This Selected Issues paper analyzes the condition of household, corporate, and bank balance sheets; sustainability of the U.S. external current account deficit; the impact of a slowdown in the growth on the euro area economy; and the implications of the reduction in U.S. treasury securities for monetary policy and financial markets. The study discusses the pros and cons of investing government assets in private securities; the recent changes in agricultural support policy and their impact on other countries; technological innovations and the adoption of new technologies.

Abstract

This Selected Issues paper analyzes the condition of household, corporate, and bank balance sheets; sustainability of the U.S. external current account deficit; the impact of a slowdown in the growth on the euro area economy; and the implications of the reduction in U.S. treasury securities for monetary policy and financial markets. The study discusses the pros and cons of investing government assets in private securities; the recent changes in agricultural support policy and their impact on other countries; technological innovations and the adoption of new technologies.

VI. Recent Changes in U.S. Agricultural Support Policy and Their Impact on Other Countries1

1. Although the agricultural sector (including forestry and fishing) accounted for only 1.3 percent of U.S. GDP in 1999, U.S. agricultural exports account for a significant share of global agricultural trade. As a result, changes in U.S. agricultural policy can have important effects on other countries. In recent years, the United States has enacted major legislation to reform government support—most notably the Federal Agricultural Improvement and Reform (FAIR) Act of 1996. The aim of the FAIR Act was to increase the efficiency and transparency of government support for major crops by shifting away from price supports, which distorted supplies and prices, toward a transitional program of income support However the FAIR reforms have not been implemented as originally intended; bumper crops and falling world prices have led to the provision of substantial “emergency” government assistance to grain and seed farmers over the past four fiscal years. The large and prolonged nature of this assistance, along with the unfinished reform agenda from the 1996 FAIR Act, has raised concerns in other major grain-producing countries that U.S. policies have contributed to global overproduction and artificially depressed prices for selected crops.

A. The Federal Agricultural Improvement and Reform Act of 1996

2. Prior to 1996 and dating back to the 1930s, U.S. agricultural policy centered on providing assistance for agricultural producers through price supports or quota arrangements. The 1996 FAIR Act was designed to break the link between support payments and market activities of major field crop producers (wheat, corn, rice, cotton, and oilseeds). These rules represent a dramatic move to decouple farm support from production, reducing distortions. To provide greater responsiveness to market signals, the FAIR Act replaced price supports on these crops with seven-year Production Flexibility Contracts (PFCs). The PFC set a reimbursement schedule based on the amount of eligible crops planted in previous years (1991 to 1995). Overall reimbursements were fixed and scheduled to decline over time Total expenditures on PFCs were set at $5.6 billion in 1996, rising to $6 billion in 1997, and then declining to $4 billion in 2002.

3. To allow for greater production flexibility, the FAIR Act eliminated most crop planting restrictions on farmers with PFCs (the “Freedom to Farm” provision), with the only restriction being that producers could substitute between the major field crops but not into alternative crops (such as fruits or vegetables). The FAIR Act also restructured the export promotion programs to cap annual expenditures and focused crop reduction programs on conservation.2 In addition, the FAIR Act reduced—but did not eliminate—some of the distortions in the sugar, peanut, and dairy programs. Government-set peanut quotas are now meant to impose “no net cost” to U.S. tax payers, and the peanut quota is supposed to reflect food use demand (as opposed to a minimum level for price support). In addition, the FAIR Act had declining dairy price supports aimed at ending the government purchase programs.3

4. However, the FAIR Act also allowed wheat, feed grains, and oilseeds to qualify for a version of the commodity loan program similar to one that had previously been used to support prices. This crop-loan program provides short-term (nine to ten months) financing at the beginning of the planting season for major field crops, with future production used as collateral.4 The producer repays the loan at maturity (harvest time), using a crop-specific “loan rate” (or target price).5 If the market price is less than the loan rate, the producer can default on the loan with almost no cost, and the government takes title to the crop. Previously, when the government was the “buyer of last resort” and willing to store the crop, the loan rate set a price floor. Under the new version of the commodity loan program, however, the government immediately sells any collateral it receives when a producer defaults on a loan, depressing the market price.

5. When crop prices fall beneath the loan rate, the new loan program offers a significant benefit. If the producer chooses to forgo the loan program at the beginning of the planting season, the producer can receive a “loan deficiency payment” as a subsidy. When the 1996 FAIR Act was under consideration, crop prices were forecast to remain at high levels, and the FAIR Act set loan rates based on these levels (Table 1). However, prices declined dramatically beneath the loan rates.

Table 1.

United States: Prices and Subsidies for Selected Crops

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Sources: ERS (2001), pp. 32, 43 and McCaw (1996), Table III.

Price forecasts are from the February 1997 USD A Agricultural Baseline (forecasts through 2005).

Note: Prices in dollars/bushel (rice: dollars/cwt). Subsidies are an average of subsidized and unsubsidized crops. The 2001 subsidy forecast assumes the subsidy increases in proportion to price declines.

6. In the face of declining prices for major crops since 1997 and strong pressures for “temporary” measures to aid farmers, the U.S. Congress passed four emergency appropriations bills in FY 1998-2001, totaling $23.1 billion (Table 2). Approximately two-thirds of this aid came in the form of “supplements” to the PFCs. In 1998, producers received an additional 50 percent to their PFC payment; in 1999 and 2000, their PFC payments were doubled. Other measures enacted included an expansion of the loan-deficiency program, crop-loss assistance, and new crop subsidy programs for fruit and vegetable producers.

Table 2.

United States: Direct Government Payments

(In billions of U.S. dollars)

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Source: Economic Research Service (USDA). Data are for calendar years.

Forecast.

B. Impact of the FAIR Act on U.S. Agriculture

7. While the intent of the 1996 FAIR Act was to reduce government intervention in agriculture, two aspects of recent farm policy have undermined reform progress. First, the FAIR Act made it easier to receive loan-deficiency payments and substantially increased its benefits because loan rates did not adjust downward with the fall in crop prices. Because of the method used to calculate the deficiency payments, the final sale price of the crop plus the payment can exceed the loan rate.6 In 1999, subsidies for soybean and wheat production provided an effective producer price that was above the crop loan rate. Because the FAIR Act eliminated many crop production limitations the loan-deficiency payment can also provide an incentive for producers to shift production into those crops that have had the largest price declines adding to oversupply While the FAIR Act permitted the Secretary of Agriculture to adjust loan rates in response to changing economic conditions, the rates have not been adjusted Indeed the loan rates for soybeans increased 7 percent between 1996 and 1998; at the same time, soybean prices fell 27 percent.

8. Second, the provision of emergency assistance has helped economically inefficient producers to remain in business, contributing to oversupply in selected crops. The four supplemental appropriation bills appear to have caused producers to expect large payments in compensation for declining prices; government payments comprised 49 percent of net farm income (for all products) in 2000. These payments also appear to have helped to boost agricultural real estate values by an estimated 31 percent during 1999 to 2001 (Figure 1).7

Figure 1.
Figure 1.

United States: Effect of Government Payments on Farm Real Estate Values and Agricultural Prices1/

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A006

Source: National Agricultural Statistical Sen-ice (USDA) for price received by farmers, Economic Research Service for balance sheet data needed to compute real estate values.1/ Forecast.

9. One of the most significant changes in the FAIR Act was the “Freedom to Farm” provision that permitted producers to substitute among a range of crops and still qualify for the PFC payments. The number of crops that could qualify for loan deficiency payments also expanded, resulting in a significant shift in crop production. Between 1996 and 1999, the total acreage of wheat planted declined by 12.9 million acres (or 17 percent), while planted soybean acreage increased 9.5 million acres (or 15 percent).8 In addition to inducing crop substitution, loan-deficiency payments are estimated to have expanded overall major field crop acreage by 4-5 million acres in 2000.9 The large increase in planting of field crops and the shift into soybean production (a crop with some of the largest price declines in the past five years) illustrate the perverse effects of the emergency agricultural assistance. The additional production due to U.S. government programs added to downward pressure on global prices caused by subsidization in other countries and higher-than-expected global production. Figure 2 shows the dramatic price declines for both wheat (45 percent from peak to trough) and soybeans (37 percent from peak to trough). The soybean loan rate for the loan-deficiency program has been set high enough so that soybean producers are forecasted to receive a significant benefit through 2007.10 In fact, as Figure 2 shows, producers may even receive larger support for 2001 crops than they did for crops planted in 1999.

Figure 2.
Figure 2.

United States: Soybean and Wheat Prices, 1990-2006 (f)

(U.S. dollars per metric ton, annual data per crop year)

Citation: IMF Staff Country Reports 2001, 149; 10.5089/9781451839586.002.A006

Source: FAPRI(2001).1/Assumes that the soybean loan rate is adjusted according to optional guidelines.

10. While U.S. support to agriculture has increased sharply, payments remain concentrated in a narrow range of crops and producers. Over 90 percent of payments go to producers of a few crops that represent only 26 percent of total agricultural production.11 U.S. agricultural policy has also been criticized by some observers for providing extensive protection to the largest farms. Direct payments are highly concentrated; the bottom quartile (by gross agricultural output) of producers receive only 14 percent of government payments, while the top quartile receives 71 percent.12 U.S. price support measures are even more concentrated, with the top quartile of producers receiving 97 percent of the benefits.13

C. International Implications of Recent U.S. Agricultural Policy

11. While the 1996 FAIR Act represented a major reform effort, the supplemental emergency measures and increase in deficiency payments reversed much of the progress achieved toward more market-related price signals for a number of major crops. Because the United States is an important agricultural exporter (accounting for 32 percent of global grain exports and 42 percent of global soybean exports in 2000), its policies have had a significant effect on global markets.

12. Other major economies, such as the European Union (EU) and Japan, subsidize their producers to a greater extent than in the United States (Table 3).14 Indeed, the EU provides over twice as much subsidization as the United States ($115 billion vs. $54 billion in 1999), while Japan provides nearly 10 percent more ($59 billion vs. $54 billion in 1999). In terms of total subsidies as a proportion of production, subsidies are more than twice as large in the EU and Japan, and even higher in Korea.15

Table 3.

International Comparisons of the Importance of Subsidies to Producers Selected OECD Countries

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Source: OECD (2000). The Producer Support Estimate is an approximation of the total value of government support programs to agricultural producers. This estimate includes both the value of direct government payments and imputed value of price supports, and other price or quantity restrictions that may not involve government outlays but benefit producers.

13. However, few countries reversed their trend as dramatically as the United States. Between the late 1980s and 1996, U.S. agricultural support fell by nearly one-half. Subsidies fell from 26 percent to 14 percent of production. But by 1999, the rate of subsidization had more than doubled, to levels higher than before the FAIR reforms were initiated. Of OECD countries, only Canada and New Zealand achieved a similar decline in the level of support payments during the 1980s and early 1990s. New Zealand has kept agricultural support low. Subsidy levels have been rising in Canada, from 15 percent of production in 1997 to 21 percent, but by less than the United States.

14. This dramatic increase in both the absolute value and relative size of U.S. subsidy payments has meant that U.S. producers have benefited from relatively increasing protection. To the extent that these subsidies delay exit from the industry, the subsidies contribute to global overproduction and depressed prices. Gardner (2001) and Westcott and Price (1999) estimate that the prices of corn, wheat, and soybeans were 3 percent lower and the price of cotton 10 percent lower than they otherwise would have been in 1998 because of loan-deficiency payments. However, the total effect was likely much more significant because subsidies increased dramatically in 1999 and 2000. The economies most effected would likely be: India, the EU, Brazil, and Argentina. Indeed since soybean payments increased the relative attractiveness of soybean production to U.S. farmers, Brazilian and Argentinean soybean exporters are likely experiencing greater price pressure than these results suggest.

List of References

  • Anderson, David P., James W. Richardson, and Edward G. Smith, 2001, “Post-Freedom to Farm Shifts in Regional Production Patterns,AFPC Working Paper 01-6, February.

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  • Casaburi, Gabriel and Carlos Sánchez, 2000, “Las distorsiones de los mercados mundiales de alimentos y su impacto en la Argentina,(IERAL de Fundacion Mediterranea, Buenos Ares) March.

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  • ERS, 2001, “Statistical Indicators,Agricultural Outlook (U.S. Department of Agriculture, Washington, D.C.) April, pp. 2856.

  • ERS, 2000, “U.S. Farm Program Benefits: Links to Planting Decisions & Agricultural Markets,Agricultural Outlook (U.S. Department of Agriculture, Washington, D.C.) October, pp. 1014.

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  • ERS, 1996, “1996 FAIR Act Frames Farm Policy for 7 Years,Agricutural Outlook Supplement (U.S. Department of Agriculture, Washington, D.C.) April, pp. 121.

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  • FAPRI, 2001, U.S. and World Agricultural Outlook, Staff Report 1-01, January 2001 (Food and Agricultural Policy Research Institute, Iowa State University, Ames, IA).

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  • Gardner, Bruce L., 2001, “Benefit-Cost Economics of the FAIR Act,mimeo, March 29.

  • Lin, William, Paul C. Wescott, Robert Skinner, Scott Sanford, and Ganiel G. De La Torre Ugarte, 2000, “Supply Response Under the 1996 Farm Act and Implications for the U.S. Field Crops Sector,Technical Bulletin No. 1888, July.

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  • McCaw, George, 1996, 1996 Farm Bill Analysis (Policy Analysis Branch, Ministry of Agriculture, Food, and Rural Affairs, Government of Ontario, Guelph, Ontario, Canada), available at: http://www.gov.on.ca/OMAFRA/english/policy/farmbill.html.

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  • Morehart, Mitchell, James Ryan, and Robert Green, 2001, “Farm Income and Finance: the Importance of Government Payments,Agricultural Outlook Forum 2001 (ERS, USDA, Washington, D.C.) February 22.

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  • OECD, 2000, Agricultural Policies in OECD Countries: Monitoring and Evaluation (Paris: OECD).

  • OECD, 1999, Distributional Effects of Agricultural Support in Selected OECD Countries (Paris: OECD), AGR/CA(99)8.

  • Westcott, Paul and Michael Price, 1999, “Impacts of the U.S. Marketing Loan Program for Soybeans” (Economic Research Service, USDA, Washington, D.C.).

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  • USDA, 1996, Provisions of the Federal Agricultural Improvement and Reform Act of1996, eds. Frederick J. Nelson and Lyle P. Schertz, (Commercial Agriculture Division, ERS, USDA, Washington, D.C.), Agriculture Information Bulletin No. 729.

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1

Prepared by Chris MacDonagh-Dumler.

2

ERS (1996) summarizes the legislation, and USDA (1996) provides comprehensive details.

3

Even though the price supports have been extended to 2001 (originally meant to end in 1999), Gardner (2001) esimates that the FAIR Act has reduced the deadweight loss from the dairy programs by $1.3 billion.

4

The interest rates are at the cost of funds to the U.S. Treasury plus 100 basis points.

5

The Secretary of Agriculture has limited discretion to adjust these rates using a legislated formula (85 percent of a five-year crop average, excluding the highest and lowest priced years). The rates are also subject to crop-specific minimums and maximums. The loan rates have not been adjusted since 1996.

6

The loan-deficiency payment is calculated as the difference between the loan rate and a “posted county price,” which is a county-specific price meant to reflect the cost of transporting a crop to market. However, the difference between the spot price and the posted county price can be large.

7

Morehart, Ryan, and Green (2001) describe how to estimate the current value of agricultural real estate prices, assuming that producers received no government support. Their methodology is reproduced here with slightly updated data.

8

See Gardner (2001). Anderson, Richard, and Smith (2001) estimate a similar impact. When FAIR was passed, the estimate of the impact was much smaller; soybean acreage was expected to increase 1.4 million acres and wheat was expected to decline only 0.9 million acres (Lin, et al. (2000)).

9

See ERS (2000). Since total planted acreage for major field crops has fluctuated between 220 million and 250 million acres during the 1990s, this substitution represents approximately 2 percent of the overall stock of agricultural land.

10

If the soybean loan rate is adjusted (as the law allows), then the USDA forecasts that the loan rate will equal the farm price of soybeans sometime at the end of 2004.

11

Production as measured in total value of crops sold in 2000. See FAPRI (2001).

12

OECD (1999) provides cross-country comparisons and calculates the benefit at all levels of government. ERS (2000) makes a similar point, noting that 64 percent of all farms did not receive government payments in 1997, and 60 percent of the total payments go to farms with gross sales of at least $50,000 in 1999.

13

See OECD (1999); in that report, the top quartile of producers in the median OECD country received 65 percent of the benefit from price supports.

14

The OECD’s estimate, the producer-support estimate, approximates the total value of government support programs to agricultural producers. This estimate includes both the value of direct government payments and imputed value of price supports, and other price or quantity restrictions that may not involve government outlays but benefit producers.

15

In a study of the effects of agricultural policies on Argentinean production, Casaburi and Sanchez (2000) provide direct evidence that EU and Japanese subsidization policies introduce substantially more distortions than those caused by U.S. PFC payments.

United States: Selected Issues
Author: International Monetary Fund
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    United States: Effect of Government Payments on Farm Real Estate Values and Agricultural Prices1/

  • View in gallery

    United States: Soybean and Wheat Prices, 1990-2006 (f)

    (U.S. dollars per metric ton, annual data per crop year)