The 2002 Farm Bill: Implications for North American Trade

Relationships

North American Trade Relationships:Policy Challenges for 2002 and Beyond

Chicago

August 8, 2001

Greg Pompelli

Market and Trade Economics Division

U.S. Policy Trends• Recent U.S. farm policy has emphasized:

– Direct “AMTA” or “PFC” payments.– Elimination of supply controls.– Greater planting flexibility.

• Desires of new policy beneficiaries.

• Policy is increasingly influenced by trade potential and agreements.

• With low crop prices, emergency aid ($25 billion in past 3 years) has been recurring.

Emergency Aid Accounted for the Bulk of Payments in 2000

Emergency Assistance

CRP & Other

Production Flexibility Contracts

Loan Deficiency Payments

Total $22 Billion

Direct Payments Have Helped Support Net Farm Income

$0

$10

$20

$30

$40

$50

$60

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Calendar Year

$ B

illi

on

Net Farm Income LESS Government Payments Direct Government Payments

Levels of Support (PSE)

0

20

40

60

80

100

Per

cen

t of

Gro

ss

Rec

eip

ts

1986-88 44 33 25 -1

1999 43 17 25 15

2000 38 19 22 18

E.U. Canada U.S. Mexico

Source: OECD.

Forces Shaping the U.S. Farm Bill Debate

• Most farmers agree that:– Planting flexibility, and the ability to maximize

net returns, is desirable.– Some type of income safety net is needed.

• But, issues arise regarding:– How to meet the needs of a diverse array of

farms at reasonable cost...– …And in a manner that is WTO-compliant.

Farm Sector Diversity Provides a Context for the Farm Bill Debate...

• Farm households are heterogeneous in terms of their:– Dependence on farm vs. off-farm income.– Cost structure.– Production options.– Historical access to farm programs.

Most Farm Households Depend on Off-Farm Income

Thousand

dollars per

household

0

50

100

150

200

Farm earnings Off-farm earnings Total household income

occupation/

Limited-

resource

Retirement Residential/

lifestyle

Farming

occupation/

lower-sales

Farming

higher-sales

Large Very large

Small family farms

(sales less than $250,000)

Other family

farms

Average U.S. Household Income

$58,842

Source: USDA’s Agricultural Resource Management Study.

Farms With Sales of Over $100,000 Are Likely to Have Low Costs

0% 20% 40% 60% 80% 100%

Limited Resource

Retirement

Residential/Lifestyle

Farming, low sales

Farming, high sales

Large

Very Large

Low Cost Mid Cost High Cost

Source: USDA’s Agricultural Resource Management Study.

1999 Distribution of Farm

Payments - Percent of farms receiving payments

[Average Household Income]

• Limited resource farms 19.4% [$8,605]

• Retirement farms 29.8% [$40,515]

• Residential lifestyle farms 24.5% [$65,758]

• Farming, low sales farms 46.6% [$34,132]

• Farming, high sales farms 73.4% [$50,964]

• Large family farms 75.9% [$79,693]

• Very large family farms 60.5% [$205,323]

$2,183

$6,395

$3,844

$4,948

$10,889

$17,766$32,087

Average payment per recipient

Changing Supply Chain Relationships

Change the Context for Debate • Changing consumer demand --

• Higher incomes, greater urbanization.

• Food safety, sanitary/phytosanitary issues.

• Changing domestic and global markets --• Trade and transportation issues--particularly as they

shift export destinations and competitiveness.

• Industry consolidation and investment.

• Regulatory issues--particularly as they affect consumption and trade.

U.S. Farm Exports Are Increasingly Destined for the Western Hemisphere

0

10

20

30

40

50

60

70

Asia WesternHemisphere

Rest of the World

199019952000

Percent

Shift to Greater Trade Value in Non-Bulk Affects the Agenda

1989 1990

19911992

19931994

19951996

19971998

1999 2000 f

0

5

10

15

20

25

30

35 Billion $US

Bulk Nonbulk Perishables

U.S. Trade with NAFTA Partners Increasing...

Annual Average($ Billion)

1989-93 1994-99 PercentChange

U.S. Agricultural Exports To Canada 4.3 6.4 50

To Mexico 3.1 5.1 62

U.S. Agricultural Imports

From Canada 3.6 6.8 87

From Mexico 2.5 4.0 61

Trade with NAFTA Partners Increasing Faster than General U.S. Trade

Trade Partner 1989-1993 Average 1994-2000 Average Percent Change

ExportsCanada 4.3 6.6 54.2Mexico 3.1 5.3 68.5ROW 33.6 41.3 22.8

ImportsCanada 3.6 7.1 94.4Mexico 2.5 4.2 66.8ROW 17.4 23.1 33

01020304050607080

1980 1985 1990 1995 2000 2005 2010

U.S. agricultural export value$ billion

Source: USDA Agricultural Baseline Projections to 2010, February 2001.

…Although Export Value Overall Declined in the Late 1990’s

U.S. Competitiveness is an Issue in the Debate

1015

2025

3035

4045

5055

60

1980 1985 1990 1995 2000 2005 2010

Argentina & Brazil

United States

Soybean and soybean meal exports

Mil. Metric tons

Source: USDA Agricultural Baseline Projections to 2010, February 2001.

Farm Bill Considerations in the House of Representatives

• Ag. Committee Chair Combest asked that farm bill proposals address three issues:– What is the market impact of a group’s

proposal, including for other commodities?– What does it cost?– What are the WTO impacts?

Harmonization and Convergence Questions

• How do we remain as competitive as possible in world markets?

• Can U.S. farm policy continue with a one-size-fits-all approach?

• What are the production effects of “decoupled” payments?

• What is the best policy to meet NAFTA and WTO commitments--and to provide farmers with an adequate safety net?