U.S FARM BILL: 6 MORE YEARS OF INJURY

by Brian Doidge, Economist and Market Analyst, OCPA

(First of a 2-part series: this article deals only with Title 1-Commodity Programs; Titles 2-10 will be covered in the August/September issue of Ontario Corn Producer.)

The Farm Security and Rural Investment Act of 2002 (FSRIA) was signed into law by President Bush on May 13, 2002. It includes “US$83 billion in new spending for farm programs above the baseline and brings the grand total to $183 billion for the (10-year) life of the bill.” (Senator John McCain, R-Ariz, May 8, 2002) This represents an increase of more than 70% over the spending levels of the previous 1996-2002 Freedom To Farm (FTF) legislation. However, what FSRIA really does is essentially enshrine current U.S. spending levels when the 5 ‘emergency’ payments of the last 3 1/2 years are included.

FSRIA will continue the long-standing U.S. policy of providing sector-specific support since it channels
95% of all direct payments to U.S. grain and oilseed producers, thus focusing damage on foreign grain and oilseed competitors.

Policy has impact, especially U.S. domestic agricultural policy. Representative Larry Combest, House Agriculture Committee Chairman, said on May 3, 2002, that the new farm bill “is for rural America .... it’s not for rural Mexico, ... it’s not for rural Canada, ... it’s not for rural Europe.” What has been the impact of U.S. farm policy on rural Ontario? Since 1995/96, the U.S. FTF legislation plus emergency payments have had a devastating impact on net incomes of Ontario corn producers, and indeed of all Ontario grain and oilseed farms. Statistics Canada data show:

• net market income for Ontario grain and oilseed farms of all sizes has been in constant decline since 1996

• net market income has been negative for 5 consecutive years, and is getting worse

• Ontario cash receipts for corn in 2001 were down $100 million from two years ago, and were only 78% of receipts in 1999

• the total value of the Ontario corn crop in 2001 was only 61% of the value in 1995/96, the year before FTF took effect

• crop cash receipts for the first 3 months of 2002 fell to an 8-year low, almost 15% below the previous 5-year average.

Using Agriculture & Agri-Food Canada estimates of the depressing effect foreign subsidies have on price, accumulated injury over the last 6 years since the start of the 1995/96 FTF exceeds Cdn$456 million for Ontario corn producers alone. 6-year accumulated injury from foreign subsidies exceeds Cdn$828 million for Ontario corn, wheat and soybeans combined. And the OCPA believes these estimates of injury are low. Worse, FSRIA perpetuates this injurious impact for the next 6 years through 2007, the actual 6-year term of the new farm bill.

Preliminary analysis by the U.S. Food & Agricultural Policy Research Institute suggests total crop payments in 2002 will be 67% higher under FSRIA than as scheduled under FTF (which does not include any emergency payment). U.S. government payments in Michigan, the primary source of imported U.S. corn and soybeans into Ontario, will be 53% higher in 2002. In response to FSRIA, U.S. corn acreage will expand by 1 m acres in each of the next 3 years, and U.S. corn prices will decline by 5 cents/bushel each year. However, thanks to enhanced support payments, U.S. gross crop returns for corn will increase by US$0.20/bushel each year.

There are 3 distinct payments that a corn producer in Michigan will receive under FSRIA:

Direct Payments:

• extended through 2007

• replace the system of fixed direct payments per commodity (known as PFC or AMTA payments) that was scheduled to end in 2002

• fixed per bushel payment rate increased for all 6 listed crops (corn jumps from US$0.26/bu to $0.28/bu)

• adds new payments for soybeans (US$0.44/bu), other oilseeds, and peanuts.

Direct payments (DPs) are decoupled: they are not tied to production of specific crops or any crop, the amount of production, or the price of the crop. Plant whatever you want, but receive the DPs tied to the cropping and yield history of that particular piece of land. Once an agreement covering the 2002-2007 period is signed, a farmer or eligible landowner will receive an annual fixed payment equal to the payment rate per bushel multiplied by program yield times 85% of the base acreage per commodity.

Farmers have two options for designating base acres: leave as is from old program adding oilseed acreage, or update to 4-year average of acreage planted 1998-2001. A farmer can elect to receive up to 50% of the DP beginning December 1 of the year prior to the year the crop is harvested, and the balance in October of the year the crop is harvested.

Loan Deficiency Payments - LDP:
(if commodity loan is not taken against stored crop) or Marketing Loan Gain (MLG) - if commodity loan is taken against stored crop and repaid:

• program essentially unaltered from FTF

• but loan rates for wheat and feed grains increased (corn increased from $1.89/bu to $1.98/bu for 2002/03, reducing to $1.95 2004-07)

• loan rates for soybeans and minor oilseeds reduced (soybeans reduced from $5.26/bu to $5.00/bu 2002-2007).

A grower can elect to receive the LDP/bushel on the day of his choosing after harvest, provided he still has beneficial interest or ownership of the grain. The LDP rate is the amount by which the loan rate exceeds the posted county price for his county on the day of his choosing, and thus is equivalent to the MLG that could alternatively be obtained for crops under loan.

New Counter-Cyclical Income Support Payment:

• essentially takes the place of the 5 emergency payments made 1998-2001

• payments are based on historical production and are not tied to current production

• payment is made whenever the effective price is less than the target price (target price for corn is $2.60/bu 2002-03, $2.63/bu 2004-07; soybeans $5.80/bu 2002-07)

• payment rate is equal to target price/bushel minus DP rate/bushel minus higher of 12-month marketing year average price or loan rate/bushel; i.e., maximum CCP rate for corn in 2002/03 is $2.60 - .28 - 1.98 = $0.34/bu

• payment is equal to payment rate times payment yield times 85% of base acreage.

Producers sign an agreement for the 2002-07 period and must select between 2 options for determining base acres, and 3 options for determining payment yield. Base acreage method selected must be same as selected for the DPs, either as it was under FTF plus oilseed acreage, or updated to the average of acreage planted 1998-2001. Yield options apply for each individual crop and only for CCPs: a) as is under FTF; b) 70% of the increase in yields from FTF and average of 1998 - 2001; or c) 93.5% of average yields 1998 - 2001.

Much has been written about payment limitations under the FSRIA. The Wall Street Journal, in a May 3 article, “The Farm State Pig-out,” says: “Of $71 billion handed out to farmers over the past five years, two-thirds went to just 10% of the farmers.” The House (Republican) version of the proposed Bill visualized strict limits on payments, but the Senate (Democratic) version with strong support from southern Democrat cotton and rice interests did not. Enter politics. 2002 is an election year for one-third of the Senate, including 12 vulnerable mid-western Democratic Senate seats. Democrats hold only a 1-seat majority in the Senate. Some political horse-trading ensued. Democrats offered Republicans Congressional passage of Trade Promotion Authority (i.e., Bush’s desperately desired Presidential WTO ‘fast-track’ trade negotiating authority) in exchange for Bush’s support for the Farm Bill. The Democrat version won out. Although total dollar payment limitation under FSRIA is reduced to $360,000, limits are easily circumvented through the 3-entity rule and the use of commodity certificates. The majority of direct payments in the U.S. will continue to flow to the largest producers.

How does support provided under the FSRIA compare with support provided here? Preliminary analysis for Ontario suggests that in 2002/03 (using current price projections), a typical 500-acre Ontario grain and oilseed farm (200 corn, 200 soybeans, 100 wheat and producing provincial average yields) would receive support from government of:

• Cdn$114.43/acre if operated under the new FSRIA program in the U.S.

• Cdn$88.00/acre if operated under current support programs in Quebec

• Cdn$40.06/acre in Ontario under the newly announced 2-year extension of the Market Revenue
Insurance program (@ 85% of support price and yield, minus 1/3 holdback), including support provided under NISA and the Ontario Farm Income Disaster Program.

But an even more important issue is that support in the U.S. under FSRIA will continue to be ‘sector-specific’, with 95% of direct payments going to grains and oilseeds; safety nets in Canada are ‘whole-farm’, with only 30% of support going to grains and oilseeds. Massive U.S. subsidies concentrated in one sector inflict severe damage on that sector north of the border, but the current whole-farm Canadian income safety net package was not designed to, and does not, offset such long-term focused injury. Moreover, current thinking at both the Federal and Provincial level is to eliminate commodity- and sector-specific support programs such as Market Revenue Insurance that could be capable of offsetting sector-specific injury if enhanced.

Critics (and there are many nations posturing, fuming and spouting, including Canada) claim that spending authorized by FRSIA exceeds U.S. Aggregate Measure of Support limitations under WTO agreements. The Food and Agricultural Policy Resarch Institute (FAPRI) calculated that there was only a 19% chance that U.S. farm program spending would exceed the specified WTO limit. The Bill itself contains a clause that says “if the Secretary determines that the AMS ceiling will be exceeded, the Secretary shall, to the maximum extent practicable, adjust expenditures to avoid exceeding allowable levels.” The U.S. claims that because of this requirement, spending under FSRIA cannot exceed WTO limits. The U.S. is within its rights and within its limits, but that is not the point. The point is that the U.S. is exercising its sovereign and legal right to support its agriculture to the maximum permissible limit.

“To spend less is to say to our people, `tough luck, you are out of business.’ That would be a profound mistake.” (Senator Kent Conrad, Dem-ND, May 8, 2002) Significant that most of the bluster is coming from those nations spending far, far less than their permissible limit.