BUSH ADMINISTRATION TABLES FARM BILL PROPOSALS; TRADING PARTNERS DISSATISFIED

Several of the US' top trading partners have expressed dissatisfaction with the Bush administration's proposed reforms for future agricultural subsidy spending, unveiled on 31 January. They had hoped for a clearer signal from Washington that it wanted to move towards reducing trade-distorting farm subsidies, a key issue in the Doha Round trade talks. Although the administration has said that the plan would reduce farm payments by some USD 17.5 billion over the next five years, most of the savings are simply the result of higher commodity prices.

The reforms, which include changes to practices that have come under fire at the WTO as well as an end to handouts for the wealthiest farmers, have received praise as a step in the direction of reducing overproduction and trade distortions. However, even though other governments say that they do not go far enough, some farm groups have complained that the changes would already cut too deep, and insist that they will not find favour in Congress. The administration intends for its proposal to form the basis of the legislation that Congress will create to replace the current 2002 farm bill, which is set to expire in September.

Rich country farm subsidies have been at the heart of the deadlock in the multilateral trade negotiations. The eventual shape of the new farm bill will affect Washington's ability to offer domestically sellable subsidy reduction in the talks, but could be overridden by subsequent laws implementing cuts agreed to as part of a potential Doha Round accord. The EU, Brazil, India, and others have been insisting that the US must lower the ceiling on its trade-distorting support well below the USD 22.5 billion cap that it has already offered. Washington insists that they would have to agree to accept substantially more agricultural imports before it puts further subsidy reduction on the table.

Even if the US is unable to negotiate subsidy cuts in exchange for concessions from other countries as part of a successful Doha agreement, its farm payments will be under pressure: Canada has initiated a WTO dispute against US corn and other agricultural subsidies, arguing that they violate multilateral trade rules and illegally distort prices (see BRIDGES Weekly, 17 January 2007).

Insulating US from WTO challenges key aim

Indeed, insulating US policy from further disputes was one of the administration's central objectives. In his introduction to the 183-page document setting out the proposals, US Agriculture Secretary Mike Johanns said that he wanted to make farm spending "more equitable, predictable and better able to withstand challenge."

Brazil has successfully sued US cotton subsidies at the WTO, winning a landmark ruling in 2005 (see BRIDGES Weekly, 9 March 2005, http://www.ictsd.org/weekly/05-03-09/story1.htm). Johanns has long warned that support programmes under the current farm bill would be vulnerable to further such challenges unless reformed. In contrast, many farm groups - as well as influential members of Congress - would like to see the generous subsidies in the 2002 farm bill extended.

Some crucial US subsidy programmes are based on price supports for the 'programme commodities' such as corn, wheat, cotton, rice, and soybeans that receive more than 90 percent of total payments. This policy aims at supporting farmers' incomes: for instance, if the price floor for corn is USD 5 per bushel, but the market price is USD 2 per bushel, the government will pay farmers the difference, irrespective of the cost of production. This gives them an incentive to produce more, thus distorting both production and trade. The most trade-distorting subsidies currently permitted under WTO rules are placed in what is called the 'amber box', where they face both strict limits and the steepest cuts under a potential Doha accord.

The administration's proposed changes sought to make some of these 'trade-distorting subsidies' less so. Price floors for specific commodities under the 'marketing assistance loan' scheme are set to change from fixed levels to 85 percent of the average market price over the preceding five years (excluding the highest and lowest year). This programme provides farmers subsidies that compensate for the gap between the market price and the price floor; they simply forfeit the commodities grown to the government if they cannot repay the loans. According to the US department of agriculture, "this change minimises market distorting and encourages farmers to plant crops based on market prices instead of the level of subsidy payment." Critics claim that the change will in reality not be very significant.

Also targeted by the proposed changes are Washington's current price-based 'countercyclical payments,' which rise when world prices fall. The administration has suggested replacing the price-based payments, which reward farmers for heavy production, with revenue-based grants that would kick in when national revenue per acre for a commodity falls below a target level. However, the target revenue per acre for different commodities would still be linked to the 2002 farm bill's target prices, leading some to question the real extent of the reform. Currently, countercyclical payments are classified as 'blue box' subsidies, thought to be less trade-distorting than 'amber box' ones, and thus facing milder cuts. Preserving the ability to maintain countercyclical payments has been a major US objective in the Doha Round subsidy negotiations.

Aspects of the countercyclical payments were ruled illegal in Brazil's cotton case. The rice lobby has complained that the administration's proposed reforms to countercyclical payments and marketing loans would weaken the "viable safety net" provided to farmers by the current legislation.

In any event, higher prices for most commodities mean that subsidy payments would have been set to fall even without the changes. This is what allowed the administration to project that the new proposals would cost USD 10 billion less than what was spent under the current farm bill. The rest of the savings are accounted for by the additional USD 7.5 billion in 'ad hoc disaster aid' that was allotted to US farmers over the past five years.

The administration seeks to remove planting limitations. In the cotton case, the WTO ruled that certain 'direct payments' not targeted at any specific crop nonetheless fell within the amber box of trade-distorting capped payments -- precisely because some 'specialty' non-programme crops such as fruits and vegetables were not eligible for them. Since this limitation could influence planting decisions, the payments were deemed ineligible for classification as 'green box' support that distorts neither production nor trade, and is exempt from either limits or cuts.

In a direct nod to the threat of WTO litigation, the farm bill proposal called for reforming certain export credit guarantee programmes "to bring them into compliance with the findings of the World Trade Organization dispute resolution panel in the Brazil cotton case."

US domestic laws that enforce existing multilateral trade rules allow the agriculture secretary to adjust expenditures under certain farm subsidy programmes (peanuts, sugar, and dairy) to ensure that Washington does not exceed its allowable limit on trade-distorting domestic support at the WTO. The administration's proposal would extend the agriculture secretary's authority to modify spending to cover all payments that could count as 'amber box' support - in addition to expanding it to cover commitments under future WTO agreements, including a potential Doha Round deal.

Cotton subsidies likely to remain high

Even if Congress were to accept these reforms, the administration acknowledged that US cotton subsidies - the focus of Brazil's WTO victory and the subject of special attention in the Doha Round talks - are likely to remain high, due mainly to low prices and high yields.

"While program crop prices are generally expected to remain firm or increase over the next few years, upland cotton is an exception," the document stated. "The combination of increases in upland cotton yields per acre and declining US upland cotton textile production is expected to limit price gains and result in substantial cotton program expenditures, compared to other commodities."

New money for 'specialty crops', conservation, biofuels

Producers of fruits, vegetables, and other so-called 'specialty crops' have traditionally received virtually no government assistance, even though the crops they grow are now worth more than the heavily-subsidised - but politically influential - programme commodities. The administration proposes USD 5 billion in new spending over the next ten years on fruit and vegetable producers, including support for research and a programme to boost purchases of such produce by schools.

The proposal also called for USD 7.8 billion in new spending on conservation schemes, including expanded protection for wetlands and water quality. Such measures appear to fall into the 'green box,' since they do not directly affect production or trade.

In keeping with its new focus on reducing gasoline use by replacing it with biofuels, the administration seeks to earmark USD 1.6 billion in new funding for renewable energy research, development and production. USD 500 million each would be invested in bioenergy research and renewable energy systems for farmers and rural small businesses. USD 210 million would be used to support USD 2.1 billion in guaranteed loans for cellulosic ethanol projects (see BRIDGES Weekly, 31 January 2007).

The proposal would also dedicate USD 400 million "to expand exports, fight trade barriers, and increase involvement in world trade standard-setting bodies."

Beefed up payments under other non-trade-distorting programmes mean that the proposed farm bill would actually spend USD 5 billion more than the existing one would if it were to be extended.

Subsidy cap proposed

Notably, the farm bill proposal called on Congress to agree to cut off subsidy payments to farmers or corporations who earn more than USD 200,000 per year after expenses. A related proposal would cap total payments to individual farmers at USD 360,000.

The administration pointed out that 97.7 percent of all US taxpayers earn less than USD 200,000, emphasizing that the cutoff would affect only 71,800 of the roughly 2 million tax filers who declared farm income in 2003. The current limit is USD 2.5 million, and comes with a sizable loophole for beneficiaries who derive more than three-quarters of their income from farming or related activities.

Nevertheless, the plan has drawn opposition from some farm groups. Mary Kay Thatcher, a lobbyist for the American Farm Bureau Federation, expressed "serious concerns" about the cutoff to the New York Times. She said that large-scale farming had become an economic necessity.

On the other hand, the Shelbyville, Tennessee-based Times-Gazette reported that local cattlemen were untroubled by the prospect of the change, since they were not going to be affected by it.

Whether the proposal can receive Congressional approval remains to be seen. EU member states have been unable to agree on a similar cutoff for subsidy payments.

Trading partners lukewarm

International relief and advocacy group Oxfam welcomed the administration's proposals as "a first step toward unlocking the paralysis in multilateral trade negotiations." However, the organisation cautioned that it was not yet clear whether the plan would reduce US exports of subsidised farm products even if it managed to win support in Congress.

"Although this proposal signals a shift away from trade-distorting subsidies towards more WTO-friendly farmer supports, much more needs to be done to align the Farm Bill with existing international trade rules," said Celine Charveriat, head of Oxfam's Make Trade Fair campaign. "The devil is in the details, and at this point it is unclear how far these reforms would reduce the trade-distorting effects of the current subsidy system and allow the poorest farmers of the world to benefit from trade."

Oxfam also praised the administration's request to convert 25 percent of the food aid budget to cash in order to facilitate purchase from regional sources in beneficiary countries (funds from the US' principal food aid programme can currently only be used to buy US-grown food). It said that shipping food in from the US is not only inefficient, but can also destabilise local food production. In the Doha Round negotiations on food aid, the EU and other countries have urged Washington to switch to primarily cash-based assistance.

Reactions from some of the US' main trading partners were less optimistic. Canadian Agriculture Minister Chuck Strahl told the Globe and Mail newspaper that the Bush administration's plan deserved praise for trying to bring "more discipline" to farm spending, but that the USD 87 billion price tag remained unacceptably high.

"So far as Doha is concerned, it is not possible for us to form a clear view from this proposal of what the Administration's negotiating approach will be," noted the European Commission in a statement. It pointed out that if commodity prices start to decline, "trade distorting farm support would rise again under these proposals." However, Brussels acknowledged that "this is not the end of the story: further steps are not precluded by these initial proposals."

At a 7 February meeting of the WTO General Council in Geneva, the Brazilian delegation, on behalf of the G-20 group of developing countries, said that the US administration's proposals did not appear to restrain farm spending enough to meet the bloc's objectives. The G-20 would like to see subsidy expenditures cut to below current levels, accompanied by rules preventing payments from being concentrated on a handful of products. The group observed that this would not necessary prevent the US from agreeing to deeper cuts as part of the ongoing negotiations, and subsequently modifying the new farm bill.

US officials have consistently maintained that its new farm legislation would "not be written at the WTO," and that further subsidy cuts would be possible based on what was on offer in the Doha Round talks. They say that the reform proposals were made with farm policy in mind, not the ongoing trade negotiations. Sources report that the US delegation made a similar point at the Geneva meeting.

Members of Congress - including Minnesota Democrat Collin Peterson, who chairs the powerful House agriculture committee where the farm bill will ultimately be written - have given the administration's proposal a cautious welcome. Peterson, who had made no secret of the fact that he would like the next farm bill to strongly resemble the existing one, said "it is better than what I thought it was going to be."

ICTSD reporting; "Give farm policy new direction," WISCONSIN STATE JOURNAL, 3 February 2007; "Farm bill proposals draw mixed responses," SHELBYVILLE TIMES-GAZETTE, 6 February 2007; "Agriculture Dept. Urges Big Overhaul in Farm Policy," NEW YORK TIMES, 1 February 2007; "Farm bill doesn't go far enough," LA TIMES, 4 February 2007; "'Less than meets the eye' in Bush's farm bill," FINANCIAL TIMES, 5 February 2007; "Brazil says US farm bill lacks punch for Doha," REUTERS, 3 February 2007.