FarmPolicy

WTO Cotton Compliance Report: Brazil Can Seek Financial Sanctions Against U.S.

Reuters news reported yesterday that, “The United States is not doing enough to bring its support for cotton into line with international trading rules, the World Trade Organisation (WTO) said on Tuesday.

“The published ruling by the WTO appeal body opens the way for Brazil, which brought the original case against the United States in 2002, to seek billions of dollars in sanctions against Washington.”

(A summary of the 2002 Cotton case (DS267) is available at this WTO webpage. The findings and conclusions of yesterday’s WTO report of the compliance panel on Brazil’s complaint against the U.S. can be viewed here, while the full report of the compliance panel is available here.)

The Reuters article indicated that, “The appeal court’s findings had already been circulated confidentially in an interim report in July and then finally in October, but were made available to the public for the first time on Tuesday.”

In addition, the article noted that, “Only on Monday, the WTO launched an investigation into U.S. farm support at the request of Brazil and Canada.”

The Associated Press reported today that, “Brazil has reserved the right to impose annual sanctions of as much as $4 billion on the United States, but would probably seek less in retaliatory measures because the U.S. has removed some of the offending subsidies.

“The office of the U.S. trade representative in Washington said it was considering a final appeal.

“‘We are very disappointed with the compliance panel’s findings,’ spokeswoman Gretchen Hamel said. ‘We continue to believe that support payments and export credit guarantees under our programs are fully consistent with our WTO obligations.’

“Despite repeated legal setbacks, Washington looks set to continue the payments. The Senate joined the House on Friday in approving a new $286-billion farm bill that would leave cotton programs largely intact for the next five years.”

A separate Reuters article from yesterday (via DTN), stated that, “The compliance panel concluded in its 204-page report that ‘U.S. marketing loan and counter-cyclical payments have led to an increase in U.S. production and exports of cotton that have then suppressed world prices.’

“The panel ruled that the United States, the world’s largest cotton exporter, remained in violation of world trade rules even after it repealed its ‘Step 2’ payment to cotton mills and exporters in August 2006.”

The article noted that, “But cotton prices have been climbing as part of a wider commodity boom and in line with smaller acreage. Prices for the 2007 crop are expected to jump by up to a quarter.

“‘The international cotton market is strong, demand is exceeding production, world prices are up, and exports in countries such as India and Brazil are dramatically rising,’ the National Cotton Council said in a statement.

“‘It is not credible to assert that U.S. cotton is currently causing serious prejudice to anyone in the world cotton market,’ it said.”

With respect to the WTO compliant brought by Brazil and Canada regarding allegations that the U.S. has provided agricultural subsidies that exceed the levels allowed by the WTO, an editorial item posted today at the Los Angeles Times Online stated that, “On Monday in Geneva, the World Trade Organization launched an investigation on behalf of Canada and Brazil into trade-distorting farm subsidies in the United States — the kind the Senate decided by a 79-14 vote should continue. Though the case could take years to work out, a victory for Canada and Brazil could be extremely costly for the U.S. economy, because those countries and any others that could show they had been damaged by our irresponsible farm policies could be allowed to raise tariffs against U.S. exports to make up for the losses.

“WTO rules contain arcane formulas and categories for subsidies and tariffs, which nations use to protect domestic industries. Certain kinds of subsidies damage trade relationships, while others have little or no effect; the WTO refers to the most damaging kind as ‘amber box’ subsidies, and harmless ones as ‘green box.’ The United States is allowed to pay about $19 billion a year in amber farm subsidies under WTO rules, and in recent years has fallen well below that ceiling. But Canada and Brazil claim that’s because of an accounting trick: The U.S. is counting many payments that should fall into the amber category as green.”

The L.A. Times opinion item indicated that, “A victory for Canada and Brazil might or might not force an overhaul of farm legislation. The WTO could prohibit countercyclical payments, in which case Washington would have to do away with them, or it could simply rule that they have to be counted as amber box subsidies. The second scenario is the scariest. Because the prices of subsidized crops are very high and rising, the government is spending little on countercyclical payments, so the U.S. is unlikely to exceed its $19-billion annual limit even if it keeps the payments in place and counts them toward its amber total. But what happens if Canada and Brazil win and crop prices later drop sharply? That could put the U.S. well above its amber ceiling, which would spark retaliatory tariffs around the world.

“Placating a relative handful of commodity farmers — who don’t need the money and who aren’t collecting the countercyclical payments right now anyway — isn’t worth that kind of risk, as Congress would have recognized if it weren’t in thrall to the farm lobby. The price for its shortsightedness could get even steeper in the future.”

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In news regarding the Doha Round of WTO trade talks, an item posted yesterday at this WTO webpage stated that, “Director-General Pascal Lamy, on 18 December 2007, reported to the General Council that ‘we are closer to achieving the major goal we all share—establishing modalities in Agriculture and NAMA, which in turn would pave the way to the conclusion of the Round’. He added ‘if we agree on modalities early next year, I believe that we should be able to conclude the Round before the end of 2008’”. (Related article available here).

And in an item published on Monday in Reforma (Mexico City, Mexico), EU Trade Commissioner Peter Mandelson noted in part that, “But getting to this Doha deal is now as much a political challenge as a negotiating problem. All sides recognise the middle ground where a deal is possible. All sides need to be ready to show flexibility. All sides are highly sensitive to their domestic politics. The United States will need to show its cards on the levels to which it is willing to reduce its trade distorting farm subsidies. The large emerging economies such as India and Brazil will need to come to the table with industrial tariff cuts of their own. Mexico’s well-respected voice in urging this final trade off is both useful and necessary.

“With a wider and more diverse WTO membership than ever before, getting the Doha round to its current state has been an exercise in political balance and incremental advance. It is also a test of the strength of our commitment to multilateralism and development. We have arrived at a point where only political leadership and a willingness to make a few more tough choices are needed. Nobody wants to repeat the mistakes of Cancun. Success in Doha comes with a small political price. Failure would cost us much more. No multilateral trade round has ever failed. Can we really afford to allow Doha to be the first?”

Energy Bill

In news regarding U.S. energy policy, an issue that has emerged as a significant factor that has impacted market prices and production decisions, possibly eclipsing the Farm Bill in significance, particularly with respect to corn, Steven Mufson reported in today’s Washington Post that, “A year of rhetoric, lobbying, veto threats and negotiations ended yesterday as the House of Representatives voted 314 to 100 to pass an energy bill that President Bush is to sign this morning. The bill will raise fuel-efficiency standards for automobiles, order a massive increase in the use of biofuels and phase out sales of the ubiquitous incandescent light bulb popularized by Thomas Edison more than a century ago.”

Mr. Mufson stated that, “For farmers and agribusiness, it is a windfall, providing more support than perhaps even the farm bill. It doubles the use of corn-based ethanol — despite criticism that corn-based ethanol is driving up food prices, draining aquifers and exacerbating fertilizer runoff that is creating dead zones in many of the nation’s rivers.

“The law will also require the massive use of biofuels using other feedstocks, creating an industry from technologies still in laboratories or pilot stages whose economic viability is unproven. The law says that at least 36 billion gallons of motor fuel a year should be biofuels by 2022, most of it in ‘advanced biofuels,’ not a drop of which are commercially produced today.

“Although the bill does not include any costs for the biofuels mandate, a fivefold increase over current production, it is likely that current subsidies for those fuels will be extended. If so, the mandate could cost the federal government as much as $140 billion over 15 years.”

Philip Brasher reported yesterday at The Des Moines Register Online that, “President Bush plans to sign the bill into law Wednesday in a ceremony at the Energy Department.

“The bill, which the House approved 314-100 this afternoon, requires that refiners buy 15 billion gallons of corn ethanol by 2015 and also requires use of new versions of biofuels made from crop residue, grasses and other sources of plant cellulose.”

Mr. Brasher noted that, “There’s also a new mandate for biodiesel, requiring up to a billion gallons of annual usage by 2012.

“The total biofuels mandate, including cellulosic fuels and biodiesel, would reach 36 billion gallons by 2022.”

Dow Jones News reported yesterday that, “With mandated levels of demand four times current production, the Renewable Fuels Mandate is a major boost for the biofuel sector.”

And Reuters writer Matt Daily reported yesterday that, “The new U.S. energy bill that will prop up the battered ethanol industry has triggered a rebound in the shares of ethanol makers, but hurdles to growth and volatile commodity prices will keep them on rocky path into 2008.”

The article stated that, “Even with the recent rally, ethanol company stocks remain down between about 25 to 50 percent since the end of 2006 as profit margins for the fuel faded because of a supply glut from the fleet of newly constructed plants.

“Analysts remain bullish on the sector for the longer term, but expect those companies’ share prices to remain choppy in 2008, largely because of the volatile price of corn, the main source of the fuel.

“‘Corn prices are likely to remain high. On the other hand, ethanol prices are likely to go higher as well,’ said Kelly Dougherty, analyst with Calyon Securities.”

“The surge in oil prices to more than $90 a barrel this year has helped make ethanol more competitive, even as corn prices rallied to record levels above $4 per bushel,” the Reuters article said.

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The new energy bill would presumably continue to have ripple impacts on other sectors of the U.S. agricultural economy, including on the price of farmland (related graph- U.S.; related graph- state-by-state).

An item posted yesterday at The Des Moines Register Online reported that, “Iowa farmland value increased 22 percent in the last year, the highest increase in 31 years, according to a survey by Iowa State University Extension.

“The average value of farmland increased about $700 to a record $3,908 per acre, the survey said. Ethanol continues to drive the boom in prices, said Mike Duffy, ISU Extension farm economist who conducts the survey. Prices have hit records for five years straight.

“‘My general feeling is that the land market will remain strong for at least the next five years,’ he said. ‘We have seen a fundamental shift in demand for corn due to ethanol production. I don’t think this demand will diminish in the near future.’”

Farm Bill

In recent Farm Bill analysis, Dan Morgan noted yesterday at The Washington Post Investigations Blog that, “In advance of this year’s farm bill debate, The Washington Post reported that 16 private crop insurance companies made $3.1 billion in profits from the heavily subsidized program over the past eight years while the government lost $1.5 billion. Rep. Henry A. Waxman (D-Calif.), citing findings of the Government Accountability Office and the Agriculture Department’s Inspector General, dubbed the crop insurance program ‘a textbook example of waste, fraud and abuse in federal spending.’

“But last week, in one of several examples of the farm lobby’s ability to beat back reform, an amendment reducing industry subsidies by $2 billion over 10 years was soundly defeated, 63 to 32. The proposal from Sens. Sherrod Brown (D-Ohio) and John Sununu (R-N.H.) would have cut federal administrative contributions and required the industry to share slightly more of the underwriting gains in good insurance years. To block it, farm organizations and well-heeled crop insurance lobbyists pulled out the stops. It is a familiar outcome to anyone who followed the debate over the last farm bill.”

Mr. Morgan added that, “This year alone, the American Association of Crop Insurers, representing most private crop insurance companies and hundreds of large agents, has distributed nearly $80,000 to 40 members of Congress. The group’s executive director, Michael R. McLeod, called the defeated legislation ‘the Brown amendment to terminate crop insurance’ Big reinsurance companies that backstop the program would have refused to share its risks if the Brown-Sununu trims had gone forward, he contended.

“On the contrary, Brown contended, revenues to crop insurance companies would actually increase under the Senate bill, in part because of a new provision requiring farmers and ranchers seeking federal aid after weather losses to have purchased crop insurance. Senate Agriculture Committee Chairman Tom Harkin (D-Iowa), whose campaign fund collected $9,000 from McLeod’s group in January, wasn’t swayed by the crop insurers’ logic. He voted for the amendment.”

For more on the crop insurance amendment, see this item from National Public Radio (Dec. 15), as well as this FarmPolicy.com audio podcast (Dec. 13).

Brownfield’s Tom Steever reported yesterday that, “Senator Charles Grassley is not walking away from his efforts at getting a farm payment cap in the final version of the farm bill.

“The amendment of a $250,000 limit offered by he and Byron Dorgan didn’t make it into the Senate bill. But the Iowa Republican told reporters Tuesday he’s sending letters to House and Senate Ag leadership urging them to get the limits in the conference report.

“‘I don’t think I should give up; I don’t get another opportunity for another five years,’ Grassley said Tuesday, adding, ‘if I don’t win reelection, I won’t be around here to do it then.’”

The Brownfield link also includes audio from Sen. Grassley.

Omnibus Spending Bill

As FarmPolicy.com noted yesterday, the omnibus spending bill being considered by Congress included an extension of some portions of the current Farm Bill.

Reuters news (via DTN) reported yesterday that, “U.S. farmers and ranchers hit by a drought that has shriveled crops and depleted water reserves this year will get disaster relief as part of a multibillion dollar spending bill working its way through Congress, Democratic lawmakers said on Tuesday.”

The article noted that, “Earlier this year, Congress passed legislation that allowed farmers to get disaster assistance to cover losses in either 2005, 2006 or before Feb. 28, 2007.”

A press release issued yesterday by Sen. John Thune (R-SD) noted in part that, “Today Senator John Thune announced that his hard fought efforts to extend the deadline for crop and livestock disaster assistance to December 31, 2007 were successful. The Omnibus Appropriations bill, which is expected to pass the Senate later this evening, includes Thune’s disaster program extension legislation, which would assist agriculture producers in South Dakota who suffered crop and livestock losses after February 28, 2007.”

The release added that, “Disaster losses for 2005, 2006, or through February 28, 2007, are covered under the emergency disaster assistance legislation that Congress passed in May. With the extended deadline in the Omnibus Appropriations bill, producers are still limited to eligibility for disaster assistance in only one of the three years, and may choose which year to receive payment for eligible disaster losses.”

Carl Hulse reported in today’s New York Times that, “The Senate voted Tuesday night to approve a sweeping year-end budget package after adding $70 billion for the wars in Iraq and Afghanistan over the objections of Democrats who have been stymied all year in their efforts to change the course of the conflict in Iraq.

“By an overwhelming 70-to-25 vote, senators moved to provide the money sought by President Bush after the defeat of two Democratic-led efforts to tie the money to troop withdrawals.”

The Times noted that, “The $555 billion budget plan, which finances all federal agencies except the Pentagon, passed 76 to 17 despite some Republican complaints about excessive spending. It goes back to the House for a final vote, expected Wednesday, on the war money.

“If the measure clears the House, Mr. Bush has indicated he will sign the spending bill, which will end his standoff with the Democratic-controlled Congress.”

Keith Good

Posted by Keith Good • December, 19, 2007 • 6:20 am