Since negotiations on a new WTO trade policy agreement were suspended in late July of this year, attention has focused on which U.S. crops under existing U.S. farm programs may be targets for a WTO case filed by another country. A recent report from the Congressional Research Service titled Potential Challenges to U.S. Farm Subsidies in the WTO by Randy Schnepf and Jasper Womach “reviews the general criteria for successfully challenging a farm subsidy program, and then uses available data and published economic analyses to weigh U.S. farm programs against these criteria.”
The authors used the WTO Upland Cotton Panel Report in the Brazilian case against the U.S. to identify the most likely approaches for a new case based on “significant price suppression” in world markets. The panel identified four factors that supported the link between the U.S. subsidies and world price:
The relative size of U.S. production and exports of cotton;
U.S. subsidies directly linked to world market prices for cotton;
Time coincidence of subsidies and suppressed world cotton prices; and
The difference between cost of production and revenue from sales.
Schnepf and Womach analyzed commodities covered by farm programs against the four factors. For the 2002-2005 crop-marketing years U.S. cotton production was 20 percent of world production and 40 percent of world trade, with U.S. exports at 70 percent of U.S. production. For those same years, U.S. corn and soybean production accounted for 40 percent and 38 percent of world production, respectively, with U.S. corn accounting for 60 percent of world trade and U.S. soybeans for 44 percent. Exports accounted for 18 percent of U.S. corn production and 35 percent of soybean production. Half of U.S. wheat production was exported and accounted for 9 percent of world production and 25 percent of trade. U.S. rice production accounted for only 2 percent of world production and 13 percent of trade, but 52 percent of U.S. rice production was exported.
Corn, soybeans, wheat and rice have the same subsidy structure as cotton. Direct payments are not linked to world market prices, but could be considered amber box rather than green due to the fruits and vegetables planting prohibition. Wheat has had few loan deficiency payments (LDPs) and counter cyclical payments (CCPs) under the 2002 farm bill. Soybean had LDPs and CCPs for the 2004 crop. Corn had substantial LDPs and CCPs for the 2004 and 2005 crops. Rice had both payments in all four years. The authors also included crop insurance as a price-linked program because government costs are averaging $3 billion per year, and it is raised as an issue by other countries. Crop insurance payments as a portion of total payments are more important for wheat and soybeans than for corn and rice.
The time coincidence of subsidies and low prices was not analyzed except to point out that a country filing a case would choose years when payments for a commodity are the highest, which coincides with years when market prices are lowest. To the extent that U.S. domestic prices track world market prices, or vise versa, large subsidy payments to U.S. producers would almost always coincide with low world market prices.
The authors compared the average total cost of production as estimated by USDA to market revenue and total revenue including all government subsidies. For cotton, 1997-04 government payments were 37 percent of total revenue, and total revenue was 101 percent of total costs. Corn for 1996-04 and soybeans for 1997-04 had total revenue to total costs of 102 percent and 101 percent, respectively, with subsidies accounting for 17 percent of the total revenue for corn and 10 percent for soybeans. Keep in mind that soybeans did not have direct payments prior to the 2002 farm bill. Wheat for 1998-04 received 30 percent of its total revenue from subsidies, but still covered only 87 percent of its average total costs. For 2000-04 rice received 52 percent of its total revenue from subsidies, and total revenue was 146 percent of average total costs.
Some countries have argued that the marketing loan program is like an export subsidy because it allows U.S. crops to compete in international markets. The authors note, “However, under SCM Article 3 an export subsidy must be based specifically on export performance or upon use of domestic over imported goods.” Since the marketing loan does not have those requirements, it probably will not be attacked as an export subsidy.
Schnepf and Womach also raised issues for the 2007 farm bill. Unless the prohibition on planting fruits and vegetables is removed, “other countries might challenge any categorization other than non-product specific AMS or amber box for the direct payments. Counter-cyclical payments are tied to the same payment acres as direct payments and likely would be categorized the same as direct payments.” A WTO compliant revenue assurance program would have to limit compensation to less than 70 percent of a producer’s income losses. The Conservation Security Program may have a problem because of a WTO requirement “that environmental payments ‘shall be limited to the extra costs or loss of income’ due to requirements of a government program, ‘including conditions related to production methods or inputs.’”
Any one of the four commodities could be a target depending on what points a complainant wanted to stress. Some of these issues may be less important due to the recent increase in grains and oilseeds prices. The purpose of a WTO case is to force reforms in programs that have been determined to have caused market distortions in past years. If market conditions have fundamentally changed, rehashing the past might not produce benefits for the future. The more important issue will be how to avoid creating new programs that cause market distortions in future years.