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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
of dumping.
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 conclusions.
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. 
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