Legislative Issues, WTO, & U.S. Farm Policy Presented by Chip Conley Democratic Economist House Agriculture Committee

International Agreements and US Farm Policy Uruguay Round –Reduction Commitments –Policy Changes –How we got there Doha Round -Framework Agreement -Deficit Reduction -Policy Implications

US Farm Policy AMS Base: Cut by 20% Billion US$ Avg Total23.9 Corn7.2 Dairy5.3 Wheat3.4 Cotton1.7 Sugar1.1 Subtotal Subtotal 18.7 (78%)

How Did We Get There? Deficit reduction requirements cut farm program spending Farm Bill, $4.5 billion, Reconciliation Act, $3.2 billion, Farm Bill, $4.5 billion, Reconciliation Act, $3.2 billion, Farm Bill, $12.8 billion, Rising commodity prices from reduced direct payments.

Farm Program Policy Changes Loan Rates, $/bu

Farm Program Policy Changes Cotton Loan Rate, cents/lb

Farm Program Policy Changes Milk Support Price, $/cwt

Doha Round Framework: Domestic Support “Substantial reductions” for developed countries’ aggregate measure of support (AMS) TBN. Reductions in overall AMS (Amber, Blue, de minimis) and in 1) Amber box and in 2) de minimis. De minimis capped at 5% of value of overall production and to be reduced by amount TBN. First year 20% cut in overall AMS.

1 st Year 20% Down payment, U.S. Billion US$ Permitted2001 Total Amber Box De minimis Non-product specific Product specific Blue Box (CCP) 10 NA (5.0) Green Box 50.7 With 20% reduction

How Do We Get There? DEFICIT REDUCTION- while agreement is being negotiated. Farm Bill in Attention to what will result in reductions to various boxes and likely commitments. Taxpayer supported-products vs. consumer supported-products. Selection of base period.

Budget Outlook Budget situation and outlook has determined outlook for farm policy. Federal deficits from 1981 to 1995 have led to cuts in agriculture spending in deficit reduction legislation. Resulted in lower price and income supports while Uruguay Round agreement was being negotiated.

Budget Outlook Federal surpluses in 1998 through 2001 have provided funding for emergency market loss and crop loss assistance and the Agricultural Risk Protection Act projected 10-year federal surplus of $5.6 trillion provided $79 billion additional funding to write 2002 Farm Bill, along with $1.3 trillion tax cut.

Projected Surplus/Deficit(-) CBO March 2005 Baseline

2006 Congressional Budget Resolution, $ Billion Fiscal Year Tax Cuts Entitlement Cuts 130 Iraq Supp 2005 & Net Discretionary Change -244 Additional Debt Service Total

Projected Surplus/Deficit(-) Resulting Deficit w/CBR

Budget Outlook, $ Billion Fiscal Year CBO 2005 March Baseline March Baseline Cong. Budget Resolution Resolution Extend CBR ,685 Resulting Deficit ,493

Projected Surplus/Deficit(-) Resulting Deficit w/ CBR Extended

Expected Additions to Deficit Omitted Items, $ Billion Fiscal Year Further Cost of Iraq War AMT Repair Additional Debt Service Resulting Deficit ,827

Projected Surplus/Deficit(-) Resulting Deficit w/Omitted Items

Magnitude of Future Deficit Reduction, $ Billion Fiscal Year Resulting Deficit ,776 House-passed Budget ,021 Reconciliation ,775

Comparison to 2004 House Budget $ Billion Fiscal Year Reconciliation-88-2,775 House-passed Reconciliation ‘ Multiple of House-passed 1311

Comparison to 2004 Budget Reduction for Ag, $ Billion Fiscal Year House-passed Ag Reconciliation ‘ Agriculture’s share of Reconciliation 9%7% Future Agriculture Reconciliation

Policy Implications How to reduce farm program spending. WTO compliance by category (Amber, Blue, Green boxes). Fruit and vegetables, specialty crops, planting prohibition. Land values.

Policy Implications: How to Reduce Ag Spending Farm Commodity Programs are now direct payment programs. Few efficiencies to be gained as in 1990 Flex Acres 15% reduction in deficiency payments. Reductions likely to be in commodity (A/B/G), conservation direct payments (Green), crop insurance premium subsidies (de minimis).

CCC Outlays by Payment Type

Policy Implications: WTO Dimension Policymakers must consider trade negotiation proposals in deficit reduction. Previous US proposal to reduce AMS to 5% of value of Ag production implied Amber Box limit of $9.5B, 50% less than $19.1B. Current “Substantial Reduction” is suggested to mean 40-50% reduction. Amount TBN. Dairy and sugar pose major challenge: small budget impact, significant AMS impact.

Commodity Program Costs Avg

Meeting WTO Agreement Dairy and Sugar must be considered in AMS reduction, if not budget reduction. These are not just Market Access issues. Cutting AMS will have disproportionate impact on farm income vs. budget cuts. How reductions are made has broad policy implications.

Specialty Crop Issues WTO panel ruled Direct Payments may not be Green Box because of fruit and vegetable planting prohibition. Specialty crop interests seek CCC funds in Ose-Dooley bill, mostly Green box. Likely accommodation in next farm bill. Shifting funds from program crops to specialty crops while reducing overall spending.

Land Values Values/ rental rates have kept rising through low price years Farm bill continued policy that resulted in farmer incomes being higher when prices are low. International competitive issue: US vs. Brazilian soybeans

Real Estate Values vs. Prices Received, =100

Real Estate Values vs. Prices Received

Land Values & U.S. Competitiveness: US$/bu USHeartlandBrazilParana/MGArgentina Production / Variable Variable / Fixed Fixed / Internal transport Freight to Rotterdam Price at Rotterdam / Source: Economic Research Service, USDA

Summing Up Framework agreement models Uruguay Round but with pressure for greater overall reductions, especially domestic supports, perhaps 40-50%. Deficit reduction pressure will likely continue for several years, continued cuts in agriculture programs. Policymakers must be mindful of how cuts are effected to reflect WTO commitments.

Summing Up Price support levels (Amber) likely to be cut the most, CCP’s (Blue) some, Direct payments (Green) less. Dairy and sugar programs will need to be addressed carefully. Specialty crops and planting prohibitions will likely need to be addressed.

Summing Up Land values will likely decline, both as a result of reduced gov’t assistance and to meet competitive challenge with other countries.