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Farm Bill Cost Still a Concern; Food Prices; CAP; Doha; Crop Progress

Farm Bill

Philip Brasher reported in Friday’s Des Moines Register that, “The new farm bill that got final congressional approval Thursday could result in large subsidies for Iowa’s farmers and wind up costing taxpayers billions of dollars more than lawmakers are estimating, according to a U.S. Agriculture Department analysis.

“Under a new program created by the bill, subsidies for corn alone could reach $10 billion a year nationwide if market prices dropped to $3.25 a bushel, a historically high level. Another $4 billion could be paid to soybean growers at a market price of $7 a bushel.

“This would push the price tag for the farm bill well over the $300 billion mark over the next five years. It was estimated by Congress to cost $289 billion over five years.

“The potential payments ‘are just off the charts here,’ Charles Conner, the deputy agriculture secretary, told The Des Moines Register.”

Mr. Brasher added that, “What makes the program potentially expensive, according to the USDA, is that the state revenue guarantee levels when the program is to set to start in 2009 would be based on market prices for 2007 and 2008, years in which prices for all major commodities have soared. The USDA says the average price paid to farmers for the 2007 corn crop will be a record $4.25, and this year’s crop is expected to be worth even more: $5.50 a bushel.”

“Conner said the USDA has been concerned about the program’s price tag for some time but didn’t know how costly it could be until it could analyze the actual bill’s final language,” the Register article said.

Mr. Brasher also indicated that, “Bruce Babcock, an economist at Iowa State University who helped develop the program, agreed with the USDA’s analysis of the new subsidy program. But he said the new plan was designed to give farmers a better chance of getting a government payment in times when market prices and production costs are well above the levels that would trigger conventional subsidies.

“‘I think that this helped get the farm bill passed,’ Babcock said.

“Farmers were expected to get little in the way of subsidies from existing programs other than $5 billion in fixed payments that goes out every year regardless of how high or low market prices may be.

“Congressional budget analysts estimated that the new program would actually save the government money, but that was because they were required by Congress to use outdated data developed in 2007, Babcock said.

“Kate Cyrul, a spokeswoman for the Senate Agriculture Committee, agreed that the program could be costlier than estimated but said market prices would have to fall significantly from current levels.

“The new program would be called Average Crop Revenue Election, or ACRE. Payments would be triggered when revenue for a commodity falls below a statewide target based on recent trends in prices and crop yields.”

DTN writer Chris Clayton reported yesterday (link requires subscription) that, “A new counter-cyclical program in the farm bill could lead to a windfall of billions of dollars in government payments, USDA officials say, despite commodity prices being too high for producers to collect traditional counter-cyclical or marketing-loan payments.

“As the veto battle over the farm bill continues between the Bush administration and Congress, USDA officials argue that Congress did not fully analyze the potential effects of the optional revenue-assurance program called the Average Crop Revenue Election program, or ACRE.

“Given market conditions, USDA projects as many as 90 percent of corn, wheat and soybean farmers could sign up for the ACRE program next year. If corn prices fall to $3.50 a bushel, soybeans drop to $8.50 a bushel and wheat falls to $5 a bushel, then the ACRE program could pay out as much as $12.5 billion in commodity payments to farmers.

“‘We are gravely concerned about the potential costs here,’ said USDA Deputy Secretary Chuck Conner in a phone interview Monday.”

Mr. Clayton explained that, “The major fear is that ACRE would guarantee revenue based on the average per-bushel price over the 2007 and 2008 crop years. If prices and yields remain strong, there would be little payout under the program, but a major market drop would kick in the program.

“The ACRE income averages are more than double the current counter-cyclical target prices in the farm bill for corn, wheat and soybeans. If someone would have suggested at the beginning of the farm-bill debate that officials would double those target prices, people would have laughed, Conner said.

“‘Under the guise of revenue assurance that’s what we have done here,’ Conner said. ‘For that reason, we are anticipating very high participation in this. In terms of income revenue, this is a dream come true out there. It’s about as risk-free as you can possibly get.’”

Concluding, the DTN article stated that, “Budget projections on the farm bill actually project the program saves money rather than increases spending. The Congressional Budget Office based cost estimates on March 2007 cost estimates. That data allowed Congress to project ACRE will generate a cost savings, largely because producers would reduce their direct payments.

“‘It’s kind of a double whammy from a taxpayer standpoint,’ Conner said. ‘Here, you are creating a program with tens of billions of dollars worth of liability, but you have successfully done it in such a way that you manipulate the numbers to spend money elsewhere as well.’

“USDA’s analysis of the ACRE program is part of the administration’s continued campaign against the farm bill, despite the votes last week in Congress that indicate the bill would garner enough support to override an expected veto from President Bush. Conner said he is the first to admit that a veto override is an uphill battle.

“‘This will be one of those provisions where we will try to make the case that Congress is not fully representing the true costs of this bill,’ Conner said.”

Food Prices

Scott Kilman reported in today’s Wall Street Journal that, “The government raised its one-month-old forecast of how much food prices will rise in 2008 by half a percentage point to a range of 4.5% to 5.5%.

“The forecast released Monday by the Agriculture Department is the third consecutive month the agency has raised its food-inflation forecast by half a percentage point. With the latest increase, the food-inflation forecast is approaching levels not seen in the U.S. since 1990, when food prices climbed 5.8%. Food prices rose 4% last year.”

Mr. Kilman explained that, “The new forecast will play into a political battle over subsidies for the U.S. ethanol industry, which is devouring corn at a record pace to make an alternative fuel to high-priced gasoline.”

The Journal article indicated that, “In recent weeks food-industry officials and antihunger activists have tried to undermine broad support in Congress for the ethanol industry by linking ethanol’s appetite for corn to the rising cost of food here and abroad. Reflecting how ethanol is becoming a hot issue, Agriculture Secretary Ed Schafer held a news conference Monday [transcript and video available here] to minimize the industry’s role in the inflationary tide sweeping through U.S. grocery stores.

“Mr. Schafer blamed rising food costs on, among other things, the soaring price of oil which is raising the food industry’s transportation and packaging costs. He also blamed foreign weather problems and trade protectionism for raising prices of crops such as wheat and rice.

“Mr. Schafer singled out the Grocery Manufacturers Association for running a campaign against ethanol. The Washington trade group of food and beverage companies wants Congress to roll back the requirement that the oil industry use 15 billion gallons of corn-derived ethanol by 2015.”

To listen to comments made at yesterday’s USDA briefing by USDA Chief Economist Joe Glauber, just click here (MP3-19:05). Also, visual PowerPoint slides from yesterday’s USDA briefing are available here.

Similarly, an Associated Press article from Monday reported that, “Trade restrictions, not biofuels, are to blame for soaring world food prices, top U.S. and Brazilian agricultural officials said Monday.

“Export restrictions in India, Vietnam and Argentina – among the world’s top producers of rice, soy and wheat – are reducing world food supply and inflating prices around the globe, said Mark Keenum, Under Secretary for Farm and Foreign Agriculture Services at the U.S. Department of Agriculture.”

The AP article stated that, “Increased production of sugarcane-based ethanol hasn’t reduced Brazilian bean, soy and corn output, as experts predicted, Brazilian International Agribusiness Secretary Celio Porto agreed.”

Nonetheless, Reuters news reported today that, “Texas Republican Sen. Kay Bailey Hutchison introduced legislation on Monday to freeze the federal mandate for corn-based ethanol at this year’s current level of 9 billion gallons.

“Hutchison said her legislation allows for necessary adjustments in the renewable fuel standard to transition to a more realistic and sustainable source which does not use food for fuel.

“‘The ethanol mandate is clearly causing unintended consequences on food prices for American consumers,’ Hutchison said. ‘Freezing the mandate is in the best interests of consumers, who cannot afford the increasing prices at the grocery store due to the mandate diverting corn from food to fuel.’”

Food Prices- EU Farm Policy

James Kanter and Stephen Castle reported yesterday at the International Herald Tribune Online that, “The recent sharp rise in global food prices added a new element Monday to the long-running debate over farm subsidies in the European Union, with some government ministers seeing a new reason to dismantle the multibillion-euro payouts and defenders countering that the system was needed more than ever before.

“At a meeting in Brussels, countries led by France emphasized the need to keep certain subsidies paid directly to farmers in return for producing staples like meat.

“‘The solution to the crisis is not, first of all, through free trade,’ said the French agriculture minister, Michel Barnier, rejecting the position promoted by pro-market countries like Britain and Denmark as a response to rising food prices.”

The IHT article noted that, “But other EU countries, like Britain, argued for allowing markets a greater role in influencing what is grown in Europe, and against back-tracking on cuts agreed upon in years past.

“‘If anyone argued it should return to where it was previously that would be a mistake,’ Hillary Benn, the British agriculture minister, said, referring to the CAP.

“During the meeting, EU ministers discussed channeling more foreign aid to help developing countries improve their agricultural output. Some ministers also underlined the importance of developing fuels from agricultural waste to reduce demand for low-carbon fuels from crops, which also could be used for food.

“But, if anything, the rise in commodity prices has sharpened arguments about European farm policy, setting the stage for a divisive debate over the future of the €100 billion, or $155 billion, EU budget – and over the Common Agricultural Policy in particular, which is worth more than 40 percent of that amount – later this year.”

And John W. Miller reported in today’s Wall Street Journal that, “France, which takes over the EU’s rotating presidency in July, says it wants to return to an older EU system in which subsidies were tied to production. Currently, subsidies are given according to acreage, regardless of how much a farm produces. The change, say the French, would help increase output at a time of rising prices.

“A group of countries led by the United Kingdom, meanwhile, is pushing hard for a plan to shift more subsidies away from farming and to other rural businesses. The U.K. says the current subsidies allow too many inefficient farms to stay in business. A less-distorted market would be more productive, U.K. officials say.

“Ideally, the U.K. and similarly minded countries would like to slash farm aid, which takes up around 40% of the EU’s total budget. But under a French-driven treaty signed in 2003, the EU can’t cut total farm subsidies until 2013. So the countries are trying to change the way the money is spent.

“The 2003 agreement included a review this year, as a concession to the U.K. and other countries unhappy at the 10-year freeze on subsidies. Initially, EU officials thought the review would be academic, but rising food prices have pushed the issue back to the top of government agendas across the EU.”

Doha

Reuters writer Jonathan Lynn reported yesterday that, “Mediators in the core agriculture and industrial goods negotiations at the World Trade Organisation (WTO) issued new proposals on Monday, clearing the way for a meeting of ministers to clinch an outline trade deal.

“The revised proposals, or texts, trigger a process of further negotiation, trade-offs between farming and manufacturing and ultimately a meeting of ministers to take the tough political decisions on the headline cuts in tariffs and subsidies.”

An update posted yesterday at the WTO Online stated that, “Two revised papers including what could become the formulas for cutting tariffs and trade-distorting agricultural subsidies in a final deal were issued on 19 May 2008. They are the outcome of the latest discussions in negotiation groups and will pave the way for talks combining the subjects before they are agreed by all WTO member governments.”

And a separate WTO update from today added that, “Director-General Pascal Lamy said today that the negotiating documents put forward this week on agriculture and industrial goods trade provide a platform for intensified work in the coming weeks.”

Reuters writer Jonathan Wright reported on Monday that, “European Union Trade Commissioner Peter Mandelson said on Monday he saw the makings of a global trade agreement in new proposals drafted to save the World Trade Organisation’s Doha round.”

Meanwhile, a statement issued yesterday by the U.S. Trade Representative’s Office indicated in part that, “We are going to be studying these revised texts in the days ahead. The U.S. is committed to concluding a successful Doha Round this year that achieves new market access for agricultural and industrial products and services in both developed and emerging market economies.”

However a Reuters news article from yesterday reported that, “A new proposal in world trade talks for cutting tariffs on manufactured goods reduces the chance of reaching a deal because it requires too little of major developing countries and too much of the United States, a top U.S. industry official said on Monday.

“‘This text is a serious weakening from the first text. If the Doha Round doesn’t produce the promise of market access and the promise of reasonable balance, there just won’t be support for it,’ said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers.”

Crop Progress- Commodity Prices

Cheri Zagurski and Anthony Greder reported yesterday at DTN that, “U.S. corn producers didn’t quite meet the prior week’s blistering planting pace in the last seven days, but they came close. Corn planting progress as of May 18 was 73 percent, according to USDA’s Weekly Crop Progress report, up 22 percentage points from the week prior. Last week, 51 percent of the crop was reported planted, an increase of 24 percentage points from the week prior.

“Corn planting remains 15 percentage points behind last year’s pace and the five-year average pace. Emergence was reported at 26 percent, 33 percentage points behind last year and 30 percentage points behind the five-year average.”

In commodity price developments, Associated Press writer Stevenson Jacobs reported yesterday that, “Soybean prices plunged Monday as investors bet that Argentina’s government will soon resolve a farmers’ strike over an export tax that has slowed grain shipments…[S]oybeans for July delivery dropped 45 cents to settle at $13.33 a bushel on the Chicago Board of Trade, after earlier falling as low as $13.22 a bushel.”

The article added that, “Other agriculture futures traded mostly higher. Wheat for July delivery shot up 15.5 cents to settle at $7.91 a bushel on the CBOT, while rough rice futures rose 23.5 cents to settle at $20.30 per 100 pounds. July corn futures, meanwhile, fell 4.25 cents to $5.8675 a bushel on the CBOT.

“In energy futures, crude oil closed above $127 for the first time Monday on a report that the Organization of Petroleum Exporting Countries would not increase production before its next meeting Sept. 9.

“Light, sweet crude for June delivery jumped 76 cents to settle at a record $127.05 a barrel on the New York Mercantile Exchange.”

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Yesterday’s “Analysis from Washington” article by Dan Morgan regarding the Farm Bill has been appended with a reader comment.

Ferd Hoefner, the Policy Director at the Sustainable Agriculture Coalition provided additional analysis yesterday with respect to Dan’s article.

To read Ferd’s comments, just click here and scroll to the end.

Keith Good

 Email This Post Posted by Keith Good • May, 20, 2008 • 4:39 am