Pasour, E.C., Jr.

AgEcon Search - Research in Agricultural & Applied Economics

  Give to AgEcon Search    The World’s Largest Open Access Agricultural & Applied Economics Digital Library    This document is discoverable and free to researchers across the globe due to the work of AgEcon Search.    Help ensure our sustainability.         AgEcon Search http://ageconsearch.umn.edu aesearch@umn.edu          Papers downloaded from AgEcon Search may be used for non-commercial purposes and personal study only. No other use, including posting to another Internet site, is permitted without permission from the copyright owner (not AgEcon Search), or as allowed under the provisions of Fair Use, U.S. Copyright Act, Title 17 U.S.C. Different techniques are used to col-lect the money. Here is how it works for some of the commodities. -Wool and Mohair: Assessments are deducted from incentive payments paid by the Federal Government to growers. These deductions are $0.04 per pound for wool and $0.045 per pound for mo hai r. -Cotton: An assessment of $1 per bale plus 0.6 of 1 percent of the bale's value is collected by the first buyer of cOlton from the producer. -Potatoes: A maximum assessment of 0.5 of 1 percent of the prior 10 years U.S. average price received by growers is authorized. The current assessment of $ .02 per cwt. is collected at d1e first point of sale. -Eggs: An assessment of $0.05 per 30 dozen case of eggs is collected at the point of first sale . -Wheat: An assessment of $0.01 per cwt. of processed wheat is paid by manu-facturers. -Milk: Under the Dairy Promotion and Research Board program, $0.15 per cwt. is collected on all milk marketed by producers with a credit of up to $0.10 allowed for producer contributions to State and regional promotion programs. Assessments under the six milk market orde r programs are $0.10 per cwt. -Fruit and vegitable market or-ders: Assessments are made on han-E. C. Pasour, Jr., on Free Trade's Price dlers. The amounts vary. New ProgramslProposals -Honey: Assessments have been recommended at $0.01 per pound for d1e first year of the program. This rate may be increased by $0.005 per pound per year up to a maximum of $0.04 per pound. A hearing has been he ld but d1e program is still subject to approval by producers in a referendum. -Beef: The Food Security Act of 1985 aud10rizes an assessment rate of $1 per animal per sale. -Pork: The Food Security Act of 1985 aud10rizes an initial assessment rate of up to 0.25 of 1 percent of the value per sale. [!I U.S. Fanners Can't Have Free Access to World Markets and Price Supports, Too In d1e public debate over trade poli-cies, Americans typically portray the United tate as a free trade island in a ea of agricultural protectionism. But d1e U.S. has been throwing up obstacles to free trade wid1 U.S. domestic agricultur-al poliCies that date back to the Agricu l-tural Adjustment Act of 1933. U.S. agriculture has been a pereJU1ial albatross in efforts by the United States to liberalize u-ade. Price supports plus import quotas, export subSidies, defi-ciency payments, and so on cause the same economic distortions d1at arise from more familiar protectionist meas-ures such as import taxes. The problem po ed by U. . farm policy in efforts to expand trade and negotiate agricultural trade liberalization through GATT (The General Agreement on Tariffs and Trade) is rooted in the inherent conu-a-diction between domestic price sup-ports and free inte17national u-ade. Price supports for farm commodities are incompatible with trade expansion? because import barriers are a necessary appendage of farm poliCies that hold do-mestic prices above world price levels. The conflict between domestic farm. programs and free trade was apparent E. C. Pasour, Jr., is in the Department of Economics and Business at North Caro-lina State University. Second Quarter 1986 when GATT was established in 1947 to liberalize and expand trade. As Thomas Grennes points out in his 1985 Heritage Foundation publication, it is no coinci-dence that agricu ltu ral and od1er "pri-mary products" are not bound by the GATT principles which generally pro-hibit import quotas and export subsi-dies. The United tates insisted on spe-cial treatment for agricultural products. The GATT exemption for agricultural products was made necessary by Section 22 of the Agricultural Adjusffi1ent Act of 1933, as amended. It requires d1at the U.S. Govermnent in1pose quantity re-strictions whenever imports would "ma-terially interfere" with the operation of U.S. farm programs. It is not clifficult to see why such pro-tection is required for dairy, sugar, pea-nuts, tobacco, and other products where domestic prices are held above world price levels. In 1984, for example, do-mestic pfices of U.S. dairy products were two to three times prices in international markets. Call for "Miami Vice?" The case of sugar, where d1e domestic price in early 1985 was more than six times prices in international markets, is even more dramatic. Without rigid im-port controls for price-supported prod-ucts, consumers would substitute lower priced imports for domestically pro-duced products. And, the displaced U.S. production would accumulate in gov-ernment stocks, further undermining farm programs. That kind of price differential also at-tracts smugglers. There have been re-ports in the press of shiploads of foreign sugar entering d1e United States illegally. But the U.S.-inspired GATT principles that permit special exemptions for farm products also incorporate limits on how far countries can go in limiting imports to protect domestic suppo rt programs. Import quotas are not to be used to re-duce imports by more than domestic production is restricted. This means that limitations on imports should not cause the ratio of in1pOrts to domestic produc-tion to be below the ratio that would exist if there were no restrictions on imports. Thus, if imports would be 20 percent of domestic production in the absence of restrictions on imports, an import quota should not reduce the ra-tio of imports to domestic production to less than· 20 percent. D. Gale]ohnson shows in the Decem-ber 1984 American]ournal of Agricultur-al Economics that this principle has been "grossly violated" by d1e United States for a number of products includ-ing sugar, dairy, peanuts and beef. In d1e case of sugar and beef, for example, im-port quotas exist even though the U.S. CHOICES· 33 makes no attempt to reduce domestic production. This has also been the case for dairy except for the recent voluntary diversion program. The peanut progranl is buttres ed by import quotaS that virtu-ally exclude peanut impons. EXpOI1 subsidies that favor exported products over goods sold on the home market are largely prohibited by GAlT However, agricultural goods are exempt from this ban-with limits. Kelmeth Dam's 1970 University of Chicago Press book on GAlT points out that subsidies are not to be applied "in a marmer which results in (their) having more than an equitable share of world expol1 trade in that product. " Equity, of cour e, is in the eye of the beholder. What pro-ducers in the country subsidizing ex-pons consider equitable, producers in competing countries are likely to con-sider inequitable. US. agricultural interests are highly critical of subsidized agricultural ex-pons by other countries, especially by members of the EEC. However, the Unit-ed States continues to spend billions of dollars on expol1 subsidies to dispose of surplus farm products under the aegis "Food for Peace." Moreover, the target price and defiCiency payments system, similar in effect to expol1 subsidies, per-mits returns received by US. farmers to significantly exceed prices in interna-tional markets. This approach insulates US. producers from world market prices. In May 1985, the Reagarl Administra-tion and Congress agreed on a 2 billion "expol1 enharlcement program" to run through fiscal 1988. The program is aimed at markets that were taken over by competing nations using "unfair trade practices." In view of the US. re-cord of subsidizing expons, US. criti-cism of similar poliCies by other coun-tries is hypocritical. Smoke For Peace Although P.L. 480 (the "Food for Peace" program) has been called Ameri-ca's chief weapon in the fight against world hunger, much of its political sup-POI1 comes from its ability, not to fight hunger, but to increase the demand for US. farm products. For example, a large amount of P.L. 480 aid to Egypt over tlle years has taken the form of tobacco. EXpOI1 subsidies are inconsistent with GATT objectives. Ac:, Kenneth Dams points out, "Whether the motive of the selling country is to aid its own farmers or to aid the recipient country, food aid that preempts the commercial markets 34' CHOICES of tllird-counuy exporters creates an in-ternational u-ade problem arld may in the end be deleterious to tile interests not only of tile international trading community but even of the recipient country itself. " In ShOI1, tile US. has long maintained protectionist u-ade poliCies to hold do-mestic agricultural prices above interna-tional market prices. When other coun-tries institute trade restrictions it should be no surprise that, while contrary to general GAlT principles, tiley are simi-lar to those used by the United States. Our appeals to Japarl, members of tile EEC, and otiler countrie to open their markets to US. products are not credi-ble so long as we maintain protectionist poliCies for US. agricultural products. Losing the Productivity Edge Agricultural productivity is increasing rapidly througbout most of the world. It is happening not only in the United States and the Europearl Economic Community, but also in the developing COWl tries. For example, Thailand, Malay-sia, and the Philippines bave all in-creased their farm productivity by more than 35 percent during the past decade, accordipg to Dennis AvelY of the US. State Deparunent. More Information Professor Pasour identifies several publications that you may want to ob-tain. They include: "Helping US. Farmers Sell More Overseas." It is a chapter written by Thomas Grennes and is included in Backgrounder, No. 411, dated Febru-ary 27, 1985. It is available from TIle Heritage Foundation, 214 Massachu-setts Avenue, NE, Washington, D.C. 20002. Its cost is $2.00. The GluT: Law and International Economic Organization by Kenneth W. Dam. It was published in 1970 by the University of Chicago Press, 5750 Ellis House, Chicago, IT. 60637. Its price is $25.00. Dennis Avery's paper entitled "The Dilemma of Rising Farm Productivi-ty." It can be obtained by writing Den-nis Avery, Bureau of Intelligence and Research, Depa!1ment of State, Wash-ington, D.C. 20520. "Domestic Agricultural Policy in an International Environment: Effects of Otiler Countries' Policies on the Unit-ed States" by D. Gale Johnson in the 1984 American journal of Agricul-tural Economics. US. policy makers may have little choice but to reform domestic farm pro-grarlls. Rising farm productivity is plac-ing increasing budget and associated po-litical pressures on protectionist farm progranls. Rising productivity yields a progressively higher price tag for US. consumers and taxpayers to maintain US. price support prograrll . Moreover, as export markets become more importarlt, tile responsiveness of total demand of US. farm producr.c:, to reductions in output and higher prices increases. Ed Schuh and others argue that the characteristics of demarld may be such that with higher prices the total value of US. farm products may be less than at low prices. This relation hip, of course, does not add res the related net return question. A 50-Year-Old Shelter It may appear ironic tilat US. agricul-ture, tile world's leading exporter of ag-ricultural products, has been a perennial problem in U . attempts to reduce u'ade barriers. However, much of U . agricul-ture has been sheltered from competi-tive forces for 50 year . Price suppons and tile necessary accompanying trade restrictions of import quotaS and export subsidies have been used to protect U . agriculture from competition by foreign producers. A recognition tilat tile GAlT objective of liberalizing trade is no less appropri-ate in agriculture tilan in otiler sectors is long overdue. The United States acting unilaterally carmot abolish protectionist measures in otiler countries. This nation can, however, be an aggre ive leader in developing international agreements to reduce tile level of agricultural protec-tion in all countries and be willing to negotiate US. domestic policy. Eliminat-ing (or lowering) farm commodity price suppons is in tile self interest of tile United States because protectionism lowers tile level of US. production and US. exports and impons. It tilereby harms consumers and farm producer . Moreover, it is hypocritical for tile United States to criticize otiler countries for using import controls, export subsi-dies, and oilier trade resu-ictions which tilis country is also using. US. farm poli-cies violating tile GATT principle tilat permits some limitation of imports to protect price SUppOI1 programs are e -pecially egregious. Greater conformity to GATT princi-ples by the United States is likely to be necessary to encourage other countries to open up world markets for US. prod-Second Quarter 1986 ucts. The phasing o ut of domestic price supports that now raise U.S. prices above world price levels is an importan t first step in achieving a more open econ-omy and in increasing expotts of u.s. farm products. The United States should phase out price suppotts fotthwith and indepen-dently of GATT negotiations to reduce trade barriers. Price SUppOltS not only are inimical to trade. They are also inef-fective in attaining d1eir primary objec-tive of increasing me long-run profitabil-ity of farming. Two developments are creating addi-tional pressures on dle United States, at long last, to make OUf domestic agricul-tural poliCies more consistent wim the objectives of GATT. First, dlere is growing concern about d1e cost of farm programs. The US. Treasury cost of price and income stabi-lization programs alone increased from $4 billion in 1980 to some $18 billion in 1985. Second , riSing global farm produc-tivity coupled wim slow economic Gregory Gajewski and Ronald Meekhof on Band-Aids for Banks Bankers Dream While Regulators Adjust the Rules The income and equity of commercial banks specializing in farm lending are declining wim me farm economy. In 1985, almost 1300 agricultu ral banks had loan losses of 2.5 percent or more of loans outstanding-a level high enough to wipe out net income at me typical farm bank. Since 1983, returns to agri-cultural bank equity have been halved. The number of farm bank failu res has jumped almost tenfo ld, and d1e number of "problem" agricultural banks has qua-drupled. The poore t prospects are for farm banks in Iowa, Kansas, Nebraska, Minnesota, and Missouri. Agricultu ral banks and meir organiza-tions are p ressing for Federal assistance. Proponents point to me Farm Credit Sys-tem (FCS) rescue package, me net WOrdl certificate program for troubled savings and loans, and me 1984 Continental Illi-nois bailo ut to justify meir case. The re-lief movement has fo und support in dle Senate among Republicans from farm states. Senator , espedally mose facing reelectio n, are concerned about me im-pact of reduced banking services on ru-ral economies and, in turn, me effects on d1e e lections dlls fall. In contrast, dle Federal bank regula-tors-me Federal DepOSit Insurance Corporation (FDIC), me Board of Gov-ernors of me Federal Reserve System Financial Economist and Chief of Fi-nance and Tax Branch, respectively. Economic Research Service, U S. Depart-ment of Agriculture. Second Quarter 1986 (Fed), and dle Comptroller of me Cur-rency-have been reluctant to provide aggreSSive relief to farm banks. Theyem-phasize me potential damage Federal as-sistance to agricultural banks could have on me safety and soundness of me na-tion 's banking system. Recent hearings held by me Senate Committee on Banking, Housing, and Urban Affairs and chaired by Jake Garn (R-UT) p rovided a unique opportunity to clarify me different positions held by me banking industry and me institutions dlat regulate me banks. There is a great diverSity of opinion as to whemer re lief is needed, and if so, me most effective approach. The most widely discussed relief measures include: - Extending me net woLth certificate p rogram to agricultural banks; -Allowing agricultural banks to spread meir farm losses over a number of years; -Subsidizing acquisition of failed banks by healdlY banks; - Inlplementing various accounting reforms. The hearings pointed out mat, in d1e extreme, the dloice facing policy mak-ers is between: (1) a bank bailo ut, and (2) fai th in market forces. The first would increase risks to d1e safety and soundness of me banking system wIllIe me second could cuttail credit for farm and odler rural businesses. The chal-lenge is to find a middle ground mat facili tates dle recovery of banks mat are growd1 of many countries has meant lower international farm product prices. These lower prices increase dle budget cost of maintaining domestic price sup-POlt programs. Thus, increasing competition in mar-kets for US. farm products and budget pressures may force US. poli cy makers to do what mey heretofore have been unable to do-modify our domestic farm poliCies to make mem compatible widl dle GATT objective of liberalized trade. ~ fundamentally viable but experiencing temporary adverse economic adjust-ments. System Not Threatened Even wimout a relief program, me na-tional commercial banking system can weamer me agricultural crisis. However, mere remains a remote possibility mat confidence in me system could be shak-en by failing agricultural banks. These kinds of developments are highly un-likely because institutional safeguards, provided by me FDIC and me Fed-protect dle banking system from any runs on rural banks. Though me nation's banking system is not really at risk, me aVailability of credit and financial services in rural areas is at issue. Also at issue is: me extent to which bank owners should be held responsi-ble for meir lending decisions, me eligi-bility of troubled banks servidng omer sectors for a legislative o r regulatory remedy, and me structure and stability of me banking system. The issues also relate to fairness. Why protect assets of bank owners when farmers have lost a quatter trillion dol-lars in asset values and tens of d10usands have experienced fo reclosures and liq-uidations? The response is d1at farm bank aid will ease me transition fo r farmers. The aim, some say, is to help farmers mrough their banks, even if it means saving bank owners. Problem of Overcorrection Some analysts argue mat when mar-CHOICES "35 

E. C. Pasour, Jr., on Free Trade's Price: U.S. Farmers Can't Have Free Access to World Markets and Price Supports, Too

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