Potential Impact of Proposed 2012 Farm Bill Commodity Programs on Developing Countries

Date period
2 November 2012

SummaryThe United States is the largest exporter of many key commodities leading to a significant impact on international markets. In this paper Bruce Babcock and Nick Paulson examine what proposed changes in US agricultural policy would do to the scale of production and the potential impact for developing countries. Currently available estimates examine scenarios with stable or increasing prices for farm goods, our experts take this analysis further by considering how low market prices would interact with government policy and highlight the products and countries likely to be affected.

ForewordBudgetary pressures in the United States may result in legislators changing key aspects of agricultural spending in the upcoming farm bill. In an environment of high farm incomes recipients of government funds are finding it increasingly difficult to justify the status quo. Trading partners of the US have long voiced their opposition to trade distorting elements of its agricultural policy.The confluence of these factors may lay the groundwork for significant change.

Those close to the debate on U.S. agricultural policy in Washington D.C. have noted a near absence of discussion on WTO compliance. As one of the biggest agriculture spenders in absolute and per capita terms, the US has an impact on producers and consumers in other countries. The distortion caused to global trade by government policy may have been lower in recent years due, at least in part, to high international prices for key goods. However, many payments under proposed legislation are likely to remain and will perhaps be incorporated into a strengthened crop and revenue insurance programme. The crop prices used under such programmes will determine future budgetary outlays and may affect farmers' decisions. The structure of payments under these programmes, especially for cotton, rice, dairy and sugar, could shift production and prices abroad. Moreover, if current prices face a downward revision, US subsidies could increase sharply, nearing their WTO ceilings or fiscal limits.

The WTO Doha Round trade negotiations included limits on domestic support for agriculture as a key element. Although the round is currently at an impasse, the domestic support elements of the negotiating document, or draft modalities, have stabilized. In this context, national policies enacted independently of discussions in Geneva are likely to have significant impact in both setting the tone of talks when they resume and farm output in the interim. A proposed move away from direct payments to more trade distorting ‘amber' and ‘blue' box spending would backpedal on important reforms enacted in the US since the 1990s.

American agricultural policy, particularly where it concerns trade, is arguably a compromise between the producers and law makers, even in the context of reform. Many law makers, their constituents and the Obama Administration have focused on the importance of improved nutritional outcomes from subsidies, environmentally sound agricultural management and reducing waste.

These are welcome steps in the right direction. However, as one of the most important traders of farm goods, US domestic policy plays an outsize role in global food security prospects, and the fate of large portion of vulnerable people in developing countries. A policy shift in the country often helps set the agenda elsewhere. An environment of fiscal accountability may be the right time for reform.

In the paper that follows, Bruce Babcock and Nick Paulson, leading experts on US commodity programmes, offer an analysis of how production of key farm goods will change due to proposals on the Farm Bill and the countries most likely to be affected by them. They offer insights on the development of US agricultural policy and the particularities of the current House and Senate proposals, including the proposed resolution of the Upland Cotton dispute between the US and Brazil through the Stacked Income Protection Plan. We hope that you find the paper as fruitful a contribution to the debate and the quest for solutions.

Ricardo Meléndez-Ortiz
Chief Executive, ICTSD