21 June 2002

How will the farm bill

stay WTO friendly?Easy!

Arguments rage as to whether or not the US farm bill

breaks the World Trade Organisation rules. It probably

doesnt, says Illinois-based ag commentator Alan Guebert

POOR Ann Veneman. For the 16 months before passage of the 2002 US Farm Bill, secretary of agriculture Veneman showed no interest in shaping the biggest, most expensive farm legislation in American history.

Now that the six-year, $102bn (£70bn) programme is law, Veneman finds herself in a global crossfire defending a very complex programme that she (a) didnt want; (b) doesnt like and (c) knows will likely not work.

The secretary, however, is not alone. Although congress passed the legislation with easy majorities and President George Bush readily signed it, all now find themselves defending it from a waterfall of complaints, both foreign and domestic.

At home, the legislation was roundly flogged by every national newspaper for institutionalising the worst aspect of 1996s Freedom to Farm law: Send billions of taxpayer dollars to thousands of well-landed farmers without asking them to idle 1sq m of cropland. Editorialists called the Farm Security and Rural Investment Act of 2002 a "boondoggle" (futile and unnecessary work), a "give-away" and a "can-never-work" programme. They may well be proven correct if good weather delivers good crops through 2008.

On the foreign front, critics from Europe to China griped so loudly about the 2002 US Farm Bill that a non-farmer listener might assume it will be the underlying cause of all future wars, earthquakes, disease and even dandruff.

Well, maybe not dandruff. But Americas foreign farming friends do have cause to worry. Estimates peg global ag subsidies in 2002 at $350bn (£240bn), or almost $1bn/day (£685m/day). Any ag policy that raises the ante by at least $5bn/year (£3.4bn/year) for 10 years – as does the 2002 Farm Bill – also raises the odds against ag subsidy reform in the next decade.

But those odds may improve for three reasons.

The first is the developed nations commitment to reduce domestic ag programme costs. I know, I know – nations have made these pledges since Cain partnered with Abel on the worlds first family farm. But past promises did yield the Uruguay Round of subsidy caps which led to new promises of tougher caps in the 2001 Doha Round.

As such, American trade negotiators hope to complete an accelerated round of Doha farm talks by late 2003. They promise to deliver, too. How?

Because of reason number two: The 2002 Farm Bill, say congressional sources and the White Houses Special Trade Representative, is fully faithful to WTO guidelines. At first blush that seems ridiculous because Freedom to Farm, according to US Department of Agriculture, sent US farmers $21.5bn (£14.7bn) in 1999, $22.9bn (£15.7bn) in 2000 and $21.1bn (£14.4bn) in 2001.

But as most accountants know, its not the total that always matters; rather its how you arrive at the total; how you break it apart and where you put those parts. In the WTO ag agreement, those American parts are divided mostly among the green box, the double-decker amber box and a blue box.

The green box holds many items, the biggest being conservation programmes. Under Freedom to Farm, that box never approached its WTO limit. Under the new law – including the big, new Conservation Security Programme – the limit likely will not be breached. So, claims congress, its WTO legal.

The amber box is where countries park trade-distorting subsidies. One type are product-specific and price-related. The big American ones here include Loan Deficiency Payments – government payments farmers receive to bridge the gap between low market prices and government-set "loan" prices – and the dairy, sugar and peanut programmes. WTO limits permit the US $19.1bn/year (£13bn/year) in these subsidies.

The amber box also holds non-product specific, non-price related subsidies such as annual payments tied to historical crop production, the new counter cyclical payments (to raise farm income in poor price years) and crop insurance subsidies. The WTO permits the US $10bn (£6.8bn) annually in these payments.

Together, the total amber box cap is $29bn (£19.9bn), a mark not even ugly F2F threatened to surpass. Indeed, it will take a remarkable set of circumstances for the US to blow the amber box cap under the new, richer law.

If thats not enough to guarantee WTO legality, theres the third, rock-solid reason. Section 1601(e) of the Farm Bill reads, in part: "If the Secretary determines that expenditure (of) total allowable domestic support levels under the Uruguay Round … will exceed such allowable levels … the Secretary shall … make adjustments in the amount of such expenditures … not to exceed such allowable levels."

In other words, if future US farm programme payments threaten to break the annual WTO caps, by law the Secretary "shall" – not "may," but "shall" – make changes to the programme to keep subsidies within the boxes.

What might the Secretary do if the amber box limit is threatened? The best bet is cut loan rates which, in turn, would limit Loan Deficiency Payments to keep the amber box from overflowing. Thats right, farm fans, this Farm Bills higher loans rates will probably be the first WTO casualty if US farm prices remain in the tank and big payments threaten a tidal wave of international reaction.

So will the US exceed WTO ag subsidy limits? Perhaps, but its highly unlikely. Besides, its against the law.

A law poor Ann Veneman must now implement. That should make her even less popular than today.

Veneman finds

herself in a

global crossfire defending a very

complex programme that she (a) didnt want; (b) doesnt like and (c) knows will likely

not work

On the foreign

front, critics

from Europe to China griped so loudly about the 2002 US Farm Bill that a non-farmer

listener might assume it will be the

underlying cause of all future wars, earthquakes, disease

and even dandruff