FarmPolicy

February 23, 2019

Trade Negotiations & U.S. Farm Subsidies

Reuters writer Missy Ryan reported this morning that, “A bipartisan group of U.S. senators urged the Bush administration to reject deep cuts to U.S. cotton subsidies in world trade talks, promising to oppose any agreement with major subsidy reforms that some poor countries insist they need to compete on world markets.

“‘We cannot abandon a group of farmers who have operated within the parameters of a program written to comply’ with existing trade rules, Sen. Saxby Chambliss of Georgia and nine other southern lawmakers said on Thursday in a letter to U.S. Trade Representative Susan Schwab.

“‘Treating cotton differently than all other agriculture products in the Doha Negotiations will further erode support in the U.S. Congress for the WTO and the Administration’s trade agenda,’ wrote Chambliss, the top Republican on the Senate Agriculture Committee, and his fellow senators.”

The Reuters article indicated that, “The U.S. cotton industry, which produces 40 percent of the cotton on world markets, wields major political clout in Congress, but it has suffered setbacks since Brazil triumphed several years ago in a WTO case against its subsidies.

Despite the recent dip in corn prices, USDA’s National Agricultural Statistics Service reminded readers in their August 31 Agricultural Prices report that corn prices are still high from an historic perspective.

Some reforms were made, but the two countries are still battling over whether more needs to be done.

“The senators’ letter is another sign of U.S. lawmakers’ ambivalence about international trade. The Bush administration is hoping to push a spate of free trade deals through Congress this year, but the road now appears unfettered for just one.”

Ms. Ryan pointed out that, “In their letter, the senators linked the cotton issue to their support for renewing trade promotion authority, which allows the administration to broker deals that are voted on without changes in Congress.”

Recall that Reuters news reported yesterday that, “The United States has agreed to cut its maximum agricultural subsidies in a ‘significant step’ towards advancing negotiations on a new global trade pact, the mediator of the farm talks said on Thursday.

“Crawford Falconer, New Zealand’s ambassador to the World Trade Organisation (WTO), said Washington had for the first time agreed to cut its subsidies to levels he proposed in July.

“That would mean the United States would cut its farm subsidy ceiling to $13-$16.4 billion a year. Washington had earlier said it would cut the ceiling to $22.5 billion, from above $45 billion now, and signalled it may go as low as $17 billion.”

For more details on U.S. agricultural payments, click here; see also this graphical depiction of government payments from 1997 through a 2007 estimate.

With respect to this development, a recent AFP article reported that, “Diplomats at the World Trade Organisation said the US agricultural negotiator, Joseph Glauber, had announced during talks late Wednesday that the United States accepted WTO proposals on subsidy cuts made two months ago as a basis for negotiations.

“It marked a shift in the US position on the compromise proposal suggesting a limit of 12.8 to 16.2 billion dollars (9.2-11.6 billion euros) a year on its agricultural subsidies.

“Until now, Washington has refused to accept a ceiling below 23 billion dollars.

“‘I had never heard them say that before. It’s not a small thing,’ said Crawford Falconer, the New Zealand ambassador chairing the farm negotiations.

“The European Union, which has been calling for greater concessions from the United States on farming, on Thursday welcomed the shift.”

The AFP article noted that, “A senior EU official underlined Thursday that the wider economic climate was ripe for progress on the agriculture talks, which are believed to hold the key to unlock the rest of the negotiations

“‘On agriculture, the economic conditions have never been better to strike a deal, with world market prices booming,’ said the official, who declined to be named.”

And Dow Jones News writer William Echikson reported yesterday that, “A new U.S. willingness to cut its farm subsidies is positive and could help conclude a global trade deal, the European Commission said Thursday.

“‘We have already welcomed’ the U.S. move, said Peter Power, the commission’s trade spokesman.

“All partners must make commitments on both texts to play their part, he said, adding the European Union now hoped to be able to conclude the deal.”

Mr. Echikson noted that, “European farm subsidies and high tariffs also have been a subject of contention.

“Earlier this week, E.U. Trade Commissioner Peter Mandelson said talks has made more progress than people realize and a deal is almost done on key issues.

“‘While everybody has said that the talks are failing they have in fact been moving forward,’ Mandelson told the Council on Foreign Relations in New York.”

For more on the perspective of Commissioner Mandelson, see this video item from the Council on Foreign Relations, “C. Peter McColough Series on International Economics: A Conversation with Peter Mandelson,” which was posted earlier this week.

Despite some positive reaction following the news associated with the U.S. position on domestic levels of farm support, Bloomberg news writer Jennifer M. Freedman reported yesterday that, “U.S. willingness to accept proposals limiting farm subsidies and opening markets to both agricultural and industrial goods probably won’t be sufficient to lead to a global trade agreement this year.

“‘It’s a step in the right direction, but it won’t break the impasse,’ said Brian Gardner, head of U.K.-based Food Policy International, which analyzes agriculture strategy. ‘They still have a long way to go.’

“The U.S. agreed for the first time to limit trade-distorting farm payments to between $13 billion and $16.4 billion provided other World Trade Organization members accept proposed cuts in agricultural tariffs, the WTO’s top farm-trade negotiator said yesterday. The move was aimed at energizing talks that have dragged on for almost six years as rich and poor countries spar over cuts in import tariffs and farm subsidies.”

The Bloomberg article stated that, “Still, two ‘basic problems’ continue to dog WTO talks and make it unlikely that the more flexible U.S. position will lead to a quick agreement, Gardner said.

“The U.S. remains ‘particularly vulnerable’ because most of its domestic aid is in the most damaging classifications and would therefore be subject to substantial reductions, he said. A group of developing countries including Brazil, China, India, South Africa and Mexico are pressing for limits on U.S. aid.

“The second big obstacle is the European Union’s insistence that its most sensitive products remain in a category in which they are subject to lower aid reductions. The EU is ‘not moving as far as the U.S. would like on market access,’ Gardner said.

“Under the July proposals, the EU’s spending would fall to between 27.6 billion euros ($37.5 billion) and 16.5 billion euros from a current ceiling of 110.3 billion euros.”

Concluding, the article stated that, “‘The U.S. position doesn’t change the underlying politics,’ [Philip Whyte, a senior research fellow at the Centre for European Reform] said by telephone. ‘Bubbling under the surface, there is a sense among key negotiators that progress is being made; but despite that progress, the politics is still going to get in the way of a deal before 2009.’”

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Scott Patterson, writing today at The Wall Street Journal Online, provided an interesting analytical look at the price of ethanol and corn, and indicated that the market price of these two agricultural commodities could have an impact on inflation.

“Investors are starting to worry that the Federal Reserve’s interest-rate cut could stoke inflation by heating up the economy and hurting the dollar. But the Fed could get help from an unlikely arena: ethanol.

“The price of ethanol soared earlier this year to record levels of more than $4 a gallon as the Bush Administration vowed to boost production of alternative fuels. That drove up the price of corn, a key ethanol ingredient,” the Journal said.

Mr. Patterson then stated that, “Ethanol prices have slumped in recent months, to less than $1.70 a gallon. Demand for the gasoline substitute has remained strong, but production has been stronger as producers rushed to cash in on the boom.

“That has cut into profits margins and ethanol producers are cutting back. Construction on new ethanol plants is down more than 60% from last year, according to Friedman Billings Ramsey analyst Eitan Bernstein.

“Corn prices are also off, down about 25% from this year’s peak, in part due to expectations for a bumper corn crop, according to government estimates. Fewer plants coming on line could also hit corn prices, says Mr. Bernstein.

“As producers scale back, of course, ethanol and corn prices could rise again. For now, lower prices could give the Fed much needed breathing room.”

Despite the recent dip in corn prices, (see chart), USDA’s National Agricultural Statistics Service noted in their August 31 Agricultural Prices report that for Food Grains, “The August index, at 191, is 11 percent above the previous month and 46 percent above a year ago.”

As a reminder for just how high corn prices still are from an historic perspective, see this chart, which was included in the August Agricultural Prices report.

In a related article, Des Moines Register writer Jerry Perkins reported today that, “Early signs of a shakeout are rumbling through the ethanol industry, which will lead to more plants being owned by fewer and bigger investors, a leading biofuels venture capitalist said Thursday.

“Sano Shimoda of BioScience Securities Inc. in Venice, Calif., said at the first Renewable on Parade conference that investors who put their money into ethanol five years ago are smiling now because they profited from a surge in ethanol demand that led to skyrocketing high prices.

“But there are problems coming, he said, because of higher costs for corn to make ethanol and lower prices for the finished product because of an increase in supplies. Those factors have combined to squeeze profit margins for ethanol plants.”

***

The “Washington Insider” section of DTN noted yesterday (link requires subscription) that, “While the Senate Ag Committee farm bill debate is not yet a stalemate, it is clearly still out of focus. Sen. Tom Harkin, D-Iowa, continues to schedule press briefings regarding ideas, alternatives and schedules. And, he said his committee will mark up its version of the bill in the next few days. However, congressional observers say the committee is still not ready — that Harkin has not yet been able to find enough agreement among panel members to clear a broad bill — and that he still has not been able to find adequate budget offsets for the programs he wants included.

“The range of these problems is highlighted by Harkin’s position on a permanent ag disaster program, which he told the press on Tuesday that he now supports — after opposing it for the past several months. He observed, ‘I think we can accommodate both [a permanent disaster title and a revenue-based countercyclical payment program] and I plan to do so … I think there’s going to be a way to do this — have it [a revenue-based CCP] maybe as an option for farmers.’”

The DTN item indicated that, “In the meantime, committee members are said to be working on bills of their own. For example, Sens. Kent Conrad, D-N.D., Saxby Chambliss, R-Ga., and Blanche Lincoln, D-Ark., are expected to offer a bill of their own if Harkin proposes far reaching changes to traditional farm programs or too strict farm program payment caps. Numerous drafts of various Conrad-Chambliss ideas have been reported to be floating for weeks among farm-state lawmakers and association lobbyists.

“And, the budget problem continues to be a major roadblock, and some of the ideas being tested as ways to get around this problem are highly unusual. One example is the use of a commodity price trigger for direct payments. Such a policy could cut the Congressional Budget Office cost profile of that program by scaling the program back when prices are strong — as CBO expects them to be in the future.”

Concluding, the “Washington Insider” analysis stated that, “Yet another rumor about farm bill progress was that if the Ag Committee felt it could not agree on a bill, the Senate could take up the House farm bill instead — a procedure being actively pushed by some members of the House Agriculture Committee. However, congressional sources say that the Senate leadership is unlikely to go that route, and that Senate Majority Leader Harry Reid, D-Nev., has told senators that ‘no such strategy is at hand.’ Harkin repeated that theme on Tuesday.

“Taking a bill directly to the floor would be a drastic step, and likely is not under active consideration at this time. However, it is clear that the congressional leadership wants a bill this year and that they appear to be relatively satisfied with the one cleared by the House in July. Thus, if Chairman Harkin’s committee continues to delay its markup, the strategy of moving to an unusual — and, uncontrollable — floor debate on a bill passed by the other chamber could become an increasingly likely alternative later in the fall, Washington Insider believes.”

Robert Pore, writing yesterday at The Grand Island Independent Online (Nebraska) reported that, “Sen. Ben Nelson, D-Neb., said difference between Democrats about the new farm bill and how to fund it will be ironed out and Senate debate on the farm bill could begin early next month.

“‘The fact that there are these differences is not unusual, and, as a matter of fact, is probably pretty healthy,’ Nelson said Wednesday during a telephone conference with state reporters. ‘I think we will get a better bill as a result of that.’

“The differences of opinion are between Senate Agriculture Committee Chairman Sen. Tom Harkin, D-Iowa, and Senate Finance Committee Chairman Sen. Max Baucus, D-Mont.”

Mr. Pore noted that, “The current farm bill expires Sept. 30, but Congress is expected to pass a continuing resolution that will extend the 2002 farm bill for about a month.

“Nelson, a member of the Senate Agriculture Committee, said the next farm bill must meet budget spending parameters, which are at the heart of debate among Democrats and special interest groups seeking funding for their particular programs.

“‘October is a time frame when a lot of this will become clearer,’ he said.”

The article added that, “But Nelson said even if a markup is accomplished and the Senate passes its farm bill version, a House/Senate conference committee then has to hammer out their differences.

“‘I can’t tell you how long it will take in conference to square that circle,’ he said. ‘There are a lot of differences in what the Senate bill will look like ultimately and what the House bill looks like. It’s better to be right than fast on this. It’s important to get it done right.’”

***

Paul Lewis reported in today’s Washington Post that, “Agriculture Secretary Mike Johanns resigned yesterday to return to Nebraska, where Republican officials expect him to run for the Senate seat being vacated by Chuck Hagel (R).”

Mr. Johanns’ letter of resignation can be viewed here, while a transcript of a news conference with President Bush regarding Mr. Johanns’ departure can be viewed here.

Mr. Lewis reported that, “Johanns’s deputy, Chuck Connor, was named acting secretary.”

For additional analysis of this development see,

* Joseph Morton. “Trade hallmark of Johanns’ tenure as U.S. agriculture secretary.” Omaha World Herald. 9.21.

* Ian Swanson. “Senators praise Bush’s pick to succeed Mike Johanns.” The Hill. 9.21.

Keith Good

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