Posted January 12, 2006:
The need for the US to completely dismantle its farm program is
one of the ideas being spread at this time by think tanks, academics,
and trade officials. The argument is that the current program with
its LDP/MLGs and counter-cyclical payments subsidize the export
of US grain at below the cost of production leaving us open to charges
This is essentially the argument that Daniel A. Sumner makes in
the analysis he did for the Cato Institute, Boxed In: Conflicts
between U.S. Farm Policies and WTO Obligations. Last week we looked
at the model that Sumner used in his analysis and showed that by
looking at crops one at a time he came to some very questionable
We would not disagree with the overall conclusion that US farm
programs have resulted in lower prices for US farmers and thus farmers
around the world. We would not disagree with the argument that US
farm policy allows US farmers to sell their crops at below the cost
of production, both domestically and in the export market.
What we do disagree with Sumner about is the cause of the low prices
and below the cost-of-production-exports. He argues that it is the
subsidies themselves because they result in excess US production.
We would argue that the problem is not with the subsidies themselves
but rather the set of policy mechanisms contained in the 1996 and
2002 Farm Bills. From a trade compliance point of view, the 1996
Farm Bill was the wrong legislation at the wrong time. And the 2002
legislation made the situation even worse.
Let us suppose that in 1996 we had renewed the policy instruments
contained in the 1990 Farm Bill (a far from perfect piece of legislation)
with a minor tinkering, what would be the current cost of this program?
Would it cost more or less than the current $20+ billion? What boxes
would these payments fall into and what would be the impact on commodity
prices in the US and around the world?
The costs for a continuation of the policies contained in the 1990
Farm Bill would be in the range of $8-$10 billion a year, a far
cry from the $20+ billion slated to be spent this year. Because
the 1990 legislation used supply management programs much of the
cost of the farm program would be blue box and compatible with our
current and projected World Trade Organization (WTO) obligations.
With the elimination of supply management programs in the 1996
Farm Bill, at any given stocks-to-use level, US farmers received
$0.34 a bushel less for their corn than they did under the 1990
Farm Bill and earlier legislation going back to the mid 1970’s.
Soybean and cotton prices would also have been proportionately higher
under supply management than under the current legislation. As a
result, under supply management US prices could easily have approached
the non-land cost of production. Because the US is the world price
leader in agricultural commodities, much of this price gain would
have been transmitted to farmers around the world, reducing their
incentive to charge the US with dumping.
The irony is that while the 1996 Farm Bill was touted as being
more market oriented than previous legislation it is actually less
market oriented than its predecessors under which farmers earned
most of their income from the marketplace and not the mailbox. In
addition to being less market oriented, we argue that in terms of
WTO negotiations it is more market distorting.