The 2002 Farm Bill: Implications for North American Trade Relationships North American Trade Relationships:Policy Challenges for 2002 and Beyond Chicago August 8, 2001 Greg Pompelli Market and Trade Economics Division

U.S. Policy Trends Recent U.S. farm policy has emphasized: –Direct “AMTA” or “PFC” payments. –Elimination of supply controls. –Greater planting flexibility. Desires of new policy beneficiaries. Policy is increasingly influenced by trade potential and agreements. With low crop prices, emergency aid ($25 billion in past 3 years) has been recurring.

Emergency Aid Accounted for the Bulk of Payments in 2000 Emergency Assistance CRP & Other Production Flexibility Contracts Loan Deficiency Payments Total  $22 Billion

Direct Payments Have Helped Support Net Farm Income $0 $10 $20 $30 $40 $50 $ Calendar Year $ Billion Net Farm Income LESS Government Payments Direct Government Payments

Levels of Support (PSE) Source: OECD.

Forces Shaping the U.S. Farm Bill Debate Most farmers agree that: –Planting flexibility, and the ability to maximize net returns, is desirable. –Some type of income safety net is needed. But, issues arise regarding: –How to meet the needs of a diverse array of farms at reasonable cost... –…And in a manner that is WTO-compliant.

Farm Sector Diversity Provides a Context for the Farm Bill Debate... Farm households are heterogeneous in terms of their: –Dependence on farm vs. off-farm income. –Cost structure. –Production options. –Historical access to farm programs.

Most Farm Households Depend on Off-Farm Income Thousand dollars per household Farm earnings Off-farm earnings Total household income occupation/ Limited- resource RetirementResidential/ lifestyle Farming occupation/ lower-sales Farming higher-sales LargeVery large Small family farms (sales less than $250,000) Other family farms Average U.S. Household Income $58,842 Source: USDA’s Agricultural Resource Management Study.

Farms With Sales of Over $100,000 Are Likely to Have Low Costs Source: USDA’s Agricultural Resource Management Study.

1999 Distribution of Farm Payments - Percent of farms receiving payments [Average Household Income] Limited resource farms 19.4% [$8,605] Retirement farms 29.8% [$40,515] Residential lifestyle farms 24.5% [$65,758] Farming, low sales farms 46.6% [$34,132] Farming, high sales farms 73.4% [$50,964] Large family farms 75.9% [$79,693] Very large family farms 60.5% [$205,323] $2,183 $6,395 $3,844 $4,948 $10,889 $17,766 $32,087 Average payment per recipient

Changing Supply Chain Relationships Change the Context for Debate Changing consumer demand -- Higher incomes, greater urbanization. Food safety, sanitary/phytosanitary issues. Changing domestic and global markets -- Trade and transportation issues--particularly as they shift export destinations and competitiveness. Industry consolidation and investment. Regulatory issues--particularly as they affect consumption and trade.

U.S. Farm Exports Are Increasingly Destined for the Western Hemisphere Percent

Shift to Greater Trade Value in Non-Bulk Affects the Agenda f Billion $US BulkNonbulkPerishables

U.S. Trade with NAFTA Partners Increasing... Annual Average ($ Billion) Percent Change U.S. Agricultural Exports To Canada To Mexico U.S. Agricultural Imports From Canada From Mexico

Trade with NAFTA Partners Increasing Faster than General U.S. Trade

U.S. agricultural export value $ billion Source: USDA Agricultural Baseline Projections to 2010, February …Although Export Value Overall Declined in the Late 1990’s

U.S. Competitiveness is an Issue in the Debate Argentina & Brazil United States Soybean and soybean meal exports Mil. Metric tons Source: USDA Agricultural Baseline Projections to 2010, February 2001.

Farm Bill Considerations in the House of Representatives Ag. Committee Chair Combest asked that farm bill proposals address three issues: –What is the market impact of a group’s proposal, including for other commodities? –What does it cost? –What are the WTO impacts?

Harmonization and Convergence Questions How do we remain as competitive as possible in world markets? Can U.S. farm policy continue with a one- size-fits-all approach? What are the production effects of “decoupled” payments? What is the best policy to meet NAFTA and WTO commitments--and to provide farmers with an adequate safety net?