As United States policy makers consider a new Farm Bill next year, the challenge of meeting domestic needs while balancing global concerns will be at the forefront of discussions. Financial sustainability of U.S. cotton growers needs to be addressed, along with the international demand for greater market access and growth of developing cotton-producing countries. According to U.S Agriculture Secretary Mike Johanns, those goals are not mutually exclusive; in fact, they may require looking at the future of cotton markets from the same perspective.
“Without open markets, the future is clouded for an industry that is so dependent on trade,” Johanns said at the Cato Institute’s Center for Trade Policy Studies in Washington, D.C.
Outlining a proposal on U.S. agriculture policy, Johanns said markets would benefit from reducing so-called trade-distorting support and tariffs by opening trade and increasing economic activity. He said the proposed plan in the Doha Round calls for a 53% reduction in all trade-distorting domestic support, which would mean significant changes to the 2002 Farm Bill. That would decrease the current allowed base spending level from $47.9 billion to $22 billion, but Johanns said he didn’t want domestic growers to get the wrong idea. Even with those changes, he emphasized that he supports the U.S. government’s investment in agriculture, but believes that assistance can be re-structured to better serve the global community.
“Our current Farm Bill programs cannot achieve their objectives with these substantial reductions, so these programs would have to be reformed if we reach an agreement that reduces trade-distorting support by 53%. This would cause us to rethink how we support agriculture,” Johanns said. “Viewed another way, we would have the opportunity to shift our resources to green box for example, such as conservation. There is no current ceiling on the green box today.”
A Difference of Opinion
Johanns has traveled the country, talking to farmers at Farm Bill listening sessions to learn what they like and dislike about the current policy. The comments vary across the spectrum from farmers who want substantial changes to those who would like to see the 2002 bill rubber-stamped for another five years. From cotton growers in Lubbock, TX, the answer was almost unanimous. “They want the Farm Bill reauthorized,” Johanns said. Other farmers have concerns about “trade-proofing the program” or “equitable distribution of federal funds to the areas that do not grow program crops.”
Some policies, such as conservation and Rural Development programs, receive few criticisms, while the subsidy programs are a point of contention. To understand the different perspectives, Johanns said it was important to analyze the current bill and examine its effects on U.S. agriculture and trade. Breaking the 2002 Farm Bill down to what he called “just the facts,” Johanns explained why some growers seek what they call a more equitable distribution of government subsidies.
“In the U.S., five crops account for 21% of our cash receipts in agriculture. Those five crops receive 93% of our subsidy payments,” he said. “Meanwhile our specialty crop farms which are now equal in value to the program crops – let me repeat that our specialty crops are equal in value to our program crops – receive virtually nothing from the subsidy program … So we have one group that gets the lion’s share of subsidies and another group equal in production value that receives virtually nothing.”
In addition to the disparities between program and specialty crops, Johanns also explained that subsidies were not allocated equally to the five program crops. He said on average, using numbers from 2002-2005, program crop subsidies were distributed as follows: soybeans received about 6%; rice, 8%; wheat, 10%; cotton, 23%, and corn, 46%. He also pointed out that commercial farms, which make up about 17% of the farms that get assistance, received more than half of the total payments.
If the Doha Round proposal to reduce trade-distorting support and tariffs by 53% was adopted, the distribution of funds and subsidies would be shaken up to say the least, but Johanns believes that positive results for domestic growers and international markets could outweigh the loss in funds.
Impact on Global Markets
Developing countries across the globe watch as the U.S considers re-evaluating its agriculture-assistance programs, hoping to receive a substantial economic windfall from fewer trade restrictions. Under the current Doha negotiations, Johanns said there was consensus on several trade measures that would impact both the U.S. and global markets; however, without a final agreement, they would never come to fruition.
“Before the talks broke up, for example, it was agreed upon that all export subsidies would be eliminated by 2013. This was a significant step, but one that won’t be taking place without a final agreement,” Johanns said. “It was agreed that 39 least-developed countries would be provided significant duty-free, quota-free access to markets around the world. It was also agreed that substantial improvements in market access, tariff reductions in particular, would boost economic activity around the world. Better trade opportunities foster prosperity.”
According to Johanns, those least-developed countries could receive an economic boost on such a grandiose scale that the impact would be staggering. Two-thirds of the WTO members are considered developing countries, and 32 members are designated the least-developed. In those countries, more than 70% of the indigent live in rural areas with agriculture as the primary employer. Fewer trade restrictions in those countries could mean great stimulus in their economies.
“Developing countries are potentially large beneficiaries of an ambitious outcome from Doha. According to a World Bank study, roughly half of the global economic benefits from free trade would be enjoyed by those developing countries,” Johanns said. “Globally, 93% of the gains from agricultural policies would come from reducing trade-distorting import tariffs. A study by the International Institute of Economics estimates that global free trade could lift as many as 500 million people out of poverty and inject $200 billion annually into the economies of developing countries.”
Facing WTO challenges
While significant changes to the Farm Bill could open up international markets by stimulating trade and increasing prosperity domestically and abroad, Johanns said U.S. growers have another reason to support fewer trade-distorting subsidies and tariffs – the U.S. would face less vulnerability to WTO challenges. Brazil’s pledge to challenge the U.S. marketing loan program and counter-cyclical payment programs jeopardizes essential components of the U.S. farm program. But other countries are joining the fray, challenging subsidies and tariffs that they believe cause “serious prejudice” – or economic harm – to their trade efforts.
“We lost the Step 2 Cotton Case in the WTO, despite aggressively defending it. Uruguay has expressed concern about our rice program, and the C4 countries in Africa continue to raise concerns about the cotton program,” Johanns said.
Johanns said the U.S. had two options in addressing that concern. First, the U.S. could continue to institute programs that are dismantled piecemeal by WTO challenges. The second option, Johanns said, is to “grab hold of these issues and craft farm policy in such a way that it leads us to the future with vision and foresight. It comes down to a choice between being the authors of future farm policy, or being in the audience as WTO challenges pull the safety net out from underneath our producers.”
Federal Agriculture Investment is a Good Thing
For Johanns, the answer is clear-cut that U.S. farm policy needs to “be equitable, it needs to be predictable, and it needs to be beyond challenge … But how we do it is enormously important. It should be done in a way that is pro-trade, pro-growth, and fiscally responsible.”
Even as Johanns argues for a Farm Bill that eliminates much of the trade-distorting support, he defends the position that federal support of U.S. agriculture is a positive program. For him, the deal-maker is how that program is administered.
“I have always argued, I will do so forever, that federal investment in agriculture is wise, it’s worthwhile policy. But how we do it is enormously important,” he said. “I believe we owe it to our farmers and ranchers to do more than just rubber-stamp policies of the past. We owe it to them to thoughtfully consider how U.S. farm policy can help to set the future course of America’s first industry.”