Expected Changes to US Farm Policy Resulting from the Doha Round Larry D. Sanders February 2006

Farm Bill Pressures and Dynamics Twin Deficits Twin Deficits –Trade Deficit –Federal Budget Deficit Trade Situation & Policy Trade Situation & Policy Political Economy Political Economy –Domestic –International

Trade & Trade Deficit: US Trade Balance, ($ million) NOTE: 1991: $31.1 b. 2004: -$617.1 b. 2005(projected): b. 1991: -$31 bil. 10/05: $68 bil.

US Agricultural Trade Balance ($mil/FY; agricultural product only)* WTO NAFTA *NOTE: If fish & forest product added to ag, trade balance would be -$21.1 b.for fy05. $62.4 b. $57.7 b

The Proposed Modified Boxes AmberNew Blue Green Payments coupled to production & prices Payments decoupled from production but coupled to prices Payments decoupled from production and prices Policies that are trade distorting & targeted for reductions under the URA (price supports, marketing loans, payments based on ac or # of livestock, input subsidies, etc.) Policies that are trade distorting but exempt from reductions under URA, including direct payments linked to certain production- limiting policies (US crop deficiency payments, EC compensatory payments, etc.) Policies that are non-trade distorting & are acceptable under URA, including tax- payer-funded and non-trans- fers from consumers (research, extension, pest/disease control, crop insurance, marketing/ promotion, natural disaster relief, conservation programs, public stockholding, decoupled income support, income safety nets, etc.)

The Next Farm Bill: 2007? 2008? 2011? Current farm bill: 6-year act ( ) Current farm bill: 6-year act ( ) Debate for the “next” farm bill already engaged Debate for the “next” farm bill already engaged Rewrite of FSRIA02 began in 05 Rewrite of FSRIA02 began in 05 –Budget Reconciliation –Appropriations New “enabling” legislation in ? New “enabling” legislation in ? –2006 & 2008 election anxiety may encourage a 2007 farm bill –Doha Round complications suggest late 07, early 08 or 2011 WTO agreement and new farm bill

FY06 Reconciliation Package (S 1932) House passed 1 Feb 06; Senate passed Dec 05 House passed 1 Feb 06; Senate passed Dec 05 $39.7 b. cuts from all programs $39.7 b. cuts from all programs $2.7 b. cuts from ag programs $2.7 b. cuts from ag programs –No across-the-board Commodity program cuts –Cotton reform (eliminate Step 2 Aug ’06) –Dairy market loss payments MILC extend thru Sep ‘07 –Advance direct payments reduced from 50% to 22% in ’07 –Watershed Rehab Program cancelled Oct ‘06 –CSP spending reduced to $1.95 b –EQIP spending reduced $30 m –Renewable Energy Program spending reduced $20 m. ’07

FY06 Reconciliation Package (S 1932) Cuts from ag programs—cont. Cuts from ag programs—cont. –Broadband Rural program cancelled Oct ’06 –Value Added grants cancelled Oct ’06 –Rural Business Investment program cancelled Oct ’06 –Rural Business Strategic Investment grants cancelled Oct ’06 –Rural Firefighters/emergency personnel grants cancelled Oct ’06 –Initiative for Future Ag & Food Systems cancelled for ’07-’09 No cuts: food stamps, child nutrition No cuts: food stamps, child nutrition

Evolutionary…not Revolutionary Change? Never do today what you can put off till tomorrow. --Matthew Browne Near term program changes marginal; Near term program changes marginal; likely more to come in 2007 But, WTO restrictions likely to coincide with writing of next farm bill; cuts may become dual purpose But, WTO restrictions likely to coincide with writing of next farm bill; cuts may become dual purpose –20-50% cuts for WTO? –$3-$20 billion in cuts for deficit reduction? Production expenses (fuel, fertilizer, interest rates) will rise faster than commodity prices Production expenses (fuel, fertilizer, interest rates) will rise faster than commodity prices Budget deficit/debt solution choices Budget deficit/debt solution choices –Increase taxes –Cut spending –Grow economy –Do nothing

Review of Past Decade Suggests Mixed Bag for Farm Bill and Trade Agreement Impacts Theory says: Theory says: –Lower prices bring increased exports. Conflicted opinions: Conflicted opinions: –Trade agreements reduce trade barriers & increase trade? –Trade agreements help big agriculture/agribusiness & harm small farms? –Big business with co-opted government manipulate market prices for own gain? Reality check of past decade: Reality check of past decade: –US exports & imports trending up –Wheat prices & exports trending down –Corn & cotton prices trending down & exports trending up –Agribusiness has done relatively better than farms

US Wheat price & exports, NAFTANAFTA WTOWTO FAIR96FAIR96 FSRIA02FSRIA02

US Corn price & exports, NAFTANAFTA WTOWTO FAIR96FAIR96 FSRIA02FSRIA02

US Cotton price & exports, NAFTANAFTA WTOWTO FAIR96FAIR96 FSRIA02FSRIA02

General Trade Market Analysis for 2002 Farm Bill ( ) Exports and Imports continue increasing Exports and Imports continue increasing Trend for Imports increasing faster than exports Trend for Imports increasing faster than exports –Ag trade surplus narrowing –Some months of ag trade deficit have occurred within past 2 years –Trend suggests annual ag trade deficit in next 5 years 96-02: 26% increase in imports; 11% decline in exports 96-02: 26% increase in imports; 11% decline in exports 02-04: 29% increase in imports; 17% increase in exports 02-04: 29% increase in imports; 17% increase in exports Prices down for wheat & corn; mixed for cotton Prices down for wheat & corn; mixed for cotton Export volume up for wheat, corn, cotton Export volume up for wheat, corn, cotton Export value up for wheat, corn, cotton Export value up for wheat, corn, cotton

General Trade Market Analysis for 2002 Farm Bill ( )--continued Summary: Summary: –Complex reasons for trade flows –Farm bill may be part of reason for price declines –Not likely primary contributor to increase in imports –Cotton export value more than doubled (121% increase) ; but, down 16% in 2005 to date (Oct-Aug) –Feed export value increased 9%, but down 5% in 2005 to date –Wheat export value increased 46%; but down 17% in 2005 to date –With Step 2 terminated, expect some decline in cotton exports

The Political Reality of An Election Year: 2006 Weakened President Weakened President “Safe” politics & election year jitters “Safe” politics & election year jitters The next presidential election (’08) may overshadow ’06 The next presidential election (’08) may overshadow ’06 Wildcards Wildcards

Politics: Political Triangle of Ag & Budget Policy Politics: Political Triangle of Ag & Budget Policy JUDICIAL EXECUTIVE LEGISLATIVE INTEREST GROUPS New committees Turf battles Reconciliation Bush Doctrine Bush Budget USDA Trade talks Ag groups one voice? Non-ag groups Competitors Federal Reserve Fight inflation Critical of federal deficit Greenspan retiring

Net Farm Income & Direct Government Payments 1996 Farm Act $ Billion *Projected 2002 Farm Act

Net Farm Income & Direct Government Payments: Assume 20% cut in Govt Payments Farm Act $ Billion 2002 Farm Act 2-8% reduction in NFI 96-05