What‘s in Store for the Next Farm Bill?

1. What‘s in Store for the Next Farm Bill? Andrew M. Novakovic The E.V. Baker Professor of Agricultural Economics Presented to the Agribusiness Outlook Conference December 2005 Prepared by Andrew Novakovic

2. Outline • Why do lawmakers and elected officials care about agriculture? Are these factors changing? • What policy elements have been shaping agriculture and its trends? • MTN: multilateral trade negotiations • US policy • Policy in other countries • Special concerns for New York? Prepared by Andrew Novakovic

3. Why Do We Care About Agriculture, or Do We? • Number of farmers is insignificant, although political power is disproportionately large • Economic scope of production agriculture is small but not trivial • Economic scope of the food and fiber sectors is large • Food security is not a trivial concern • Food prices/expenditures are important Prepared by Andrew Novakovic

4. Why Do We Care About Agriculture, or Do We? • Various value systems have been suggested for why we maintain an extensive system of economic support for ag • However, a fundamental issue is whether we are • fixing something that is broken (market failure); e.g. FMMO, countercyclical payments • or • simply giving money to farmers (welfare, income redistribution); e.g. direct payments Which one do you want to be a part of? Prepared by Andrew Novakovic

5. Agricultural Policy: To Support Prices or Not Support Prices • The Support of Farm Incomes, primarily through the support of agricultural product prices, has been a national policy goal since the Agricultural Adjustment Act of 1933. • With US production booming and European agriculture’s recovery, levels of support and the creativity in developing support mechanisms hit a new high in the late 1950s. • Like the income tax code, agricultural programs became increasingly complex through the 1970s • The 1980s boomed for much of crop agriculture but was a period of excess followed by painful adjustment for dairy Then what? Prepared by Andrew Novakovic

6. Agricultural Policy: Let’s Support Prices • 1990 Farm Bill - back to the future • Target Price -Deficiency Payment • Crop Loans • Marketing Loans • Production controls P Demand Supply TP LR qs Domestic crop markets Prepared by Andrew Novakovic

7. Agricultural Policy: Let’s Not Support Prices • 1996 - “Freedom to Farm” • Concept: • Markets are strong • We have a high baseline (planned spending without change in policy) for ag budget, let’s use it to: • phase out subsidies and supports over the life of the bill and be blissfully free market by 2000 Prepared by Andrew Novakovic

8. Agricultural Policy: Let’s Not Support Prices • 1996 - “Freedom to Farm” • Tools: • No ARPs (no longer a supply control) • No Target Price (no deficiency payments) • Continued marketing loan for cotton & rice • Created marketing loan for wheat, soybean, and feed grains • Created a (new) direct payment: Agricultural Market Transition Assistance => convert price support to cash, reduce amount of cash annually from high to low to nothing in the next farm bill (added MILC for dairy farmers) • Farmers had to remain ag land owners but could receive payment regardless of what they did or did not produce Prepared by Andrew Novakovic

9. The Economic Setting of the 1996 Farm Bill (Debated in ’95) World recession High prices in ’93, ’94 and part of ‘95 2 weeks after signing ’96 Bill prices started falling Prepared by Andrew Novakovic

10. Agricultural Policy: Let’s Not Support Prices • 1996 - “Freedom to Farm” • What Really Happened: • Farmers liked the Freedom part • Farmers liked the cash payment part • Farmers liked the cash payment part more • Farmers never believed that supports would actually terminate - “if agriculture gets in trouble, they will have to bail us out because they can’t afford not to (food security) • Cash payments enabled high production at low prices • Low prices for 6 years enable the resumption of price supports “me too”-dairy is an afterthought Prepared by Andrew Novakovic

11. Agricultural Policy: How Much and What Kind Can We Afford? • 2002 Farm Bill - Major Crops (grains & oilseeds) • New “Target Price” - Counter Cyclical Payments (CCP) • Pay according to old base crops, but produce what you like • Low market triggers a payment • More or less actual production does not alter payment • Continued Marketing Loan and Marketing Loan Gain, with updated Base Acres and Yields but with payment acres limited to 85% (I.e., update makes sense to farmers, limit makes sense to government DP = Base * .85 * DP yield * DP Rate CCP Rate = [TP – DP rate – (max of price or loan)], 0 CCP = Base * 0.85 * CCP yield * CCP Rate • Direct Payment - just take some money Dairy still an afterthought -- MILC Prepared by Andrew Novakovic

12. Why Did We Do What We Did in 2002? • Farmers were right: we aren’t ready yet to ignore short-term, low farm prices (stifling other ideas for general farm support - revenue insurance, green payments, etc) • The Uruguay Round Agreement and anticipated Doha has some bright handwriting on the wall: we have to reduce blatant commodity price supports, somehow Prepared by Andrew Novakovic

13. Agriculture’s Fickle Relationship to MTN Overarching MTN/GATT Approach • Gradually eliminate tariffs • Convert non-tariff barriers to equivalent tariff (tariffication) • Increase market access Agriculture • Sensitive area, not seriously broached until Kennedy Round (Europe doesn’t want it either) • Exporters seek freer trade • Importers hold back as long as possible • Some momentum during Tokyo Round • Nothing significant until Uruguay Round • Now the horse is out of the barn Prepared by Andrew Novakovic

14. MTN: Where We’ve Just Been • Uruguay Round Objectives • Market Access • Replace Quotas with Tariffs • Reduce tariffs • Reduce trade distorting export subsidies and domestic interventions • Objectives were substantially met Prepared by Andrew Novakovic

15. The Big Boxes of WTO • Green box: • Not trade distorting (direct, decoupled payments,conservation payts) • Blue box: • Minimally distorting because production is controlled (EU’s CAP, our hope for Counter Cyclical) • Amber box: • Trade distorting - subsidies tied to either price or production (where most of US programs are placed, although we are helped by the de minimis rule, e.g. Direct payments as 5% of value of all agriculture) • Red Box: • Subsidies that must be stopped (empty box) Prepared by Andrew Novakovic

16. Why Classification Matters • The classification of the new countercyclical program in the non-commodity-specific portion of the amber box helped the U.S. in meeting the domestic support limits (de minimis rule) • Expenditures from programs in the non-commodity-specific category are compared against the value of all agricultural production in the country (as opposed to crop value for commodity-specific programs) • Given U.S. agricultural production values of $200 billion, the non-commodity-specific amber box can hold up to $10 billion in support before reaching the de minimis mark and counting against the domestic support limit • Putting anything new in Amber is tough • We want to get our CCP in Blue Prepared by Andrew Novakovic

17. Why Classification Matters • The calculation of subsidies is probably not what you would think • Dairy occupies about 1/4 of US Amber box because of poor choices we made in how costs of program are calculated. • US offers to “reduce subsidies” really mean to lower the ceiling allowed in the current WTO. Thus if our ceiling is 100 and but we actually only spend 40, then an offer to cut the ceiling by 50% doesn’t really mean much • Our competitors can do the arithmetic just as well as we can • Getting Counter Cyclical into Blue would be a huge help and is a US priority Prepared by Andrew Novakovic

18. MTN: Where We’re Going • Doha Round Objectives and Status • More of the same, in terms of objectives Market access: Substantially reduce tariffs and increase quantities in TRQs Export competition: Eliminate export subsidies, variable export taxes, and exclusive import rights by state trading importers Domestic support: Substantially reduce amber box subsidies and simplify into exempt and nonexempt Prepared by Andrew Novakovic

19. MTN: What does it mean for US agricultural policy? • Influencing domestic support policies is part of the trade policy agenda • Changes in EU put them on a higher moral ground for domestic supports, although vulnerable on access, the ball is more in our court w.r.t. supports • President talks big • Congress in denial • WTO Cotton Decision looms large • Developing countries: Rich countries need to give up A LOT MORE • =>Trade negotiations and the US budget will likely define what is feasible for the next US Farm bill. Prepared by Andrew Novakovic

20. Latest 30 November 2005 Truth or consequences: Why the EU and the USA must reform their subsidies, or pay the price Oxfam Briefing Paper 81 The USA and the EU are currently blocking a deal to make trade fair in the Doha Development Round. In the wake of findings by the WTO that US cotton subsidies and EU sugar subsidies are illegal, this paper presents powerful new research detailing a slew of other rich country subsidies of $13bn that are also on the wrong side of the law. In addition to the strong moral imperative for the trade superpowers to radically reform the way they subsidise agriculture, there is a also a legal requirement for change. The choice lies with the USA and the EU: either they face manifold legal actions that will force reform on a piecemeal basis, or they negotiate reform upfront in the Doha trade round. Experience of the real issues confronting poor people is linked to high-level research and analysis and lobbying. Oxfam aims these efforts at changing international policies and practices in ways which would ensure that poor people have the rights, opportunities and resources they need to improve and control their lives. Pushing hard on rich countries to eliminate ag supports Prepared by Andrew Novakovic

21. USDA announces Conservation Security Program (CDP) sign-up in 220 watersheds nationwide – March 28, 2005 to May 27, 2005 Additional CSP information is available from the USDA's Natural Resources Conservation Service (NRCS) USDA announces $6 Million for New Initiative for Limited Resource Farmers – March 15, 2005 USDA releases New Conservation Technical Assistance Policy – February 15, 2005 More eGovernment solutions through an electronic Customer Statement. The Customer Statement will be a focal point for providing agricultural producers access to their USDA information and facilitating online business with USDA Resources Continually updated Questions and Answers on the 2002 Farm Bill by USDA Updated county loan rates provided by USDA Find Loan Deficiency Payments Rates Glossary of Farm Bill terms provided by the Economic Research Service at USDA Summaries of the Farm Security and Rural Investment act of 2002: * Short Summary * Comprehensive Summary Review the full bill text of the Farm Security and Rural Investment Act of 2002 Information by Farm Bill Title — Provided by the USDA The 2002 Farm Bill has been officially designated Public Law 107-171 Not much here Prepared by Andrew Novakovic

22. Senate Vote: No Paylimit Change 53 Senators back Chairman Chambliss against changes to program eligibility rules for farmers receiving commodity farm payments Official CBO details on Ag Budget Payment Limits: Chambliss in Senate debate: • direct payments cut to $20,000 • payment to producers actively farming) Chambliss: On Agriculture Chairman Chambliss discusses the agriculture budget's fair share with agriculture reporters. Agriculture's Budget share set by Senate-House at $3 billion in deficit reduction over 5 years. “Agriculture Committee Senators can now work with a more realistic budget amount to reduce spending equitably among the commodity support, conservation and nutrition programs,” said Chambliss. More in April 28 news release Entrusting the American food supply to the reliability of the American farmer. Farm Bill: Budgeted and delivering support Chairman Chambliss outlines Committee work, the ag budget, and trade issues in Feb 4 session with reporters. The 2002 Farm Bill: Conservation Security Program Rules CSP is a voluntary program that provides …… Resources: Soybean Rust - Prevention, tracking, fighting this fungus on soybean crops. USDA Soybean Rust website Agricultural Glossary - University of Arkansas Division of Agriculture - www.NationalAgLawCenter.org Glossary of farm bill terms by USDA's Economic Research Service 24-Hour Service for checking application status, and verify USDA information about your operation. USDA's Customer Statement Complete most forms on USDA's E-file site. Farm Bill answers for producers - continually updated on USDA's web site. Disaster help for producers - calculating crop loss payments, new USDA information Disaster Declarations - Details available to state and county level Crop Insurance Checklist - Committee examines continued challenges of providing producer coverage: more details Conservation program details - full listing on USDA web site Country of Origin Labeling "COOL" implementation by USDA USDA posts county loan rates for crops Not much here Prepared by Andrew Novakovic

23. Spotlights "The 2007 Farm Bill will affect America's entire agricultural community, so I believe our entire agricultural community should have a say in the process. I welcome input from across the nation about what is working and what we can do to improve farm policy." - Mike Johanns, Secretary of Agriculture Comment on the 2007 Farm Bill USDA provides its customers with a form to submit feedback on a series of questions related to the 2007 Farm Bill. Transcript Of The Washington State Farm Bill Forum With Agriculture Secretary Mike Johanns And Moderator Bob Hoff, Northwest Ag Information Network Cheney, Washington - November 3, 2005 Transcript Of The Montana Farm Bill Listening Session With Deputy Secretary Of Agriculture Chuck Conner, Senator Max Baucus, Senator Conrad Burns And Governor Brian Schweitzer With Moderator Taylor Brown, Northern Ag Network The Museum Of The Rockies Bozeman, Montana - November 4, 2005 Transcript of Rhode Island Farm Bill Forum With Mark Rey USDA Under Secretary For Natural Resources And The Environment, And Moderator Peter Augus, Narragansett, Rhode Island, October 14, 2005 Transcript Of New Hampshire Farm Bill Forum With USDA Under Secretary For Rural Development Tom Dorr And Moderator Fred Kocher Manchester, New Hampshire, October 25, 2005 Last Modified: 11/22/2005 * Farm Bill Events Calendar Related Topics Latest Farm Bill News and Transcripts Farm Bill Events Calendar Farm Bill 2007 Official Comments Farm Bill 2007 Official Comments En Español Farm Bill Photo Gallery Federal Register Notice - PDF Quite a bit here Prepared by Andrew Novakovic

24. Current Farm Bureau Issues Legislative Priorities Legislative Priorities 109th Congress The following list of priority issues for the 109th Congress were adopted by AFBF Board of Directors on January 12, 2005. The Public Policy Agenda publication with information regarding each issue will be available to you soon. If you have any questions regarding the priority issues please contact Lauren DeKosky, Director, Legislative Services, laurend@fb.org, (202) 406-3686. Priority Issues: * Farm Policy Issues o Protect the Integrity of the 2002 Farm Bill o BSE Regulation o Animal ID Implementation * International Trade Issues o Increasing Agricultural Exports o WTO Action in 2005 * Energy and Transportation Issues o Reauthorization of Water Resources Dev’t Act and Trans. Bill o Energy Legislation * Tax Issues o Capital Gains Tax Cut o Permanent Elimination of Death Taxes o Replacement / Reform of the U.S. Tax Code * Environmental Issues o Crop Protection and Agricultural Inputs o Clean Water Act Implementation o Endangered Species Act Reform * Regulatory Reform Issues o Farm Labor Reform Not ready for change yet Prepared by Andrew Novakovic

25. 2007 Farm Policy Reform: Creating Healthy Farms, Healthy Food and a Healthy World U.S. farm policy, once vital to American prosperity, no longer meets the needs of most farmers and ranchers, the land or the public. American Farmland Trust has embarked on a campaign to change this outdated policy. The time is right. We are at a threshold moment where, for the first time in 70 years, we can create a program that saves our best land, supports healthy farming and produces healthy food. The taxpayers–and American agriculture–deserve no less. You can help by supporting policies that: * Reward and encourage stewardship; * Provide a real safety net for all farmers and help them manage risk; * Encourage entrepreneurial innovation and new markets; and * Expand consumer access to nutritious, safe food. Farm Policy Must Reads Keith Weller/USDAMarket Based Approach to Conservation History and Outlook for Conservation Programs The Financial Health of Farm Households The 2007 Farm Bill and the WTO Negotiations Commodity payments primer Emphasis shifts in U.S. agri-environmental policy Our Policy Work 2007 Farm Policy Reform The Case for Reform Policy Options Action Plan Reform in Action Take Action Voices for Change Sign up for E-news or the U.S. Farm Policy Update to receive the latest information about farm and ranch land conservation and U.S. farm policy. Eager for change to more general and “green” support Prepared by Andrew Novakovic

26. Latest News (excerpt) November 2005 Letter to Sens. Gregg, Chambliss Regarding 2006 Budget Reconciliation 11/01/2005 The NCC joined other agricultural groups on a letter to Sens. Gregg, Chambliss regarding the 2006 Budget Reconciliation and strongly encourage rejection of any amendments which would substantially alter the fundamental policies and delicate balance and allocation of financial resources embodied in the Farm Security and Rural Investment Act of 2002. STATEMENT - On The U.S. Proposal For WTO Agricultural Negotiations 10/12/2005 Reacting to the latest agricultural proposal by the USTR, as outlined on its web site, NCC Chairman Woods Eastland said that “the proposals represent a very aggressive stance by the United States in the Doha Negotiations and would require significant cuts in U.S. farm programs if agreed to by the Members of the World Trade Organization (WTO) and the U.S. Congress.” September 2005 Brazil Cotton Case and the WTO 09/30/2005 NCC President/CEO Mark Lange addressed the International Cotton Association meeting in Liverpool regarding the Brazil cotton case and the WTO. Farm Bill Information Loan/LDP Issues and the Marketing of Upland Cotton 11/18/05 Farm Law Changes, Tighter Payment Limits Would Harm Arizona and Western Agriculture 11/10/05 NCC Grateful for Senators’ Payment Limitations Opposition 11/03/05 Farm Family Letter 11/03/05 In a letter to Senate Agriculture, Nutrition and Forestry Committee Chairman Chambliss (R-GA) and Senate Budget Committee Chairman Gregg (R-NH), NCC producer members from across the Cotton Belt expressed deep concern over the continued efforts to dismantle the current farm bill that has served production agriculture so well. Farm Law Changes, Tighter Payment Limits Would Harm Georgia and U.S. Agriculture 10/21/05 Farm Law Changes, Tighter Payment Limits Would Harm Texas and U.S. Agriculture 10/06/05 Joint Letter Regarding FY06 Agriculture Appropriations Measure 09/20/05 The NCC joined commodity groups and others in a letter to Sen. Thad Cochran, chairman of the Committee on Appropriations, and Sen. Robert Bennett, chairman of the Subcommittee on Agriculture, Rural Development and Related Agencies, asking that as they and their colleagues develop the FY06 agriculture appropriations measure -- they reject any provisions which would substantially alter the current farm law. (members only) NCC Engaged in Preserving Farm Law Integrity and Addressing Major Trade Issues 09/14/05 The National Cotton Council is emphasizing to lawmakers and USDA the need for the current farm law to remain unaltered through its 2007 duration, and that payment limits should not be further tightened. Denial & Resistance Prepared by Andrew Novakovic

27. 3 Huge Factors Will Shape the Next Farm Bill • BUDGET (spend less) • huge federal deficit • Ag Ctes have to obey budget • House willing to sacrifice Food Stamps over commodities • WTO (change what you do) • Pressure to reduce domestic support and increase access • Restrictions on what can be done (e.g., not trade distorting) • WHAT INDUSTRY WANTS • Minimal change • Level • form Prepared by Andrew Novakovic

28. Can Agriculture Survive? • US Agricultural Price and Income Supports aren’t going to survive the next 20 years or less • US Agriculture will, • although it will look different • US agriculture has a long term comparative advantage Prepared by Andrew Novakovic

29. Thanks for your attention. • Take it away, Jerry