Illinois AgriNews - June 2007
 
Whither Direct Payments?
Robert L. Thompson
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign
As Congress starts writing the 2007 Farm Bill, its biggest headache is the budget constraint. To get federal spending under control, Congress has adopted a pay-as-you-go policy. To spend more on some program, it has to reduce expenditures on something else.
Congress will hold spending on every federal program to no more than it would cost if it were extended, unchanged into the future. The Congressional Budget Office projected federal government spending if all existing U.S. laws, including the 2002 Farm Bill, were extended unchanged for 10 more years.
Because of the ethanol boom, prices of grains and oilseeds are projected to stay above the levels that would trigger loan deficiency payments (LDPs) or counter-cyclical payments (CCPs). If the 2002 Farm Bill was extended for five years, there would be no LDPs or CCPs paid and the cost of commodity programs would drop by half. As a result, the dollars available for commodity program budgets have dropped by half.
The one commodity program whose cost did not change in the budget projections is direct payments. As a result, direct payments are the only pot of money that might be tapped for other purposes in this tight budget environment.
Some interests want to keep the LDP and CCP structure in the next farm bill, but with higher target prices and/or loan rates. To pay for the higher cost, they would reduce or eliminate direct payments. However, this would be contrary to the efforts of the U.S. in the World Trade Organization (WTO) to reduce the distortions in international ag trade caused by domestic supports.
The domestic commodity programs that cause the greatest distortions in world trade are those linked to production of specific commodities. The United States , where 93% of all payments go to only five commodities, is one of the countries with the greatest concentration of farm program benefits on a few commodities.
The objective of the WTO trade negotiations is not to reduce the support given to agriculture, but to reduce the share of support that is linked to production of specific commodities. The U.S. moved in this direction when it created direct payments on fixed historical bases. The European Union (EU) has reduced price supports and moved support to fixed payments per acre with an aggressive conservation cross-compliance requirement.
If the 2007 Farm Bill shifts support from decoupled direct payments to measures that are linked to the production of specific commodities, this will be seen as a huge step backwards and will undermine the credibility of the American negotiators in the WTO trade negotiations.
There are ways other than direct payments to distribute support to farmers without linking it to production of specific commodities. Some interests advocate conservation payments. Others suggest replacing LDPs, CCPs, marketing loans, disaster payments and the subsidy to crop insurance with subsidized whole farm revenue insurance. Still others suggest increasing support for research or rural development.
Whatever direction the Farm Bill takes, to avoid WTO problems, support now provided through direct payments should not become linked to the production of any specific commodity. If all countries were to decouple support from production of specific commodities, world agricultural trade would be much less distorted. |
