USDA FARM BILL PROPOSAL AND THE DOHA ROUND

1. USDA FARM BILL PROPOSAL AND THE DOHA ROUND Presentation to the G-20 Geneva, 26 February 2007.

2. What to have in mind in relation to the USDA proposal • Expected since mid-January • Administration input to Congress decision-making. Congress detains the initiative in relation to the Farm law; • To have in mind that in the 2002 Farm Bill process, Administration inputs were completely jettisonned by Congress; • No expectation that the Administration proposal would be anywhere near landing zones for the Doha Round (FB process would be carried out anyway since current bill expires by 30 September);

3. What to have in mind in relation to the USDA proposal • Independently from the Doha process, there will be a Farm Bill; • Key question – does in any way the proposed FB encroach on the Doha negotiations or impedes their progress? • Answer is NO! Why? Administration recommendations may be brushed aside, followed, improved or deteriorated by Congress. • Nevertheless, it gives clear signals on the Administration’s intentions.

4. What to have in mind in relation to the USDA proposal • What are the main intentions behind the proposal? • Limited reform process with limited cuts in trade-distorting expenditure; • Gradual process of “greening” of payments; • Changes in the countercyclical payments; • Policy space for the Administration – circuit breaker; • Increasing importance of conservation payments and bioenergy

5. What to know when assessing the proposal • Budgetary estimates are based on price baseline. Price baseline indicates high prices for the upcoming years (very similar to the situation of FB 1996 – FAIR Act); • High prices would be the solution, if they were not the problem. USA programs are price-linked. If prices fall for some reason, there will be immediate repercussion in terms of increased spending (1998-2001 scenario, with emergency payments being authorized – Market Loss Assistance – MLA’s, precursor to CCPs).

6. Projected Prices - USDA

7. What else to know when assessing the proposal • USA AMS is calculated based on Market Price Support Programs (transfers from consumers, implied calculation) – sugar and dairy - and non-exempt direct payments – Marketing Assistance Loans (budgetary transferences). AMS= sugar+dairy+budgetary transferences AMS= US$ 1,0 billion+ US$ 4,5 billion+ FARM BILL estimates

8. Composition of the USA AMS

9. USA AMS distribution

10. USA AMS distribution

11. Farm Bill proposals • MAL – marketing assistance loans (non-exempt direct payments) – types of payments - of Loan Deficiency Payments (LDP), Marketing Loan Gains (MLG) and Certificate Exchange Gains (CEG) • Proposed changes – • Loan rates based on 85% of the five-year Olympic average of the crop’s market price, with a ceiling ensuring that loan rates are lower than or equal to current loan rates; • The proposal includes some other changes, including basing MALs on monthly local prices instead of daily local prices (smaller than daily prices); • Conclusion: minimal changes in loan rates – reduction in MAL payments due to higher prices

12. Changes in Loan Rates – Main commodities

13. Farm Bill proposals • Countercyclical payments • Originally – based on the difference between target prices and current prices and paid on historical base areas and yields; • Proposal – based on difference between actual and national target revenue (prices times production), based on the average 2002-2006; • Consequences – on the average payment levels will be more stable. Producers will be more “tied” to crops and more insulated from market signals. Product-specific disciplines warranted

14. Farm Bill proposals • Direct payments – based on 85% of the historical base areas and yields • Base areas and yields kept constant (proposed changes to Green Box disciplines) • Prohibition to fruits and vegetables – compliance to the Cotton Panel • Increased rates – gradual transfer from Amber to Green and increased payments – around 550 million/year. Highest increase for cotton.

15. Changes in Direct Payment Rates – Main commodities

16. Farm Bill proposals • Dairy programme – maintain administrative price and revise Milk Income Loss Contract program aligning it to the countercyclical payments (historical base); • Consequences – retain around US$ 4.5 billion of the AMS assigned to dairy and classify the MILC program in the Blue Box (less space for other crops).

17. Farm Bill proposals • Sugar program – continuation of the market price support but more flexibility on the usage of allotments to manage domestic supply and avoid forfeitures to the Commodity Credit Corporation; • Consequences – retain around US$ 1 billion in the AMS for the sugar program.

18. Farm Bill proposals • Circuit breaker - 2002 Farm Bill amended to allow it to apply to the Doha Round, and to be applicable to more forms of support which are expected to be disciplined under the outcome of the Doha negotiations (including OTDS and possible product-specific caps); • Comment – significant expansion of the Administration discretionary powers at the expense of Congress. Indeed, it implies that nothing can be ruled out in the WTO negotiations.

19. Farm Bill proposal and the Doha Round and the Cotton Panel • Relevance of the Cotton Panel can be assessed by the number of changes included in the Farm Bill: end of the exclusion of fruits and vegetables in the direct payments; warning about loan rates levels (cause “serious prejudice”); proposals on export competition, more pronounced transfer of payments from Amber to Green in cotton; • Doha Round – base areas and yields in the direct payments – unchanged

20. Farm Bill and possible Doha Round commitments • How do Farm Bill suggested budgetary expenditures relate to OTDS commitments? • In principle, impossible to assess, as budgetary estimates are linked to projections on commodity prices level. So, projection of future price behaviour is as arbitrary as USDA estimates. • Alternative: compare behavior of the future law and its parameters with the performance of the 2002 Farm Bill.

21. Implications of budgetary proposals and Market Price Support Proposals

22. Doha Round: current proposals on OTDS

23. USA October 2005 proposal without “water” OTDS = AMS + Blue Box+ de minimis = 7.6 (AMS cut - 60%) + 4.8 (2,5% of the value of production) + 2.0 (average expenditures in crop insurance) = 14.4 billion

24. Alternative scenario – FB 2007 parameters with actual prices 2002/07

25. 2002 FB Parameters1998-2006 Prices and Yields

26. 2007 FB Parameters1998-2006 Prices and Yields

27. OTDS – Comparison

28. Conclusions I • 2007 FB proposal – at the agregate level is compatible with • OTDS of US$ 15 billion, if de minimis equals average 2002/07; • OTDS slightly higher than 17.5 billion, if de minimis equals 2.5% of the value of production; • OTDS of US$ 12.1 billion, as proposed by the G-20, if market prices conform to USDA price baseline;

29. Conclusions II • 2007 FB proposal at AMS and Blue Box level would lead to • Breaches in AMS ceiling of US$ 7.6 billion in 4 out of 5 years in the period 2002/07 (slight improvement over 2002 FB that would lead to breaches in 5 out of 5 years) • Breaches in Blue Box ceiling of US$ 4.8 billion in 2 out of 5 years (deterioration in relation to 2002 FB that has not led to breaches of the ceiling in any of its 5 years). • At the agregate and at the box level, the 2007 FB would require the frequent usage of the circuit breaker (not to mention the need to resort to it at the product-specific level)

30. DOMESTIC SUPPORT DISCIPLINES • Assuming that G-20 OTDS cuts do not prevail and that final OTDS will be around levels of the USA October 2005 proposal with its water being squeezed out: • US$ 15 billion, out of which US$ 7.6 billion in AMS, US$ 4.9 billion in Blue Box and US$ 2.6 billion in de minimis • Disciplines will be required (too much money uncontrolled). • Instructions of the framework – product specific AMS based on a historical period • New Blue Box – creation contingent on additional disciplines.

31. Product-specific caps • Consistency of the disciplines – sum of product specific caps and size of the box at the end of the implementation period. If it is • Lower – caps will be more stringent than the box cuts • Higher – caps will be irrelevant. • Equal – only one combination of prices will allow the box ceiling to be attained. • Pragmatic solution – sum of product specific caps should be slightly higher than the size of the box.

32. AMS Product Specific Caps

33. Blue Box disciplines • Framework - Creation of the Blue Box contingent on new disciplines to ensure that the Blue Box will be less trade distorting than the AMS; • G-20 proposals – price-gap differentials and product-specific caps; • USA do not accept price-gap differentials (too intrusive, impinging on Congress prerogative to set loan rates and target prices). Product-specific caps are equivalent way to set price-gap differentials; • Commodity groups still refuse to accept Blue Box product-specific caps.

34. Blue Box disciplines • Alternatives: New Zealand proposal and Chairman Crawford’s paper suggested a concept of a joint AMS-Blue Box cap. • Essential elements of the concept • It should not detract from the AMS cap; therefore, implying that the Blue Box cap would be the residue; • The sum of the joint individual caps should be roughly equal to AMS and Blue Box ceilings (i.e. US$ 12.4 billion= 7.6 (AMS)+4.8 (BB)

35. Elements for a joint cap • How to calculate joint caps: • Approaches (1) Historical AMS and CCPs performance period 1995-2005 (even though there are years in which CCPs did not exist – indeed, they were not necessary); (2) Share of the value of production – 10 to 15% of the value of production (including AMS caps); (3) Add AMS cap to 2002 FB allocation revised to reflect the new BB cap (US$ 4.8 billion); (4) Econometric impact of subsidy levels on international prices – 2 to 4% price decline; (5) Effectiveness in containing commodity peak expenditure levels (around 50% cuts in relation to peak year); (6) Exception – cotton. Separate approach (already provided for in Hong Kong Ministerial Declaration) – levels of spending during 1995-2002 already found to generate serious prejudice

36. Elements for a joint cap • All these approaches resulted to be concentrated around a landing zone that would fulfill the requirements above; • No stone left unturned in our analysis as to the caps being effective constraints on the ability of the USA to pile up support, particularly in low price years.

37. Historical spending

38. Value of production and price impact – problems with cotton

39. How would the joint caps operate? • The individual joint caps should respect: • The AMS product specific cap (based on historical expenditure); • The total AMS ceiling (US$ 7.6 billion); • The total Blue Box ceiling (US$ 4.8 billion). • Let’s imagine a Product X with AMS cap of US$ 1.3 billion and a joint cap of US$ 2.5 billion.

40. Different scenarios with AMS and Joint caps

41. Comments • The joint cap, indeed, allows for more flexibility in Blue Box expenditure levels than a strict Blue Box cap. • How relevant is this flexibility? • To bear in mind that Blue Box is much smaller than the AMS (US$ 4.8 billion in comparison to US$ 7.6 billion); therefore it is impossible to go deep enough; • Moreover, various commodities also seek space in the Blue Box, increasing the likelihood of exhausting the overall ceiling prior to using all available room (difference between the actual AMS spending and the joint cap); • Our econometric studies do show that the CCPs are less distorting than MALs. So, the distorting effect of the amounts disbursed is not neutral in relation to the distribution between AMS and Blue Box. It is preferable to have less AMS spending.