WTO Limits on Farm Subsidies

 I've wondered whether USDA would run into problems with the WTO's limits on farm program payments. A recent CRS report analyzed the problem.

The last paragraph of the summary says:

If the United States were to exceed its WTO annual spending limit, then offending farm programs (whether ad hoc or traditional) could be vulnerable to challenge by another WTO member under the WTO’s dispute settlement rules. However, if the payment programs that appear likely to cause the United States to exceed its WTO spending limits in 2019 and 2020 prove to be temporary, then a successful WTO challenge might not necessarily result in an adverse ruling against the United States or any other authorized retaliation (e.g., permission to rais e tariffs on U.S. products), depending on the outcome of a WTO dispute settlement proceeding. 

The issue is summarized as this:

The U.S. government provided up to $60.4 billion in ad hoc payments to agricultural producers cumulatively in 2018, 2019, and 2020, in addition to existing farm support. These payments have raised concerns among some U.S. trading partners, as well as market watchers and policymakers, that U.S. domestic farm subsidy outlays might exceed its annual WTO spending limit of $19.1 billion in one or more of those three years. [emphasis added]

I bolded the numbers because the last I'd heard it was $48 billion. I'm sure the $60 billion had little to do with the election results.

Evaluation of MFP

 NYTimes has a piece tied to GAO's assessment of MFP in a report Monday.  The criticisms seem to focus on higher payments for Southern producers and for big producers.  

I'd note that the WTO just issued an opinion that Trump's tariffs on China were illegal. MFP was intended to counter the adverse effects of the Chinese tariffs which responded to Trump's tariffs.

Trump's MFP Leads to WTO Violation?

That's the Congressional Research Service's tentative conclusion--US may be billions over its "amber box" limit in 2019.. Its conclusion:

According to the scenarios developed in this analysis, including a projected set of market conditions, the United States may potentially exceed its cumulative amber box spending limit of $19.1 billion in 2019. Excessive amber box payments in 2019 could result from the addition of large MFP payments to the traditional decoupled revenue support programs ARC and PLC.
However, this analysis found that U.S. compliance with WTO amber box spending limits was very sensitive to a change in market conditions and market valuations. Noncompliance hinges on many key market factors that are currently unknown but would have to occur in such a manner as to broadly depress commodity prices through the 2019 marketing year (which extends through August 31, 2020, for corn and soybeans). Another crucial uncertainty is how the U.S.-China trade dispute—with its deleterious effects on U.S. agricultural markets—will evolve.51 Resolution of the U.S.-China trade dispute and an improved demand outlook could lead to higher commodity prices and output values while lowering payments under countercyclical farm programs such as MAL, PLC, and ARC. Such a turn of events could help facilitate U.S. compliance with its WTO spending limits.

No Cottonseed Loans But Another Cotton Program

AEI has a post criticizing the new cotton program, taking a cynical view of the motivations, as one might expect of them. It reminds me I never posted on the program.

What's the new cotton program?  It's a "one-time" cost-share program to assist in ginning cotton.

You ask: is ginning cotton a new requirement?  I thought cotton had been ginned for a few years.  I even read about Eli Whitney inventing the saw gin in 1797 and how that impacted history. If cotton ginning isn't new, why do cotton producers suddenly need cost-share assistance?

I suggest googling "cottonseed" in this blog--you'll find 3 posts back at the beginning of the year on the issue of adding cottonseed as an oilseed.  The issue then was whether Secretary Vilsack had the authority to do as the cotton producers asked.  He was saying no back in February.  I cynically said lawyers would find a way.  Apparently they didn't find a way to add it as an oilseed; perhaps the years and decades of history was too much. 

But they did find a way to authorize a $300 million program, which was announced mid June.  How?  Damned if I know.  I did a quick check for a Federal Register document, and found a notice, not a rulemaking.  The notice says: "The Commodity Credit Corporation Charter Act (15 U.S.C. 714c(e)) includes authority for CCC to use its general powers to increase the domestic consumption of agricultural commodities (other than tobacco) by expanding or aiding in the expansion of domestic markets or by developing or aiding in the development of new and additional markets, marketing facilities, and uses for such commodities."  It goes on to argue the need for the program.

So, I rest my case, my cynical case: put enough pressure on the lawyers and they'll come up with something which sounds halfway reasonable.  As a retired bureaucrat, I can only applaud their chutzpah.  It's not PIK, but it's on that scale.  (Have I written about PIK--someday I must.)

Now if there were anyone really opposed to the program, they might find a favorable Texas district judge to slap an injunction on USDA for not following the Administrative Procedure Act, like the conservatives did on Obama's immigration (actually Jeh Johnson's) measure.  But there's no one opposed to doling out money, not like there is on immigration.  So no court case, only the Brazilians, whose victory over our cotton subsidies is probably ultimately responsible for the new program, might have problems with it.  And since it's one-time, they may not challenge it under WTO.

Given the decimation of Southern Democrats, I'm wondering the political motive for this action.  In the past you could account for favoring cotton because there were people like Sen. Lincoln, or Pryor still in Congress, but now not.  Was there a backroom deal, maybe to get Sen. Cotton to lay off on an appointee?  (I'm sure Sen. Cotton will be happy about this program. :-)

WTO-Doha Restrictions on Agricultural Payments

In the late 90's, IIRCC, we were just starting to deal with our commitments under the WTO, commitments which restricted nations' ability to provide support to their farmers. There were different color categories, depending on whether the payments had the effect of distorting trade.  One reason for changing from deficiency payments tied to planted acreage to direct payments based on past history (i.e, the Freedom to Farm formula in 1996) was to change the categorization.  The theory was that payments based on planted acreage increased production in a country, payments based on historical base acreage delinked payments and production.

Anyhow, years have passed.  Generally countries have reduced their supports and because negotiations for new WTO agreements failed, we haven't heard much about the subject in recent years.  Today though  Farm Policy quotes an article:

"...only the United States wouldn’t be able to meet the commitments assigned to it under draft 2008 Doha texts. However, that calculation is based on U.S. subsidies from 2012 and doesn’t factor in changes in U.S. agricultural policies in the new farm bill.
“Under the proposed commitments, the United States would have exceeded its trade-distorting subsidy limits by $3.6 billion in 2012. A diplomatic source said it’s unclear whether the farm bill will help or hurt in this area particularly because it’s not clear whether the U.S. will classify crop insurance as trade-distorting in its next subsidy notification.”

 My impression is that crop insurance used be considered as something which encouraged production; certainly EWG believes that, especially with regards to the Great Plains. 

The Farm Bill Draws Nigh

Reports are that the farm bill will hit the House floor today. But EWG has an ominous post about the possibility that some provisions will run afoul of the WTO.

WTO Fades Away

That's my read of this statement from Collin Peterson as reported in Farm Policy:

“As for a coming House-Senate conference, Peterson said he told Senate Ag Chairwoman Debbie Stabenow, D-Mich., ‘there will be target prices’ in the Title I safety net program and ‘they will be based on planted acres not to exceed base acres.’ He noted that some commodity groups are ‘simply wrong’ to press base acres rather than planted acres for any target price payments. ‘We can’t sell that to Congress any more … about paying for acres not planted.’”

My recollection is that the WTO believes that paying on planted acres encourages production, which is limited under its rules for agriculture.

Price Loss Coverage

Been lazy so haven't looked up the actual provisions of this program as included in the House farm bill.  Looks like a target price/counter cyclical type program, but based on planted (and prevented planted) acreage and with updated yields.  If I get ambitious I'll do some research.  It strikes me though that such a program will have problems with WTO rules--farm programs aren't supposed to encourage plantings.

It's All in the Spin: Farm Bill

."Farmers will no longer be paid for crops they are not growing, will not be paid for acres that are not actually planted, and will not receive support absent a drop in price or yields."

From the press release from Chairwoman Stabenow.  That's all very well and good, but years ago the spin was something to the effect of:  "Farms will no longer be locked into growing a specific crop to earn benefits and will have flexibility to plant any crop they wish."  I'm still wondering about the WTO classification on the draft.

[Updated to add "Years ago", as when Pat Roberts, the ranking Republican on the Senate committee, was pushing Freedom to Farm as chair of House Ag.]

John Phipps on Crop Insurance and Market Distortion

Have I said recently I hadn't noticed much concern about WTO rules vis a vis the next farm bill?  Seems to me in past cycles it was a top concern.  Indeed the delinking of payments and current plantings in the Freedom to Farm of 1996 was, I think, a big issue, at least for those who weren't bewitched by the dream of getting government out of agriculture.

John Phipps reports here the Brazilians are taking the position that crop insurance is market distorting. You'll remember they've already won a WTO case against our upland cotton program.

Where's the WTO Rules?

There's a blog, CAP Health, which discusses EU agricultural policy.  Based on a cursory review, it doesn't seem as if the EU is going to follow the US in shifting strongly to a crop insurance policy.  Which leads me to the question in the title: one of the advantages of the direct payment program in the Republican's Freedom to Farm legislation in 1996 was its compliance with WTO rules on agricultural subsidies.  These days I've not seen those rules mentioned in any of the discussion of changes to farm legislation. Are they no longer applicable, do we just not care, or does crop insurance fit within them as well as direct payments?

Changing Direct Payment Program

It's sounding more and more as if the direct payment program will be eliminated or drastically changed in the new farm bill.  The wheat and corn people like crop insurance, but not the cotton and rice people. Of course, the number of cotton and rice farmers is down, and only a fraction of the wheat and corn.  I'm not sure though how many wheat, corn, and soybean farmers in the South there are who don't grow cotton or rice and who might be satisfied with crop insurance.  That is, whether the problem the South sees with the actuarials for crop insurance is limited only to cotton and rice.

The Doha round of negotiations appears to have fizzled out.  I'm not sure whether or not that makes it easier to move money from the direct payment program, which complies with the WTO restrictions, to something else which is less compliant.

[Farm Policy cites an ERS study:

Meanwhile, an update from USDA’s Economic Research Service yesterday explained that, “While the Direct and Counter-cyclical Program and Federal crop insurance are both part of the farm safety net, they do not necessarily serve the same farmers. Looking at counties that received at least $20 in direct payments per cropland acre in 2008, or $20 in crop insurance indemnity payments averaged over 2007 to 2009, clear geographic patterns emerge [see graphical illustration here]. Direct payments tend to be higher in the Corn Belt (corn and soybeans), Mississippi Delta (cotton and rice), and the Texas-Louisiana Gulf Coast (cotton and rice). They are also high in Arizona (cotton), California (cotton and rice), and parts of the Southern Atlantic Seaboard. Crop insurance indemnity payments tend to be higher in the wheat-growing regions in the Northern Plains and parts of the Southern Plains, as well as North and South Carolina. Both programs are high in the Texas Panhandle (cotton and wheat) and across Alabama and Georgia (cotton and peanuts).”
 ]

Fruit and Vegetable

From Congressional Research Service report to Congress on WTO status
includes the status of the fruit and vegetable limitation (which I blogged about here).

The claim that the United States has exceeded its total spending limits hinges
largely on a previous ruling from the U.S.-Brazil cotton case in which a WTO panel
found that U.S. payments made under the Production Flexibility Contract (PFC) and
Direct Payment (DP) programs do not qualify for the WTO’s green box exemption
category because of their prohibition on planting fruits, vegetables, and wild rice on
covered program acreage. However, the panel did not make the extension that PFC and DP payments should therefore be counted as amber box programs, but instead was mute on this point. In its WTO notifications, the United States has notified its PFC payments as fully decoupled and green box compliant.21 This is an important distinction because the green box contains only non-distorting program payments and is not subject to any limit. Canada and Brazil argue that, because of the previous panel ruling, PFC and DP payments do not conform with WTO green-box rules and should be included with U.S. amber box payments.

The report suggests the issue is moot--because projections for high commodity prices into the future will keep the U.S. from violating the WTO limits.