Concern about the impact of U.S. farm program legislation on farmers in developing countries has been part of the trade policy agenda since agriculture was included under WTO rules in 1995. Agricultural economists Bruce Babcock of Iowa State University and Nick Paulson of the University of Illinois addressed that in Potential Impact of the Proposed 2012 Farm Bill Commodity Programs on Developing Countries for the International Centre for Trade and Sustainable Development.
The analysis was completed in October 2012 based on the versions passed by the full Senate and the House Agriculture Committee. Babcock and Paulson see both as “a step backwards in terms of efforts to only provide farmers with support that does not distort their planting decisions.” The direct payment and countercyclical programs use fixed base acres and program yields to calculate payments which are ‘decoupled’ from production decisions and have minimal impact on farmers’ plantings. The Senate would replace these with a ‘shallow loss program’ called Agricultural Risk Coverage (ARC). Cotton farmers would have a Stacked Income Protection (STAX) Program for revenue protection.
The House version of the bill has its own shallow loss program called Revenue Loss Coverage (RLC). The House bill retains the counter-cyclical program and calls it Price Loss Coverage (PLC). The program’s target prices are increased, program yields are updated and payments are based on planted acres instead of base acres. The House bill offer farmers the choice of PLC or RLC. The current programs are reported to the WTO in the green box of minimally trade distorting, but the new programs will likely be amber box because they are tied to current acreage, yield and price.
Babcock and Paulson used Congressional Budget Office (CBO) price forecasts for 2013-17 from March 2012 in their analysis which also were used to estimate the costs of the House and Senate bills. If market prices stay near those levels, they concluded that the average payments for the various programs are rather modest under both the House and Senate bill for corn, soybeans, wheat cotton and rice. They wrote, “Only cotton STAX payments and rice PLC payments might be expected to create a significant incentive to plant more cotton and rice.”
They also estimated payments if market prices moved 15 percent lower than the CBO price projections for the first three years of the farm bill and held at that level for the last two years. Because ARC and STAX guarantees are based on five averages of market prices, payments are high in the early years but decline over time. STAX in the House bill has a floor price which limits the decline in the price guarantee. The Senate bill does not have that floor price for the guarantee. The fixed target prices under the PLC program result in increased payments as market prices decline below the target prices.
The authors considered changes in revenue per acre that can be obtained from programs by increasing acreage of one crop over another as a key measure of the extent to which programs incentivize a change in planting decisions. The authors cite a study that showed a 50 percent increase in returns resulted in 1.5 percent increase in U.S. acreage planted. A 20 percent increase in returns from farm programs would result in a 0.6 percent increase in acreage of the five crops. Farm programs can also shift the choice of individual crops. If the PLC in the House bill became law an incentive would be created to plant relatively more rice.
With market prices similar to the CBO projections for 2013-17, the aggregate increase for the five crops would be 321,000 acres, 0.14 percent of the 232.6 million acres expected to be planted each year. Corn would be unchanged at 89.77 million acres, while soybeans would be down 0.29 percent at 76.21 million acres. Wheat would be up 0.11 percent at 52.56 million acres and rice would be up 0.29 percent at 3.03 million acres. Cotton would have most of the increase of 0.47 million acres to 11.32 million acres, a 4.36 percent increase.
If the low price scenario comes true, acreage would decline by almost 5 million, a 2.13 percent reduction. If all producers would then participate in the PLC for price protection, except cotton, corn acreage would decline by 1.0 percent and soybeans by 2.3 percent. Rice acreage would increase by 0.8 percent, wheat 6.0 percent and cotton by 12.9 percent. The authors then wrote, “The central finding of this report is that the recoupling of farm support to planted acreage in the new U.S. farm bill proposals will increase planted acreage of those crops which receive a higher guarantee relative to market price levels than other crops, particularly when market prices fall below support prices.”
Babcock and Paulson conclude by noting that in the last six years of relatively high commodity prices the aggregate response of U.S. crop acreage has been quite inelastic. They wrote, “This suggests that overall production of US subsidized crops will not be significantly impacted by the new programs.” The crop mix will be affected as outlined above. At prices near the CBO projections, the programs will have little impact. If prices decline significantly below the CBO projections, farmers are expected to gravitate toward those crops treated relatively well by the programs, including wheat acreage gaining on corn and soybeans. The high prices and low stocks caused by the drought this year have probably pushed that possible scenario to the later years of the 2012 farm bill.
As a major producer and exporter of agricultural commodities, U.S. farm policy cannot be ignored. As Babcock and Paulson have shown, farm policy can impact farmer decision making particularly in low price years after high-priced years. But, a few numbers on world crop acreage may provide some perspective on the acreages in the analysis. According to estimates by the Foreign Agricultural Service of USDA, the total world area harvested of the ten major row crops increased by 129 million acres from 2005-06 to 2012-13, 55 percent of the total acreage of the U.S. five major crops. U.S. acreage for the ten crops increased by 9 million for those years. World cotton acreage declined by 1 million, with the U.S. down by 4 million.
Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology