2002 U.S. Farm Bill Revisited:Impacts, Implications of the WTO

Ruling and the U.S. Budget

12th Annual Farming for Profit!Moose Jaw, SK, Canada

June 27, 2005Flynn Adcock and Parr Rosson

Center for North American StudiesDept. of Agricultural Economics

Texas A&M UniversityCNAS CNAS

Overview

• Program Spending & Summary of FSRIA Provisions

• Implications of Budget Reconciliation

• Implications for WTO Obligations• Case: U.S. Farm Bill, Canadian

Cattle Feeding, and BSE CNAS

U.S. Farm Program Spending

CNAS

U.S. Federal Budget Outlays byFunction, FY 2005

Physical Resources includes: transportation, community and regional development, etc.Source: Budget of the U.S. Government; www.whitehouse.gov/omb/budget/fy2003/pdf/hist.pdf

National Defense18.8%

Human Resources64.0%

Physical Resources5.3%

Net Interest7.2%

Agriculture1.2% Other

3.4%

Total Estimated Outlays: $2.48 Trillion

Health, Medicare, Social Security

CNAS

CCC Net Outlays, FY 1980 – 2006E

Source: Commodity Credit Corporation Budget, USDA

2.75 4.

0411

.65

18.8

57.

3217

.68

25.8

422

.41

12.4

610

.52

6.47

10.1

19.

7416

.05

10.3

36.

034.

65 7.26 10

.14

19.2

232

.27

22.1

15.6

817

.43

10.5

624

.07

19.8

1

1980 1985 1990 1995 2000 2005E$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

Billion Dollars

CCC Net Outlays, (2000 $) FY 1980 – 2006E

Source: Commodity Credit Corporation Budget, USDA; Bureau of Economic Analysis, U.S. Dept. of Commerce

$5.1 $6

.8$1

8.6

$28.

9$1

0.8

$25.

4$3

6.3

$30.

6$1

6.5

$13.

4$7

.9$1

2.0

$11.

3$1

8.2

$11.

4$6

.5$5

.0 $7.6 $1

0.5

$19.

6$3

2.3

$21.

6$1

5.1

$16.

4$9

.8$2

1.9

$17.

4

1980 1985 1990 1995 2000 2005E$0.0

$10.0

$20.0

$30.0

$40.0

Billion Dollars

$5.1

$25.

8

$22.

4

$12.

5

$10.

5

$6.5

$10.

1

$9.7

$16.

1

$10.

3

$6.0 $7

.3

$10.

6

$19.

2

$32.

3

$22.

1

$15.

7

$17.

4

$10.

6

$24.

1

$19.

8

1986 1991 1996 2001 2006E$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

Billion Dollars

Wheat Corn Other Feed GrainsRice Cotton Other

CCC Net Outlays, By Commodity FY86 – 06E

Source: Commodity Credit Corporation Budget, USDA

FSRIA Provisions

CNAS

Summary of Provisions

• FSRIA Signed May 13, 2002• Effective for Crop Years 2002-07• New Spending from $45.1-$51.7 Billion

(2002-2007)• Major Increases in Environmental,

Conservation, & Energy• Institutionalizes Previous Ad-hoc

Funding for Commodity Programs CNAS

FSRIA Titles• Title I: Commodity Programs*• Title II: Conservation*• Title III: Trade*• Title IV: Nutrition• Title V: Credit• Title VI: Rural Development• Title VII: Research & Related Matters• Title VIII: Forestry• Title IX: Energy• Title X: Miscellaneous*

CNAS

Farm Bill Spending, 2002-07

• Total Cost: $273.9 Billion• Commodity Programs: $98.9 Billion• Conservation: $21.3 Billion• Food & Nutrition: $149.6 Billion• Total Over Baseline: $51.7 Billion• Average Annual Cost: $8.6 Billion

(over baseline) CNAS

Farm Bill Program Spending by Title, Budget Authority, FY 2002-2007

Excludes funding for discretionary programs which is provided through annual appropriations.

Total Estimated Outlays: $273.9 Billion (March 2002 Baseline)

Source: The 2002 Farm Bill: Overview and Status , Congressional Research Service

Commodities36.1%

Conservation 7.8%

Trade0.8% Food Programs

54.6%

Miscellaneous0.7%

CNAS

FSRIA Provisions

• Commodity Programs-Sources of Payments to Producers– Direct Payments (AMTA/PFC) -

Continuation– Marketing Loan Gain (MLG) or Loan

Deficiency Payments (LDP) - Continuation

– Initiated New Counter-cyclical Payments (CCP) - reinstates Target Prices* CNAS

FSIRA Provisions (cont.)

• Soybeans & Peanuts Covered Under All Payment Provisions

• Dry Peas, Lentils, and Chickpeas now Covered under Marketing Loan Program

• Required Country of Origin Labeling at Retail for Meats, Seafood, Produce, Peanuts (MCOOL Provisions Postponed for all but Seafood)

• CCP (counter-cyclical payments) for Dairy farmers CNAS

U.S. Loan Rates

2002 Farm Bill2004 – 07 Rate

2002 Farm Bill2002 – 03 Rate

1996 Farm Bill 2001 Rate

Crops

N/AN/AN/AN/A

0.0935.261.211.656.50

0.51922.581.711.89

355.0355.0Peanuts ($/ton)

11.7211.94Lentils ($/cwt)7.437.56Small Chickpeas ($/cwt)

6.226.33Dry Peas ($/cwt)

0.0930.096Minor Oilseeds ($/lb)5.005.00Soybeans ($/bu)1.331.35Oats ($/bu)1.851.88Barley ($/bu)6.506.50Rice ($/cwt)0.520.52Upland Cotton ($/lb)2.752.80Wheat ($/bu)1.951.98Sorghum ($/bu)1.951.98Corn ($/bu)

Wheat loan rates will be announced by class: hard red spring, hard red winter, soft red winter, soft white wheat, and durum.

FSIRA Provisions (cont.)

• Wool, Mohair, & Honey Get Marketing Loan Payments

• Conservation Reserve Program (CRP) Acreage to Expand from 36.4 ma to 39.2 ma

• Environmental Quality Incentive Program (EQIP): 6 fold increase, $400 million in 2002 increasing to $1.3 billion in 2007

Farm Bill Payments• Direct Payments = Payment rate x (Base acres

x .85) x Farm Program Yield

• Counter-cyclical Payments (CCP)– Secretarial Action Required to Implement Target price-Effective price (Higher of Market price or loan rate

plus Direct payment rate) Counter-cyclical payment rate ($/unit)

• CCP = CCP rate x (Base acres x .85) x Updated Farm Program Yield CNAS

Potential Impacts of Farm Bill

• U.S. Dry Pea and Lentil Planted Area Expected to Rise– Marketing Loan

Program– Favorable Lentil

Prices/Falling Alternative Crop Prices

– Relatively Low Input Costs

– Long-term Benefits from including in Crop Rotation

• Most Growth in ND, WA, MT

U.S. Peas and Lentil Production

Source: Vegetables and Melons Outlook, ERS, USDA

195293

215286

223370

211406

392355

329336

367385

760920

1990

1995

2000

2005

0 200 400 600 800 1000

1,000 MT

Dry Edible Peas Lentils Others

Potential Impacts of Farm Bill

U.S. Wheat, Barley, and Canola Production

Source: Vegetables and Melons Outlook, ERS, USDA

84

64

77 74 7267 71

76 78

69 68

59

49

7165 64

1990 1995 2000 20050

20

40

60

80

100

Million MT

Wheat Barley Canola

• Wheat Production up from Recent Low in 02/03 MY

• Barley Production down from Highs of Early 1990’s – Less than ½ of CN

• Canola Crop Grew from near Zero in 90 but has fallen since 2001 – Very Small compared to Canada

Potential Impacts of U.S. Budget Reconciliation

• Research by TAMU AFPC in early 2005• Impacts are dependent on which parts of the

program are adjusted• Reducing Direct Payments (de-coupled) would

have the greatest impact on income because fixed• Counter-Cyclical and Loan Deficiency/

Marketing Loan Gain Payments are not fixed but based on market conditions

• Simulation results show that loan rate reductions would be least harmful to producers

• Cuts to CRP were not analyzed

Implications of WTO Obligations and the Cotton Case

CNAS

WTO Issues/ImpactsWTO Issues/ImpactsDirect payments – Green Box (don’t count)

MLGs/LDPs – commodity specific Amber Box

CCPs – noncommodity specific Amber Box

Amber Box limit is $19.1 billion annuallyNoncommodity specific support is not included

when calculating the AMS as long as it is <5% of the value of agricultural productionThese amber box payments are referred to as

“de minimis” (trifling amount)If >5% then full amount counts CNAS

WTO and the New Farm Bill

$0

$5

$10

$15

$20

$25

96 97 98 99 00 01 1996-02 2002-07AMS AMS (before de minimis) WTO Limits

Aggregate Measure of Support (AMS) refers to the $19.1 billion annual spending cap on Amber box payments. Source: FAPRI

Billion Dollars

WTO Issues/Impact (Continued)

Farm Bill Adjustment Authority Related to Doha Round (WTO) Compliance

Potential for Year 1 cut in support ceiling of 20%, from $49.1B to $39.3B

Will have to Adjust Export Credit Guarantees to Comply w/6 Month Maximum

Changes to Some Programs to Make More “Green” CNAS

Implications of WTO Cotton Case

• Findings against U.S. cotton-related programs• Step 2 of Cotton Program Likely Gone• Restrictions on what crops can be planted on

program acreage (fruits/vegis) may be lifted• Findings against Export Credit Guarantee

Program as well – Some Changes as Early as Next Month

• These Findings will be considered during Budget Reconciliation and for 2007 Farm Bill

Case Example: Beef and Cattle

CNAS

U.S. Farm Bill, Canadian Cattle Feeding, and BSE

• Investment in Prairie Province Beef Industry• Availability of Cheap U.S. Corn and Export of this

Corn to the Canadian Cattle Feeding Industry• Concern over the Potential Impacts of MCOOL• Dynamics Changed with Discovery of BSE• Ban on Canadian Cattle Exports to U.S. and Low

Canadian Prices Led to More Investment in Prairie Beef Industry

• Canadian Industry May be Stronger when Normal Trade Resumes – But With Uneven Benefits

U.S. Feed Grain Exports to Canada

Source: U.S. Trade Internet System, www.fas.usda.gov/ustrade

$98.

0 $109

.0

$106

.3

$98.

1

$98.

6

$99.

9 $109

.8

$159

.0

$114

.4

$102

.7

$89.

3

$85.

0

$87.

5

$94.

9

$101

.0

$103

.9

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0Million Metric Tons

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

$180.0US$/MT

Corn Other Corn Unit Value

Alberta Direct Fed Steer Price, Jan 01 – Jun 05

Source: Alberta Agriculture, Food and Rural Development, www.agric.gov.ab.ca2001 are monthly averages, source CANFAX, calculated by LMIC

JanFeb

Mar

AprM

ayJun

JulAug

SepOct

NovDec

$20

$40

$60

$80

$100

$120CN$/CWT

2001 2002 2003 2004 2005

Alb/Sask Cattle on Feed, Jan 01 – Jun 05

Source: CanFax, www.canfax.ca

JanM

aySep

300.0

500.0

700.0

900.0

1100.0

1300.0

Thousand Head

2001 2002 2003 2004 2005

Summary and Conclusions

• U.S. Farm Spending, while High, is Low Compared to Rest of U.S. Budget

• Farm Spending Less than Mid-80s in Real Terms• Most of Farm Bill Spending in Food/Nutrition

Programs – 36% in Commodity Support• Direct Payments are Green Box; MLG/LDP and

CCP are Amber Box• Inclusion of LDP for Lentils/Peas Spurred the

Greatest Shift in Production• Budget Reconciliation Impacts are Unclear CNAS

Summary and Conclusions (Continued)

• Doha Round, Cotton Case, and Budgetary Concerns to Impact Next Farm Bill

• Inclusion of Fruits and Vegetables in the Program and/or as Crop Alternative for Program Acres???

• MCOOL Less of a Threat than BSE• Canadian Cattle Industry Likely Stronger Post-BSE

but Cow/Calf Producers will Need Greater Recovery Time

• U.S. Farm Bill Impacts on Canada Appear to be Less than Other Factors such as BSE or Canadian Policy Changes