US Farm Policy and the WTO Joe Glauber Chief Economist, USDA 27 April 2012

On the collapse of the WTO G6 ministerial July 2006 “This is neither desirable nor inevitable. It could so easily have been avoided. What stands between us and the modalities of an agreement are not vast numbers or enormous sums…the United States was unwilling to accept, or indeed to acknowledge, the flexibility being shown by others in the room and, as a result, felt unable to show any flexibility on the issue of farm subsidies…Actions have consequences and this action has led to the Round being suspended” - - EU Commissioner Peter Mandelson

Outline Reforms in US agricultural policy, Uruguay Round “Counter Reformation” and consequences for US trade policy Doha Current farm policy debate Conclusions

Reforms in farm policy, Lower support prices Moves towards greater planting flexibility Moves towards decoupling payments from plantings Conservation programs But –Marketing loans introduced –Export subsidies

1996 farm bill Freeze loan rates Eliminate set asides; [almost] full planting flexibility Replace deficiency payments with fixed transition payments Eliminate honey and wool; phase out dairy support But: –marketing loans for wheat and feed grains –No mechanism to lower support prices

Uruguay Round provides minimal disciplines on domestic support Uruguay Round Agreement on Agriculture –20% reduction in total amber box support from base –Minimally distorting policies exempt from reduction commitments (green box) –Supply limiting policies exempt from reduction commitments (blue box) –Peace Clause Broadly consistent with US farm policy

Trade Policy views-mid 1990s 1995/96 record high prices –1995 AMS: $6.2 b (well under cap of $23.1b) With planned dairy phaseout under farm bill, AMS projected to fall to $1.2 billion by 2000 (Nelson 1997) With deficiency payments gone, no need for blue box US well positioned for next trade round –Lower AMS –Eliminate blue box –End peace clause

The “counter-reformation” in US farm policy Collapse in prices in late 1990s => ad hoc legislations Dairy program is extended Ag Risk Protection Act 2000 => $6 billion increase in crop insurance spending 2002 Farm Bill –Raised loan rates; extended to pulses –Reintroduced counter-cyclical payments –Updated payment bases –Peanut reform

With consequences… Amber box spending soars: –Almost $17 bil in 1999 and 2000 –Marketing loan payments $8-9 bil/yr US notifies ad hoc market loss assistance payments as amber WTO members critical of increase in spending –Brazil investigates soybeans and cotton support; brings cotton case to WTO in 2003

US amber box support URAA limits

Doha sharpens incongruities between US trade policy goals and US farm policy US 2002 proposal –Reduced combined amber and blue to 5% of value of agricultural production –No extension for peace clause Unlike Uruguay Round, US is isolated on domestic support issues –EU CAP reforms –Japan rice reforms

Total AMS as percent of binding Source: WTO submissions; Orden et al. 2011

Reversals in US trade policy Perceived need to accommodate policies: –Changes in blue box to accommodate countercyclical payments –Extension of peace clause to protect itself from WTO challenges Aug 2003: US-EU agreement (Blue box for CCPs in exchange for EU demands on sensitive products and export subsidies) –G20 forms—no more Blair House –C4 cotton initiative Cancun collapse

Framework Agreement July 2004 Tradeoff of market access concessions in developing countries for concessions for US domestic support policies US gets new blue box for CCPs but w/ additional disciplines Developing countries get Special Products, Special Safeguard Mechanism

Percentage of Global Imports Potentially Affected by Special Product Designation Average trade over , tariff lines ranked by import level

October 2005 US Proposal Domestic support offer –Cut AMS cap by 60% => $7.6 bil –Cap blue box at 2.5% of vop => $4.8 bil –Cut OTDS by 53% => $22.6 bil While offer on AMS and blue box recognized as significant, OTDS is seen as insufficient and far above applied levels

US offers on OTDS Billion $ Overall Trade Distorting Support = Amber + Blue + de minimis

DDA texts as of Dec 2008 AMS cap reduced by 60% => $7.6 billion Blue box capped at 2.5% VOP => $4.8 bil De minimis reduced to 2.5% of VOP Product specific caps for amber and blue box payments Overall trade distorting support = AMS + Blue box + de minimis capped at $14.5 bil

2008 farm bill Introduced area revenue plan (ACRE) –producers allowed to switch from CCP program –Blue box => amber box Supplemental disaster assistance (SURE) –Amber box DDA implications: –Increased amber support –Decreased blue box

Probability of exceeding DDA commitments in 2018 BaselineNo ACRE100% ACRE Product specific AMS > commitments corn10% 0%22% soybeans 2% 0%18% wheat 7% 0%27% cotton 8% 0% Total AMS > $7.6 bil21%18%35% OTDS > $14.5 bil23%17%34% Source: FAPRI Jan 2011

Current farm bill debate Budget Dissatisfaction with direct payments Base versus planted acres Role of crop insurance and “shallow losses”

Projected Outlays Selected programs Source: CBO Baseline—March 2012 Mil $ $8.6 b avg $4.9 b $0.6 b $6.3 b

Budget proposals Administration: $33 billion cut over 10 years Ag Committees: $23 billion cut over 10 years with $15 bil coming from commodity programs House: $33 billion

Dissatisfaction with Direct Payments Need for payments questioned in times of high prices Benefits accrue largely to landowners Wide differences between planted and base acres Payment limitation issues But… For many producers, DPs are the only payments received over past several years Minimally trade distorting; notified as green box Tie to conservation compliance

Growth of the crop insurance program Mil $

Shallow losses Source: American Farm Bureau Federation, Oct 17, 2011

Classification of Domestic Support Programs for WTO Notification ProgramUnder URAA Under Doha agreement Direct paymentsGreen Marketing loan benefitsProduct-specific amber Counter-cyclical paymentsNon-product specific amberBlue Crop insurance premium subsidies Non-product specific amber Policies > 70%: non-product specific amber Policies ≤ 70%: green Crop insurance delivery costs (A&O + underwriting gains) Green ACRE paymentsProduct-specific amber Supplemental disaster (SURE)Non-product specific amber Livestock disaster paymentsProduct-specific amber Dairy price supportProduct-specific amber Milk Income Loss ContractProduct-specific amber SugarProduct-specific amber Conservation Reserve ProgramGreen Environmental Quality Incentive Program Green Conservation Stewardship Program Green Nutrition ProgramsGreen

Program proposals Transfer $ from DPs to ACRE/shallow loss programs (green => product-specific amber) Extend Supplemental Disaster (non- product-specific amber) Extend Supplemental Disaster (non- product-specific amber) Tie DP to cost of production (green => amber/blue) Margin-based dairy program (potentially blue/green at least for base level protection)

Conclusions Since mid-1990s, US farm policy has developed with little attention given to WTO disciplines (contrasts with other major subsidizers) US trade policy has sought to accommodate farm policy changes (blue box for CCPs); but at a price (SP/SSM) High prices have kept AMS levels low, but potential for breaching limits remains non-trivial if prices fall Budget pressures present opportunity to make significant changes in farm policy, but likely outcome will favor policies that are tied to prices and actual plantings Shift of green box programs to amber box