The 2007 US Farm Bill: Analysis of the USDA proposals Agricultural Trade Policy Analysis DG for Agriculture and Rural Development European Commission

AGRI G5 USDA 2007 Farm Bill proposals 26 February What is a “Farm Bill”?  The process… –A “Farm Bill” formally signifies a proposal for US farm legislation –A Bill is introduced (in Congress) to replace expiring legislation –A Farm Act is the final legislation that reflects decision by Congress  …and its content –Farm legislation covers many areas (titles)...a total of 13 were recently proposed by USDA, 10 are in current legislation –Most USDA outlays (50-60%) are spent under Title IV - Nutrition …...mainly for food stamps, but also for school lunches and women’s programmes –Farm support falls under Title I – Commodity Programmes… …which covers both market price support and all cash payments –Conservation (II), Rural Development (VI), Research (VII)…...are titles that have gained attention and some additional funding in 2002 –The Energy Title (IX) is essentially driving current debate… …with oil prices above 70 $/barrel and corn prices above 4 $/bu in the foreseeable future

AGRI G5 USDA 2007 Farm Bill proposals 26 February A reminder: components of US crop policies 1996 Farm Act  AMTA payments (PFC) –decoupled, historical and declining  Loan programme –loan at loan rate (crop is collateral) or –loan deficiency payment = LR-P (but no loan, crop kept by farmer)  Other payments –ad hoc payments (MLA) –crop insurance (for yield, price, or revenue loss) 2002 Farm Act  Fixed payments –decoupled, updated and fixed  Loan programme –loan at loan rate (crop is collateral) or –loan deficiency payment = LR-P (but no loan, crop kept by farmer)  Other payments –CCP = TP-DP-max(LR,P) –crop insurance (for yield, price, or revenue loss)

AGRI G5 USDA 2007 Farm Bill proposals 26 February Loan programme details  Eligibility requirements –Meet conservation requirements, report land use, meet quality standards –Have “beneficial interest” in crop on date of claim of loan or payment  Loan rates –Vary by county, and are based on rate of county where crop is stored could be adjusted for quality standards –Loans are settled either by repaying loan with interest (if price higher than loan rate plus interest) receiving payment (marketing loan gain) if price below loan rate forfeiting commodity to CCC –Eligible producers who forgo loan may obtain a loan deficiency payment LDP equals the LDP rate times quantity for which LDP is requested

AGRI G5 USDA 2007 Farm Bill proposals 26 February Direct and counter-cyclical payment details  Eligibility requirements –producer has base acres and payment yields (historical support) –eligible commodities: cereals, oilseeds, rice, peanuts, cotton  Direct payments –Replace production flexibility contract payments (at similar rates) Soybeans and peanuts added to the list DP = (85% of base acres) X (payment yield) X (DP rate)  Counter-cyclical payments –issued if effective price is below target price –effective price equals direct payment plus higher of average market price or national loan rate CCP = target price – direct payment – max (LR, P)

AGRI G5 USDA 2007 Farm Bill proposals 26 February US support policy instruments - maize

AGRI G5 USDA 2007 Farm Bill proposals 26 February US maize and the loan programme LDP MLG

AGRI G5 USDA 2007 Farm Bill proposals 26 February US maize and the countercyclical programme LDP CCP DP CCP

AGRI G5 USDA 2007 Farm Bill proposals 26 February The source of US maize farm returns

AGRI G5 USDA 2007 Farm Bill proposals 26 February Main direction of USDA proposals  Structure of farm support remains –No dairy reform; minor sugar programme revisions –Loan rates to follow moving average of prices, with lower max ceiling For most crops, declines are small, but cotton and rice feel impact –Countercyclical support shifts from a price-trigger to a revenue trigger Per acre target revenue determines shortfall to be compensated Yields for revenue trigger are updated, but payment yields remain  Effort to shift to decoupled support very timid –In general, increase for most crops are minor, except for cotton  It is now up to the US Congress to decide –First reactions indicate USDA got what it wanted, a basis for discussion… …in a debate that is essentially remains domestic and DDA-detached… …but in which USDA plays a more active role in all Farm Bills since 1990

AGRI G5 USDA 2007 Farm Bill proposals 26 February Main changes proposed by USDA 2002 Farm Act  Fixed payments –decoupled  Loan programme –loan at loan rate (crop is collateral) or –loan deficiency payment = LR-P (but no loan, crop kept by farmer)  Countercyclical programme –Price shortfall trigger –CCP = TP – DP - max (LR, P) –current price triggers programme 2007 Farm Bill proposals  Fixed payments –variable increases in most crops  Loan programme –moving loan rate –basis 5-yr market price avg –maximum rate set at 1996 levels  Countercyclical programme –target revenue set per acre –shortfall based on (price x yield) –revenue yield updated –payment still based on old yield

AGRI G5 USDA 2007 Farm Bill proposals 26 February Implied area support for US crops

AGRI G5 USDA 2007 Farm Bill proposals 26 February How to analyse the impact of USDA’s proposals  Focus on commodity programmes –Identify main changes in loan and countercyclical programme –Ignore impact of changes at farm level (capping; pricing adjustments) –Identify national level implications  Focus on past –USDA proposals are driven by high price assumptions –US farm policy costly when prices are low –Assume 2007 USDA proposals applied in period  Identify scenarios that cover several possibilities –Limit analysis on loan rate level and countercyclical revenue yield –Look into absolute price gap between LP/CCP and average price –Simulate new price gap if new LP/CCP rules applied

AGRI G5 USDA 2007 Farm Bill proposals 26 February US wheat market and support prices

AGRI G5 USDA 2007 Farm Bill proposals 26 February US maize market and support prices

AGRI G5 USDA 2007 Farm Bill proposals 26 February US soybeans market and support prices

AGRI G5 USDA 2007 Farm Bill proposals 26 February US cotton market and support prices

AGRI G5 USDA 2007 Farm Bill proposals 26 February Simulation scenarios and their underlying assumptions VariableScenario 1Scenario 2Scenario 3Scenario 4 Loan ratemoving average maximum rate CCP revenue yield average average average average Note: Both yield and loan rate averages are Olympic averages.

AGRI G5 USDA 2007 Farm Bill proposals 26 February Actual (USDA) and simulated US 8-crop payments

AGRI G5 USDA 2007 Farm Bill proposals 26 February Evolution of US AMS ( crop years)

AGRI G5 USDA 2007 Farm Bill proposals 26 February How do USDA proposals on Farm Bill and OTDS match?

AGRI G5 USDA 2007 Farm Bill proposals 26 February Tentative conclusions  Loan programme savings if USDA proposals accepted –Maize and cotton main recipients in future –Are wheat and soybeans about to move out of loan support?  Countercyclical support changes nature –Generally becomes less costly when prices are low… …provided that price shocks are internal (high yields) –New revenue target insulates US farmers from markets even more… …but costs of programme could become less variable  USDA Farm Bill proposal not enough for DDA –Market price support for dairy and sugar needs to decrease –Effective product-specific disciplines important in new blue box Concentration of CCP in maize and cotton a real risk –Other type of support (crop insurance) also important in overall equation

AGRI G5 USDA 2007 Farm Bill proposals 26 February ANNEXES The 2007 US Farm Bill: Analysis of the USDA proposals

AGRI G5 USDA 2007 Farm Bill proposals 26 February US total loan programme payments

AGRI G5 USDA 2007 Farm Bill proposals 26 February a. US loan deficiency payments

AGRI G5 USDA 2007 Farm Bill proposals 26 February b. US marketing loan gains

AGRI G5 USDA 2007 Farm Bill proposals 26 February c. US certificate exchange gains

AGRI G5 USDA 2007 Farm Bill proposals 26 February Total MLA/countercyclical support

AGRI G5 USDA 2007 Farm Bill proposals 26 February Total decoupled support