U.S. Farm Policy at a Crossroads?

Several factors could shape the next farm bill. The large Federal budget deficit will put pressure on lawmakers to craft a bill that spends less money than previous farm bills. Some elements of farm policy provide for fixed, predictable levels of spending, some allow for variation within a prescribed range, and some are very open-ended. The most open-ended spending obligation in current policy is the marketing loan program, which provides for higher payments as production of eligible crops rises and their prices fall.

World trade commitments also will play a role. Many lawmakers have been arguing for a "wait and see" approach to crafting farm legislation, in anticipation of a new trade agreement under the World Trade Organization (WTO). These lawmakers argued that it made more sense to see what changes to farm policy might be required under a new WTO agreement. With the future of the current round of WTO negotiations in serious doubt, that line of reasoning seems less convincing.

Even in the absence of a new trade agreement, WTO obligations still may play a role in the new farm bill. The United States has already had to alter its farm policy as a result of a successful complaint brought by Brazil against elements of the U.S. cotton program. Some export subsidy programs had to be eliminated as a result of the ruling, but Brazil and other countries remain unsatisfied that the United States has changed its policy enough to comply with the ruling. A broader interpretation of the ruling is that the United States simply spent too much on its domestic supports. Canada recently initiated a WTO complaint against the corn support program, arguing that the program encourages over-production and, therefore, distorts trade and world prices. Both the cotton ruling and the potential corn case may require the United States to change program parameters to cap spending in years of low prices.

Both the budget situation and the potential WTO problems could provide strong arguments against the existence of the marketing loan and counter-cyclical payment programs, since both are considered to be production and trade-distorting under the WTO. The combined programs could push "amber box" payments above the levels allowed in the WTO. The problem is, those programs best exemplify one of the main goals of U.S. farm programs—to provide price and income support to farmers when they most need it by providing payments that increase as commodity prices decrease. The alternative to these programs is a system of fixed annual payments, regardless of the level of farm prices and income. A system of high fixed payments would be fine with many farmers, but high government payments to farmers in years of high market revenues would be politically unpalatable outside the farm sector.

The emergence of renewable fuels as a component of national energy policy also will factor into the next farm bill. Energy legislation passed two years ago provided for mandated minimum levels of use for renewable fuels, increasing to 7.5 billion gallons annually by 2012. Current levels of production and use of corn-based ethanol are well above the currently mandated levels, so some farm-state lawmakers favor the inclusion of an increase in the renewable fuels mandate in the new farm bill. Supporters of this provision argue that it is a win-win proposition for the United States—increased use of corn or other crops for fuel would reduce reliance on imported oil, and the increased demand should boost crop prices, which would reduce the need for government payments to farmers for income support.

Livestock producers are increasingly arguing, however, that they do not "win" when corn prices increase, because their production costs increase. Environmental gains from cleaner burning fuels are somewhat offset by the return to monoculture corn production in place of rotations of corn with other crops, especially soybeans. The fact that corn production requires high levels of nitrogen fertilizer, which is produced from petroleum, also offsets some of the perceived gains.

Increased usage of corn for fuel instead of for food, especially as the result of government mandates, also raises potential ethical problems. Even some farmers who stand to benefit the most from increased usage of corn for fuel admit to some unease about the impact on the availability of food. Many farmers take pride in the idea that they "feed the world," and increased usage of corn for fuel would hamper their ability to do so.

The Bush administration has not yet released a specific set of proposals for new farm legislation, although it seems very likely that it will push for lower spending levels than the current farm bill. In addition, public statements by the Secretary of Agriculture indicate that the administration would be willing to consider some fairly major changes to current policy. There also is little doubt that the Democratic leadership in Congress would like to use its newly regained majority status to right perceived wrongs. Lawmakers, such as Tom Harkin (D-Iowa), the new chairman of the Senate Ag Committee, have some definite ideas about new directions for farm policy.