The 2007 U.S. Farm Bill: Issues and Challenges Won W. Koo Chamber of Commerce Distinguished Professor and Director Center for Agricultural Policy and Trade Studies North Dakota State University

Outline of Presentation 1. Changes in recent farm policies and their characteristics 2. Constraints in formulating the new farm bill 3. New farm bill alternatives 4. Political uncertainty 5. Issues

Changes in New Farm Policies and Their Characteristics The 1996 farm bill - movements from supply control to market directed program by allowing production flexibility - background; high commodity prices (e.g., price of wheat – $4.71 in 1995/96), and pressure from the UR agreement.

The 2002 Farm Bill Enhancement of income safety-net by including disaster assistant program Background: wide variations of commodity prices since 1998, and federal budget surplus

The 2002 Farm Bill (Farm Security and Rural Investment Act)  Main objective was to stabilize and enhance net farm income  Elements of the farm bill Direct payments CCP payments Loan payments Maintain PFC

Farm Bill Program Payments for an Average Farm in ND (2005) Average ($1,000)Percentage share NFI66.4 CCP9.614 Market loan Direct payment15.824

Distribution of Net Farm Income With the Current Farm Bill and Without the Farm Bill Provisions

Constraints in Formulating the New Farm Policy  The WTO negotiations and Regional (bilateral) FTAs

Current WTO Policies—WTO Boxes  Green box Policies that have, at most, a small impact on production and trade No restrictions on green box subsidies Examples:  CRP, EQIP, and other conservation programs  Food stamps and other nutrition programs  Agricultural research

 Amber box Policies that affect production and trade WTO sets limits based on the support level Examples:  Marketing loan, milk and sugar price supports, CCP(?) and Crop Insurance (?) Under current WTO rules, U.S. limit is $19.1 billion

 Blue box Subsidies that are somewhere between green and amber boxes No limits on the blue box No current U.S. policies are in the blue box EU shifted subsidies from amber and blue boxes to green box

 De minimis subsidies Certain subsidies that do not count toward limits if their value is small enough Examples:  Marketing loss assistance payments from  Crop insurance

U.S. Proposal to the WTO 60% cut in the amber box limit (CCP in blue box) from $11 billion to $7.6 billion Limitation of the blue box payments to 2.5 percent of the value of agricultural production (about $5 billion) Elimination of export credit program for payment period longer than 180 days CCP in the blue box (actual CCP between 2002 and 2005 were below the proposed limit of $5.0 billion)

Net Farm Income Distribution for the Average of All Farms under the Base and 60% Reduction Scenarios

 The WTO litigation The WTO ruling on U.S. cotton and the EU sugar

 Regional and bilateral FTAs - Structural changes in the U.S. agricultural sector Increases in HRS and durum wheat imports from Canada under CUSTA Increases in sugar imports under NAFTA and CAFTA Increases in ag. exports to Korea under KUSTA, mainly rice and beef.

 The U.S. proposal and the WTO ruling may require a significant changes in the 2007 U.S. farm bill  The regional and bilateral FTAs could require an adjustment in the U.S. farm Policy

Federal Budget Deficit - $3.5 b  The total U.S. budget in $1.9 t  $1.6 t – defense, social security, medicare, medicaid, interest on external debts  $93 b- annual increase in healthcare, social security, and interest  Hence, Agriculture is high on everyone’s list for cuts.

Public Supports  The U.S. public support subsidizing farms based on (1) controlling food costs (2) protecting family farm from the competition (3) health and safe food (4) promoting clean environment However, no support for large-size farms

Changes in the U.S. farm sector  Increase in size and number of large-size farm  Decrease in middle-size family farm  80% of agricultural output is produced by less than 20% of large-size farms  It is time to refine the objective of the new farm bill

Public Survey in the EU  Public support domestic subsidies for (1) health and safety food products (2) promote clean environment (3) well-being of farm animals These three elements became corner stone for the CAP reform 2003

Key Issues Addressed in the CAP reform (1) competitive EU agriculture (2) environmentally friendly production methods (3) quality products (4) enhancing landscapes (5) sustainable rural economy

Alternative farm bill proposals (1) Continue the current farm bill - require to change if the WTO negotiations with the U.S. proposal is adopted - too expensive - American Farm Bureau, U.S. Farmers Union. Grain glowers association

(2) Buyout program (David Orden) - an explicit agreement to end the farm support program by making a significant but temporary compensation payments ex, buyout programs for peanut and tobacco - An estimation of buyout for U.S. farm program The estimated discount value(5%) of annual payment under 2002 farm bill for 25 yrs -$125 b The annual cost of buyout of the 25yrs payment - $21.5 b

(3) Revenue/income insurance program (Bruce Babcock, W. Koo) Payment : green box if support level is 70% of 5 yr Olympic average of the income - do not enhance farm income, but reduce variations in income level - need to include a DP to enhance farm income (4) The current farm bill plus buffer stock program and supply management (Darryl Ray)

Political Uncertainty  Growing concern on benefits form trade liberalization - major increase in imports of HRS and durum wheat from Canada under CUSTA - increase in sugar imports from Mexico and CA countries under NAFTA and CAPTA - decrease in Ag trade surplus from $30 b in 1990 to $4 b in 2006  2006 mid-term election  2008 president election

Issues  Bio-energy (1) producing ethanol from biomass-produced CRP land (2) producing ethanol from wheat straw, corn stover, wood chips, switch grass, etc.  Payment limits Limited subsidies for large-size farms

Direction of the New Farm Bill  Depend upon which party controls either the U.S. House or Senate  Shift from amber box payments to green box, meaning enhancing income insurance concept  Include a bio-energy program

Reference Taylor and Koo, Analysis of the 2002 Farm Bill and New Farm Bill Alternatives, Report 578 Mattson and Koo, 21 st Century Farm Policy: Challenges and Opportunities (Executive summary), Special Report 06-1.