a group of ranchers in South Dakota and Montana pushing for it while others opposed it.
With regard to meat, opponents said the provision would unfairly burden producers who import feeder cattle from Mexico. They argued the requirement would be unworkable since there was no tracking system in place for cattle from birth to feeding to slaughter.
Some foreign government sources raised the prospect that the requirement could be challenged in the WTO, noting that the WTO agreement on Technical Barriers to Trade requires that such measures must be the least trade restrictive possible, and must serve a legitimate objective. These sources said the labeling measure was clearly trade restrictive, and that it did not serve any health or safety objective.
The final farm bill also authorizes increased spending in export promotion programs, including a provision that would increase funding levels for the Market Access Program to $200 million by 2006, up from a current level of $90 million, an informed source said. The bill also authorizes $308 million through 2006 for the Food for Progress program, which the Bush Administration budget request zeroed out. That program supports food assistance to developing countries on credit or grant terms (Inside U.S. Trade, Feb. 8, p. 1).Inside US Trade:
