International Issues with Unexpected Impacts

1
International Issues with Unexpected Impacts

• Suzanne Thornsbury and Lourdes Martinez
• Agricultural Economics
• Michigan State University
• 2006 Spring Horticulture Meeting
• Hart, MI

2
Why You Should Care About International Markets?

• Competition
• Millions of consumers outside the U.S.
• Millions of consumers inside the U.S. (changing
  demographics)
• Market access
• Impacts on U.S. policies

3
Planting Flexibility Restrictions (U.S. Farm Bill)

• Fruit and vegetable planting restriction
• 2002 farm bill permits planting flexibility among
  program crops on base acres
• FV restriction limits planting of most
  non-program crops on base acres
• About 160 crops covered by FV planting
  restriction

4
Planting Flexibility Restrictions (U.S. Farm Bill)

• If you have base acres PLUS a history of FV
  production with FSA
• Plant a restricted FV
• Forego base payments on those acres for that
  cropping season
• If you have base acres but NO FV history
• Plant a restricted FV
• Forego base payments for that cropping season
  plus monetary penalty

5
The Flexibility Issue U.S. Farm Policy and the
WTO

• The Cotton Case
• Brazil challenge (September 27th, 2002)
• US subsidies to cotton farmers from 1999-2000 and
  those authorized in the 2002 Farm Bill,
  contravene WTO rules on Subsidies and
  Countervailing Measures and the Agreement on
  Agriculture
• US responsible for driving down world cotton
  prices, causing harm to Brazilian farmers while
  increasing the US share of the global cotton
  market.
• Oxfam International published "Cultivating
  Poverty The Impact of US Cotton Subsidies on
  Africa (September 30th, 2002)
• Subsidies given to American cotton farmers
  encourage over-production and export dumping
• Artificially low world cotton prices
• Devastate African cotton farmers

Source International Centre for Trade and
Sustainable Development www.ictsd.org Bridges
Weekly Trade News Digest Vol. 8, Number 15, 30.
(2004)
6
The Cotton Case (cont)

• US response
• Subsidies do not encourage over production
  because they were 'decoupled' (independent of the
  yield of farmers).
• The US lost on this crucial point.
• "Cotton Initiative" (June, 2003)
• Benin and Chad, third parties to the case, had,
  along with other African countries (Burkina Faso,
  Côte d'Ivoire, Guinea-Bissau, Mali, Niger,
  Senegal and Togo), called for the end to cotton
  subsidies
• WTO ruled in favor of Brazil on all major claims
  (September, 2004)
• The panel found that 'Product Flexibility
  Contract' (PFC) and 'Direct Payments' (DP)
  amounted to trade distorting domestic support
• According to US, no immediate changes would occur
  in terms of cotton subsidies due to the ruling

7
The Flexibility Issue U.S. Farm Policy and the
Domestic Issue

• Farmers in the Midwest who traditionally have
  rotated soybeans with vegetable crops grown under
  contract for processing
• Many producers found that program rules severely
  restricted the amount of acreage on which they
  could continue that rotation.
• Owners of rental farmland much less willing to
  rent to farmers wanting to grow vegetables
• Fear of losing base acreage on which their
  payments are based.

Source Rawson, Jean M. Specialty Crop Issues in
the 109th Congress Congressional Research
Service-The Library of Congress. August 19, 2005
8
The Flexibility Issue U.S. Farm Policy and the
Domestic Issue

• FV markets with tight margins, limited demands
  (differentiated products)
• High investments

9
What Does the Debate Look Like?

• What is likely FV supply response from program
  crop producers if given greater flexibility?
• What is the likely impact of that supply response
  on FV prices?
• What is equitable compensation for FV producers
  whose income is affected by that price change?

10
Potential for Market Impacts

• Why Michigan?

One of the most diverse states in agricultural
production over 200 commodities produced on a
commercial basis (MDA)
Harvested cropland by North American Industry
Classification, 2002

• Cash receipts for agricultural products average
  3.7 billion annually
• Program crops (corn, soybeans, and wheat) 860
  million per year (23)
• Major non-program crops (dry beans, fruits and
  vegetables) 581 million per year (16).

11
Potential for Market Impacts MI

• Dry Pickling Fresh
• Bean Cuke Tomato
• Equipment L H M
• Irrigation L H H
• Contracting/
• relationships L H H
• Labor L L H
• Payments/revenue M L L
• Potential supply
• response M/H L L
• Major market change unlikely if supply response
  low

12
Potential for Market Impacts TX

• Texas AM study (Fumasi et al., 2006) compared
  rankings of net revenue per acre for 10 crops (3
  program crops) before and after removal of FV
  planting restriction
• Rankings unchanged for most crops
• Ranking of cabbage rose on corn, grain sorghum
  base acreage
• Ranking of watermelons rose on cotton base
  acreage
• Study assumes that no other constraints exist
  that keep producers from growing a particular
  crop.
• If other constraints exist, supply response lower

13
The Real Issue that Remains

• Compensation
• Understanding the policy options and consequences
• Inclusion of payments to fruit and vegetable
  producers in program payments
• All crops shift to revenue insurance/ revenue
  assurance programs
• All crops shift to working lands programs
• Other program compensation research, export
  market assistance, invasive pest assistance, etc.

14
Options and Consequences

• Program crop acreage in 2002 (million)
• Feed grains 112 Wheat 78
• Soybeans 55 Cotton 14
• Rice 4 TOTAL 263
• Non-program crop acreage in 2002 (million)
• Fruits/nuts 4
• Vegetables 6
• TOTAL 10
• To include fruit and vegetable producers
• Decrease program crop payments 3.6
• Increase total program budget 3.8

Source D. Schweikhardt, Ag Econ, MSU
15
Options and Consequences

• Understanding the range of compensation options
• Supply response highly variable across all FV
  crops, including some very near zero.
• Precise estimates of supply response very
  difficult to measure across full range of FV
  crops. There are no FV producers.
• Inclusion of FV in all crops policies (working
  lands or revenue insurance options) may negate
  other compensation

16
Conclusions

• Planting restrictions almost certain to be lifted
  under the next farm bill
• Impacts on FV markets variable depending on
  other non-market factors
• Compensation yet to be determined
• Global markets impact your operation in
  unexpected ways (i.e, they cannot be ignored)