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Deficit, WTO, grower success likely farm bill weights

Anyone who keeps up with the federal deficit knows that the farm sector is likely to face a vastly different budget outlook when Congress begins writing a new farm bill than when it wrote the 2002 legislation.

Farm organizations that were able to parlay a projected $236 billion surplus into an expanded 2002 farm bill will be severely challenged to repeat that feat with the U.S. Treasury wracking up deficits of $412 billion and $318 billion in the last two fiscal years.

But the outlook for continued deficits “as far as the eye can see,” as one observer has said, isn’t the only pressure farm groups and farm-state congressmen will be feeling when the House and Senate Ag Committees sit down to begin writing the new farm law.

Average annual farm program benefits have risen 56 percent under the 2002 farm bill, compared to the 1996 law, according to an economist with USDA’s World Agricultural Outlook Board. And 2005’s relatively large crops and low commodity prices aren’t likely to help change those numbers.

The potential for U.S. farm program payments to exceed the caps set by current and future WTO agreements will also weigh heavily on the deliberations for the next farm bill, the economist says.

Carol Skelly, a fibers economist/cotton analyst with USDA’s Office of the Chief Economist, says that annual average gross income for farmers and ranchers has increased 19 percent for the crop years covered by the 2002 farm bill compared to the 1996-2001 years under the 1996 law.

“Both market receipts and farm program receipts have risen – from $7 billion to $8.3 billion,” she said, speaking at a session of the Cotton Economics and Marketing Conference at the Beltwide Cotton Conferences in San Antonio.

Yields offset prices

“With respect to market-based income, planted acreage and farm prices have averaged lower since 2002, but higher yields – the highest on record in 2004 and 2005 – have more than offset other factors. As a result, average gross market income has risen by 6 percent for the period 2002-2005.

“Average annual farm program benefits (excluding Step 2 payments) have risen 54 percent under the 2002 farm bill, compared with the 1996 farm bill period.” She listed three reasons for the increase:

-- The 2002 farm bill included a target price and counter-cyclical payments which have provided more income protection than the ad hoc market loss assistance payments which were made available in some years under the 1996 farm bill;

-- Market prices have averaged about 7 percent lower since 2002, and program benefits are highly responsive to prices;

-- The quantities receiving benefits are significantly higher.

The 1996 farm bill or Freedom to Farm originally included only production flexibility contract payments, similar to the current farm bill’s direct payments, and marketing loan benefits, As the farm economy worsened due to adverse weather and the Asian currency crisis, Congress added market loss assistance payments in 1998 through 2001.

The latter averaged $517 million per year for the four years they were in effect, according to Skelly. Following the re-establishment of the target price in 2002, counter-cyclical payments are likely to average $1.075 billion, or about double, for the four years they have been in effect.

CCPs increase

Lower prices have also contributed to the rise in program benefits and costs. Because they are designed to be counter-cyclical, CCPs increase along with marketing loan benefits when the national average selling price for a program commodity drops.

“World and U.S. cotton prices have declined in recent years due partly to technological change resulting in higher productivity and partly to a general downward trend in commodity prices,” notes Skelly. “The upland cotton marketing year price received by farmers averaged 65 cents during the first three years of the 1996 bill, but exceeded 60 cents in only one of the subsequent seven years, 2003-04.”

Farmers are also receiving payments on higher actual production, which skyrocketed in 2004 and 2005 because of significantly higher yields. “Likewise, the quantities earning CCPs also increased substantially – by 22 percent – over the old market loss assistance payments due to the reconfiguration of bases and yields in the 200 farm bill.”

Last October, U.S. Trade Representative Rob Portman offered to make far-reaching changes in U.S. farm programs to try to get the Doha Development Round negotiations back on track.

The most relevant features for cotton include: A 60 percent reduction in trade-distorting “amber box” subsidies, primarily marketing loan benefits, and including counter-cyclical payments in the Uruguay Round Agreement’s “blue box,” where they could not exceed 2.5 percent of the total value of production, or about $5 billion for all commodities.

To date, other WTO members have failed to respond with proposals for increased market access that the chairmen of the Senate and House agriculture committees have said are necessary before they will support a new Doha Round agreement.

Reduce, eliminate

But foreign governments, non-governmental organizations, such as Oxfam International, and national media outlets are expected to continue to demand that the new agreement require the United States to make substantial reductions or totally eliminate the U.S. cotton program.

“The Food and Agricultural Policy Research Institute has provided a useful illustration of the possible effects of the U.S. proposal,” said Skelly. “FAPRI analysts calculated support levels for the major commodities such that the proposed limits would be exceeded only 5 percent of the time.

“To accomplish this, target prices for the grains, oilseeds and cotton would have to be reduced 7 percent by 2011 (from 72.4 cents to 67.3 cents for cotton); loan rates would be reduced 11 percent by 2011 (from 52 cents to 46.3 cents for cotton).”

Meeting the WTO limits on spending, whatever they become, has been a problem under the current farm bill because of the unpredictable nature of benefits which are tied to market prices. “Thus, the predictability of program expenditures may be a constraint on how benefits are paid under future legislation.”

Direct payments, which are made on a fixed crop base and program yield, are “entirely predictable,” says Skelly. Counter-cyclical payments are less so because they vary with price, but they still fall within a predictable maximum of about $1.3 billion for cotton. Marketing loan benefits are completely unpredictable because current law places no floor on the marketing loan repayment rate or the quantity eligible.

“Marketing loan benefits reached a historical maximum of nearly $2.6 billion in 2001, when the marketing year average price fell below 30 cents per pound and upland cotton production was 19.6 million bales. Under the same price scenario, raising upland production to its recent two-year average of 22.8 million bales could increase marketing loan benefits to $2.9 billion.”

Adding about $600 million for direct payments and $1.3 billion for counter-cyclical payments, she said, would raise total program costs to about $4.8 billion, about 28 percent more than the previous high.

Payments decoupling

Decoupling of payments, which began with Freedom to Farm and was carried over with the direct payments in the 2002 bill, will also be a central issue in the next farm bill debate, primarily because the more closely a payment is tied to actual production, the more scrutiny it will draw from WTO negotiators.

“While it is difficult to predict how the debate will go, a likely scenario would be a proposed shift in benefits from coupled to decoupled categories, e.g., fewer amber box payments and more green and blue box payments,” she said. “For cotton producers, this will inevitably raise the question of inactive base; that is, historical base which is eligible for payments but no longer producing cotton.”

The 2002 farm bill allowed producers to choose whether to retain their historical base or update to reflect recent plantings. Applying that procedure raised the total national upland cotton base from 16.2 million to 19.2 million acres as individuals sought to maximize potential payments farm by farm.

“The result is a current total base that is 40 percent higher than the most recent four-year average of actual plantings,” says Skelly. “A scenario in which a higher proportion of payments are made on the base, as opposed to actual production, would tend to shift benefits away from current producers in favor of historical producers.”

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