Global Trends by Martin Khor

Monday 19 May 2008

New US farm bill will anger the world

The United States Congress has just passed a new farm bill that continues the system of high subsidies even when food prices and farm profits are at record highs.  It will incense the rest of the world.

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Last week, both Houses in the United States Congress passed a Farm Bill that continues the present system of high agricultural subsidies, rewarding big farmers that have already gotten much richer because of the recent hike in food prices.

This is a real pity, even a scandal, because the US farm subsidies are the main cause (together with the subsidies in Europe and Japan) of the greatest distortion in world trade. 

The subsidies enable high-cost farmers and food companies to sell their products at below the cost of production and unfairly beat off the products of farmers in developing countries that don’t have the same kind of money to subsidise.

Many developing countries around the world have been importing artificially cheapened imported rice, wheat, corn, and chicken from the US and Europe.

Their own small farmers, which are often more efficient than those in the rich countries, have been displaced by these subsidized imports – one reason why agriculture has fallen in many developing countries, making them vulnerable to the present crisis of food shortages and high prices.

The expiry of its present Farm Bill was thus an opportunity for the US to cut its subsidies.  With prices at record highs and farm revenues soaring, a cut in subsidies would have been even more justified, and easier to enact as the farmers are in a position to absorb cuts in such good times.

Alas, the farm lobbies are so powerful that the members of Congress would rather preserve the status quo and keep the welfare system going rather than displease the farm interests especially in an election year.

And so we have the 2008 US Farm Bill, passed by the Senate and the House of Representatives by more than a two-thirds majority, enough to over-ride a veto that President George Bush has threatened to exercise.

Because it facilitates the continuation and in some ways the worsening of the high subsidies, the bill will send the wrong signals to the trading partners of the US and further sour the mood at the World Trade Organisation whose members are already facing an uphill battle to finish the Doha negotiations.

So far, the strongest critics of the bill have been Bush himself and his senior agriculture officials.  They said the bill will incense the US’ trade partners who will step up their criticisms of the US at the WTO.

Bush said that the bill contradicts the US attempts at the WTO talks, that it has at least $10 billion in hidden spending, subsidizes millionaire farmers and contradicts the reforms the United States seeks in world trade talks.

The Deputy Agriculture Secretary Chuck Connor said: “It’s no secret our current farm programs under the current law have come under enormous fire.  How does this bill respond?  This bill responds by increasing trade-distorting supports on 17 out of the 25 of the commodities that we provide.”

He added that the US’ trade partners “are going to get incensed and we would expect them to protest in every way they can.”

US agriculture officials said that the measures that could bring problems for the US at the WTO include rules benefiting US sugar producers, a $4 billion standby disaster fund and a new cotton incentive similar to the one that the WTO panel has ruled illegal.

Lori Wallach, director of Public Citizen’s Global Trade Watch, said the farm bill contradicts the US Doha Round agriculture positions, and Doha proposals that conflict with the bill will face significant built-in opposition from those who just voted for the bill.

“The emperor not only has no clothes (no authority, Fast Track or otherwise) but has just been shown embarrassingly to be making proposals at WTO it knows would not be passable in Congress.”

The Farm Bill is estimated to cost $289 billion over a five-year period. Of this, about $200 billion goes to domestic food aid. Commodity-based subsidies for rice, cotton, corn, soybeans, wheat and other crops will take up $43 billion. Crop insurance will be about $23 billion, and conservation programmes will have $27 billion.

Critics are having a field day pointing out the bill’s many faults.  Firstly, the Bill fails to set realistic limits to which farmers can receive subsidies. Bush had proposed limiting farm subsidies to those earning less than $200,000 a year.  However, under the farm bill, even millionaires can receive the hand-outs. 

For direct payments, those with individual farm income up to $750,000 or $1.5 million income for married farmers are eligible for subsidies.  Those with non-farm incomes up to $500,000 (or $1 million for married farmers) can also get the subsidies. A Congress member said this means a family with income up to $2.5 million could still receive subsidies.

Secondly, the handsome payouts are coming at a time when farmers and food companies are already getting massive income increases due to rising prices.  Net farm income will rise to $92.3 billion this year, 56% above 2006.   The bill misses the opportunity of reducing subsidy levels at a time when high prices and incomes enables it to do so without pain.   

Third, the bill increases the subsidy rates for over a dozen crops, and also introduces four new crops to the subsidies.  For example, prices have shot up for the five most subsidized crops, but the 2008 farm bill is maintaining or increasing subsidies for most of them, according to some reports.

For example, the rice price has shot up from $3.88 per cwt during the 2002 farm bill debate to $14.80 during the 2008 farm bill debate (or by 281%), but there are no significant cuts in the subsidy level in the 2008 farm bill.

The average wheat price rose 256% in the same period (from $2.84 to $10.10 per bushel) but the 2008 bill increases the subsidy rate.  The price of soybean rose 164% (from 4.47 to $11.80 per bushel) but there is an increase in subsidy rates.

Fourth, the bill continues direct payments to farms irrespective of the price of the crops.

Annual direct payments are to total more than $5 billion, with allocations of $2 billion to corn farms, $1 billion to wheat farms and $2 billion to farms of other crops.

These payments are not based on farm incomes, crop prices or such criteria and farmers are not required to grow the listed crop; to get the subsidy, they only have to have grown it in the past.  

Fifth, there will be an especially “sweet deal” for sugar.  The bill will increase price supports, and give a guarantee of 85% of the domestic sugar market at these guaranteed prices.  Surplus sugar is to be bought at 23 cents a pound by government and sold to ethanol producers at around 3 cents a pound.

With the new farm bill having such features, it is going to be difficult, to say the least, for US negotiators to persuade other WTO members to make sacrifices or concessions so that the US President or Congress will find it worthwhile to sign on to a Doha deal.