Perspectives on Farm
Policy Reform
Julian M. Alston and Daniel A Sumner
Department of Agricultural and Resource Economics
University of California, Davis
Western Agricultural Economics Association
Annual Meeting, Anchorage, Alaska
June 28-30, 2006
Reform? Reform?
Are things not bad enough already?
Attributed to Justice John Astbury, 1926
Chronological Landmarks
• 1994 – Uruguay Round Agreement on Agriculture (URAA)
• 1996 – Federal Agricultural Improvement and Reform (FAIR) Act
• 2002 – Farm Security and Rural Investment (FSRI) Act
• 2001 – Doha Round of WTO begins . . .
• 2007 – New Farm Bill
Outline
• Recent history of farm commodity policies
• Current status and prospects
• Effects of farm subsidies on Western agriculture
• Policy reform in Australia and New Zealand
• Facilitating policy reform
Main Provisions of URAA
Implementation Period
Negotiated Change
Market Access
Average tariff cuts, all ag. products
Minimum tariff cuts per tariff line
Developed
Countries
(1995-2000)
Developing
Countries
(1995-2004)
– Percent –
-36
-15
-24
-10
-20
-13
-36
-21
-24
-14
Aggregate Support
Total cuts in AMS
Export Subsidies
Value cut by product
Volume cut by product
Farm Bill Policies
• 1996 FAIR Act
– eliminated annual set-asides and crop price supports
– replaced deficiency payments with “direct payments”
– continued marketing loan payments
• Ad hoc supplement to direct payments
– 50 % in 1998
– 100% in 1999-2001
• 2002 FSRI Act
–
–
–
–
converted ad hoc payments to countercyclical payments
continued direct payments
extended both to additional crops, including soybeans
introduced updating of program base acreage and yields
Program Crop Revenue under
2002 Farm Bill
Government payments vary in share of total revenue
Target Price
CCP
Loan Rate
Market Price
Fixed payments
MLG/LDP
Market Receipts
}
}
Not required to currently
produce program crop to get
these payments
}
Paid per unit of production
(Based on a figure from Joe Outlaw Texas A&M)
Critical Trade Disputes – U.S. Cotton
WTO panel and appellate body ruled that U.S.
• Step 2 subsidies entail GATT illegal
– domestic content subsidies
– export subsidies
• Export credit guarantees = illegal export subsidies
• Marketing loan and CCP programs
– depressed world prices resulting in
– serious prejudice to interests of Brazilian cotton growers
• Support includes direct payments & crop insurance
– are these “amber box” and part of AMS?
– has U.S. exceeded AMS limits?
Doha Round WTO Negotiations
• Current framework implies
– Elimination of all export subsidies including
• credit subsidies
• STE subsidies
• commercial substitute food aid
– Substantial reductions in domestic subsidies
• new blue box (smaller cuts for “almost” green box programs)
– Substantial expansion in access
• reductions in tariffs
• expansion of TRQs
• exceptions for sensitive products (U.S. sugar? Korean rice?)
• If no consensus on parameters by June 30?
U.S. Farm Program Expenditures
35.0
billion dollars
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1996
1997
1990 FACT Act
1998
1999
2000
1996 FAIR Act
2001
2002
2003
2004
2005
2002 FSRI Act
2006
Farm Support in OECD Countries
[Total US$ 280 billion in 2004]
(Source OECD Stefan Tangermann)
70
60
PSE (%)
50
40
30
20
10
OECD
EU
USA
Japan
0
1986
1989
1992
1995
1998
2001
2004p
he
at
M
O
ai
th
ze
er
G
ra
in
s
R
ice
O
ils
ee
ds
Su
ga
r
M
Be ilk
ef
/V
ea
Pi
l
g
m
ea
t
Po
ul
try
Eg
gs
To
ta
l
W
PSE (%)
PSEs by Commodity
EU and US, 2004
80
70
60
50
40
30
20
10
0
EU
US
Current Status and Prospects
• Strong support for status quo
• Forces for change
– Budget deficit
– Environmental groups
– Publicity about beneficiaries
– Growers of non-program crops
– Doha round
– URAA rules and WTO rulings
– Economic evidence
Western Agriculture Shares of
U.S. Value of Production, 2004
Other Program Crops
Poultry
All Other Commodities
Cotton
Cattle & Calves
Total Agriculture
Wheat
Nursery & Greenhouse
Dairy
Hay
Fruits, Nuts, & Vegetables
0%
10%
20%
30%
Western US
40%
50%
60%
70%
Non-Western US
80%
90%
100%
Western Agriculture Shares of
U.S. Value of Production, 2004
Non Western
Western
Major
Horticulture
11%
Program
Crops
33%
50%
29%
10%
Total: $179.3 billion
44%
Dairy
Other
Livestock
and Crops
16%
7%
Total: $69.9 billion
Subsidies Harm Unsubsidized
Producers
• Directly through competition for
– resources
– consumers
• Indirectly because they
– consume public funds
– consume attention of policymakers
– slow increases in market access
Policy Reform in Australia and NZ
45
OECD
40
New Zealand
Australia
35
PSE (%)
30
25
20
15
10
5
0
1986
1989
1992
1995
1998
2001
2004p
Key Ingredients of Reforms
• Systematic, economy-wide approach
– Driven by financial crisis in NZ
– Part of general industrial policy in Australia
• Transparency institutions
– Australia’s Industries Assistance Commission
• Adjustment assistance
– Australia’s Rural Adjustment Scheme
• Compensation
Facilitating Policy Reform
• Systematic, economy-wide approach
• Transparency institutions
• Adjustment assistance
• Compensation
Conclusion
• Pressures for policy change from
–
–
–
–
Budget deficit
WTO (both Doha and URAA)
Environmental groups
“Other” agricultural interests
• Institutional innovations may help
– Transparency institutions
– Adjustment assistance
– Buy-outs