Lecture notes on Agricultural Policies, EEP 131 - PowerPoint PPT Presentation


PPT – Lecture notes on Agricultural Policies, EEP 131 PowerPoint presentation | free to download - id: 3b2048-ZGNmN


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

Lecture notes on Agricultural Policies, EEP 131


Lecture notes on Agricultural Policies, EEP 131 September 2007 Why is a section on Agriculture part of this course? Agriculture is one of the main sticking points ... – PowerPoint PPT presentation

Number of Views:213
Avg rating:3.0/5.0
Slides: 64
Provided by: areBerkel
Learn more at: http://are.berkeley.edu


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Lecture notes on Agricultural Policies, EEP 131

Lecture notes on Agricultural Policies, EEP 131
  • September 2007

Why is a section on Agriculture part of this
  • Agriculture is one of the main sticking points
    in the current WTO trade negotiations (the Doha
    Round), and it was important to the formation of
    the WTO.
  • Agriculture is an important component of NAFTA.
  • The environment provides services that are
    essential to agriculture, and agricultural
    practices impact the environment.
  • Policies, particularly those in developed
    countries, strongly influence agricultural
    sectors in those countries, and (via
    international markets) also influence agriculture
    in developing countries.
  • The US is currently debating a new Farm Bill that
    will determine US ag policy during the next six

Background of Uruguay Round Agriculture Agreement
  • Uruguay Round Agreement on Agriculture sought to
    bring Ag into GATT. (Discuss history, ag
    exemption, give examples of accidental
    developments, e.g. Europeans had low import
    restrictions on soybeans when soybeans were not
    an important crop in the 60s and 70s. Imports
    increased drastically and Europe sought to impose
    restrictions, which were resisted by the US)
  • Remind students that trade restrictions cause
    welfare losses countries gain by reducing their
    trade restrictions even if partners maintain
    their restrictions. Ag policies inflict costs on
    domestic economies and also on trade partners.
  • Explain that a given level of producer support is
    more costly to achieve with tariff than with
    producer subsidy. Mention production and
    consumption distortions.
  • Trade and domestic policies are linked for
    example, maintaining a producer price higher than
    world price requires import barriers or export
    subsidies, or for govt to hold large stocks.
    (Mention history of EU's lakes and mountains.)

Background, continued
  • Trade restrictions may be a cheap way -- in
    terms of government revenue, not of social
    welfare -- to provide producer protection. (See
    next slide.) Reduction of trade restrictions
    increases the fiscal costs of protecting
    producers. Therefore, a reduction of trade
    restrictions may put downward pressure on
    domestic (non-trade) policies.
  • (Show that if an importing country imposes a
    production subsidy, without a trade restriction,
    the government has to either buy surplus or make
    deficiency payments the subsidy.)
  • Payments under farm programs are capitalized into
    land value. This means that the farmer who is
    receiving current government payments may already
    have "paid" for them in paying a higher price for

Suppose that the world price is pw. Under free
trade, country shown in this diagram is an
importer. Government wants to support producers
by increasing producer price to p gt pw. (i)
Show that tariff and import quota (where quota
licenses are auctioned) are equivalent. (ii)
Show that under either policy, deadweight loss is
bd. (iii) Show that if govt switches from tariff
to a producer subsidy, producer price remains at
p and consumer price falls to pw. Consumers
gain abcd and taxpayers lose abc. The net
gain is d, the amount by which deadweight loss
falls. Producer subsidy is more efficient than
trade policy (tariff or quota) but producer
subsidy requires higher govt expenditures
Information about URAA
  • Distinction between Coupled Vs Decoupled
    payments. Decoupled payments supposedly have
    minimal trade impact.
  • Green box, blue box and amber box policies.
  • Green box policies supposedly do not distort
    (i.e. Increase) production. Crop revenue and
    insurance program protects farmers against losses
    due to adverse weather and other non-market
    conditions. These programs are not
    commodity-specific. They are green box provided
    that they do not exceed 5 of the total value of
    production otherwise amber box.
  • Blue box are exempt direct payments linked to
    supply controls (which supposedly offset
    distortionary effect of payment), e.g. a payment
    to idle land.
  • Amber box are market price support, other direct
    payments, e.g. output and input subsidies.
  • PSE (producer support estimate, formerly producer
    subsidy equivalent) AMS (aggregate measure of
    support). These are usually expressed as a
    percentage of farm revenue.
  • AMS is the support to producers associated with
    amber box policies, as a fraction of their
    revenue. PSE includes green box and blue box
  • The Peace clause was an agreement not to use
    the WTO dispute process to oppose domestic ag
    policies, provided that these policies did not
    violate the URAA in particular provided that
    support levels did not exceed agreed limits

Three main areas of reform under URAA
  • (i) Reduce trade barriers and make them more
    transparent via tarrification, TRQs (tariff rate
    quotas) URAA eliminated non-tariff barriers and
    "tarrified" them, but some countries put "water
    in the tariff". Average tariff cuts were to be
    36 for DC's (minimum 15) average 24 for
    developing countries (min 10). Example of
    differing responsibilities for DC and LDC
  • (ii) reduce AMS 20 for developed countries, 13
    for developing countries.
  • (iii) reduce value of export subsidy by 36 for
    DC and 24 for LDC.

Limited achievements of URAA
  • URAA set Bound rates, the max permissible
    tariff rate. These remain much higher for ag
    than for manufacturing. Tariffs particularly
    high for certain products important to LDCs
    staple food products, tobacco, beverages, fruit
    and veg, meat products, ground nuts.
  • Tariff "dispersion" (or "escalation") remains a
    problem. Higher tariffs associated with more
    highly processed products discourages
    development. Average tariff on processed product
    as a multiple of average tariff on unprocessed
    products 2.75 (EU), 1.25 (US), 3 (Canada), 3.75
    (Japan). (OXFAM pg 98)

Recent US Farm Bills
  • 1996 FB (Freedom to Farm Act) emphasized
    Production Flexibility Contracts. Under these,
    whole-farm payments were not linked to production
    of specific crops and therefore supposedly do not
    create inter-crop distortions.
  • Payments may lead to increased farm income and
    thereby increase ag investment they also reduce
    exit from agriculture.
  • 2002 Farm Bill (Farm Security and Investment
    Act) re-introduced Direct Payments, replacing
    Production Flexibility Contracts. The direct
    payments are calculated on the basis of previous
    acreage, so the US claims that they do not
    distort production decisions.
  • However, the reference period used for
    calculating payments was recently changed from
    1986-88 to 1998-2001. If farmers anticipate
    that there will be subsequent revisions, they
    have an incentive to change their acreage. In
    this case, the direct payment distorts production
  • In addition, direct payments are contingent on
    farmers using land for agricultural purposes, but
    do not allow farmers to use the land to cultivate
    fruits, vegetables and certain other crops.
    (Explain the point of this restriction
    policymakers are concerned that producers will
    switch to these other crops, causing oversupply
    in those sectors.) It is disputed whether Direct
    payments are in the Green box or the Amber box.

2007 Farm bill and Doha Round/WTO
  • Doha Round and US Farm bill both scheduled for
    completion in 2007. Doha Round collapses. Farm
    bill likely to reflect budget constraints and
    domestic politics rather than goals of
    international ag reform. Congressional leaders
    say they will not try to anticipate the results
    of a Doha deal on agriculture. House Agriculture
    Chair Colin Peterson, D-Minn. I want to write a
    Farm Bill thats good for agriculture. If
    somebody wants to sue us at the WTO, weve got
    a lot of lawyers in Washington.
  • The U.S. has not reported and categorized its
    domestic support payments to the WTO since
    2001the year before the last Farm Bill was
    passed. This lack or reporting makes it difficult
    to know whether the Farm Bill is complying with
    WTO rules.
  • The U.S. has not complied with WTO dispute panel
    ruling on U.S. cotton subsidies. Brazil has
    requested a new WTO dispute panel to force the
    U.S. into full compliance

US Proposals
  • US 2005 proposal for ag reform was to
    re-categorize subsidy payments from Amber Box to
    Blue Box, leaving US total spending unchanged,
    but requiring other WTO members to cut their ag
    tariffs also requested an extension of the Peace
    Clause, which would exempt Farm Bill subsidy
    programs from legal challenge at the WTO.
  • In 2006, the European Union and nine other WTO
    members asked for an economic simulation of the
    various agriculture proposals at the WTO. The
    simulation found that under the U.S. proposal,
    U.S. agriculture spending could legally increase.

Emerging biofuels market
  • Emerging biofuels market likely to make US ag
    less dependent on exports. For example, if only
    a quarter of the ethanol plants currently
    proposed in the Midwest do come on-line and if
    the corn needed to supply these plants and the
    plants currently under construction were to be
    diverted from exports, Midwest corn exports could
    be cut in half by 2008.

Subsidy levels a cause or an effect of world
price changes?
  • U.S. subsidies are associated with commodity
    dumping that depresses world prices. U.S. farm
    subsidies (using WTO classification) rose from 7
    billion in 1995 to 23 billion in 2000 and have
    recently fallen. Fluctuations occur because
    (some) subsidies depend on the market price.
    Subsidy falls when market price rises (as has
    recently occurred for grains)
  • IATP claims that U.S. farm subsidies do not
    dictate price fluctuations rather, the market
    price dictates overall subsidy levels. And
    subsidies play only a marginal role in the
    cropping decisions of U.S. farmers. This
    statement implicitly accepts that subsidies are
    decoupled from supply decisions. Use graph
    (next slide) to show that a policy that makes US
    supply less elastic causes fluctuation in demand
    (e.g. arising from biofuel demand) to increase
    variability of US exports, thus increasing
    fluctuations in world price
  • IATP continues the significant increase in
    U.S. subsidies over the past ten years is tied
    almost directly to the removal of supply
    management tools in the 1996 Farm Bill, which
    required farmers to set aside a percentage of
    their acreage to qualify for government payments.
    Without those tools, U.S. farmers overproduced at
    such levels that the market price for most major
    crops dipped well below the cost of production.
    (Hard to reconcile this statement with the claim
    that subsidies are decoupled.)

US target price of p makes US supply inelastic
at prices below p. US target price policy makes
US excess supply less elastic. Therefore, the
target price policy causes fluctuations in US
demand (left panel) to increase fluctuations in
world price (right panel).
High demand
Low demand
US supply and demand
US excess supply and world demand
Fallout from 1996 Farm Bill and biofuel surge
  • 1996 Farm Bill was written to comply with WTO
    rules. It required most farm subsidies to be
    phased out by 2001 payments were to be
    decoupled. Farmers were allowed to produce as
    much as they wanted (Freedom to Farm act),
    prices collapsed and the subsidies were restored
    in the form of emergency payments. In 2002,
    Congress transformed those emergency payments
    into a permanent part of the Farm Bill, calling
    them countercyclical payments.
  • 2006, the growth of the ethanol market sent corn
    prices higher than they had been in a decade and
    has led to price increases for other crops,
    particularly other animal-feed crops like wheat
    and soybeans. Ethanols growth and rising prices
    had an immediate impact on farm subsidies, which
    went down from 24.3 billion 2005 to an estimated
    16.5 billion in 2006. The U.S. Department of
    Agriculture projects prices to continue to rise
    in 2007 and subsidies to again decline. Will the
    price increases be sustained? There was also a
    price increase in 1995, when the 1996 Farm Bill
    was written.

Dumping in ag trade
  • Dumping means exporting at a price less than
    average cost. The dumping margin is the
    difference between export price and production
    costs. Dumping is illegal except for
    agriculture. US policy allows the use of
    anti-dumping penalties, known as countervailing
  • OXfam calculates export prices as of production
    costs (percent dumping margins) US and EU
    account for approx half of wheat exports. In
    these countries, export prices are 46 (US) and
    34 (EU) below production costs. US accounts for
    50 of world maize exports export prices are 20
    below production costs.
  • Prices received by (Organization of Economic
    Cooperation and Development) OECD farmers were
    about 31 above world prices, compared to 57
    higher than world prices in mid 1980s. (Farm
    prices higher than world prices by 0 in
    Australia and New Zealand, 10 higher in US, 35
    higher in EU and 100 higher in Iceland, Japan,
    Korea, Norway and Switzerland. (OECD consists
    primarily of wealthy countries and some
    middle-income countries such as Mexico.)
  • High variation in PSE across countries and
    commodities average PSE is 18 in US and 36 in
    EU. PSE is 48 for sugar and milk and 80 for
  • Amber box support is 76 of total producer
    support, down from 90 in late 80s. Gross
    farm receipts in 2002 46 higher than they would
    have been absent government support, compared to
    61 in mid 80s Consumer subsidy equivalent
    (CSE) 24 compared to 33 n mid 80s.

Recent farm bills and ag dumping
  • The last two U.S. Farm Bills encouraged
    over-production and low priced commodity crops,
    leading to increased ag dumping. Compare dumping
    levels 1990-1996 to the 1997-2003
  • Wheat dumping levels increased from an average
    of 27 percent per year pre-1996 Farm Bill to 37
    percent per year post-1996 Farm Bill.
  • Soybean dumping levels increased from an average
    of 2 percent to 11.8 percent.
  • Maize dumping levels increased from an average
    of 6.8 percent to 19.2 percent.
  • Cotton dumping levels increased from an average
    of 29.4 percent to an average of 48.4 percent.
  • Rice dumping levels increased from an average of
    13.5 percent to an average of 19.2 percent.

Food aid
  • (Simulation results) Global reform leads to a
    slight overall decline in food aid (because of
    decreased supply in aid-giving countries,
    presumably), although the decline is significant
    in some areas (9 decline in Southern Africa).
  • Higher food prices increase need for food aid,
    but increased export earnings decrease the need.
  • In addition, reduction in domestic tariffs in
    developing countries is more than offset by
    increase in world price, leading to an increase
    in domestic price and a positive supply response.

US policies and food aid
  • U.S. programs are controversial almost all the
    aid is in the form of food produced, bagged,
    fortified and shipped in the U.S. by U.S.-based
  • The alternative (followed by most donors other
    than US and Canada) provides cash to buy food as
    close to the final destination as practical, in
    order to support long-term agricultural capacity
    in the area suffering food shortages, and to
    inject cash into local economies. (Mention A.
    Sens research)
  • Consequence is U.S. food aid is slower to arrive
    and as much as twice as expensive as prevailing
    commercial prices. Local purchases ought to be
    the first recourse for food aid to minimize the
    risk for future dependency and to provide an
    injection of cash into the local economy.
  • In 2005 Bush proposed and Congress rejected
    adding 300 million for food aid purchased from
    local or regional sources. Opposition to the
    proposal came from U.S. shipping firms, U.S.
    agribusinesses that provide the food and U.S.
    NGOs the latter deliver food aid (project aid
    for development purposes and humanitarian aid in
    emergencies). They sell some of this food in
    recipient countries to generate funds for their
    development work (monetization). Monetization
    is inefficient but NGOs believe that U.S.
    government would be unlikely to provide
    offsetting cash for development.

WTO negotiations and Farm Bill on Food aid
  • Doha negotiations involved U.S. food aid under
    heading of export competition. US uses export
    credits to sell program food aid, pricing
    competing exporters out of the market.
  • The U.S. has resisted reforms on food aid,
    particularly on monetization. Recipient countries
    have supported US position to avoid risk of
    reducing total food aid
  • Role of food aid in current Farm bill uncertain.
    Bushs proposal included more money for the
    purchase of food aid by recipient countries. Some
    but not all U.S. NGOs reducing their support for

History of environment in Farm Bills
  • First US ag conservation initiativeSoil
    Conservation Act of 1935, created with strong
    public support because of the disastrous affect
    the Dust Bowl on agriculture. In constant
    dollars, nearly twice as much funding was
    available for conservation programs in 1937 as in
  • The Agricultural Act of 1956 initiated the Soil
    Bank, taking 29 million acres out of production.
    Objective was to institute conservation practices
    on soil bank acres and also to decrease
    surpluses. First goal successful, second was not.
    Farmers put least productive acres in the soil
    bank, so effect on production is modest. The
    Soil Bank was an expensive supply management
    tool. It illustrated the importance of limiting
    retirement on a per-county basis to avoid
    devastating local economies and also the
    importance of a bid system rather than fixed
  • Farm productivity (output/acre) increased by 50
    between 1950 and 1970, largely through the
    adoption of hybrid corn, improved plant breeding,
    increased acres of row crops, and improved
    management, including fertilizers, pesticides and
    favorable weather.
  • The Emergency Feed Grain Act of 1961 began a
    trend that paid farmers to replace production
    acres with conservation acres. In 1965, the Act
    was amended to provide for five- to ten-year
    contracts for farmers to take corn and grain
    sorghum out of production and use the land for
    conservation purposes. Again, farmers removed the
    least productive land from production and used
    the income for more inputs, thus commodity
    supplies continued to increase.

Farm Bills in the 60s and 70s
  • The Emergency Feed Grain Act of 1961 paid farmers
    to replace production acres with conservation
    acres. In 1965, the Act was amended to provide
    for five- to ten-year contracts for farmers to
    take corn and grain sorghum out of production and
    use the land for conservation purposes. Farmers
    removed the least productive land from production
    and used the income for more inputs, thus
    commodity supplies continued to increase.
  • In 1970s world grain prices increased due to
    Soviet shortages. US policy encouraged planting
    fence row to fence row policy was established
    by the U.S. Secretary of Agriculture, Earl Butz.
    Land that the government had spent millions
    helping to establish in conservation uses went
    under the plow as soon as the conservation
    contracts expired. Row crop production expanded
    at the expense of pasturelands and woodlands,
    land prices increased. Increased production led
    to lower farm prices and the ag crisis of the
    late 70s and 80s
  • Farm policy in the 1980s included broader
    environmental concerns, including soil quality,
    water quality, air quality, biodiversity and
    wildlife. The environmental lobby became active
    in farm policy, recognizing that it was easier to
    achieve environmental goals using agricultural
    rather than environmental legislation. The 1985
    Farm Bill contained the Sodbuster, Swampbuster,
    Conservation Compliance, and the Conservation
    Reserve Program (CRP).

Farm bills in the 80s
  • By 1985 the environmental effects of fence row
    to fence row philosophy were apparent. Commodity
    policies contradicted the goals of conservation
    programs. The 1985 Farm Bill initiated
    conservation compliance requirements, requiring
    farmers to meet a minimum standard of
    environmental protection on environmentally
    sensitive land (primarily highly eroded land or
    wetlands) as a condition of eligibility for
    federal farm program payments. It was difficult
    to establish the level of acceptable soil loss.
  • A more flexible approach required owners of
    highly erodible lands to develop and implement a
    farm conservation plan by 1995, or face
    significant financial penalties. Between 1992 and
    1997, conservation compliance, and the adoption
    of other conservation measures (e.g. no-till and
    conservation tillage) helped to reduce soil
    erosion by up to 295 million tons per year
  • Enforcement of conservation compliance provisions
    lead to political disputes. USDA employees were
    called soil cops, and enforcement was spotty
    and varied significantly between counties. That
    lesson cast a cloud on the conservation
    compliance provisions, and although the
    legislation still exists, it is rarely enforced

Conservation reserve program (CRP)
  • CRP was established in the 1985 Farm Bill and
    reauthorized in the 1990, 1996 and 2002 Farm
    Bills. Purpose of the program is to convert
    highly erodible cropland or other environmentally
    sensitive acreage to resource-conserving
    vegetative cover also intended to reduce crop
    production. It provides annual rental payments
    for 10 to 15 years to landowners through the
    Commodity Credit Corporation (CCC) based on the
    agriculture rental value of the land (as
    determined through competitive bids). It also
    provides up to 50 percent cost share for approved
    conservation practices.
  • 36 million acres currently in the conservation
    reserve. It helps to conserve soil and protect
    wildlife, and is supported by farmers and
    wildlife groups. It is associated with a 25
    percent reduction in soil erosion.
  • It is important in protecting the water quality
    of the Upper Mississippi River Basin and the Gulf
    of Mexico. The five Mississippi River basin
    states (Illinois, Iowa, Minnesota, Missouri and
    Wisconsin) currently have a total CRP enrollment
    of 7 million acres, or approximately 19 percent
    of the national CRP acreage. Many acres will
    expire in 2007

CRP, continued
  • CRP has generated approx 500 million per year in
    conservation enhancements (freshwater recreation
    and wildlife hunting and viewing). Enrollment of
    36 million acres has reduced soil erosion by more
    than 44 million tons per year, protected and
    improved soil quality and productivity, produced
    benefits to wildlife also reduced surplus
  • The 2002 Farm Bill increased the CRP enrollment
    cap from 36.4 million acres to 39.2 million
    acres some contracts could be extended up to 15
  • CRP contracts on over 28 million acres expire
    between 2007 and 2010. Concern that increased
    grain prices could cause many acres to be
    returned to production. As of March 2007, 4.6
    million of the 27.8 million eligible acres will
    be reenrolled, and in the Corn Belt states, 1.4
    million of the eligible acres will exit the
  • Greater environmental benefits can be achieved
    with the same amount of money the program is
    targeted to specific outcomes e.g., targeting
    toward increasing the amount of carbon in soil
    could improve wildlife habitat and water
    quality. Targeting CRP on erosion gives almost a
    three-fold reduction in soil loss and double the
    nitrate runoff reduction (important for dealing
    with problem of hypoxia in Gulf.

Conservation Security Program (CSP).
  • CSP introduced in 2002 Farm Bill, rewards farmers
    for voluntary conservation practices on their
    working lands, combining production of economic
    products and environmental benefits surface
    water quality, groundwater protection, air
    quality, fish and wildlife habitat, energy
    conservation, soil quality, biodiversity and
    genetic preservation.
  • Farmers receive annual payments as they provide
    public benefits to the nations natural resources
    and environment. Any farmer who incorporates
    conservation practices can participate. Other
    conservation programs are ignore farmers who are
    already practicing good stewardship. All regions
    of the country and all types of agriculture can
    participate in CSP. Payments per farm are also
    capped at a modest amount annually so that large
    farms will not benefit disproportionately, but
    support continues life of the individual five- to
    ten-year conservation plan and contract.

(New sub-topic) Estimated effects of ag
liberalization (ca. 2003)
  • Give a sketch of how economists estimate the
    effects of policy reform.
  • Developed countries account for 80 of
    distortions, (EU 38, US 16, Japan and Korea
    12, Canada 2). Elimination of polices would
    increase price of ag products by 12.
  • USDA/ERS estimated world benefit of removing all
    ag policies is 56 billion per year. (This
    includes static welfare gains and the dynamic
    gains -- 45 -- caused by higher investment due
    to increased income.
  • Food importing countries may have static welfare
    losses but dynamic gains. Claims that poorer
    countries enjoy the greatest dynamic gains)
  • 35 billion accrues to developed countries (11 B
    to EU and 13 B to US). 21 B to developing
    countries ( 2 B to China, 6 B to Latin America,
    1.6 B to Mexico, 5 B to other Asia, 0.8 B to
    South African Countries.

Estimated effects, cont.
  • Greatest gains to poor countries comes about due
    to their removal of their own trade policies.
  • Claims that most of the gains to US come from
    reduction in partners' trade policies. Full
    reform would increase US exports by 19 per year.
  • Compare these estimates to OXfam's Full
    liberalization by industrialized countries
    generates gains of 3 billion each for India,
    China, Brazil, more than 14 billion for Latin
    America, 2 billion for sub-Saharan Africa.
    These estimates exclude dynamic effects.

Features of ag protection
  • High tariffs in developed countries tend to be
    associated with more highly processed commodities
    (tariff dispersion discussed above).
  • Decreasing these tariffs promotes growth of ag
    processing sectors in developing countries.
    Developing countries who have preferential trade
    agreements will lose from trade reform, e.g.
    countries in Caribbean Basin Initiative, which
    import to US at preferential rates, or Lome
    Convention countries that import to EU.
  • However, even these countries might benefit from
    removal of distortions if it encourages

Effect of reform on developing countries (ca.
  • In around half of developing countries, ag
    exports account for more than a third of export
    earnings. Ag trade is important to these
  • (World Bank report quoted by OXFAM says that
    elimination of OECD ag distortions would benefit
    developing countries by 20 billion per year,
    almost the same as USDA report.)
  • Elimination of developed country distortionary ag
    policies increases developing countries value of
    exports by 24 and cause the value of their
    imports to fall by 3 (due to higher world
    prices). (A decrease in value of imports
    following an increase in price implies that
    developing country demand for ag imports is
  • Elimination of developing country distortionary
    ag policies (mostly trade restrictions) cause
    value of their imports to increase by 20 and
    value to increase by 8.
  • Elimination of developing country distortions
    causes the value of their exports to increase by
    5.5 (volume to increase by 4). This increase
    is partly due to demand effect (to the extent
    that developing countries export to other
    developing countries) and partly due to supply
    effect (to the extent that developing countries
    implicitly or explicitly tax their exports, e.g.
    via state traders.)

Other estimates of the effect of farm policies
  • Oxfam (ca 2003) provides other reports of the
    welfare costs of current policies. It claims
    that EU CAP depresses terms of trade for
    Argentina and Uruguay 7-8 and costs Argentina 2
    billion per year.
  • US corn farmers receive 20,000 govt support per
    year (not clear how this is measured), while
    Filipino farmers earn 365 per year.
  • Oxfam claims that Filipino liberalization of
    (trade) corn market caused US import prices in
    Philippines to fall by 30 in one year. (Not
    clear what the market effect of this was, since
    we aren't told size of imports.)
  • Poor farmers obtain a large fraction of their
    income from corn sales, so any decrease in price
    harms them a lot. Remember that although
    importers have a net gain from a reduction in
    import price, competing producers in import
    countries lose. An example EU milk subsidies
    that increase EU exports to Jamaica displace
    Jamaican milk.

Another version of corn in Philippines
  • Another paper (by Cristina David) disputes
    Oxfam's claims re corn in Philippines. Her data
    shows that nominal protection rates increased
    from 25 in late 1970's to 90 by late 90s. This
    tariff is an implicit tax on hog production, a
    commodity for which the Philippines is thought to
    have a comparative advantage. Overvalued
    exchange rate also is implicit tax on exports.
    Claims that "dirty tariffication" limited the
    impact of URAA.
  • (Interesting monopoly power story She also
    mentions the Philippines attempt to behave as
    monopolist vis a vis Japan in bananas. Existing
    banana growers were allowed to limit the area
    planted to bananas, for export. The banana
    cartel limited productivity growth, and
    Philippines share of banana market declined.)

Policy status in OECD countries (based on OECD
2003 pub Ag Policies, Monitoring and Evaluation)
  • What has actually happened to levels of ag
    support since URAA?
  • OECD is Organization Economic Cooperation and
    Development. Mostly rich countries, but
    includes some middle income countries, e.g.
  • Support levels unchanged in recent years but down
    over long term.
  • Circa 2003 average OECD PSE was about 31, down
    from 38 in 1986-88. (In contrast, the absolute
    as opposed to the percentage level of support has
    increased, according to Oxfam.)

Levels of support
  • Support to OECD farmers in 2000-02 was 235
    billion per year. (Total support to ag was 318
    B -- 75 went to producers and 15 to general
    services, such as research, education, inspection
    and control).
  • Compare to per capita income of low-middle
    countries (2,000) and low income (410).
  • Total support for OECD ag 1.2 of GDP, down
    from 2.3 in mid 80's. US farmers receive an
    average of 21,000 in subsidies (16,000 for EU
  • These average figures are misleading, because the
    distribution is extremely skewed. There are
    legal limits on the amount of subsidies that a
    farmer can receive, but these limits appear to be
    easy to avoid, by having many family members own
    portions of the corporate farm.
  • Rich country support goes disproportionately to
    rich farmers. In EU, 17 of farmers receive 50
    of support in US, top 20 of farms receive 84
    of support (OXfam pg 114) Across all crops,
    richest 10 of farmers receive two thirds of
    total govt payments to agriculture. For cotton,
    richest 10 receive 73 of total payments

Other kinds of impediments to ag trade (apart
from explicit trade restrictions and producer
  • Non-tariff barriers sanitary and phytosanitary
  • Consumer boycotts. PETA boycott of Indian leather
    reduces Indian shoe exports.
  • EU standards to protect consumers from aflatoxin
    reduces African exports by 670 million per year,
    with negligible (?) health benefits.
  • EU blocks Indian bed linen.
  • U.S. catfish producers persuade Congress to
    redefine "catfish" excluding Vietnamese species.
  • Requirement of dolphin safe labeling for US

Agriculture and environment in OECD countries
  • Ag accounts for 40 of land use and 45 of water
  • Most policies have promoted intensification of
    agriculture, exacerbating environmental problems.
  • Some improvement since early 90s, lowering demand
    for chemical and mechanical inputs and grazing
    for livestock.
  • Soil erosion and water pollution remain major
    problems, costs many billions per year.
  • Since mid 80's, environmentally-related payments
    to farmers have increased from 1 to 3 of total
    OECD support to producers. (EU expenditures on
    ag-environmental payments -- excluding member
    state contributions -- comprise 5 of CAP budget
    8 of US ag budget.

Ag and environment, continued
  • Support to producers increasingly tied to
    environmental cross compliance. Types of
    programs payments to adopt and support
    low-intensity farming, including organic land
    retirement payments to farmers to meet
    transitional costs of complying with new env
    regulations promoting the planting of
    "shelterbelts" for sequestration of greenhouse
    gasses and production of bioenergy.
  • Payments made to farmers on basis of farmland
    covered, not environmental results objective is
    to cover farmers' costs of complying with
  • Programs not well targeted, leading to mixed
    results. (In US, since 1990, enrollment in
    Conservation Reserve Programme (CRP) have been
    targeted using Environmental Benefits Index,
    which related environmental benefits to costs.)
  • Some times the programs are undercut by other
    programs that worsen environmental problems.
    Some programs subsidize "basic environmental
    maintenance" activities, contrary to Polluter
    Pays Principle.

Ag and environment, continued
  • Environmental charges and taxes rarely used,
    because most ag pollution is non-point. (Explain
    distinction between point and non-point source
  • Taxes on inputs, e.g. pesticides, used in Belgium
    and Scandinavian countries. These may not be
    efficient, unless there is a direct relation
    between input and environmental problem. (Explain
    Principle of Targeting).
  • Examples of other market measures Netherlands
    has a system of tradable permits for manure
    produced by farms. Wetland mitigation banks
    tradable water rights in US.

Types of environmentally-related regulations
  • Regulations on use of pesticides, regulation of
    farm practices such as spreading manure, stocking
    rates, construction of livestock facilities.
  • How important are these costs to location
    decisions? OECD study of pig sector concludes
    that difference in compliance costs associated
    with the use of manure has small effect on
    international competitiveness of pig farms,
    relative to traditional factor such as producer
    support, wages, land rents and capital costs.
  • Receipt of support in some cases requires certain
    type of environmentally friendly behavior. In
    US, 44 million hectares of highly erodable
    cropland and 31 million hectares of wetlands are
    subject to cross-compliance restrictions.
  • The effectiveness of these programs may be
    undermined when they coexist with
    production-linked support that cause the
    environmental problems.

Case study, Mexican corn
  • Corn and Mexico is an interesting case study
    because US ag policies and NAFTA combine to
    affect corn production, producer welfare, and
    biodiversity in Mexico.
  • Mexican corn has tremendous genetic diversity.
    60 of Mexican farmers use locally adapted
    varieties these cover 80 of area under
  • When NAFTA was introduced, corn accounted for 60
    of Mexican land under cultivation, made up 2/3
    the value of Mexican ag output. Horticulture
    accounted for less than 6 of value.
  • Ag accounted for 7 of Mexican GDP in 1998 (down
    from 15 in 1960), employed 22 of labor force.
    This difference indicates lack of productivity in
  • Mexican govt wanted to use NAFTA to encourage
    reallocation of labor out of ag, and within ag to
    more productive crops (sugarcane, coffee,
    horticulture), and also relieve fiscal pressure
    by decreasing need to subsidize food and ag
  • Mexico thought that NAFTA would also relieve
    pressure to farm marginal land, improving
    environment. There are typically costs of
    adjustment. The plan was to offer adjustment

Current situation
  • Corn in Mexico accounts for 60 of cultivated
    land, employs 3 million farmers (8 of Mexicos
    population and 40 of people working in
    agriculture) and is the countrys main staple
    food crop.
  • There are a total of 18 million people dependent
    on corn production, including farmers and their
  • Seventy-two percent of national corn-producing
    units are organized into ejidos mostly
    small-scale holdings that account for 62 of corn
    production. Corn production accounts for more
    than two thirds of the gross value of Mexicos
    agricultural production,while horticultural crops
    account for only 6.

Land supply in Mexico
  • Mexicos climate ranges from desert wasteland
    conditions in the North to tropical conditions in
    the Southeast, so has possibility of diversified
  • Mostly mountainous and much of it is arid only
    11.8 of land area is arable.
  • The scarcity of high-quality land creates
    disputes. The issue of land and land rights
    important for understanding Mexican history and
    still generates conflicts today.
  • 6.6 million ag workers in Mexico do not own land.

Mexicos decision to not use the adjustment period
  • NAFTA allowed Mexico a 15 year adjustment period
    on corn trade, giving its farmers more time to
    adjust. During the first year of NAFTA, Mexicos
    tariff-free import quota was set at 2.5 million
    metric tons of corn. This quota was to expand 3
    a year , reaching a tariff-free import quota of
    3.6 million metric tons of corn.
  • Since beginning of NAFTA, annual corn imports
    into Mexico have exceeded the allotted
    tariff-free quota. Mexico did not collect
    revenues from these above-quota imports. Instead
    of phasing out corn tariffs in 15 years as
    planned, the tariffs were phased out in 30
    months, during which time corn prices fell 48.
    (Imports of US corn rose by a factor of 15.)
    Mexico essentially removed trade restrictions,
    eliminating tariff revenues. This loss, together
    with more restrained fiscal policy, reduced
    govt's ability to support ag sector, leading to
    lack of adjustment assistance.
  • This accelerated process took place along with
    decreases in government support for farmers,
    further compounding the adverse effects on corn
    farmers. The decision to truncate the adjustment
    period benefited large companies importing corn
    as animal feed.

Mexicos rapid adjustment
  • Lost revenue from Mexicos decision not to
    implement the tariff rate quotas (TRQ) for corn
    exceeded 2 billion. Reasons for the decision to
    speed adjustment include disorganized control
    mechanisms at the border and perceived need to
    lower prices and reduce inflationary pressures.
    Government wanted to obtain cheap corn for
    processors (illustrating balance of power between
    corn processors and producers). Until recently,
    producers were not even represented on the
    committee to set import quantity.
  • Mexican corn production remained at high levels,
    area of corn cultivation expanded, so
    productivity fell expansion on to marginal land
    increased environmental damage. (Increased fruit
    and horticulture production has not absorbed
    amount of land or labor that govt anticipated --
    more efficient use of inputs have led to
    productivity increases, lowering amount of labor
    per unit of output.)
  • Figure next page shows that had adjustment been
    gradual, and tariff revenues used to compensate
    Mexican corn farmers, the effect of NAFTA on the
    farmers would have been minimal. (But part of
    the point of NAFTA was to induce the corn sector
    to shrink.)

Effect on producers of reducing domestic price
from a to pw, rather than from a to b, as
permitted by NAFTA
Additional lost producer surplus
Lost tariff revenue
Consumers were expected to gain from cheaper corn
  • Tortilla price did not fall because at end of
    1998 Mexico ended price controls on tortilla and
    stopped subsidizing tortilla mills.
  • Tortilla producers (maybe) are local monopolists
    in Mexico, and they did not pass on cost
    reductions -- lower corn prices-- to consumers
    see next slide.
  • Price controls can increase economic efficiency
    if good is provided by a monopoly.

Competitive firms and monopolist respond
differently to fall in costs
  • Graph in next slide shows linear demand and
    constant costs, which fall from c to c 1. With
    competitive firms, price falls from c to c-1,
    i.e. all of the fall in price is passed on to
  • With monopoly, price is set where marginal
    revenue (MR) marginal costs (constant in this
  • In this example, demand slope a, so MR slope
    2a. Using formula slope rise/run, show that
    price falls by ½. The monopoly passes on only
    half of the fall in costs.
  • The same qualitative result holds under
    increasing marginal costs and most demand
    functions (linearity is not needed).

  • price

Costs c
New costs c -1
Inverse demand (slope a)
Marginal Revenue (Slope 2a)
Rural poverty in Mexico
  • As of 2001, 81.5 of people in rural areas were
    living in poverty. For the economically active
    population in agriculture the incidence of
    poverty increased from 54 in 1989 to 64 in
  • Since 1992, the proportion of workers employed in
    agriculture has shrunk by 10 rural wages are
    30 lower than other sectors of the economy, such
    as construction.
  • Rural population obtains 44 of household income
    from non-farm wages 80 of families living in
    rural areas have at least one family member
    living outside of the community. (Are these
    figures an indication of vulnerability or of
    farmers successful diversification
  • Slight increase in the average per capita GDP
    during NAFTA period, together with increase in
    rural poverty in Mexico. Average annual growth
    rates in the agricultural sector averaged 1.7 in
    the 1990s, 0.6 in 2000 and 1.9 in 2001.
  • Ag becoming less important in national economy
    down 4 points since 1980, currently 4.4 of the

Inequality in Mexico
FDI and trade
  • Foreign direct investment (FDI) rose during the
    NAFTA period but only 0.3 went into
    agricultural production. FDI in the food
    processing industry increased from 2.3 to 5
    billion from 1993 to 1997.
  • The Mexican government predicted that farmers
    would reallocate production to horticultural
    crops and that that market would grow to absorb
    new producers. But Mexico already accounts for
    60 of total horticultural imports to the U.S.
    and Mexicos additional share in that market is
    constrained by competition with other countries
    and U.S. producers.
  • Rural areas with high unemployment not suited to
    horticulture because of soil, climate, and
    topography. Currently fruit and vegetable
    production accounts for only 15 of total
    agricultural production, employs just 18 of the
    agricultural labor force, and makes up just 8.6
    of cultivated land.

Recent increases in corn price
  • Emerging market for biofuels has led to higher
    grain prices, including higher prices in Mexico.
  • If the price decreases in corn following NAFTA
    was a bad thing, then shouldnt the recent
    price increases be a good thing?
  • (Some) critics of liberal trade object to both
    the fall in corn prices and the recent rise in
    those prices.

Case study cotton
  • Cotton provides an example of the harmful effects
    of government intervention, and it illustrates
    the potential role of the WTO in helping poor
    countries obtain fairer treatment.
  • Cotton has very high subsidies in the United
    States, even relative to other subsidized crops.
  • United States has a big market share and a major
    influence on world markets. LDC farmers are
    significant exporters of cotton and have suffered
    from price suppression caused by subsidies.
  • Elimination of US cotton subsidies would lead to
    price increase of about 26. US cotton producers
    received subsidies of 3.9 billion in 2001/02
    (about 230/acre, about equal to the average
    yearly income of a Burkina Faso farmer). Amount
    of US cotton subsidies exceed entire GDP of
    Burkina Faso, where 2 million people depend on
    cotton production, and over half live below
    poverty level. Amount of subsidies more than 3
    times entire USAID budget for entire African

Factors affecting cotton market
  • Cotton market affected the weather and other
    factors that fluctuate, and some trends.
  • But subsidies keep US production high and prices
    lower than they would be, especially in years
    when low prices are already expected.
  • Every study finds that cotton subsidies drive
    down world prices. Some studies find very, very
    high effects of subsidies. Others find
    implausibly low subsidy impacts by only looking
    at a subset of subsidies or by looking at years
    when high prices are already expected, or by
    assuming almost all the adjustments happen in
    quantities and not price.
  • Estimates show that US cotton subsidies
    substantially reduce world price.

Cotton background
  • Cotton prices slumped in the mid 90s, to about
    60 of its historical level. There was a modest
    price increase in the early 2000's.
  • There are 11 countries in Africa where cotton
    accounts for more than 25 of export earnings.
    Increased cotton production is associated with
    increased income of the very poor.
  • The World Bank has used loan conditionality in
    Africa to encourage cotton market liberalization
    in Africa. Meanwhile the US does not remove
    government involvement in cotton markets.
  • USDA estimates that average cost of producing
    cotton in US is 0.73 per pound. Long term
    average price of cotton is 0.72 per pound, but
    during the late 90s it fell to around .42 per
    pound. A third of US producers produce at a
    price greater than 0.73 per pound. By
    comparison, production costs in Burkina Faso are
    about 0.21 per pound.

US Farm Subsidies Costly and Complex
  • Value of US subsidies varies inversely with price
    For cotton the subsidies often roughly equal to
    the market value of the crop (2 to 4 billion)
    mostly tax financed. Different types of
  • Marketing loan payments on all production
  • Direct payments on historical (updated) base
    with some planting restrictions. (Explain
    importance of updating it undercuts the
    decoupling of policies.)
  • Counter-cyclical paymentstied to price and paid
    on historical (updated base) with restrictions
  • Crop insurance subsidies
  • Export credit guarantees for buyers of US cotton
  • (See Dan Sumners slides and papers for more info
    on cotton. Discuss his role in US Brazil cotton

Government Cotton Payments under the 2002 Farm
Government cotton payments average about half of
total revenue for cotton farms
Target Price 0.724

Do not have to currently produce cotton to get
these payments
Loan Rate 0.52

Fixed payment 0.0667

Market Price
Paid per unit of production of cotton (Based
on a figure from Joe Outlaw Texas AM)
Market Receipts
Determinants of Policy Effects on World Price
  • Cotton programs provide substantial revenue that
    is linked to production incentives.
  • Subsidy share of revenue (about 50 for cotton in
    many years)
  • Degree of subsidy linkage high for cotton, but
    less for some subsidy types than others
  • Supply response in US to fall in expected per
    acre revenue, large because removing subsidy
    would remove 35 to 40 of revenue (drive revenue
    below variable costs)
  • The Cotton Council is right, many US cotton
    growers need these subsidies to stay in the
    cotton business.

(No Transcript)
Effect of Removing Cotton Subsidy
  • Large US and world market impacts of removing US
    cotton subsidies
  • Effects would vary by year, but US production
    would be 20 lower or more and US exports fall by
  • World price would be higher by about 10
  • This price increase encourages more production
    and exports from LDC producers

WTO involvement
  • US support to cotton producers is double the
    level in 1992. Violation of "peace agreement of
    URAA entitled Brazil to bring WTO dispute against
  • Effect of US subsidies cost African producers
    301 million, 25 of the amount the region
    receives in US aid.
  • African nations could sue the US using the WTO's
    Legal Advising Center (a kind of legal aid), but
    that would risk danger of retaliation from US,
    e.g. withdrawal of aid, debt relief, and trade

Litigation continues to be important
  • It did not take much actual litigation (a couple
    of WTO cases) to get lots of attention
  • Influential players (including chairs of major
    committees and the Secretary of Agriculture) rank
    WTO disputes as a major driver for change in US
    farm subsidies. (However, see earlier quote from
    House Ag Chair lots of lawyers.)
  • Those writing the farm bill want to comply with
    obligations and avoid more cases

WTO Implications of Litigation
  • Affect process of WTO negotiation and
    agreementmore attention to specific wording
  • Some implications of definition of colored boxes
  • Pressure for rules that can be predictably
  • Credibility of WTO in small and developing
    countries increased with successful developing
    country cases (cotton, sugar)
About PowerShow.com