Conservation payments under federal government programs are popular with farmers and ranchers and the general public. The payments are also generally considered non-trade distorting and fit in the “green box” for WTO domestic support programs. Congress is being encouraged in the new farm bill being written this year to sharply increase conservation payments. A recent analysis by Randy Schnepf of the Congressional Research Service titled “WTO Compliance Status of the Conservation Security Program (CSP) and the Conservation Reserve Program (CRP)” provides insights on WTO requirements for green box conservation programs.
The Conservation Security Program (CSP) provides financial and technical assistance to promote conservation on working farm and ranch lands. In fiscal year (FY) 2006, USDA spent $259 million on 15.8 million acres, $16.40 per acre enrolled in the program. Contracts are for 5-10 years with three tiers of payments based on resource management standards. Producers are eligible for four types of payments — stewardship or base payments; cost-share payments on existing practices; one-time new practice cost-share payments; and enhanced payments. Of the $259 million in outlays in FY2006, $7.1 million were for stewardship payments and $2.6 million for enhancement payments, with the remainder for cost-share payments.
Schnepf explains that the WTO, Agreement on Agriculture, Annex II, paragraph 12 requires producers to fulfill specific conditions under a conservation program and that payments be limited to the extra costs or lost income from complying with the program. About 96 percent of the payments for the current CSP appear to easily qualify under the green box. The stewardship payments and the enhancement payments are in what Schnepf calls a “gray zone” of uncertainty. Since cost share payments are limited to 75 percent of the practice costs and are usually much less, total payments for the four types are generally less than the cost share value. Also, the stewardship and enhancement payments could be considered direct, fix payments that would also be green box compliant. The Bush Administration has proposed changes to create a single payment that would make the CSP more WTO compliant.
The Conservation Reserve Program (CRP) makes payments to farmers to take highly erodible or environmentally sensitive cropland out of production for 10 or more years. In FY2006, CRP outlays were $1.8 billion on almost 37 million acres, $48.65 per acre enrolled. Under WTO rules land has to be enrolled for a minimum of three years with no production of marketable agricultural products. Schnepf points out that the CRP could violate WTO rules when CRP land is harvested or grazed during periods of drought as the Secretary of Agriculture has authority to allow. If that authority were used more than once every four years under a contract, it could make the entire contract period in violation. The Secretary of Agriculture can also modify or waive a CRP contract to permit land to be used for the production of crops.
Schnepf notes that use of CRP land has become a much a larger issue because proposals for the next farm bill include incentives for commercial harvesting of biomass crops from CRP acreage. This is likely to be considered an agricultural production activity. The larger the amount of CRP acreage involved in biomass production and the larger the subsidies per acre or ton produced, the greater are the chances that the program would be challenged at the WTO. Schnepf suggests that one option is to shift CRP land growing biomass crops from status as a land retirement program to an environmental program where payments would be offset by the higher costs and increased uncertainty of growing biomass crops.
How likely a conservation program will be challenged in the WTO is partly a function of program costs. Schnepf calculates that for FY2003-FY2006 total four-year outlays for the CSP were $505 million, while total annual costs of CCC farm support programs were about $20 billion. A relative low cost program by definition would likely be less trade distorting than a much higher cost program regardless of the purposes of the program. With price and income support programs costs declining due to higher market prices and the potential for higher outlays for the CSP and CRP under the 2007 farm bill, conservation programs could become larger targets.
The existing green box criteria for conservation programs are not likely to be changed under the current Doha Round of WTO trade policy negotiations. The August 2004 WTO Framework Agreement called for the criteria to be “reviewed and clarified,” but that is not a high priority in the talks. Schnepf notes that some analysts in the U.S. and the EU believe that conservation activities have public benefits and minimally distort trade. Also, without incentives participation in conservation programs could be low.
Congress should not shy away from increasing conservation payments because of WTO compliance concerns. The most important point is to recognize that not all conservation payments will be treated alike. Payments that offset extra costs or loss of income in complying with conservation programs are the easiest to defend. Programs can be redesigned to fit under different paragraphs of Annex II of the Agreement on Agriculture. Commercial production of biomass crops under the current CRP is likely to be challenged, particularly if acreages are large and subsidies are substantial.
The higher the costs for a program, the more likely it will be subject to a challenge. The U.S. has developed a reputation, fairly or not, of trying to shift programs among the WTO boxes to avoid cutting the overall level of payments to farmers. An expensive conservation program will be a target regardless of arguments about its public benefits.