Perspectives on the 2007 Farm Bill

July 16, 2007 // 2:00pm4:30pm

On July 16, 2007, three experts on agricultural policy presented their papers on the prospects for agricultural policy reform in the 2007 Farm Bill. Robbin Johnson presented a case for fundamental farm policy reform, suggested policy measures that are consistent with rural economic realities, and evaluated the prospects for reform in 2007. Ford Runge examined the state of ethanol production and suggested a remedy for the market distortions caused by the subsidies and trade protection accorded to the corn-based production of this fuel. William Krist explored the limits that WTO rules have placed on the 2007 Farm Bill and the implications of the Farm Bill for a successful Doha Round of trade negotiations.

Options for Reform
As farm policy reformers anticipate the 2007 Farm Bill, Johnson said, they should go beyond the typical critique that U.S. farm policy promotes inefficiencies, inequities, and wastefulness. A more fundamental criticism, he said, is that U.S. farm policy no longer reflects the economic realities of rural America. These realities include the fact that two thirds of farm output is now outside the reach of commodity programs; that service and manufacturing industries now provide more rural jobs than agriculture; that most families classified by the U.S. Department of Agriculture as "farming" earn average incomes well-above the national average for American households in general and above the average income of rural non-farm incomes; that rural incomes have eroded over the past 25 years despite the allocation of hundreds of billions of dollars to farm programs; and that new technology, export opportunities, and shifting global production make commodity programs much less important to farming's future. Moreover, he said, new priorities such as conservation and ending hunger in America deserve to be moved from the periphery to the center of the farm policy agenda.

In order to close the gap between farm policy and the state of the rural economy, Johnson said, several measures need to be taken. First, the income support that goes to approximately 300,000 large commercial farmers is no longer necessary because they earn a high level of profit. Instead, the government's role should be to help establish institutions that would deliver private sector tools to manage the risks inherent in farming. Second, the 1.5 million farmers who receive income from non-farm sources and little from existing commodity programs would benefit from an effort at rural development that includes public investments in modern infrastructure. Third, the 300,000 farmers whose operations are too small to be profitable or helped by commodity program payments, but too large to earn income from non-farm sources, need federally funded adjustment assistance to become commercially viable or to transition to new vocations. Last, the reform community needs to connect farm policy reform with trade policy reform in order to highlight that it is in the farmers' interest to gain greater access to the global market. Taking these steps, Johnson said, will reduce the rural-urban income gap, free farm resources for other priorities, and possibly allow for the conclusion of the Doha Round.

While the prospects for fundamental reform appear bright because of dwindling budgetary resources in the face of new claimants, Johnson cautioned that there is reason to doubt that reform will take place. Possible setbacks include the modest nature of the Bush Administration's proposed reforms, a shift in the debate from ambitious changes in kind to limited changes in degree, and a crowded legislative calendar that is not conducive to an informed debate. These obstacles are compounded by the possibility of further delays in tackling the Farm Bill, which could make an extension appear more appealing as time passes. If reform proves to be unattainable this year, Johnson suggested that reformers maintain ground in today's political conflicts and push to attach two addendums – a two-year sunset provision and a repeal of the 1949 Farm Act – to any compromise bill that emerges. Taking these steps, Johnson said, will allow the reform agenda to survive until a new president emerges in 2009.

The New World of Biofuels
The second panelist, Ford Runge, examined the state of ethanol and argued for policy measures to combat the market distortions associated with its production. At the moment, he said, ethanol production has reduced the supply of corn to the point where there is no surplus. Due to the 51 cent/gallon blender's credit, the 54 cent/gallon import tariff, and production mandates, demand for domestically produced ethanol remains high. President Bush's call for a dramatic increase in ethanol production by 2017 will exacerbate the supply squeeze. These market distortions have led to higher food prices and an increase in the use of artificial fertilizer that frequently contributes to the degradation of rivers and lakes. Higher food prices, subsidies, and environmental costs have pushed research on cellulosic ethanol where bio-waste, switch grass, or other non-food inputs could be used. Runge noted that more research is needed and, in any case, the sheer volume of waste material needed would limit the long-term impact of cellulosic ethanol. He also feared that well-established interests supporting the corn-based approach will slow change.

To counter the market distortions surrounding ethanol, Runge proposed three measures. First, the blended fuel credit and the tariff on imported ethanol need to be adjusted downward. Second, mandates for ethanol use should be frozen at current levels. Third and most importantly, he argued for a new countercyclical subsidy that fluctuates inversely with the price of corn. Under this system, the subsidy falls as the price of corn rises and the subsidy rises as the price of corn falls. Such a system, Runge argued, would preserve the incentive to use corn for fuel when it is cheap and in surplus. It would also smooth out variations in the price of corn, making it more predictable for the food and ethanol industries. Adopting this measure would also be consistent with encouraging research and innovation in the development of biofuels. In concluding, Runge said that the U.S. should possess a portfolio of energy alternatives in which corn ethanol is only one.

Trade Policy and the Farm Bill
The third panelist, William Krist, surveyed the progression of agricultural trade negotiations and prospects for the 2007 Farm Bill. Since World War II, eight rounds of trade negotiations have significantly reduced trade barriers on industrial goods, thereby leading to a substantial increase in trade. It was only in the last trade round, the Uruguay Round, however, that clear limits on agricultural subsidies were established. The Uruguay Round also created the World Trade Organization, established an improved trade dispute settlement mechanism, and included a commitment by the members to future negotiations on agriculture to continue the trade liberalization process. The 1996 Farm Bill reflected the philosophy of the Uruguay Round trade agreements and moved agriculture toward a more market-based system. The 2002 Farm Bill, however, shifted direction by introducing a set of countercyclical payments linked to agricultural production. In a trade case before the WTO, Brazil argued that the combination of U.S. programs supporting cotton violated U.S. commitments made in the Uruguay Round. The WTO agreed. More recently, Canada has challenged U.S. subsidies and other domestic support for corn and other agricultural products.

Given the possibility of additional cases, Krist argued that we should not, as some have suggested, wait for additional settlement cases to arise. If the needed reforms are not included in the 2007 Farm Bill, however, he cited retaliation against U.S. exporters as a real possibility. More importantly, U.S. (and European) movement is needed to push the current Doha Round of multilateral trade negotiations forward. From the start of the negotiations, an agreement on reduced support and trade protection for agricultural commodities has been the key to making progress on further opening markets for agriculture, manufactures and services. Adopting an approach of reducing trade-distorting subsidies in the 2007 Farm Bill would be a welcome step in this direction, Krist argued, and would give the U.S. agricultural sector more time to adjust.

Drafted by Mitch Yoshida



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