When Congress convenes in January, atop the agenda for both the House and Senate Agriculture Committees will be writing the 2007 Farm Bill. Numerous hearings have been held for the past couple years. The USDA says it will present a comprehensive proposal, and there are numerous special interest groups which will be pushing their respective agendas. While the Farm Bill is something that can be controlled within the US, a new international trade agreement cannot since it needs the consent of 148 other nations. And without a new trade agreement, the Congressional Research Service has told Congress that basic elements of the 2002 Farm Bill are vulnerable to international challenges that could dismantle them.

Three years ago US farm programs such as direct payments, counter cyclical payments, and loan deficiency payments became more vulnerable to international complaints under current world trade agreements. Subsequently, Brazil successfully challenged a US cotton support program that had to be eliminated, and since then the 149 members of the World Trade Organization have been unable to reach any new agreement on trade, which could potentially grandfather in many current farm programs. However, without that agreement, the 2007 Farm Bill may have to be written without them, and instead built upon other types of farm support programs.

The Congressional Research Service (CRS), which supplies Members of Congress with authoritative information, has recently updated its advisory on agriculture policy and trade. To determine whether a farm program may have to be eliminated, it vulnerability has to be analyzed. Those criteria include 1) whether the subsidy covers a substantial share of production costs, 2) whether the commodity in question is important to world trade, and 3) whether the subsidy adversely affects producers of that commodity in other parts of the world.

1) Regarding the importance of the subsidy to the crop, most folks would say commodity payments have been a large part of the income for many commodities, based on average USDA payments over the past ten years:

Rice 72%
Upland Cotton 58%
Sorghum 45%
Wheat 34%
Barley 30%
Corn 25%
Oats 25%
Sunflower Seed 21%
Canola 20%
Flaxseed 13%
Dry Peas 12%
Peanuts 11%
Soybeans 10%

2) Is the commodity in question important in world trade? Our primary crops as indicate previously have an important export element, and by virtue of how much we produce, they also make up significant segments of world trade, says CRS, “During the 2002 to
2005 period, U.S. cotton accounted for 20% of world production and 40% of world trade. Similarly, U.S. rice accounted for 2% of world production and 13% of world trade; U.S. wheat was 9% of world production and 25% of world trade; U.S. sorghum averaged 18% of world production and 83% of world trade; and soybeans averaged 38% of world production and 44% of world trade.”

3) And do US subsidies impact foreign producers of that commodity? CRS says several studies have confirmed that they do negatively impact foreign producers.

If the WTO finds the three criteria exist and holds in favor of some complaining country, then the US has to eliminate the program, or disconnect the subsidy payment from any production requirement. CRS says the 2007 Farm Bill proposals to address the issues may be a hint of things to come, “Several options for decoupling have been considered or discussed as part of the ongoing 2007 farm bill debate. These include fully decoupled direct payments, whole-farm revenue-insurance-type programs, and conservation or “green” payments.”

In addition to the various payments, the federal crop insurance program is being evaluated as a significant problem for trade negotiations to accept. With growing subsidies, and an average $3 billion annual USDA outlay, which allow indemnity payments to be more than 2.7 times what farmers pay in premiums, the crop insurance program is subject to extensive change.

Summary:
New farm programs being written this year will likely take different forms than what appeared in the 2002 Farm Bill, all because trade negotiators threaten to eliminate them because they distort trade and financially imperil producers of the same commodity around the world. For US programs to be successful, payments will have to be disconnected from production, and the crop insurance program may have to convert from yield problems in one crop to a new program designed to insure the revenue on the entire farm.