Expected Changes to Expected Changes to US Farm Policy Resulting US Farm Policy Resulting

from the Doha Roundfrom the Doha Round

Larry D. SandersLarry D. Sanders

February 2006February 2006

Farm Bill Pressures and Farm Bill Pressures and DynamicsDynamics

Twin DeficitsTwin Deficits– Trade DeficitTrade Deficit– Federal Budget DeficitFederal Budget Deficit

Trade Situation & PolicyTrade Situation & Policy Political EconomyPolitical Economy

– DomesticDomestic– InternationalInternational

Trade & Trade Deficit:Trade & Trade Deficit:US Trade Balance, 1990-2005US Trade Balance, 1990-2005

($ million)($ million)

-800000

-700000

-600000

-500000

-400000

-300000

-200000

-100000

0

Trade Balance

NOTE:

1991: $31.1 b.

2004: -$617.1 b.

2005(projected): -712.1 b.

1991: -$31 bil.

10/05: $68 bil.

US Agricultural Trade Balance US Agricultural Trade Balance ($mil/FY; agricultural product only)*($mil/FY; agricultural product only)*

0

10000

20000

30000

40000

50000

60000

70000

91 92 93 94 95 96 97 98 99 0 1 2 3 4 5

IMPORTS EXPORTS

WTO

NAFTA

*NOTE: If fish & forest product added to ag, trade balance would be -$21.1 b.for fy05.

$62.4 b.

$57.7 b

The Proposed Modified BoxesAmber New Blue Green

Payments coupled to production & prices

Payments decoupled from production but coupled to prices

Payments decoupled from production and prices

Policies that are trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.)

Policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production-limiting policies (US crop deficiency payments, EC compensatory payments, etc.)

Policies that are non-trade distorting & are acceptable under URA, including tax-payer-funded and non-trans-fers from consumers (research, extension, pest/disease control, crop insurance, marketing/ promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.)

The Next Farm Bill: 2007? 2008? 2011?The Next Farm Bill: 2007? 2008? 2011?

Current farm bill: 6-year act (2002-2007)Current farm bill: 6-year act (2002-2007) Debate for the “next” farm bill already Debate for the “next” farm bill already

engagedengaged Rewrite of FSRIA02 began in 05Rewrite of FSRIA02 began in 05

– Budget ReconciliationBudget Reconciliation– AppropriationsAppropriations

New “enabling” legislation in 07-08-11?New “enabling” legislation in 07-08-11?– 2006 & 2008 election anxiety may encourage a 2006 & 2008 election anxiety may encourage a

2007 farm bill2007 farm bill– Doha Round complications suggest late 07, Doha Round complications suggest late 07,

early 08 or 2011 WTO agreement and new early 08 or 2011 WTO agreement and new farm billfarm bill

FY06 Reconciliation Package 2006-FY06 Reconciliation Package 2006-20102010 (S 1932)(S 1932)

House passed 1 Feb 06; Senate passed Dec 05House passed 1 Feb 06; Senate passed Dec 05 $39.7 b. cuts from all programs $39.7 b. cuts from all programs $2.7 b. cuts from ag programs$2.7 b. cuts from ag programs

– No across-the-board Commodity program cutsNo across-the-board Commodity program cuts– Cotton reform (eliminate Step 2 Aug ’06)Cotton reform (eliminate Step 2 Aug ’06)– Dairy market loss payments MILC extend thru Sep Dairy market loss payments MILC extend thru Sep

‘07‘07– Advance direct payments reduced from 50% to 22% Advance direct payments reduced from 50% to 22%

in ’07in ’07– Watershed Rehab Program cancelled Oct ‘06Watershed Rehab Program cancelled Oct ‘06– CSP spending reduced to $1.95 b. 06-10CSP spending reduced to $1.95 b. 06-10– EQIP spending reduced $30 m. 07-09EQIP spending reduced $30 m. 07-09– Renewable Energy Program spending reduced $20 Renewable Energy Program spending reduced $20

m. ’07m. ’07

FY06 Reconciliation Package 2006-FY06 Reconciliation Package 2006-20102010 (S 1932)(S 1932)

Cuts from ag programs—cont.Cuts from ag programs—cont.– Broadband Rural program cancelled Oct Broadband Rural program cancelled Oct

’06’06– Value Added grants cancelled Oct ’06Value Added grants cancelled Oct ’06– Rural Business Investment program Rural Business Investment program

cancelled Oct ’06cancelled Oct ’06– Rural Business Strategic Investment Rural Business Strategic Investment

grants cancelled Oct ’06grants cancelled Oct ’06– Rural Firefighters/emergency personnel Rural Firefighters/emergency personnel

grants cancelled Oct ’06grants cancelled Oct ’06– Initiative for Future Ag & Food Systems Initiative for Future Ag & Food Systems

cancelled for ’07-’09cancelled for ’07-’09 No cuts: food stamps, child nutrition No cuts: food stamps, child nutrition

Evolutionary…not Revolutionary Evolutionary…not Revolutionary Change?Change?

Never do today what you can put off till tomorrow.Never do today what you can put off till tomorrow. --Matthew Browne--Matthew Browne

Near term program changes marginal; Near term program changes marginal; likely more to come in 2007

ButBut, WTO restrictions likely to coincide with writing of , WTO restrictions likely to coincide with writing of next farm bill; cuts may become dual purposenext farm bill; cuts may become dual purpose– 20-50% cuts for WTO?20-50% cuts for WTO?– $3-$20 billion in cuts for deficit reduction?$3-$20 billion in cuts for deficit reduction?

Production expenses (fuel, fertilizer, interest rates) will Production expenses (fuel, fertilizer, interest rates) will rise faster than commodity pricesrise faster than commodity prices

Budget deficit/debt solution choicesBudget deficit/debt solution choices– Increase taxesIncrease taxes– Cut spendingCut spending– Grow economyGrow economy– Do nothingDo nothing

Review of Past Decade Suggests Mixed Review of Past Decade Suggests Mixed Bag for Farm Bill and Trade Agreement Bag for Farm Bill and Trade Agreement

ImpactsImpacts Theory says:Theory says:

– Lower prices bring increased exports.Lower prices bring increased exports. Conflicted opinions:Conflicted opinions:

– Trade agreements reduce trade barriers & increase Trade agreements reduce trade barriers & increase trade?trade?

– Trade agreements help big agriculture/agribusiness & Trade agreements help big agriculture/agribusiness & harm small farms?harm small farms?

– Big business with co-opted government manipulate Big business with co-opted government manipulate market prices for own gain?market prices for own gain?

Reality check of past decade:Reality check of past decade:– US exports & imports trending upUS exports & imports trending up– Wheat prices & exports trending downWheat prices & exports trending down– Corn & cotton prices trending down & exports trending Corn & cotton prices trending down & exports trending

upup– Agribusiness has done relatively better than farmsAgribusiness has done relatively better than farms

US Wheat price & exports, 1991-2005

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 4 5

0

200

400

600

800

1000

1200

1400

1600

wheat price ($bu)

wheat exports (mil. Bu.)

Line 3

Linear (wheat price ($bu))

Linear (wheat exports (mil. Bu.))

NAFTA

WTO

FAIR 96

FSRIA 02

US Corn price & exports, 1992-2005

0

0.5

1

1.5

2

2.5

3

3.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

500

1000

1500

2000

2500

corn price ($/bu; farm)

corn exports

Linear (corn price ($/bu; farm))

Linear (corn exports)

NAFTA

WTO

FAIR 96

FSRIA 02

US Cotton price & exports, 1992-2005

0

10

20

30

40

50

60

70

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

2

4

6

8

10

12

14

16

cotton price (cents/lb; farm)

cotton exports (mil.bales)

Linear (cotton price (cents/lb; farm))

Linear (cotton exports (mil.bales))

NAFTA

WTO

FAIR 96

F

S

R

I

A

0

2

General Trade Market Analysis for General Trade Market Analysis for 2002 Farm Bill (2002-2005)2002 Farm Bill (2002-2005)

Exports and Imports continue increasingExports and Imports continue increasing Trend for Imports increasing faster than exportsTrend for Imports increasing faster than exports

– Ag trade surplus narrowingAg trade surplus narrowing– Some months of ag trade deficit have occurred within Some months of ag trade deficit have occurred within

past 2 yearspast 2 years– Trend suggests annual ag trade deficit in next 5 Trend suggests annual ag trade deficit in next 5

yearsyears 96-02: 26% increase in imports; 11% decline in 96-02: 26% increase in imports; 11% decline in

exportsexports 02-04: 29% increase in imports; 17% increase 02-04: 29% increase in imports; 17% increase

in exportsin exports Prices down for wheat & corn; mixed for cottonPrices down for wheat & corn; mixed for cotton Export volume up for wheat, corn, cottonExport volume up for wheat, corn, cotton Export value up for wheat, corn, cottonExport value up for wheat, corn, cotton

General Trade Market Analysis for General Trade Market Analysis for 2002 Farm Bill (2002-2005)--2002 Farm Bill (2002-2005)--

continuedcontinued

Summary: Summary: – Complex reasons for trade flowsComplex reasons for trade flows– Farm bill may be part of reason for price declinesFarm bill may be part of reason for price declines– Not likely primary contributor to increase in importsNot likely primary contributor to increase in imports– Cotton export value more than doubled (121% Cotton export value more than doubled (121%

increase) 2002-2004; but, down 16% in 2005 to date increase) 2002-2004; but, down 16% in 2005 to date (Oct-Aug)(Oct-Aug)

– Feed export value increased 9%, but down 5% in Feed export value increased 9%, but down 5% in 2005 to date 2005 to date

– Wheat export value increased 46%; but down 17% in Wheat export value increased 46%; but down 17% in 2005 to date2005 to date

– With Step 2 terminated, expect some decline in With Step 2 terminated, expect some decline in cotton exportscotton exports

The Political Reality of An Election The Political Reality of An Election Year:Year:20062006

Weakened PresidentWeakened President ““Safe” politics & election year jittersSafe” politics & election year jitters The next presidential election (’08) The next presidential election (’08)

may overshadow ’06may overshadow ’06 WildcardsWildcards

Politics: Political Triangle of Ag & Budget Politics: Political Triangle of Ag & Budget PolicyPolicy

JUDICIAL

EXECUTIVE

LEGISLATIVE

INTERESTGROUPS

•New committees•Turf battles•Reconciliation

•Bush Doctrine•Bush Budget•USDA•Trade talks

•Ag groups one voice?•Non-ag groups•Competitors

Federal Reserve

•Fight inflation•Critical of federal deficit•Greenspan retiring

Net Farm Income & Direct Government Net Farm Income & Direct Government

PaymentsPayments

01020

30405060

708090

net farm income

govt payments

NFI-G

1996 Farm Act$ Billion

*Projected

2002 Farm Act

71.5

22.7

Net Farm Income & Direct Government Net Farm Income & Direct Government Payments:Payments:

Assume 20% cut in Govt Payments 1996-2005Assume 20% cut in Govt Payments 1996-2005

01020

30405060

708090

net farm income

adj NFI (20% cut inG)

1996 Farm Act$ Billion2002 Farm Act

2-8% reduction

in NFI 96-05