How Much “Safety” Is Available under the U.S. Proposal to the WTO?, November 2005

(2005) How Much “Safety” Is Available under the U.S. Proposal to the WTO?, November 2005. Iowa State University

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Abstract

Critics of the U.S. proposal to the World Trade Organization (WTO) made in October 2005 are correct when they argue that adoption of the proposal would significantly reduce available support under the current farm program structure. Using historical prices and yields from 1980 to 2004, we estimate that loan rates would have to drop by 9 percent and target prices would have to drop by 10 percent in order to meet the proposed aggregate Amber Box and Blue Box limits. While this finding should cheer those who think that reform of U.S. farm programs is long overdue, it alarms those who want to maintain a strong safety net for U.S. agriculture. The dilemma of needing to reform farm programs while maintaining a strong safety net could be resolved by redesigning programs so that they target revenue rather than price. Building on a base of 70 percent Green Box income insurance, a program that provides a crop-specific revenue guarantee equal to 98 percent of the product of the current effective target price and expected county yield would fit into the proposed aggregate Amber and Blue Box limits. Payments would be triggered whenever the product of the season-average price and county average yield fell below this 98 percent revenue guarantee. Adding the proposed crop-specific constraints lowers the coverage level to 95 percent. Moving from programs that target price to ones that target revenue would eliminate the rationale for ad hoc disaster payments. Program payments would automatically arrive whenever significant crop losses or economic losses caused by low prices occurred. Also, much of the need for the complicated mechanism (the Standard Reinsurance Agreement) that transfers most risk of the U.S. crop insurance to the federal government would be eliminated because the federal government would directly assume the risk through farm programs. Changing the focus of federal farm programs from price targeting to revenue targeting would not be easy. Farmers have long relied on price supports and the knowledge that crop losses are often adequately covered by heavily subsidized crop insurance or by ad hoc disaster payments. Farmers and their leaders would only be willing to support a change to revenue targeting if they see that the current system is untenable in an era of tight federal budgets and WTO limits.