U.S. Farm Policy and the WTO: How Do They Match Up?

The debate over a new farm bill has focused on how to spend an additional $73.5 billion in funding for the agricultural budget over ten years. The House of Representatives, the Senate Agriculture Committee, and Senators Cochran and Roberts (supported by the Bush Administration) have each proposed a structure for the next farm bill. A critical question becomes whether these proposals conflict with U.S. commitments to limit subsidies under the World Trade Organization (WTO) agreement. This paper explores this issue and concludes with a discussion of the future direction of U.S. farm subsidies and new WTO agreements

How Much Safety Is Available under the U.S. Proposal to the WTO?

Critics of the U.S. proposal to the World Trade Organization (WTO) made in October 2005 are correct when they argue that adoption of the proposal would significantly reduce available support under the current farm program structure. Using historical prices and yields from 1980 to 2004, we estimate that loan rates would have to drop by 9 percent and target prices would have to drop by 10 percent in order to meet the proposed aggregate Amber Box and Blue Box limits. While this finding should cheer those who think that reform of U.S. farm programs is long overdue, it alarms those who want to maintain a strong safety net for U.S. agriculture. The dilemma of needing to reform farm programs while maintaining a strong safety net could be resolved by redesigning programs so that they target revenue rather than price. Building on a base of 70 percent Green Box income insurance, a program that provides a crop-specific revenue guarantee equal to 98 percent of the product of the current effective target price and expected county yield would fit into the proposed aggregate Amber and Blue Box limits. Payments would be triggered whenever the product of the season-average price and county average yield fell below this 98 percent revenue guarantee. Adding the proposed crop-specific constraints lowers the coverage level to 95 percent. Moving from programs that target price to ones that target revenue would eliminate the rationale for ad hoc disaster payments. Program payments would automatically arrive whenever significant crop losses or economic losses caused by low prices occurred. Also, much of the need for the complicated mechanism (the Standard Reinsurance Agreement) that transfers most risk of the U.S. crop insurance to the federal government would be eliminated because the federal government would directly assume the risk through farm programs. Changing the focus of federal farm programs from price targeting to revenue targeting would not be easy. Farmers have long relied on price supports and the knowledge that crop losses are often adequately covered by heavily subsidized crop insurance or by ad hoc disaster payments. Farmers and their leaders would only be willing to support a change to revenue targeting if they see that the current system is untenable in an era of tight federal budgets and WTO limits

Loan Deficiency Payments versus Countercyclical Payments: Do We Need Both for a Price Safety Net?

The federal government currently runs two major price support programs in agriculture, the marketing loan and countercyclical payment (CCP) programs. While these programs are both targeted at providing producer price protection, they have different political and financial costs associated with them. We outline these costs and project the effects of various loan rate changes on these programs for eight crops (barley, corn, cotton, oats, rice, sorghum, soybeans, and wheat) for 2005. Loan rate changes affect the price support programs by changing the payment rate producers receive when payments are triggered. We find that the crop\u27s relative price strength versus its loan rate and the relationship between CCP base production and 2005 expected production have the largest influence on how loan rate changes affect outlays from the price support programs for the various crops. Of these crops, cotton is the only one that would be relatively unaffected by loan rate shifts. Corn and soybeans would see the largest declines in overall expenditures from price support programs if loan rates were decreased. Oats and soybeans would experience the largest percentage losses. However, the results also show that the federal government could maintain an agricultural price support structure at a lower cost than it is currently paying. The reduction in cost often comes in situations where the current array of price support programs overcompensates producers for price shortfalls. This shift would also likely find greater acceptance under the World Trade Organization (WTO) agriculture guidelines than would the current structure. For an administration that is looking to rein in deficit spending while at the same time negotiating new WTO guidelines, moving to lower loan rates could be an answer

Options for the Conservation Reserve Program

Record crop prices are signaling the world’s farmers to produce more. The recent prospective acreage report released by the USDA shows that the ability of U.S. farmers to grow more is limited by a lack of land. The USDA projects that acreage planted to crops in the United States will increase by about 1 percent in 2008 relative to 2007 acreage and about 2.5 percent relative to 2006 acreage. This lack of a supply response by U.S. farmers shows how insensitive aggregate U.S. planted acreage is to price changes, at least in the short run. It explains why introducing a major new demand for agricultural output in the form of biofuels should be expected to have such a large impact on commodity prices

The New ACRE Program: Frequently Asked Questions

ACRE, which is an acronym for Average Crop Revenue Election, is a new commodity program included in the Food, Conservation and Energy Act of 2008 (the 2008 farm bill). Farmers can choose to participate in ACRE or they can continue to enroll in traditional commodity programs. ACRE is designed to provide revenue support to farmers as an alternative to the price support that farmers are used to receiving from commodity programs. Here, we answer some frequently asked questions about this new program

Crop Insurance: A Good Deal for Taxpayers?

Last year farmers received $746 million in net crop insurance payments. But the program cost taxpayers approximately$2.5 billion, or $3.31 for each dollar paid out. Since 2001, when the provisions of the Agricultural Risk Protection Act (ARPA) fully came into force, taxpayers have paid$15.1 billion to deliver $8.82 billion to farmers. This imbalance between taxpayer costs and producer benefi ts has led some to question whether money allocated to crop insurance might be more effi ciently used elsewhere in USDA’s budget. For example, producers would have received all$15.1 billion if the funds had been sent out in the form of direct payments. Or, this $15.1 billion could support the Conservation Reserve Program for nine years. Or, of course, our national debt would be$15.1 billion smaller now without the progra

U.S. Farm Policy and the WTO: How Do They Match Up?

The debate over a new farm bill has focused on how to spend an additional $73.5 billion in funding for the agricultural budget over ten years. The House of Representatives, the Senate Agriculture Committee, and Senators Cochran and Roberts (supported by the Bush Administration) have each proposed a structure for the next farm bill. A critical question becomes whether these proposals conflict with U.S. commitments to limit subsidies under the World Trade Organization (WTO) agreement. This paper explores this issue and concludes with a discussion of the future direction of U.S. farm subsidies and new WTO agreements.agricultural policy, domestic support, trade commitments, WTO, Agricultural and Food Policy, International Relations/Trade,

U.S. Farm Policy and the World Trade Organization: How Do They Match Up?

The debate over a new farm bill has focused on how to spend an additional $73.5 billion in funding for the agricultural budget over 10 years. The House of Representatives, the Senate agriculture committee, and Senators Cochran and Roberts (supported by the Bush administration) have each proposed a structure for the next farm bill. A critical question becomes whether these proposals conflict with U.S. commitments to limit subsidies under the World Trade Organization (WTO) agreement. This paper explores this issue and concludes with a discussion of the future direction of U.S. farm subsidies and new WTO agreement

ARPA Subsidies, Unit Choice, and Reform of the U.S. Crop Insurance Program

The Agricultural Risk Protection Act (ARPA) has largely met its objectives of inducing farmers to increase their use of the crop insurance program. Both insured acreage and coverage levels have increased dramatically in response to ARPA\u27s large increase in premium subsidies. An unintended consequence of the larger subsidies is a dramatic increase in the incentive for farmers to insure their crops under optional units, that is, insurance at the field level rather than at the farm or crop level. The expected rate of return to farmers who choose to invest additional premium dollars to move to optional unit coverage ranges from a low of 61 percent at the 85 percent coverage level to 144 percent at the 65 percent coverage level. This explains why the majority of farmers choose optional unit coverage even though the alternative unit structures provide identical insurance guarantees at a substantially lower cost. We consider two policy options to eliminate the unintended consequences of ARPA subsidies. The first would simply eliminate the ability of farmers to insure their crops under optional units. This change would save taxpayers more than $300 million (if 90 percent of current acreage is insured under optional units) and would not decrease the insurance guarantee of any farmer. However, transfers to farmers, crop insurance companies, and crop insurance agents would all fall under this policy option, decreasing its political attractiveness. The second alternative would decouple per-acre premium subsidies from a farmer\u27s choice of unit coverage. Farmers would benefit from the ability to capture all the premium savings that would occur as they move to other unit structures. It is likely that there is a level of decoupled subsidy that would make both farm groups and taxpayers better off. Splitting farm groups off the blocking coalition increases the likelihood of acceptance of this proposal. Program integrity would be increased by dramatically increasing the incremental cost of farmers insuring their crops under optional units

Rankings of Risk Management Strategies Combining Crop Insurance Products and Marketing Positions

Farmers can choose from a wide selection of crop insurance products and marketing strategies. Combinations of these risk management tools have varying effects on the user\u27s risk environment. In this paper, the authors rank nine risk management strategies for their impacts on average returns, certainty equivalent returns, and risk premiums. The analysis is conducted using historical price and yield data for 1976 to 1999 in five Iowa counties. The results show the benefits of crop insurance in reducing revenue risk. Also, given that the producer will forward contract some of his or her crop, the combination of E-Markets\u27 Decision Rules for Contracts (DRC) pricing tool and Crop Revenue Coverage (CRC) crop insurance receives the highest ranking