As the 2007 Farm Bill debate unfolds, some policy observers have noted the importance of trade compliance and have argued that federal financial support to farmers should be less trade distorting. Components of these arguments often include a focus on conservation payments or direct payments, two forms of federal support that are generally considered to have less of an impact on the market than subsidies based on current production and market prices.
Interestingly, due to projected increases in market prices and resulting budget allocations, direct payments are one of the few sources of potential funding for new or expanded conservation initiatives. As a result of this budget situation, ideas for increasing both conservation programs and direct payments are more limited.
News items relating to conservation payments and direct payments have surfaced recently that shed more light on the debate.
In an update posted yesterday at The Ruminant Blog, Scott Faber asked the following question: “[H]ow well would farmers represented by Freshmen members of the House be served by USDA if Congress shifted some subsidies to help pay for USDA conservation programs?”
Mr. Faber indicated that the answer, found in a report released yesterday by Environmental Defense (“Freshman Economics”), is “that farmers in 36 of 55 districts represented by freshmen members would receive a fairer share of federal farm spending if Congress shifted direct payments to share the cost of clean water or wildlife habitat. Farmers in 12 districts would see little or no change. Many of these districts are located in California, Florida, Pennsylvania, New York and Ohio — large farm states that currently receive little support from USDA.
“So, farmers in 48 of 55 districts would receive more support from USDA or see little or no change if Congress reformed farm subsidies to help the environment. Overall, many more farmers would be able to participate in USDA programs.”
The Environmental Defense report explained that, “By linking payments to the amount of past production, direct payments favor large producers. In 2005, the largest 10 percent of direct payment recipients collected 60 percent of all direct payments. While some large farms collected more than $100,000 in direct payments between 2003 and 2005, most farmers who collect direct payments collected less than $100 a month.
“What’s more, farmers receive direct payments regardless of whether they grow a crop at all. Some experts estimate that more than $1 billion in direct payments have been made to landowners who do not farm at all. In many cases, direct payments flow to land owners, driving up the cost of renting or buying land. In particular, many landowners who rent their land to farmers raise their rent to ‘capture’ direct payments from farmers.
“Ironically, direct payments were created in 1996 as part of the ‘freedom to farm’ legislation designed to wean farmers off depression-era subsidies. Today, direct payments are treated as an entitlement. Since the passage of freedom to farm, some farms have collected more than $2 million in direct payments.”
Alternatively, the Environmental Defense report stated that, “Expanding funding for working lands conservation programs would help many more farmers and regions receive a fair share of farm spending and help address some of the nation’s most pressing environmental challenges,” and added that, “All farmers and ranchers are eligible for working lands conservation programs, and payments are linked to the costs and risks of stewardship—not to an arbitrary measure of past production.”
Additional analysis on the issue of direct payments was also noted recently by University of Illinois Agricultural Economist Robert Thompson in an essay entitled, “Whither Direct Payments?”
There, Dr. Thompson stated that, “Some interests want to keep the LDP [Loan Deficiency Payment] and CCP [Counter Cyclical Payment] structure in the next farm bill, but with higher target prices and/or loan rates. To pay for the higher cost, they would reduce or eliminate direct payments. However, this would be contrary to the efforts of the U.S. in the World Trade Organization (WTO) to reduce the distortions in international ag trade caused by domestic supports.
“The domestic commodity programs that cause the greatest distortions in world trade are those linked to production of specific commodities. The United States, where 93% of all payments go to only five commodities, is one of the countries with the greatest concentration of farm program benefits on a few commodities.”
The paper did note that a potential transfer of direct payment funding to conservation-based programs would by advantageous from a trade perspective. At the paper’s conclusion, Dr. Thompson indicated that, “There are ways other than direct payments to distribute support to farmers without linking it to production of specific commodities. Some interests advocate conservation payments. Others suggest replacing LDPs, CCPs, marketing loans, disaster payments and the subsidy to crop insurance with subsidized whole farm revenue insurance. Still others suggest increasing support for research or rural development.
“Whatever direction the Farm Bill takes, to avoid WTO problems, support now provided through direct payments should not become linked to the production of any specific commodity. If all countries were to decouple support from production of specific commodities, world agricultural trade would be much less distorted.”
The European Union has implemented reforms in the Common Agricultural Policy (CAP) that aim to meet several policy goals (income support, conservation improvements) while maintaining a trade neutral impact through the use of decoupled direct payments and conservation compliance requirements.
A Congressional Research Service Report from 2005 (“Green Payments in U.S. and European Union Agricultural Policy,” by Charles E. Hanrahan and Jeffrey Zinn), explained that, “In the EU, the relationship between agriculture, the environment, and development of rural areas has found expression in the concept of multifunctionality. Farmers are viewed as producing not only food and agricultural products, but also positive environmental and other benefits (externalities). Agri-environmental policy focuses mainly, but not exclusively, on promoting positive externalities associated with agricultural production. These include, among others, landscape, rural amenities, and cultural heritage. The premise underlying agri-environmental policy is that these externalities are public goods that are undervalued by the market and therefore require social or public funding to induce farmers to produce them. More broadly, the EU maintains that support of commodity production and farm incomes that also engenders these positive externalities is also justified.”
Later, the CRS report highlighted some CAP reforms that were undertaken in 2003 and stated that, “The major reform was the establishment of a single farm payment decoupled from production (with some exceptions for certain crops) to replace the myriad commodity payments made to EU farmers. Receiving the single payment is contingent on farmers’ compliance with environmental and other requirements (food safety, occupational safety, animal welfare) set at the EU and national levels (cross-compliance). Cross-compliance is now compulsory and all farmers receiving direct payments will be subject to it. Farmers will be sanctioned for non-observance of these standards through cuts in direct payments. These policy changes took effect on January 1, 2005.”
Although not on the table in the U.S., stringent compulsory environmental requirements in exchange for direct farm subsidies that minimize market distortions and support farm income is seen as a way to accomplish several objectives efficiently.
Meanwhile, Ken Cook, writing yesterday at The Mulch, noted that, “Over the weekend, the content of House Chairman Peterson’s ‘two bill’ approach was posted on the committee’s website. Bill #1, the one assuming no extra money is made available through the $20 billion ‘reserve fund’ for agriculture, is set forth title by title, with accompanying fact sheets. Bill #2 imagines that reserve fund [money] does become available; its provisions are found in the ‘En Bloc Amendment.’
“Translated from the French, ‘En bloc’ literally means ‘Powerball’.
“The House agriculture committee’s 46 members (of 435 in the House) represent congressional districts that accounted for fully 42.4 percent of crop subsidy payments between 2003 and 2005 (program years)–$14.7 billion out of $34.75 billion spent by taxpayers over that period. We break it down here.
“Six committee members represent districts that collected over $1 billion in crop subsidies in just three years; nine collected over $700 million, including Chairman Peterson, whose Minnesota district brought in more than $873 million. To state the obvious, these are large districts in area (two are at-large, encompassing entire states) and they are major producers of the five crops that account for over 90 percent of the Title I subsidies (corn, wheat, cotton, rice and soybeans).”
Concluding, Mr. Cook pointed out that, “Fourteen (14) members–a third of the full committee–saw $30 million or less come into their districts through crop subsidies, less than $10 million per year on average.
“That group’s farm and ranch constituents might well fare better under reform scenarios that invest more money in fruit and vegetable programs, and conservation. Among its members is ranking Republican Bob Goodlatte of Virginia (who comes in 42nd among committee members for crop subsidies over that period).
“Title I in both versions would extend the fixed direct payments, made regardless of prices or incomes, to the tune of $5.2 billion per year for five years. The mark also increases target prices for a number of crops, of most consequence for wheat, barley and soybeans.”
In other Farm Bill news, Reuters writer Charles Abbott reported yesterday that, “U.S. growers would be allowed to sell cane and beet sugar for use in making ethanol under a House Agriculture Committee proposal — a signal change for a program that treats sugar solely as a food.”
Mr. Abbott explained that, “By law, the government must run the sugar program at no net cost. The program relies on domestic marketing allotments, when needed, to balance the supply of domestic and imported sugar with U.S. consumption. Tariff-rate quotas control imports.
“Under the Agriculture Committee text, the Agriculture Department would set marketing allotments ‘for domestic human consumption’ of sugar for the 2008-12 crop years. Sugar sold ‘for uses other than domestic human consumption’ would be excluded from the limits.
“The American Sugar Alliance, a trade group for growers, said the committee proposal would make the sugar program ‘even stronger’ with its ‘long overdue loan rate increase’ and the ethanol provision.”
In a related news item, Dow Jones writer Lisa Kallal reported yesterday that, “The International Energy Agency Monday forecast global biofuel output will double from 2006 levels to 1.75 million barrels a day in 2012.
“In its medium-term oil market report through to 2012, the agency, the energy security watchdog for the Organization for Economic Cooperation and Development, included its second annual report on biofuels.
“IEA also raised its 2006 biofuel supply baseline by 79,000 barrels a day to 863,000 barrels a day due to stronger-than-expected growth and more detailed capture of projects.
“Still the agency warned while the forecasts showed a ‘considerable rate of growth’ for global biofuel production they were significantly below capacity planned for 2012.
“IEA said it maintained a cautious biofuels stance because high feedstock prices raised doubts over economic viability.”
In other farm policy developments, Reuters writer Missy Ryan reported yesterday that, “A senior U.S. lawmaker has put forward a plan to boost U.S. farm sales overseas and tinker with crop donations to the world’s hungry, but some critics are already calling Congress’ latest step toward overhauling farm policy inadequate.
“The House Agriculture Committee will start debate next week on a plan from its chairman, Rep. Collin Peterson, for the 2007 farm bill, the mammoth five-year law that will overhaul everything from farm subsidies to food stamps to food aid.”
Ms. Ryan added that, “The plan from Peterson, a Minnesota Democrat who so far has deflected widening pressure for substantial reform across farm programs, includes some changes to delivery of food assistance from the world’s biggest provider of food aid; however, the proposal “will vie against another bill approved on June 26 by the House Foreign Relations Committee, which also has purview over farm trade and food aid.”
The Reuters item indicated that, “Agriculture Committee sources said the two committees would try to informally reconcile the plans before the bill moves to the Rules Committee, the last stop before floor debate.”
A separate Reuters news item from yesterday stated that, “Brazil’s foreign minister will meet with European negotiators at the end of next week in a last-ditch effort to move stalled global trade talks forward, a presidential spokesman said on Monday.
“‘In principle, EU negotiators, Portuguese participants and obviously German negotiators will participate,’ presidential spokesman Marcelo Baumbach told reporters.”