U.S. farm policy is difficult to separate from trade policy because the U.S. government has made WTO commitments to not allow domestic support programs to distort international trade.  The stalled Doha Round of trade policy negotiations have left in place WTO policies that came into effect in 1995 and give the 2012 farm bill considerable, but not unlimited, flexibility.

The biggest change in legislation in the Senate and expected in the House, the elimination of direct payments, is not positive for trade policy.  Direct payments are ‘decoupled payments’ made regardless of production or price in the current time period.  They are placed in the WTO ‘Green Box’ list of policies as non-trade distorting because they do not influence production decisions.  They are often criticized in the U.S. political system for the very same reasons they are viewed at the WTO as non-trade distorting.

Much more important are ‘price contingent payments’ made to producers that are considered by WTO policies as distorting production signals.   These have been critical issues in WTO trade policy negotiations since agriculture was first included in the Uruguay Round negotiations in 1986.  The Aggregate Measures of Support (AMS) in the WTO ‘Amber Box’ was capped in dollar volume in 1995 and reduced over a five-year period to $19.1 billion per year for the U.S.  The AMS was to be reduced in negotiations in the Doha Round beginning in 2001, but the talks have been stalled since the summer of 2006 when the U.S. had agreed to lower its limit to $7.6 billion per year.  The rule of thumb is if payments are ‘contingent’ on the current year’s prices and acreage they are trade distorting because they reduce risks and encourage more production and are placed in the Amber Box.

The Agricultural Risk Coverage (ARC) program in the Senate legislation and likely to be in the House bill is a revenue-based ‘shallow loss program’ program tied to current yield, current price and current acreage.  It is a price contingent program and would squarely fall in the Amber Box category.  Brazil, which meets quarterly with USDA about the 2012 farm bill as part of an interim settlement for Brazil’s victory over the U.S. in the WTO cotton/export credit case filed in 2002, has said ARC is clearly trade distorting as is a similar program for cotton called STAX.

Programs like ARC and STAX can be trade distorting because they are price contingent, but still be WTO permissible if the AMS is not beyond what is allowed in the Amber Box, $19.1 billion.  But, in the Brazilian cotton and export credit case, U.S. policy was found to be depressing world cotton prices with the marketing loan and counter-cyclical programs, and Brazil believes the U.S. has to move away from those programs.  Even if the program is within the Amber Box limit, it can still run afoul of the WTO rules if challenged.

Crop insurance is a price contingent program that has grown in recent years.  Net outlays for the government according to Congressional Budget Office estimates will average almost $10 billion per year for the next ten years.  Crop insurance has been filed with the WTO in the Amber Box non-product specific category for programs that are multiproduct in scope, implementation provisions are generic, or the payment amount is not based on current production of any specific commodity.  If the programs in this category are less than 5 percent of the total value of agricultural production, the programs are considered de minimis and not included in the Amber Box.  USDA estimates the total value of crop and livestock production for 2012 at $370 billion; 5 percent of that amount is $18.5 billion.

WTO and crop insurance

The calculation of the cost of crop insurance for WTO purposes is straight forward – the value of indemnities minus the producer paid premiums.  For the 2011 crops with almost all claims accounted for, total indemnities were $10.8 billion and producer paid premiums (excluded the amount paid by the government) were $4.4 billion for costs as measured by the WTO of $6.4 billion.  This is by far the highest year ever; 2002 was the next highest year at $2.9 billion when market prices were lower and fewer acres were covered.  Depending on the current drought in the Midwest, the costs could be higher for 2012, but still under the 5 percent of total value of production.  If crop insurance were moved to the Amber Box, there would be room in that category since other costs are expected to be low.

This does not mean that the WTO commitments can just be ignored.  If the new ARC and STAX programs were to have major outlays due to lower revenues for major crops, costs in the Amber Box could build very quickly.  That is not the most likely outcome from economic models used by CBO, USDA and agricultural universities, but favorable weather around the world and downward pressure on market prices after several high-price years is a plausible scenario.

While it is easy to get lost in details of WTO accounting for agricultural policies, the larger picture should be kept in mind.  Developed countries are seen as subsidizing their agriculture to the disadvantage of developing countries.  Domestic support programs by a large exporter like the U.S. receive more scrutiny than others.  As the costs for crop insurance, ARC, STAX, target prices that may be in the House plan and other programs begin to escalate, other countries will more closely analyze U.S. programs and possibly find reasons to file complaints.

The Senate reduced funding by $1.0 billion per year for the General Sales Manager (GSM) 102 export credit program that was found in the 2002 WTO case to be a prohibited export subsidy.  USDA has been reducing the scope of the program and increasing fees to shrink the program to $3.0 billion per year agreed to by Brazil and the U.S., but the program has remained popular with importing countries.

USDA and the U.S. Trade Representative Office will be meeting again in July with Brazilian government representatives to talk farm policy.  Brazil is expected to be critical of the direction of the 2012 farm bill, but the points they make should provide insights on how the policies will be viewed in the wider WTO policy debate.  The interim agreement between the two governments ends at the end of 2012 or when the new farm bill is passed by Congress.  Some groups in the Brazilian government have already called for the reconstitution of the technical group charged with determining how the Brazilian government could retaliate.

Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology.