Watch the three Bs, says economist
When the new Republican House majority takes up the 2012 farm bill, Purdue agricultural economist Roman Keeney says farmers should expect lawmakers to reduce spending by focusing on three major areas: Brazil, budget and baseline.
In 2009 the World Trade Organization allowed Brazil to impose sanctions against the United States after ruling that U.S. cotton subsidies were illegal under the WTO framework. In April, the U.S struck a last minute deal to send $147.3 million dollars of annual support to Brazilian cotton production.
"That deal is a temporary resolution to the WTO case that Brazil won against U.S. cotton subsidy programs several years ago," Keeney said. "The major issue in resolving the WTO case is for the U.S. to bring their policy into compliance in the 2012 farm bill."
Sending $147.3 million dollars to Brazil is not a huge economic stress to the U.S., Keeney said, but it brings attention to agricultural spending at a time when the budget deficit is a major public concern.
The federal budget deficit significantly influenced the November elections. "When you consider both the moderate impact of the recession on U.S. agriculture and the negative views of crop subsidies by those struggling to weather the economic downturn in the non-farm population and in other countries the U.S. trades with, it may be difficult for congress to justify writing new farm legislation without reduced spending," Keeney said.
In practice, price levels have been high enough that agricultural subsidy spending has been at a minimum the past three years. Annual direct payments that do not adjust with market conditions are the majority of subsidy spending, and that is where legislators will need to make cuts to generate budget savings in the farm bill.
"After 15 years of giving out these payments, political champions to keep the payments in their current form seem in short supply," Keeney said. "The irony of this is that the fixed direct payments made to producers are, by far, the most compatible with WTO parameters on allowable spending. So, we may have the WTO case with Brazil encouraging less spending on farm subsidies and the response being that we cut those favored by the WTO rules."
Legislative work in 2010 on the farm bill was aimed at locking in a baseline. Legislators thought farm bill spending had reached a minimum level and if the congressional committees moved ahead to write new legislation they could do so without further reducing the budget. The prospect seems less likely given the November elections.
"Agriculture has successfully avoided budget cuts in the past and was trying to do so this time by adopting the minimal baseline and moving quickly to get a new bill," Keeney said. "The changeover in the House means that work was probably for naught, and given the legislative priorities of the new Congress we are not likely to see new farm policy until after the 2012 election year."