setting the stage how much does agriculture matter to the u.s. economy? how big a player is u.s....

Setting the Stage

How much does agriculture matter to the U.S. economy?

How big a player is U.S. agriculture in the world?

How much money does the U.S. spend on agriculture?

How Big a Player is U.S. Agriculture in the World?

#1 exporter of ag products in the world

Over 30% of crop acreage basically for export

What does this mean for policy?

How much does Agriculture Matter to the U.S. economy?

Depends Farming accounts for 1.4% of

workforce and .7% of GDP Entire food and fiber system

accounts for 17% of workforce and 12% of GDP

How Much Money Does the U.S. Spend on Agriculture?

What do you call agriculture? Do you define it by:

What Ag committees have responsibility for?

Production only?

Allocation of U.S. Budget Allocation of U.S. Budget Outlays by Function, FY Outlays by Function, FY

20012001

Defense

Human Resources

Physical Resources

Net Interest

Agriculture

OtherHuman Resources includes: health, medicare, social security, etc.Physical Resources includes: transportation, community and regional development, etc.

Source: Budget of the U.S. Governmentwww.whitehouse.gov/omb/budget/fy2003/pdf/hist.pdf

Share of Mandatory Program Spending by Share of Mandatory Program Spending by Farm Bill Title Budget Authority, FY 2002-Farm Bill Title Budget Authority, FY 2002-

2011.2011.

0%0%0%0% 5%

Commodities

Conservation

Food Programs

Rural Development

Research

Forestry

Energy

Miscell. (Sec 32 & FCIC)

Does not include funding for discretionary programs which is provided through annual appropriations.Based on CBO’s March 2002 Baseline.

$782 Billion Total

Policy

Defn: Guiding principle leading to course of action or specific program pursued by governments

Programs implement policyExample:

Policy -- Pursuit of freer tradePrograms – NAFTA, FTAA

Agricultural and Food policy

Principles that guide government programs that influence:ProductionResources usedDomestic and international marketsFood consumptionConditions under which

rural people live

More than domestic farm programs support farm prices and/or incomes

Retirement of fragile land from production (CRP)

Negotiation to reduce barriers to trade (WTO)

Water allocation, development and pricing

Food safety and terrorismChild nutrition (WIC)

Policies and programs are constantly changing – Forces of

ChangeInstability of agricultureGlobalizationTechnologyFood safetyEnvironmentIndustrializationPoliticsUnforeseen events

Review of Demand

• Economics – allocation of scarce resources to the unlimited wants of people

• Demand is a schedule of the maximum quantity consumed at alternative prices

Demand

• Change in Demand• What changes (shifts) demand?

– Income (1-3% growth annually)– Population (1-2% growth annually)– Prices of other goods– Tastes & preferences

q 1 Q/yr

Demand

0q q 2

• Change in quantity demanded– Change in quantity demanded occurs due to change in

own price

Demand• Elasticity of Demand

– Own price elasticity of demand• %Change in Q Y / %Change in P Y

• E = %ΔQY / % ΔPY

• How do you interpret E = -0.25

• What is Inelastic (Insulin)

• What is Elastic (Vacation Cruises)

• Factors that influence Elasticity– Necessity– Availability of Substitutes

Demand

• Elasticity of Demand– Domestic demand– Export demand

• Why more elastic?

-.60 -1.14

Demand

• Other Elasticity Measures

– Cross price elasticity of demand%ΔQY / % ΔPX

• Substitutes• Complements

– Income elasticity of demand%ΔQY / % ΔI

• Normal Goods• Inferior Goods

Demand

• The limits of Elasticity Measures

– Difficult to measure demand

– Difficult to sort out cause/effect

Demand

• Why are measures of elasticity important– Predict Policy Impacts – Revenue impact

4.54.5

8.08.0 ??

EEdd = -0.25 = -0.25

4.54.5

8.08.0 ?? QxQx

EEdd = -1.25 = -1.25

-0.25 = %-0.25 = %∆QY / %∆PY∆QY / %∆PY

-0.25 = %∆QY / -10-0.25 = %∆QY / -10

2.5 = %∆QY2.5 = %∆QY

8 * 1.025 = 8.28 * 1.025 = 8.2

-1.25 = %-1.25 = %∆QY / %∆PY∆QY / %∆PY

-1.25 = %∆QY / -10-1.25 = %∆QY / -10

12.5 = %∆QY12.5 = %∆QY

8 * 1.125 = 9.08 * 1.125 = 9.0

Demand• Own Price elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Own Price)Or New Qt Y Demanded = Old Qt Y Dem. * [1+ Ed * (Price Ynew – Price Yold) /

Price Yold]

If E(Qy,Py) = -.25Calculate Qt Demanded

P Old 5P Old 5

P New 4.5P New 4.5

8.08.0

QQoldold

Demand• Cross Price elasticity of demand (Ed) for policy analysis -- Substitutes New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price

for Other Commodity) Or New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceYnew–PriceYold) /

PriceYold]

If E(Qx,Py) = 0.15Calculate Qt Demanded

Dx wrt Dx wrt PyPy66

Demand• Cross Price elasticity of demand (Ed) for policy analysis -- Complements New Qt Demanded = Old Qt Demanded * (1+ Ed * % Change in Price for

Other Commodity) OR New Qt X Demand = Old Qt X Demand *[1+Ed*(PriceYnew–PriceYold) /

PriceYold]

If E(Qx,Py) = -0.15Calculate Qt Demanded

Demand• Income elasticity of demand (Ed) for policy analysis New Qt Demanded = Old Qt Demanded * (1+ Ed * %

Change in Income) Or write it as: New Qt Demanded = Old Qt Demanded * [1+ Ed *

(Incomenew–Incomeold) / Incomeold]

If E(Qx,Inc) = 0.2Calculate Qt Demanded IncomeIncome

Dx wrt Dx wrt IncomeIncome26,00026,000

25,00025,000

600mbu600mbu

Supply

• 3 stages of production• Produce in Stage II

Output

IIII III III

Supply

• 3 stages of production• Multiply MPP and APP by Price of the output

y* TVP = TPP * Py

$/Output

X1X 1$

X 1* X 1

MFC X1

MVP = P MPP X1y

Supply

• Calculate the Cost functions from production functions– Marginal cost curve MC = Px / MPPx– Average variable cost AVC = Px / APPx

AVCAVC

Supply

• Supply curve is the MC above the AVC for each firm

• Supply is a schedule of quantities of output that will be offered for sale at alternative prices

• Where is the shutdown price?

AVCAVC

Supply• Firm Supply and Industry Supply

$$ $$ $$$$ $$ $$

Firm 1 QYFirm 1 QY Firm 2 QYFirm 2 QY Industry QYIndustry QY

• Factors change Industry Supply for Output Y– Technology– Costs of inputs to produce Y– Ag. Policy PP

QtYQtY

SS00 SS11 SS22

Supply• Factors that change Supply Function for firm

– Price of Input (Px)– Productivity of X to produce Quantity of Y (MPP of X)– Increased productivity Shifts MC to right

• Analyze impacts on supply for the industry by starting with the firm

MCMC11

AVCAVC11

MCMC22

AVCAVC22

Q Y /yr

Supply

• New Technology – BST PST Roundup Ready crops• Increase TPP >> Higher MPP >> Lower MC • Supply shifts to the right

TPPTPP00

TPPTPP11 YY

XXMPPMPP00

MPPMPP11

Q Y /yrThe FirmThe Firm The IndustryThe Industry

SS00SS11

AVCAVC00

AVCAVC11

MCMC00

MCMC11

Supply• Inflation in Input Prices and Supply

Price input increases PxMC = Px / MPPxAVC = Px / APPx

MCMC22

AVCAVC22

MCMC11

AVCAVC11

SS00SS11

Supply

• Elasticity of Supply• Generally mean the elasticity of quantity

supplied with respect (wrt) own priceEs = %ΔQtY / %ΔPYEs = +0.20

Qt Supplied Y = Old Qt Y * [1+ Es * %ΔPy]Qt Supplied Y = Old Qt Y * [1+ Es * (Price Ynew

/Price Yold) / Price Yold)]

QtYQtY

2.52.5

2,6002,600 ??

Supply

• Cross elasticity of supply• Elasticity with respect to the price of

another cropEs(QY, PX) = %ΔQY / %ΔPX

Es(QY, Px) = -0.15S of Y wrt PXS of Y wrt PX

2.252.25

2.52.5

2,6002,600 ??

Supply and Demand

• Equilibrium price is where Demand equals Supply

q 1 Q/yr

Supply and Demand

• Equilibrium price is where Demand equals Supply• After the crop has been harvested the supply

becomes perfectly inelastic• Supply in the marketing year is S1 or S2

q 1 Q/yr

SS11 SS22

Supply and Demand

• Overall elasticity problem• Es = 0.15• Ed = -0.4 of FD = -2.50• Base Price $2.88 • Base Qt = 2357• New Price 3.00 due to price support• Calculate new Qt supplied and new price$

q 1 Q/yr

Welfare Economics

• Consumer surplus (a)

• Producer surplus (b)

• Total Revenue (b + c)

q 1 Q/yr

Chapter 2 of Knutson, Penn, and Flinchbaugh

Welfare Economics

• Important Assumptions– Equal Marginal Utility of a dollar for all consumers and

producers– No Externalities– No pubic goods

q 1 Q/yr

Welfare Economics

• Excess Production

q 1 Q/yr

Welfare Economics

• New Technology

q 1 Q/yr

Welfare Economics

• Policy will often create a Deadweight Loss• Example of a sales tax

– Portion of Tax Paid by Consumers (Blue)– Portion of Tax Paid by Producers (Red)– Deadweight Loss (Black)

q1 Q/yr

P* - tax

Macro Economics Review

• Monetary and Fiscal Policy Tools• Fiscal Policy

– Spend

– Taxation

• Monetary Policy– Increase Money Supply (Easy Money policy)

• Buy securities• Decrease discount rate• Decrease reserve requirement

– Decrease Money Supply (Tight Money policy)

Interest Rate

Qt Money

Tight Money Policy Increases the Interest Rate

Interest Rate

Value US$Qt Money

Interest Rate

Value US$Qt Money

Tight Money Policy Increases the Value of the Dollar

Interest Rate

Value US$Qt Money

Easy Money Policy Decreases the Value of the US Dollar

Interest Rate

Value US$Qt Money

Increasing Taxes Decreases the Value of the US Dollar

Domestic Demand

Domestic Supply Excess Supply

Demand Exports

Qt Export0

Price0 World Price0

Qt Traded

Qt per YearQS0

Impact of Stronger US Dollar on Trade

• Stronger US Dollar makes prices of US products more expensive to ROW

• If prices of exports are higher SHOW this as a lower Export Demand

• Lower exports and Quantity supplied in the US

• Lower US price

• Higher price in ROW

World Price1

Price1

Qt Export1

New Demand Exports

Macro Economic Impacts Macro Economic Impacts on Agriculture on Agriculture

• Inflation in prices of inputs• Ag very dependent on purchased inputs• Income statement affects of inflation

Profit = TR – TCProfit = (PY * QY) – (PX*QX)– I * (Loan + PX*QX)

• Inflation raises Px and real interest rate I • Inflation raises PY about 66% as much

but 5 years later

Welfare Economics

• Consumer surplus (a)

• Producer surplus (b)

• Total Revenue (b + c)

q 1 Q/yr

Welfare Economics

• Important Assumptions– Equal Marginal Utility of a dollar for all consumers and

producers– No Externalities– No pubic goods

q 1 Q/yr

Welfare Economics

• Excess Production

q 1 Q/yr

Welfare Economics

• New Technology

q 1 Q/yr

Welfare Economics

• Policy will often create a Deadweight Loss• Example of a sales tax

– Portion of Tax Paid by Consumers (Blue)– Portion of Tax Paid by Producers (Red)– Deadweight Loss (Black)

q1 Q/yr

P* - tax

Macro Economics Review

• Monetary and Fiscal Policy Tools• Fiscal Policy

– Spend

– Taxation

• Monetary Policy– Increase Money Supply (Easy Money policy)

• Buy securities• Decrease discount rate• Decrease reserve requirement

– Decrease Money Supply (Tight Money policy)

Interest Rate

Qt Money

Interest Rate

Value US$Qt Money

Interest Rate

Value US$Qt Money

Tight Money Policy Increases the Value of the Dollar

Interest Rate

Value US$Qt Money

Interest Rate

Value US$Qt Money

Domestic Demand

Domestic Supply Excess Supply

Demand Exports

Qt Export0

Price0 World Price0

Qt Traded

Qt per YearQS0

• Lower US price

World Price1

Price1

Qt Export1

New Demand Exports

• Inflation in prices of inputs• Ag very dependent on purchased inputs• Income statement affects of inflation

• Inflation raises Px and real interest rate I • Inflation raises PY about 66% as much

but 5 years later

The U.S. Policy Process

A lot like making sausage Why? Many different players

− Congress− Special interests− Constituents− Whiners− Academics

Have to understand the process if you want to influence policy

Ex. Information is good to a point

Economists Role in Policy

Concerns > Issues > Policies Policy Position

A conclusion about what the role of government ought to be with respect to a particular problem

Influenced by facts, myths, and values

Issue/Problem

Facts Values Myths

Decision

Facts, Myths, Values, and Goals

Facts – known with certainty and objectively verified

People tend to agree on facts, disagree on composition of facts

Myths – unscientific accounts perpetuated by legend

Based on tradition or convenience

Values – concepts of good, right, and desirable

Jeffersonian agrarianism

Goals – desired end results or objectives

Agrarian Myths

Economic prosperity depends on agricultural prosperity

Rural community well-being depends on farmer well-being

Land is the source of all wealth Farm programs are good food programs Farmers are environmentalists Myths are popular. What people want to

hear. Become part of policy rhetoric. Do not have to be true to affect policy.

Jefferson Agrarianism Values

Agriculture is the basic occupation of mankind

Rural life is morally superior to urban life A nation of small, independent farmers is

the proper basis for a democratic society Are these true? Can they be proven? Are

farmers better people that urbanites? If these do not hold, then economics

must be used to defend price and income support programs

Policy Goals

Goals – desired end results for policy The purpose to which a policy is directed

Economic goals Economic growth to achieve higher standard of living Full employment Freedom of choice in economic activities Equitable income distribution Economic security for those unable to earn minimum

income

Maximum economic benefits at minimum cost Stability of prices and incomes Sustainable use and preservation of public and private

resources Maintenance of a safe and adequate food supply

Economists Role in Policy

Current Events Brazil has brought charges against US

cotton policy in WTO (World Trade Organization)

Dan Sumner at UC Davis and Bruce Babcock at Iowa State Univ.

Testified at WTO hearing for Brazil Now US Cotton Council has threatened to

have Congress cut their research funding What is academic freedom? Should a professor take sides?

Economic Theory of Public Choice

Private Choices Key principles:

− All resources are scarce or limited− Assumes rational behavior− Prices signal consumption and production decisions

Public Choices Key principles:

− 1 & 2 above but votes are the market signals of public choice instead of price

Trade-offs (i.e. log rolling, horse trading) on an issue by issue basis

Positive vs. Normative Economics

Positive economics explains consequences

Deals with facts What is not What should be Let the policy makers decide for themselves –

that is why we elect them Normative economics involves value

judgments about what should be “Economists are the best trained so their

values are the best for society.” Is this true?

The Pareto Criteria

Pareto optimality Exists when it is impossible to make anyone

better off without making someone else worse off Very rare

In policy we tend to use the compensation principle as the basis for policy decisions

As long as those who are made better off by a policy change are able to more than compensate those who are made worse off, the change is justified

Welfare economic theory used to measure gains and loses

Welfare Economics

Consumer surplusProducer surplusOften in policy there is a deadweight loss

q 1 Q/yr

Approaches to Analysis

Scientific approach Scientific method (define prob., review

literature, formulate hypothesis, objective, draw conclusions)

Like chemistry lab Analytical approach

Consequences divided into pros and cons, advantages or disadvantages• These tend to depend on person’s point of view

Evangelistic approach Make case for cause and crusade for it

Educational approach Alternatives and consequences

Four Process Questions

1. What is ? Facts, observation

2. What can be? What are politics? Can it be done?

3. What will be? Predictions

4. What should be? Value judgments, normative

Political Spectrum

Liberal Conservative(more government) (less government)

Influence Triangle

Kingmakers

Active group

Interested group

Apatheticgroup

Politics of the Minority

Find allies issue by issue. Not philosophy by philosophy

Build coalitions, compromise, find common ground

Be positive, reasonable, work within system

Base case on facts, not myths or emotions

Adopt non-partisan strategy

Policy Process

Legislative branch – 435 and 100 those are the numbers

Role of Congress: write and pass legislation

Executive Branch – President and agencies can propose legislation

Judicial Branch – settles disputes Interest Groups -- producers,

consumers, agribusiness, foreign govts.

Where is The Power in Agricultural and Food

Policy?• Agriculture’s iron triangle• Government

– Executive Branch– Legislative Branch– Judicial Branch

• Other Organizations– General farm organizations– Commodity organizations– Agribusinesses– Public interest groups

• Other departments

Chapters 3 and 4 of Knutson, Penn, and Flinchbaugh06

Agriculture’s Iron Triangle

Interest Groups

USDASecretary of Agriculture

Legislative

Branch

Executive Branch

President

Cabinet

• Vice President• Heads of 15 Executive Departments• Attorney General• Under G.W. Bush Also

– EPA– OMB– National Drug Control Policy– USTR (Robert Zoellick)

Executive Departments• Agriculture (USDA)• Commerce (DOC)• Defense (DOD)• Education • Energy (DOE)• Health & Human Services (HHS)• Homeland Security • Housing & Urban Development (HUD)• Interior (DOI)• Justice (DOJ)• Labor (DOL)• State (DOS)• Transportation (DOT)• Treasury• Veteran Affairs

Structure of USDA

Secretary

Deputy

Food, Nutrition & Consumer Services

FNS CNPP

Food SafetyFSIS

Farm & Foreign Ag Services

Marketing & Regulatory ProgramsAMS APHIS GIPSA

Rural Development

RBSOCD RHS RUS

Natural Resources & Environment

FS NRCS

Research, Education & Economics

ARS CSREES

Legislative Branch

• “All Legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.” Article I, Section 1

• Membership

Functions of Congress

• Authorization

• Appropriation

• Oversight

How a Bill Becomes a LawConstituentsCongress

Executive/DepartmentsPolicy Proposals

SubcommitteeHearings <> Mark-up

CommitteeDebate <> Approval

Debate <> Amend <> Approval

Conference CommitteeHammer out differences between House & Senate

Floor Approval in Both

PresidentSign <> Veto <> Pocket Veto

House and/or Senate

Committee

A Simplified Overview of Budget Authorization and Appropriations

Process

Congress

President's Budget

BudgetCommittees

AuthorizingCommittees

AppropriationsCommittees &Subcommittees

Tax Committees

OMB andExec. Agencies

Final Budget Through Conference

Committee(Oct 1)

(Late Jan.)

BudgetResol.(Apr. 15)

Recommendations(March 15)

AuthorizingBills (May 15)

Adopted Budget

Resolution

Appropriations Bills

Action is in Committees(House and Senate 109th

Congress)• Overall Congressional Leadership

– Senate Majority: Bill Frist (R, TN) Minority: Harry Reid (D, NV)

– Speaker of the House: J. Dennis Hastert (R, IL) Majority: Tom DeLay (R, TX) Minority: Nancy Pelosi (D, CA)

• Budget Committee (sets limits on spending)– Senate Majority: Jugg Gregg (R, NH)

Minority: Kent Conrad (D, ND)– House Majority: Jim Nussle (R, IA)

Minority: John Spratt (D, SC)

Action is in Committees (109th.)

• Agriculture Committee (authorizes ag. and nutrition legislation) – Senate Majority: Saxby Chambliss (R, GA)

Minority: Tom Harkin (D, IA)– House Majority: Bob Goodlatte (R, VA)

Minority: Collin C. Peterson (D, MN)

• Agriculture appropriations subcommittee (decides what/who gets money)– Senate Majority: Thad Cochran (R, MS)

Minority: Robert Byrd (D, WV)– House Majority: Henry Bonilla (R, TX)

Minority: Marcy Kaptur (D, OH)

Majority is really important

Farm Organizations

• General farm/agribusiness organizations– American Farm Bureau Federation– National Farmers Union

• Commodity organizations– National Corn Growers– National Cotton Council– Every commodity has one, and some have

multiple

Commodity Organizations

• Most effective organizations in agriculture because of focused commodity interests

• Most effective are those that represent entire industry (NCC)

• Beef has had conflicts among cattlemen and NCBA

• If producer organization goes head-to-head with agribusiness, agribusiness normally wins (ex., packer in beef)

• Almost always have related state organizations

• Party alignment is an interesting issue

Public Interest Groups

Typically focus on only 1 issue• Environment (Sierra Club, National

Resources Defense Council, Environmental Working Group)

• Hunger lobby (Bread for the World)• Animal rights (P.E.T.A.)• Consumer lobby (CFA, CW, CU, Center

for Science in the Public Interest)

Agribusinesses/Trade Associations

• Restaurant Associations• Equipment dealers• Chemical Applicators• International Dairy Foods Association

Farm Equipment Assoc.

• Ag Electronics Association (AEA) • Agricultural & Industrial Manufacturers Reps Associati

on (AIMRA)

• Agricultural Retailers Association • American Society of Agricultural Consultants (ASAC) • American Society of Agricultural Engineers (ASAE) • American Society of Farm Equipment Appraisers • Association of Equipment Manufacturers (AEM) • Canada West Equipment Dealers Association • Canadian Farm & Industrial Equipment Institute (CFIEI

• Canadian Farm Builders Association • Canadian Society for Engineering in Ag, Food & Biolog

ical Systems (CSAE)

• Farm Equipment Manufacturers Association (FEMA) • Farm Equipment Wholesalers Association (FEWA) • Iowa-Nebraska Equipment Dealers Association • Irrigation Association • Italian Trade Commission • Lawn & Garden Marketing & Distribution Association

• Midwest Equipment Dealers Association • Mississippi Valley Equipment Association (MV

• National Agri-Marketing Association • North American Equipment Dealers Associati

on (NAEDA)

• Ohio-Michigan Equipment Dealers Association

• Ontario Retail Farm Equipment Dealers Association

• Outdoor Power Equipment Institute (OPEI) • Pacific Northwest Association • Prairie Implement Manufacturers Association

(PIMA)

• Propane Education & Research Council • Saskatchewan Trade & Export Partnership (S

• Society of Automotive Engineers (SAE) • South West Hardware & Implement Associati

on (SWHIA)

• Texas Agricultural Irrigation Association • Tractor & Machinery Association of Australia • UNAMOMA/COMAMOTER • Western Association

Summary

• General farm/Agribusiness interests generally broader than commodity policy

− Trade− Tax policy

• Often have related state organizations• Often aligned with political party

• Agribusiness firms often have their own lobbyists but still belong to commodity groups and general agribusiness organizations

Historical Overview of U.S. Agricultural Policy

• U.S. declared independence from Great Britain largely because of repressive ag policies:– Taxing and controlling exports– Limiting westward settlement– Collecting fees on settler’s land purchases

• Homestead Act (1862)– Permitted any citizen, or any person who intended to

become a citizen, to receive 160 acres of public land, and then to purchase it at a nominal fee after living on the land for five years

Chapter 7 pages 93-96 Knutson, Penn and Flinchbaugh 07

Historical Overview of U.S. Agricultural Policy

(Cont.) • Morrill Act (1862)

– Donated Public Lands to the several States and Territories which may provide Colleges for the Benefit of Agriculture and the Mechanic Arts

• Hatch Act (1887)– Established agricultural experiment stations

• Smith-Lever Act (1914)– Set up the Cooperative Extension system to

communicate new technologies from the USDA directly to farmers.

Early Policies

• Agriculture was called on to increase production for World War I– After the war, the farm economy

became depressed– Capper-Volstead Act provided limited

exemptions from anti-trust laws– McNary-Haugen bills (two price plans)

vetoed twice by President Coolidge• Most of the current policies we have

today have their roots in the Agricultural Adjustment Act of 1933

Early Policies (Continued)

• Farm Credit Administration (June 1933)– Emergency and long term credit programs

• Soil Conservation Service (now NRCS) established in 1935

• In 1933, federal government began nutrition assistance– Direct distribution of surplus foods, school

lunch, and food stamps

Agricultural Adjustment Act

• Signed into law by President Roosevelt• Gave the Secretary of Ag authority to:

– Reduce acreage by voluntary agreements– Entered into agreements with processors

to control prices paid to producers– USDA could spend money to expand

markets or remove surpluses• Financed by a processing tax• Secretary Wallace, “The present program

for readjusting productive acreage to market requirements is admittedly but a temporary method of dealing with an emergency.”

Other Significant Policies

• Agriculture Act of 1949– Last farm bill enacted without an expiration

• Agricultural Act of 1956 established the Soil Bank– Goal was to adjust supply by taking land out of

production– Acreage reserve – short term– Conservation reserve – long term

The “Golden Years”

• Early 1970s– Bad weather in U.S. and around the World– Russians started buying grain– Negative real interest rate– Prices high “parity”

• Parity prices – that price which today gives a unit of the commodity the same purchasing power as it had in 1910-1914

– 73% increase in real net farm income 1970-73– Land values rose 376% in the 1970s– Something Bad Had to Happen

Farm Problem

• For our purposes, we will start with the 1980s

• Basically one of unstable farm prices and, therefore, unstable farm income−Due to inelasticity of supply and demand−Due to shifts in international demand−Due to shifts in weather−Due to fixity of ag resources−Due to bad government policy decisions

What Are the NationalAg. Policy Objectives?

Chapter 7 Knutson, Penn and Flinchbaugh 08

1. Income – Maintain adequate net farm income for livestock and crop farmers

2. Food – Maintain an adequate food supply at reasonable prices

3. Exports – Maintain a competitive trade position4. Conservation & Environment – Enhance

environmental and conservation quality5. Inputs – Maintain a viable input industry6. Reserves – Adequate reserves in the event of crop

production problems7. Rural Areas – Development of rural areas8. Government Cost – Achieve objectives at the least

1. Income – Maintain adequate net farm income for livestock and crop farmers

2. Food – Maintain an adequate food supply at reasonable prices

3. Exports – Maintain a competitive trade position

4. Conservation & Environment – Enhance environmental and conservation quality

5. Inputs – Maintain a viable input industry

6. Reserves – Adequate reserves in the event of crop production problems

7. Rural Areas – Development of rural areas

8. Government Cost – Achieve objectives at the least cost

Price vs. Income Price vs. Income SupportSupport

• Price support – direct government intervention through buying commodities

• Production controls to reduce supply and raise price (e.g. ARPs)

• Income support – involves government support of farm income−Supporting price in which case both price

and income is supported−Supporting farm revenue through direct

payments−Income is supported but price is not supported 09

Price and Income Support Price and Income Support (combined)(combined)

(Basically raises price and thus also supports (Basically raises price and thus also supports income)income)

• Purchase program−Government purchases product at support

• Nonrecourse loan (CCC LR)−Farmer takes out loan at harvest −Has option of forfeiting to CCC in lieu of full

payment of loan

• Production control (ARP)−Raises price through controlling quantity of

commodity entering the market

Government Purchase Government Purchase ProgramProgram

• Government stands willing to purchase any amount of commodity at the established support price level

• What happens in the market?• Will need to know

– Where is support price relative to competitive equilibrium?

– Impact on Quantity Supplied– Impact on Quantity Demanded by consumers– Quantity purchased by government– Does elasticity of supply and demand matter?

Nonrecourse LoanNonrecourse Loan

• Why a loan?– Lowest Prices typically at harvest– Allows farmer to store and market

• Farmer takes out loan from Commodity Credit Corporation (CCC) = loan rate (LR) * production

• Repayment Options– Sell crop and repay loan plus interest– Forfeit crop (no recourse for forfeiture)

Nonrecourse Loan Rate (Case Nonrecourse Loan Rate (Case #1)#1)

• Is it Price or Income Support?

• Set below competitive equilibrium

• Does it matter?

– Why not?

– Why?

q 1Q/yr

Nonrecourse Loan Rate (Case #2)Nonrecourse Loan Rate (Case #2)

• Set above competitive equilibrium

• Does it matter?

q 1Q/yr

qd2 qp2

CCC stocks

Acreage Reduction ProgramAcreage Reduction ProgramNo Nonrecourse LoanNo Nonrecourse Loan

• What happens?

• Any guess at why it isn’t drawn as a parallel shift?

Acreage Reduction ProgramAcreage Reduction ProgramWith Nonrecourse Loan #1With Nonrecourse Loan #1

• What happens?

• Does the LR do anything?

P0 = LR

qd1= qs1

CCC Stocks0

Acreage Reduction ProgramAcreage Reduction Program With Nonrecourse Loan #2With Nonrecourse Loan #2

• What happens?

• Does the LR do anything?

P1=P0 = LR

qd0 = qd1

qs1 qs0

CCC Stocks0

CCC Stocks1

Loan Rate with Export Demand

• Set above competitive equilibrium in domestic market and above TD curve

• Does it matter?

q1 Q/yr

qd2 qp2

CCC stocks

Loan Rate with Export Demand #2

• Set above competitive equilibrium in domestic market and above ED curve

• Does it matter?

qdd qp

CCC stocks

ExportDemand

DomesticDemand

Loan Rate Below International Equilibrium

• Does it matter?

qdd qp

ExportDemand

DomesticDemand

Target Price (Case #1)

• Is it Price or Income Support?

• Does it matter?

– Why not?

– Why?

q 1Q/yr

Target Price (Case #2)

• Set above competitive equilibrium

• Does it matter?

q 1Q/yr

Qp2= Qd2

No CCC stocks

DeficiencyPayments

Target Price (Case #2a)

• Another way to look at this

• Supply curve vertical until above target price

Qp2= Qd2

No CCC stocks

DeficiencyPayments

Target Price & Loan Rate (Case #1)

• Both set above competitive equilibrium

• Now what happens?

CCC stocks

DeficiencyPayments

If loan rate wasn’t effective thisWould be the market price

• Target price set above competitive equilibrium and loan rate below market price

• Now what happens?

No CCC stocks

DeficiencyPayments

Qp2= Qd2

• Both set below competitive equilibrium

• What are the impacts?

No CCC stocks

Qp2= Qd2

Target Price and Loan Rate with Export Demand

• Set above competitive equilibrium in domestic market and above ED curve

• Does it matter?

qd2 qp2

No CCC stocks

InternationalDemand

DomesticDemand

DeficiencyPayments

Question: How can we get price from

current $2/bu to desired $3/bu?

• What can you do?

MP = $2.00

• What can you do?– Supply control

MP = $2.00

Qd1=Qp1Qd2=Qp2

• What can you do?– Supply

control– Price

support

MP = $2.00

LR = MP = $3.00

qd2 qp2

Qd1=Qp1

• What can you do?– Supply

control– Price support– Export

subsidy

MP = $2.00

MP = $3.00

qdd2 qp2

Qd1=Qp1

InternationalDemand

What Is a Farm Bill?What Is a Farm Bill?

• Joe’s Long Definition– Legislation developed by the agricultural committees of the

House and Senate that, when passed into law, authorizes the USDA to initiate(and/or maintain) and manage a wide range of programs and program provisions for a specified period of time.

• Shorter Definition– Tells USDA what to do, how to do it, who to do it for, and for

how long• Ex. Provide food assistance with food stamps to poor for the period

2002 to 2007.

• Each farm bill has a varying length with an expiration date.– Recent farm bills

• 1985, 1990, 19951996, 2002

What Is the CCC?What Is the CCC?

• Commodity Credit Corporation– A federally owned and operated corporation

within the USDA created to stabilize and support agricultural prices and farm income by making loans and payments to producers, purchasing commodities, and engaging in various other operations.

– Handles all money transactions for agricultural price and income support and related programs.

– the USDA bank

Major Commodities We Major Commodities We Typically Have Had Programs Typically Have Had Programs

ForFor• Wheat• Feed Grains (corn, grain sorghum, barley, and

oats)• Upland cotton• Rice• Oilseeds (soybeans, sunflower seed, rapeseed,

canola, safflower, flaxseed, and mustard seed)• Sugar• Tobacco• Peanuts• Dairy Products (milk, butter, cheese, and NFDM)• Wool and Mohair• Honey• Fruits and Vegetables

1990 Farm Bill1990 Farm Bill

• TitlesI DairyII Wool and MohairIII WheatIV Feed GrainsV CottonVI RiceVII OilseedsVIII PeanutsIX SugarX HoneyXI General Commodity ProvisionsXII State and Private ForestryXIII Fruits, Vegetables, and

MarketingXIV ConservationXV Agricultural Trade

XVI ResearchXVII Food Stamp and Related

ProvisionsXVIII CreditXIX Agricultural

PromotionXX Grain QualityXXI Organic

CertificationXXII Crop Insurance and

Disaster AssistanceXXIII Rural DevelopmentXXIV Global Climate ChangeXXV Other Related Provisions

Last farm bill to contain

supply mgmt provisions

for crops

Major Commodity Tools in Major Commodity Tools in the 1990 Farm Billthe 1990 Farm Bill

• Program Crops (wheat, feedgrains, cotton, rice, and minor oilseeds)– Target Price, nonrecourse loan and marketing

loan, and acreage reduction program

• Soybeans – Nonrecourse loan only• Wool and Mohair – Incentive program• Dairy – Price support (nonrecourse loan)

and marketing orders (price)• Peanuts – marketing quota and quota

price• Fruits and vegetables – marketing orders

(quality)

Crop Policy ToolsCrop Policy Tools

• Target Prices• Nonrecourse loan and marketing loan

rates• Set-aside/Acreage Reduction Programs• Deficiency Payments (By program crop)

– DP = TP - higher of {LR or MP} x [crop base acreage x (1-ARP%)] x farm program yield

– Had to plant the program crop to receive payment for that crop

ReviewReview

•1990 Farm Bill•Target Price•LR (ccc)•Market Loan•ARP’s

ARP supply control mechanism• Each year Sect. announces the % of base

acres to be idled (acreage reduction percentage)P

S with ARP

S with no ARP

USDA analyzes the market w/o ARP if Price is “too” low, then announces ARPCarrot & Stick

(TP + loan) (ARP)

ARP came from Set-Aside Paid Diversion type of Supply Controls 1933-1995

ARP – Acreage Reduction Program 1990-1995

S with ARP

S with no ARP

ARP => 10% idling of base acres is required to qualify for TP & loan benefits.

Target Price: Congress set TP & provided for a Deficiency Pmt.

S after ARP

TP always greater than pt where S=DWhat is equil price with TP in place? Price determined where qs = D

Peq is lower than pt S=D at A

Payment Yield 10 year moving avg of actual yields 1976-1984 and frozen in 1985.

60’s 70’s 80’s

actual

Pay yldylds

Marketing Loan Marketing Loan ProgramProgram

Marketing Loan Program in ’90 Farm Bill

•Authorized for only Cotton and Rice

•Approved for grains (fg & wheat & soybean) but never used

•Non-recourse loan on a crop

•Producers take a loan at the CCC loan rate & repay the loan at the lower of the CCC loan rate or the market price

Marketing Loan Marketing Loan ProgramProgram

1.5 Pe

qs at LR Q/yr

P*qs = Rev from mkt place

Marketing loan gain = (LR-Pe)*

Loan at LR at $2.00

Repay loan at Pe or $1.50

Pocket difference, sell crop on mkt at $1.50

TP and Mkt Loan with ARP used to reduce costs

Without an ARP the quantity supplied or qs is determined by TP=Supply

Given qs=Demand => determine Peq Set LR>Peq

Producer received: Mkt revenue: Peq * qs ; LDP or MLG = (LR-Peq)qs

Def pay = (TP-LR) * Base * PY * .85

PARP eq

World price

LR Mkt Loan

Supply Controls

• Land Retirement Programs (Voluntary)– Soil Bank (1950s)– Conservation Reserve Program (newer version)

• Land taken out of production for multiple years, normally 10 in exchange for an annual rental rate

• 30 percent rule

– Set-aside/Acreage Reduction Program (ARP)• Requires farmers to idle % of base to be eligible for

farm program benefits

– Payment-in-Kind Program• Much like set-aside/ARP except participants paid with

commodities rather than cash

Crops (Continued)

• Acreage Allotments and Marketing Quotas (Mandatory)– Acreage allotment specifies number of acres crop on which a crop can be produced– Marketing quota restricts quantity of a commodity that can be marketed

• Tobacco in US• Milk in Canada

– Capitalization of benefits

Dairy Supply Controls• Milk Diversion Program (1983)

– Designed to reduce milk supply by paying producers to market less milk

• Dairy Termination Program (1985)– Whole Herd Buyout Program– Designed to reduce milk supply by paying producers to sell whole herd for export or slaughter and remain out of

production for 5 years

• Cooperatives Working Together (CWT)– Producer funded (voluntary assessments) program to reduce production

Dairy (Continued)• Cooperatives Working Together (CWT)

– Producer funded (voluntary assessments) program to reduce production– $0.05 per cwt checkoff on milk marketings (~$60 million)– 45% on herd retirement– 10% on production reduction– 35% on export assistance

• Are they getting the biggest bang for their bucks?

Production Controls Impacts on Land Prices --

ARP• Land prices depend on demand and supply of land• ARP reduces supply of land and increases demand

for land

Qt crop

Qt land

Sland 0

MVP = Higher P crop * MPPP0

Sland 1

Production Controls Impacts on Land Prices --

Quota• Quota reduces supply of land and increases

demand for land and quota

Qt crop

Qt land

Sland w/o Quota

MVP = Higher P crop * MPPP0

Sland with Quota

Land w/ Quota

PLand &

Price of quota = Pland & quota – Pland

1996 Farm Bill1996 Farm BillTitles

I Agricultural Market Transition ActSubtitle A Title, Purpose, and Definitions

B Production Flexibility Contracts C Nonrecourse Marketing Assistance Loans

and Loan Deficiency Payments D Other Commodities

- Dairy, Peanuts, Sugar E Administration F Permanent Price Support Authority G Commission on 21st Century Prod. Ag. H Miscellaneous Commodity Provisions

II Agricultural TradeIII ConservationIV Nutrition AssistanceV Agricultural PromotionVI CreditVII Rural DevelopmentVIII Research, Extension, and EducationIX Miscellaneous Major shift from coupled

(deficiency payments) to decoupled support (AMTA/PFC payments)

Decoupled payments were referred to as AMTA and PFC payments

• Federal Agriculture Improvement and Reform Act of 1996

• Generally referred to as “Freedom to Farm”• As with other farm bills, 1996 farm bill was

an amendment to permanent legislation (1949 farm bill)

• 7 year farm bill beginning in 1996 and ending in 2002

• Major change in commodity programs relative to previous 22 years (starting with 1973 farm bill)– Fixed “decoupled” payments in lieu of target

price/deficiency payment program– Fewer production controls

OverviewOverview

• Eliminated Target Prices– No longer pays deficiency payment

based on the target price minus the higher of the loan rate or market price times base acres

• Eliminated acreage bases• Eliminated annual supply control

programs (e.g., ARPs)

Commodity ProvisionsCommodity Provisions

• Initiated decoupled payments– Also referred to as AMTA payments or

production flexibility contract (PFC) payments

• Provided full planting flexibility on previous crop acreage bases– All program crops plus haying and

grazing– Limits on fruits and vegetables

• Continued nonrecourse marketing assistance loans and loan deficiency payments – Maximum loan rate levels determined

by formula– Minimum loan rate levels set for

cotton and soybeans at $0.50 per lb and $4.92 per bu

– Fixed loan rate for rice at $6.50 per cwt

Contract Payments by Fiscal Contract Payments by Fiscal YearYear

(million $)1996 1997 1998 1999 2000 2001 2002 Total

5,570 5,385 5,800 5,603 5,130 4,130 4,008 35,626

Allocation of Payments by Crop

Crop Percent Corn 46.22 Grain sorghum 5.11 Barley 2.16 Oats 0.15 Wheat 26.26 Upland cotton 11.63 Rice 8.47 TOTAL 100.00

• Fixed payments$40,000

• Marketing loan gainsor Loan Deficiency Payments$75,000– Can use marketing certificates

• Continues 3-entity rule

Payment LimitationsPayment Limitations

1996 Farm Bill 1996 Farm Bill (Debated in (Debated in ’95)’95)

High prices in ’93, ’94 and part of ‘95

World recession

2 weeks after signed ’96 Bill prices started falling

Direct PaymentDirect Payment

Direct Payment

AMTA: Ag Market Transition Act

AMTA = Payment Rate * Base * Pay Yield * .85

1995 Outlook Reality 1996

Loan rate Peq

D reduced by world recession

Marketing Loan rate

Loan rate was to be a safety net

1996 Farm Bill Removed 1996 Farm Bill Removed ARPARP

No more ARP, kept the CRP, released land back to production

Full capacity, freedom to plant “any” crop

S with ARP

S with no ARP

ARP => 10% idling of base acres is required to qualify for TP & loan benefits.

1996 Farm Bill Removed 1996 Farm Bill Removed TPTP

Target Price: Congress set TP & provided for a Deficiency Pmt.

S after ARP

No production incentive from the target priceProduction declines, price rises

QuizQuiz

1. List and describe the purpose of three policy tools used in the 1990 farm bill.

2. Evaluate this statement. “The U.S. went from a nonrecourse loan to a marketing loan program to save money.”

What Is a Farm Bill?What Is a Farm Bill?• Long Definition

– Legislation developed by the agricultural committees of the House and Senate that, when passed into law, authorizes the USDA to initiate(and/or maintain) and manage a wide range of programs and program provisions for a specified period of time.

• Shorter Definition– Tells USDA what to do, how to do it, who to do it for, and for

how long• Ex. Provide food assistance with food stamps to poor for the period

2002 to 2007.

• Each farm bill has a varying length with an expiration date.– Recent farm bills

• 1985, 1990, 19951996, 2002

What Is the CCC?What Is the CCC?

• Commodity Credit Corporation– A federally owned and operated corporation

within the USDA created to stabilize and support agricultural prices and farm income by making loans and payments to producers, purchasing commodities, and engaging in various other operations.

– Handles all money transactions for agricultural price and income support and related programs.

– the USDA bank

I Commodity ProgramsSubtitle A Direct Payments and Counter-Cyclical Payments B Marketing Assistance Loans and Loan Deficiency Payments C Peanuts (Major Changes) D Sugar E Dairy F Administration

II ConservationSubtitle A Conservation Security (New) B Conservation Reserve C Wetlands Reserve Program D Environmental Quality Incentives Program E Grassland Reserve F Other

III TradeSubtitle A Ag. Trade Dev. And Assistance Act of

1954 and Related Statutes B Ag. Trade Act of 1978

IV Nutrition ProgramsSubtitle A Food Stamp Program

B Commodity Distribution C Child Nutrition and Related Programs

V CreditSubtitle A Farm Ownership Loans

B Operating Loans C Emergency Loans

VI Rural DevelopmentVII Research and Related MattersVIII ForestryIX EnergyX Miscellaneous

General OverviewGeneral Overview

• Commodity provisions similar to previous 1996 farm bill– Continue decoupled “AMTA” payments– Continue marketing loan gains/LDPs– No production controls– Initiate counter-cyclical payments (CCPs)

»Similar to but not the same as target price/deficiency payment program

– Allows update of bases and program yields

• Major changes for Soybeans and Peanuts– Provisions similar to other program crops

General Overview (Cont.)General Overview (Cont.)

• Required country-of-origin labeling for meat, fish, produce and peanuts by 2004– Meat products would be stamped U.S.

made only if the animals were born, raised, and slaughtered in the U.S.

– Have since pushed back implementation date

General Overview (Cont.)General Overview (Cont.)

• Added an Energy Title– Commits $405 million to the development of

resources for the production of ethanol and biodiesel facilities

• Initiates a counter-cyclical dairy program• Wool and Mohair provided marketing loan

benefits• Honey provided marketing loan benefits• Added new Conservation Security Program• EQIP funding increased 6 fold• Includes authority for LDPs on grazed

wheat, oats, barley and triticale

DefinitionsDefinitions

• Covered crops:– wheat, corn, grain sorghum, barley,

oats, upland cotton, rice, soybeans, and other oilseeds (sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed)

– Eligible for income support

• Loan Commodities:– Covered commodities plus extra

long staple cotton, wool, mohair, honey, dry peas, lentils, and small chickpeas.

Crop Base UpdatingCrop Base Updating

• Producers of covered crops had five choices:1. Retain current AMTA bases2. Retain current AMTA bases and add max oilseeds (if

applicable)3. Retain current AMTA bases and add min oilseeds (if

applicable)4. Update bases by using 1998-2001 planted and

considered planted acreage for all crops5. Retain current AMTA bases and add some

combination of oilseeds (if applicable)

• Base updating was on a farm (FSA farm number) by farm basis

• What are the implications of 1998-2001 period for Texas? Droughts 1998, 1999, and 2001)

– Bad choice of years used to updated bases

MostUsedChoices

Farm Program Yield Farm Program Yield UpdatingUpdating

• Only applied to counter-cyclical payment• Only allowed if update base acres using 1998-

2001 planted acreage • Producers had three choices:

1. Retain current program yields2. Update yields by adding 70% of the 1998-2001

average yield (excluding any year planted acreage was zero) minus current program yields to the current program yield

3. Update yields by taking 93.5% of 1998-2001 yields, excluding any year planted acreage was zero

• What are the implications for farmers/landowners who underplanted bases or did not plant anything at all?

− Got screwed – would have lost money if updated bases so couldn’t update yields

Farm Program Yield Updating Farm Program Yield Updating (Cont.)(Cont.)

• Could replace any of the 1998-2001 yields with 75% of the county average for that year

– Using 75% of 1998-01 county average yield per harvested acres to replace any yield

• Yield updating was on a crop by crop basis for each FSA farm #

• All crops on a farm were required to use the same method for determining yields

Direct PaymentsDirect Payments

• Farmers could choose to update base but were required to use AMTA (1996 farm bill) yield– Soybeans and peanuts a little different

• Same formula as AMTA paymentsDirect Payment = (payment rate x (base acres x .85) x farm program yield)

• Advance Payments– Producer Option– For 2003-2007 up to 50% in any month

between December 1 of the year before and October 1 (date payment is otherwise made)

Counter-Cyclical Counter-Cyclical PaymentsPayments

• Commodity specific based off of national price trigger

• Base owners and/or producers receive a payment that depends on the effective price for the commodity:

Target price - Effective price

Counter-cyclical payment rate ($/unit)

CCP = CCP rate x (Base acres x .85) x Updated FPY

• Effective price equals the higher of market price or loan rate plus the direct payment rate

• The national market price is the 12 month weighted average marketing year price for the crop

• Decoupled from production decision

Counter-Cyclical Payments Counter-Cyclical Payments (Cont.)(Cont.)

• Won’t know for sure what total payment will be until end of marketing year– This is roughly a year after harvest

• If Secretary determines CCPs are required:– 2002 – 2006 Payment Timing

» Producer can elect to receive up to 35% of the projected counter-cyclical payment in October of the year the crop is harvested

» An additional 35% beginning in February of the following year

» The balance after the end of the 12 month marketing year for the crop

– 2007 Payment Timing» First payment (40%) after 6 months of marketing

year» Final payment after the end of the 12 month

marketing year for the crop

Direct PaymentsDirect PaymentsCrops 1996 Farm Bill

2002 Rate2002 Farm Bill 2002 – 07 Rate

Corn ($/bu) 0.261 0.28

Sorghum ($/bu) 0.314 0.35

Wheat ($/bu) 0.461 0.52

Upland Cotton ($/lb)

0.0572 0.0667

Rice ($/cwt) 2.05 2.35

Barley ($/bu) 0.202 0.24

Oats ($/bu) 0.022 0.024

Soybeans ($/bu) N/A 0.44

Minor Oilseeds ($/lb)

N/A 0.0080

Peanuts ($/ton) N/A 36

New “covered” crops

Loan RatesLoan RatesCrops 1996 Farm

Bill 2001 Rate

2002 Farm Bill

2002 – 03 Rate

2002 Farm Bill2004 – 07

Corn ($/bu) 1.89 1.98 1.95

Sorghum ($/bu) 1.71 1.98 1.95

Wheat ($/bu) 2.58 2.80 2.75

Upland Cotton ($/lb) 0.5192 0.52 0.52

Rice ($/cwt) 6.50 6.50 6.50

Barley ($/bu) 1.65 1.88 1.85

Oats ($/bu) 1.21 1.35 1.33

Soybeans ($/bu) 5.26 5.00 5.00

Minor Oilseeds ($/lb) 0.093 0.096 0.093

Peanuts ($/ton) N/A 355.0 355.0

Dry Peas ($/cwt) N/A 6.33 6.22

Lentils ($/cwt) N/A 11.94 11.72

Small Chickpeas ($/cwt)

N/A 7.56 7.43

Target PricesTarget PricesCrops 2002 -

20032004 – 2007

Corn ($/bu) 2.60 2.63

Sorghum ($/bu) 2.54 2.57

Wheat ($/bu) 3.86 3.92

Upland Cotton ($/lb) 0.724 0.724

Rice ($/cwt) 10.50 10.50

Barley ($/bu) 2.21 2.24

Oats ($/bu) 1.40 1.44

Soybeans ($/bu) 5.80 5.80

Minor Oilseeds ($/lb) 0.0980 0.1010

Peanuts ($/ton) 495.0 495.0

Market Receipts

MLG/LDP

Distribution of Government Distribution of Government SupportSupport

Example: CottonExample: Cotton

Revenue per Pound

Target Price – $0.724

LoanRate – $0.52

Fixed payment – $0.0667

}Decoupled (do not have to produce to receive payment)

Coupled (do have toproduce to receive benefits from marketing loans gains or LDPs)

Market Price

Reflects payments not on full productionReflects payments not on full production(payment acres = .85 x base acres)(payment acres = .85 x base acres)

Payment Timeline for Most Payment Timeline for Most (Depends on Marketing Year) (Depends on Marketing Year)

CommoditiesCommodities

Oct 04 Dec 02 Feb 05 Aug 05 Oct 05 Dec 05

1st CCP Advance

for ’05 crop

2nd CCP Advance

for ’05 crop

CCP Final

for ’05 crop

1st CCP Advance

for ’06 crop

Opportunityfor Direct Payment

50% Advancefor ’05 crop

FinalDirect Payment

for ’05 crop

What a mess!

During 2001 we debated the 2002 Bill

Era: low prices for 6 years and no expectation of high prices, increased call for new safety net program.

New Safety Net in 2002 Bill is return to Deficiency Payment with New Target Price.

2002 Bill Policy Tools:

•New TP

•Direct Payment

•Continued Marketing Loan Program

•No ARP

•***Farmers were permitted to update Base Acres (frozen in 1990) & Payment Yield (frozen in 1985). 7 options for update Base & Yield.

New Target Price:

Decoupled Payment

•Def Payment is not tied to the crops you grow

•Def Payment is based on historical crops base acres & CCP yield

•Def Payment is called a Counter Cyclical Payment (CCP)

CCP= TP - Direct Pay rate – [max of price or LR] * Base acre * CCP yield * 0.85

NTPPeq

Because CCP is not related to crop being

grown, receive payment from cotton history not

for wheat grown.

The New Target Price does not directly affect quantity supplied because CCP is a decoupled payment.

2002 Bill

Direct Payment

=>decoupled

=>DP = DP rate * Base * .85 * Dp Yield

DP yield < CCP yield – updated 5 yr average actual ylds.

Continued marketing loan – LDP & MLG

Peq > NTP => No CCP for corn, wheat, sorghum, barley, oats, or soybeans

Payment Limits• What is the Issue?• Brief History of Payment Limitations• Payment Limit Commission• What Does the Data Indicate?

−Payments−Certificates

• Estimated Impacts of Tightening Limits• Conclusions

Brief History of Payment Limitations

• Payment limit debate began in late 1960s• Limits first enacted in 1970 farm bill at $55,000

and ranged from $20,000 to $40,000 through 1985 • 1985 farm bill raised to $50,000 per “person”

− Initiated 3 entity rule

• 1990 farm bill established separate limits for deficiency payments and MLG/LDP

• 2002 farm bill set direct payment limit at $40,000, CCP at $65,000, and MLG/LDP at $75,000− Introduced means testing for first time

$2.5 million AGI limitation (3 year avg) unless 75% came from Ag.

What is the Issue?

• Depends on a person’s point of view−Proponents generally feel:

Too much money goes to too fewLarge payments accelerate

consolidation/industrialization of agricultureLarge farms don’t need the moneyLarge payments lead to higher land values

−Opponents generally feel:Rules have been set and are being followedBusiness/investment decisions have been

made based on limits in current law

What is the Issue? (Continued)

• A person’s point of view tied closely to what they feel is the goal of farm programs

• A few of the often cited goals are:– Foster an abundant supply of food and fiber– Support and stabilize farm income– Help producers get access to credit– Expand agricultural exports– Conserve natural resources– Maintain the family farm and the vitality of rural

communities– Capitalize on the multiple functions of agriculture– Counter the protection provided to agriculture in other

countries

Current Payment Limitations

• $40,000 per “person” for direct payments

• $65,000 per person for countercyclical payments

• $75,000 per person for loan deficiency payments and marketing loan gains

Background: A Person

• A person is the unit to which payment limits apply—it may be an individual, an individual in a joint operation, or other entity: trust, limited partnership, corporation

• Under the 3-entity rule, an individual who receives payments may also receive payments from up to 2 other entities in which the individual has up to a 50% interest

Background: An example of maximum payments an individual

may receive

Producer has own operation, 50% interest in trust A and 50% interest in corporation B

Direct CCP MLG/LDPDollars

Own farm 40,000 65,000 75,000A 20,000 32,500 37,500B 20,000 32,500 37,500Total 80,000 130,000

150,000Grand total $360,000

Background: To be Eligible a Producer Must be Actively Engaged in Farming

• Must provide: Land, equipment or operating capital

andActive personal labor or active personal

management• Contributions must be commensurate

with shares and must be at risk

Distribution of PFC Payments, 2001

$4.1 bil. Paid to 1.2 mil. Payees

Payment size % of payees

% of payment

s$10,000 or less 91 43

$10-30,000 8 39

$30,000 or more 1 18

Payment Limit Commission

• Keith Collins, Chair with 3 members appointed by each of Secretary, House, and Senate

• Assess effects of further limitations for direct, counter-cyclical payments and marketing loan benefits on:−Farm income−Farm land values−Rural communities and agribusiness infrastructure−Planted area of covered commodities and supply

and prices of all commodities• Recommendations as Commission determines

appropriate • Report came out at the beginning of

September

Farms Receiving Government Payments

34% of all Farms in 2001

Of farms receiving payments:

Rural residence

farms (273,000)

Intermediate farms(330,000)

Commercial farms(123,000)

Avg. net cash income

2,256 17,961 124,220

Avg. gov. payments

4,827 13,865 60,532

Share of:Farms 38 45 17Payments 10 34 56Production 7 27 66

Current Limits Do Not Reduce Payments

Appreciably

Why?• Most farms are not large enough to

trigger limits, although farms in 43 states hit limits in 2001

• Large farms have multiple persons (payment limits) per farm

• No limit on marketing loan benefits

Effect of Current Limits on Payments

101214161820

2001 2001

Billion D

ollars

Amount not paid out due to limits

Mktloss

Loan benefits

Base Acres Needed to Reach $40K in Direct Payments

Crop Base acres Comment

Corn 1,636 1.5% farms harvest>1,000 ac.

Wheat 2,623 5.2% farms harvest>1,000 ac.

Soybeans 3,565 1.9% farms harvest>1,000 ac.

Upland cotton 1,176 10.1% farms harvest>1,000 ac.

Rice 416 19.9% farms harvest>500 ac.

Certificates

• Used to facilitate marketing loan administration

• Used to avoid loan forfeitures, gain not s.t. limits

• Nonrecourse loan makes LDP/MLG limit ineffective

• Have primarily been used in cotton and rice

• Use of certificates with nonrecourse loan has little consequence for taxpayers, slight increase in farm income, and avoids market disruption of forfeitures

Effects of Further Limitations on:

1--Farm Income

• Reducing direct limit to $30K, CCP to $50K and loan benefit to $75K:– Direct payments fall $255-275 mil.– CCP payments fall $400-425 mil.– Loan benefits fall $400-500 mil.

• Reductions: 4-5% of payments• Producers affected: rises to 35,000

from 12,000 farms• States most affected: CA, AZ, AR, MS

Effects of Further Limitations on: 2--Farmland Values

• 15-25% of land values due to gov. payments, but many factors determine land values

• Non-operator landlords rent out 41% of farmland

• Reducing limits to $30/50/75K would reduce rental rate and land values. Modest national effect; possibly large regional effects– Ariz. & Calif: 25% or more of producers

would reach limit

• Effects greatest in Delta, So. Plains, followed by Southeast and rural areas of Far West

Effects of Further Limitations on:3--Rural Communities &

Infrastructure• 316 out of ~2,300 rural counties are farm

dependent• Vulnerable areas: county income dependent

on farm income, farm income dependent on payments, high proportion of producers affected

• Short-run effects greatest in Delta, West Tex. , rural Ariz. & Calif., Western Kan., Eastern Neb. & So. Dak., Western Iowa– Lower acres, farm income & spending, but

higher crop prices & lower rents. Effects diminish over time

• Long-run effects largely unknown: farm structure less important than technology, economic diversity, natural amenities

Effects of Further Limitations on:

4--Commodity Supply and Prices

• Limits on decoupled payments expected to have minimal effect; main effect is limits on loan benefits

• Planted acres decline: modest national effect but larger effect for cotton and rice– E.g., cotton: 0.5 to 1.2 to 2.5 mil ac.

• Limited effect on F&V due to climate, lack of market outlets, need for contracts, investment, negative effects of shifts. Shifting to hay a likelihood

• Effects diminish over time

Conclusions

• The commission report provides support to proponents and opponents of tighter limits

• Payment limit issue is not going away– Momentum– Federal budget situation

• Differences in a person’s position on this issue can be tied to differences in their perception of the goals of farm programs

Milk Price Support Program

• Authorized by 1933 Act and made permanent by 1949 Act• Secretary of Ag directed to support the price of manufacturing grade milk by

purchasing manufactured dairy products (cheese, butter, and Nonfat dry milk)• Current support price is set at $9.90/cwt

– Make allowances– Product purchase prices

Federal Milk Marketing Orders

• Combination of:– Classified pricing based on end use

• Class I – beverage milk• Class II – fluid cream products, yogurt, perishable manufactured products (ice cream, cottage cheese, and others)• Class III – Cream cheese and hard manufactured cheeses• Class IV – Butter and milk in dried form

– Market-wide revenue pooling meaning that all producers who market in a particular order receive the same minimum “blend” price– Blend prices are weighted average based on use in each category by marketing area

• Only pertains to minimum prices for Grade A milk

Dairy Export Incentive Program (DEIP)

• Helps exporters of dairy products meet prevailing world prices for targeted commodities and destinations

• Objective:– Develop export markets where U.S. dairy products are not competitive due to the presence of subsidized

exports from other countries

• Eligible commodities:– Nonfat dry milk, butter, and cheeses (cheddar, mozzarella, gouda, feta, cream, and processed American)

Milk Income Loss Contract (MILC) Payments

• Established in 2002 farm bill• Set to end September 30, 2005 (3.5 year program)• Scored at $3.5 million over 2002-2005 period• Counter-cyclical program

– Payment rate is 45% of the difference in monthly Boston Class I price and $16.94 (target price)– Monthly payment is equal to calculated payment rate multiplied by the eligible quantity.– Annual eligible payment quantity of 2.4 million pounds

An Assessment of the Equitability of Farm Program Payments across Crops

James W RichardsonCo-Director AFPC, Regents Professor and TAES Faculty Fellow

Joe L OutlawCo-Director AFPC, Associate Professor and Extension Economist-Policy

Lindsey HigginsResearch Assistant

Measures of Equitability

• What do we mean by equity?– What share of payments does each

crop receive?

• There are many measures of equity– Payment per acre– Payment per dollar of value– Payment by farm size– Etc.

Breakdown of Payments

Corn35%

Rice9%

Wheat22%

Peanuts1%

Barley2%

Soybeans9%

Cotton18%

Oats0%

Sorghum4%

1990 to 2002 Average Support By Crop

Breakdown of Payments

Corn38%

Rice11%

Wheat26%

Sorghum4%

Oats0%

Soybeans1%Barley

Peanuts1%

Cotton17%

1990 to 1996 Average Support By Crop

Rice13%

Sorghum3%

Oats0%

Soybeans10%

Barley1%

Peanuts3%

Cotton28%

Wheat16%

Corn26%

2002 Support By Crop

Corn Cotton Rice Sorghum Oats Wheat Barley Soybeans Peanuts

Average

90-'95 Avg

96-'01 Avg

*Total Annual Support divided by Total Annual Planted Acres

**Note: CCC Expenditures obtained from Farm Service Agency, USDA. Planted acres obtained from National Agricultural Statistics Service, USDA.

eSupport per Planted Acre ($/acre)

Effective Benefits Relative to Effective Variable Costs

um Oats

Barley

Average

90-'95 Avg

96-'01 Avg

*Effective benefits divided by effective variable costs. Effective benefits include direct payments, market price or loan rate, payment fractions, and for 2002, countercyclical payments. Effective variable costs include variable costs and ARP costs.

**Note: Actual Yield and price obtained from NASS, USDA. Farm bill payment provisions obtained from Farm Service Agency, USDA. Variable costs obtained from the economic research service, USDA. Economic

Per Acre Support Relative to Total Costs

um Oats

Barley

Average

90-'95 Avg

96-'01 Avg

*Total Annual Support per planted acre divided by Total Costs per planted acre.

**Note: CCC Expenditures obtained from Farm Service Agency. Total Costs obtained from Economic Research Service, USDA.

Total Annual Support/ Total Value of Production

um Oats

Barley

Average

90-'95 Avg

96-'01 Avg

*Total Annual Support divided by Total Annual Value of Production.

**Note: CCC Expenditures obtained from Farm Service Agency. Total Value of Production obtained from National Agricultural Statistics Service.

Summary

• Important to keep in mind the intentions of the farm bill

• No single commodity consistently receives the most or least support throughout all the measures

• Results depend on which measure best defines equitable

Overview

• Milk is the most regulated product in the U.S.• Produced in every state• Milk is not all the same

– Depends on sanitary conditions produced under– Grade A

• Eligible for fluid consumption

– Grade B• Only eligible for making manufactured products• Represents less than 10% of total milk supply

Policy Position Paper

• Write for your audience: – Congressman or Senator – Farm organization policy committee

• State the policy position• Provide background information as to why it is

a problem• Use economic theory & facts to show why

your position is obviously right• Do not use outdated idealism – Agrarian or

Jeffersonian ideals – Deal in Facts not Myths

Policy Position Paper

• Write in bullet or outline form– Use bold text on left margin to indicate topic– Separate text into following headings

• Policy Option: state what the policy is and what you want from the decision maker to do (for or against)

• Background or Situation: provide information to explain the current situation, what is the problem, what caused the problem, how is your group affected, etc.

• Justification: use economic theory, facts, and persuasive logic to make the decision maker clearly see that your position is correct and the only logical alternative – never state your opinion, they are more powerful than you, as you are asking for their support

• Double space or 1.5 space, use 10 or 12 pt font and wide margins 1” – Lots of White Space on the Page

Trade Policy and FAS

• Role of Foreign Agricultural Service in USDA

• Help ag exporters develop and maintain new markets

Barriers to Trade

• Import Tariff• Export Subsidies• Export Embargo• Import Quotas• Exchange Rate Distortions• Variable Levy• Technical Restrictions

Justifications for Barriers to Trade

• Protect domestic (infant) industry • Protect national security• Maintain domestic farm programs

– (Section 22 in Ag. Adjust Act 1933)• Protect against painful adjustment• Protect national health• Retaliation against policies • Improve balance of payments• Generate revenue (export tariffs)

Trade Model Free Trade

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Exporter Trade Sector Importer

Import Quota

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Quota1

Import Tariff

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Quota to a Tariff Rate Import Quota

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Quota1

Export Subsidy

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

SE-Sub0

Export Embargo

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

Q/yr Q/yrQ/yr

Dom D0

Supply0

Export D0

S Export0

Supply0

QS0QS0QD0

QD0QT0

International Policy

• Live in a global economy where:– Interdependence means that any policy

decisions made by one country has a impact on the U.S.

– Many ag markets are global in scope thus while the price of corn may be in the US, there is a global market influenced by world supply and demand forces

– The exceptions to this global market are few and are limited to those commodities that have been able to isolate themselves through barriers to trade (successful only in varying degrees)

19Read Chapters 4, 5, 6 Knutson, Penn and Flinchbaugh

North America Free Trade Agreement

NAFTA• Really 3 Separate Trade Agreements

Canada – US Trade Agreement (CUSTA) effective in 1989

Canada – Mexico Trade Agreement effective in 1993

US – Mexico Trade Agreement effective in 1994• Farm Policy Harmonization is a major

problem

NAFTA• CUSTA – 1989

– Tariffs on most commodities phased out over 5-10 year period with following important exceptions being Tariff Rate Quotas (TRQ) on:Poultry: Canadian Poultry BoardDairy: Canadian Dairy Board and US price supportsSugar: US price supports

– A TRQ allows a certain amount of imports at a lower tariff (sometimes zero) with impacts above the quota assessed a higher tariff. Example the TRQ in Canada for cheese is 245% of the price at 20,412 MT. For the US it is 58% at 134,995 MT.

NAFTA• US – Mexico Trade Agreement in 1994

– Convert all trade barriers to tariffs (Mexico had extensive licensing of imports) and then reduce to zero over 5-15 years.

NAFTA• Overall provision that has caused conflict

involves the ability of the three countries to maintain their own domestic farm programs (subsidies) in the setting of freer trade – reductions in tariffs.– If free trade is to exist there must be

harmonization of policies.

NAFTA• Basic method for dispute settlement involves

the establishment of Panels which act as “judges” of who did what to whom (legal rights and obligations)– Members of these panels include:

• 2 members chosen by one country• 2 members chosen by the other country• 1 mutually agreed upon chair

– Original agreements had a provision for continuing discussion to eliminate domestic program issues but no Secretariat was established (comparable to EU Commission) to continue to process of negotiation

Canada Policies

• Canadian Wheat Board (CWB)– No production controls– All wheat and barley marketed through CWB except

that fed on farm– Strict Controls over quality

• Emphasis on protein content• Controls varieties planted

– CWB markets wheat to domestic and export markets– Pools all receipts from marketing– Pays producers the average price adjusted for

quality• Payments in increments as sales take place• Closes out the pool at end of marketing season

– Little or no carryover

Canada Policies

• Canadian Wheat Board acts as an effective barrier to trade by virtue of its marketing requirement

• The price incentive is to move wheat south rather than north

• Dairy and poultry boards have high TRQs combined with marketing quotas limiting the quantity of product that can be sold

• Net Income Stabilization Account (NISA) program whereby farmers can deposit with the government up to 3% of sales revenue which is matched up to $250,000 each year with an account limit of 1.5 X 5 year average sales– Withdrawals are allowed in low income years

Mexico PolicyMexican Farm Supports

•SAGARPA: USDA of Mexico

PROCAMPO: Small farmer payments

Market support payment: Pays difference between government determined target price and market price

•Maintains sugar industry

Discourages fructose in soft drinks

Mexico Policy Issues

Concern about level of U.S. subsidies

•Imports of poultry and hogs

•Lower price of corn and soybeansCorn staple

Input for livestock and poultry

Input for HFCS production

Results in low prices for poultry and hogs

•Deny access to U.S. sugar marketShare of U.S. imports

HFCS imports to Mexico

Mexico Policy Issues

•Research/Extension: Weak

•Infrastructure

Roads: Border issue

Railroads: Privatization

Utilities

Irrigation development

•Plant and animal protection

Comparison of Mexican and U.S. Agricultural Production

Commodity MMT US MMT

Sugar 49 63

Corn 19 235

Fruit 14 31

Vegetables & Melons 9 54

Citrus 6 15

Milk 9 77

Wheat 3 54

Tomatoes 2 16

Beef 1 12

Chicken 2 14

Pork 1 9

Peppers 2 --

Bananas 2 --

Mangoes 2 --

Coconut 1 --

Geopolitical Centers of Influence

• Countries or groups (blocs) of countries that have (or could have a major impact on U.S. agriculture and agribusiness

• Some individual countries are in this position now, have been, or will be– Mexico– Canada– Japan– China– Russia

• Some are organized into blocs– NAFTA– EU– MERCOSUR/FTAA– Cairns group– APEC

Geopolitical Centers of Influence

• Then there are the developing countries– Largely ignored up to now– Want preferred access to developed

country markets

• There are interest groups outside the countries and blocs that try to influence the world agenda– Greenpeace– UN/FAO

U.S.• 9.6 M sq km

– 19% arable– 214 sq km irrigated

• 280 M people• Ag

– Corn, soybean, wheat, chicken, beef, milk, pork

– Export 2 of 5 acres

• Ag policy– Export-oriented– Farmer safety net substantial

Canadian Agricultural Production

Commodity MMT US MMT

Wheat 21 54

Barley 11 5

Corn 8 235

Soybeans 2 78

Rapeseed/Canola 5 ---

Beef 1 12

Hogs 2 9

Chicken 1 13

Milk 8 75

Canada WTO Box Status

•NISA?

•Dairy and poultry boards?

•CWB?

Mexico/Canada/US

Basic need exist for harmonization of policies

•Farm subsidies

•Market information

•Grades and standards

•Infrastructure

•Plant and animal protection

TraceabilityTraceability

• The ability to trace and follow a food, feed, or food producing animal or substance intended to be or expected to be incorporated into a food or feed, through all stages of production, processing, and distribution

BackgroundBackground

• Host of Names and Related Issues– Quality Assurance– Identification systems– Identity preservation– Segregation– Process control– HACCP– Process verification– COOL

Forces for TraceabilityForces for Traceability

• Risk and Liability– Loss of customers– Loss of business

• Food Safety• Food Quality

– Intrinsic and extrinsic characteristics

• GMO Crops • BSE• Biosecurity

Are Consumers Willing to Are Consumers Willing to Pay for Traceability?Pay for Traceability?

• Traceability has Some Value Itself• More Value as Means of Verifying

Other Characteristics Like Food Safety• Can Add Value from Marketing

– Not necessarily just a cost

Animal IdentificationAnimal Identification

• Biosecurity and Disease Forced Issue• ID Itself is Not the Solution

– Doesn’t make food safe– Doesn’t prevent foreign disease

• Market Access– US beef exports to Japan

Animal IdentificationAnimal Identification

• Disease– Monitoring– Control and eradication– Emergency preparation

• Food Safety• Compatibility

– Defined standard– Compatible systems through sector

Role For GovernmentRole For Government

• Regulation• Set the Standards• Oversight and Inspection• Credibility• Process Verification

SummarySummary

• Rapidly Changing Area– Take some work to remain abreast of

changes

• Animal ID System Moving Forward– Industry and government action

• Moving Forward in All Areas

Origins of WTOOrigins of WTO• General Agreement on Tariffs and Trade (GATT)

– Established in 1947 as a forum to reduce trade barriers

• WTO replaced GATT in 1995 as legal and institutional foundation of multilateral trade relations– Designed to strengthen the trade rules by providing

a stronger set of institutions for resolving disputes and enforcing agreements

• Negotiations take place in “rounds”– There have been 9 to date– Begins with an agreement among members on

agenda– Most recent completed round was Uruguay Round– Currently on Doha Round

21Chapter 5 Knutson, Penn and Flinchbaugh

Three Basic PrinciplesThree Basic Principles

• Once a tariff concession is agreed to, it cannot be raised

• MFN (Most Favored Nation), any advantage given to one country must be given to all

• Imported goods treated the same as domestic goods in terms of regulation and taxes

Three Pillars of URAAThree Pillars of URAA• Market access: Convert

import quotas to tariff or TRQ and reduce over time

• Domestic support: Reduce domestic support by 20% from 1986-89 level– AMS = Aggregate measure

of support is total of red and amber box (trade distorting subsidies)

• Limits on value and volume of export subsidies from 1986-89 level

Loop Holes in URAALoop Holes in URAA• Precautionary principle: WTO requires that S&PS

decisions be based on science. This principle allows restrictions when scientific evidence is deemed to be insufficient. Requires seeking evidence over reasonable time period.

• TRQ evading on individual products so that no imports occurred

• Safeguards permit imposition of higher tariffs if there is a surge in imports above specified levels

• Multi functionality: Green box justification for subsidies based on contributions to the environment

4 Pillars of Doha Round4 Pillars of Doha Round(Reflects broader US goals in trade policy)

• Market access: Substantially reduce tariffs and increase quantities in TRQs

• Export competition: Eliminate export subsidies, variable export taxes, and exclusive import rights by state trading importers

• Domestic support: Substantially reduce amber box subsidies and simplify into exempt and nonexempt

• Developing countries: Enhance input into WTO and their benefits from international trading

Boxes of WTOBoxes of WTO

• Green box: Not trade distorting• Blue box: Minimally distorting

because production is controlled• Amber box: Trade distorting,

subsidies tied to either price and production

• Red Box: Subsidies that must be stopped (empty box)

Amber Box Limits for U.S. and E.U.

U.S. Bill $ E.U. Bill $

WTO ClassificationWTO Classification

•These classifications are based on recent US notifications to the WTO

•The fixed payments and conservation programs have been classified as green box

−Direct payments on a fixed payment base are considered as income support

−Conservation program payments are considered exempt as long as the payments do not exceed the actual cost of implying conservation efforts or the opportunity cost from idling land or producing under conservation production practices

• The marketing loan benefits, dairy programs, and sugar price support have been classified as commodity-specific amber box.

− All of these programs require production of the commodity to receive a payment and the size of the payment is contingent on the amount of production.

− Price support programs (such as dairy) are also placed here. Even though no payments flow out because of the program, the amount of price protection is charged against the WTO limit (calculated as the product of production eligible for price support and the price gap between the price support level and a reference price).

• The countercyclical and crop insurance programs have been classified as non-commodity-specific amber box.

− The countercyclical program falls into the amber box because payments depend on current prices and into the non-commodity-specific box because production is not required to receive payments.

− Crop insurance has been placed here and reported in aggregate (net indemnities across all crops). Given the nature of crop insurance, it probably should be classified as commodity-specific. Insurance at or under 70% coverage could be reported as green box, while higher coverage could be reported as commodity-specific amber.

De MinimisDe Minimis Rule Rule

• The de minimis rule exempts “small” domestic support payments

• Whether payments are “small” or not is defined by the product covered by the payment

• For the U.S., a five percent rule is applied for de minimis

• For commodity-specific support, payments are compared to 5% of the value of production for the commodity

• For non-commodity-specific support, payments are compared to 5% of the total value of U.S. agricultural production

Why Classification MattersWhy Classification Matters

• The classification of the new countercyclical program in the non-commodity-specific amber box helps the U.S. in meeting the domestic support limits

• Expenditures from programs in the non-commodity-specific category are compared against the value of all agricultural production in the country (as opposed to crop value for commodity-specific programs)

• Given U.S. agricultural production values of $200 billion, the non-commodity-specific amber box can hold up to $10 billion in support before reaching the de minimis mark and counting against the domestic support limit

Where We Are in Doha Where We Are in Doha Round?Round?

• Most recent Ministerial in Cancun – failed• Open rift when developed and developing

countries• Meetings came to abrupt end on Sept. 14th

when four African countries submitted a proposal to eliminate the U.S. cotton program

• G-21 (group of 21 countries) unwilling to open their markets in return

• Peace clause expires end of 2003– Can’t challenge other members export and

domestic subsidies on agriculture

Agribusiness and Farm Agribusiness and Farm PolicyPolicy

• Develop economic models for different agribusinesses

• Input suppliers• Output processors to consumers• Output users (livestock)• Exporters

Agribusiness Cost Agribusiness Cost StructureStructure

• Costs functions are characterized by flat AVC and MC

• Profits very sensitive to price of output and volume

Qt year

Agribusiness with Agribusiness with Demand Demand

• Demand for Ag. Inputs is based on MVP fro the input

• MVPinput = Price Output * MPPinput

Qt year

Y crop output

Y crop output S0

45o line

QY0QY1

QX1 QX0

Y crop output

X Qt. Input Use

X Qt. Input Sold

Demand X0

ARP and Input Suppliers’ Profits S0

Y crop output

45o line

PY0PY1

QY0 QY1

QX0 QX1

Y crop output

X Qt. Input Use

X Qt. Input Sold

Demand X1

Demand X0

MLR or TPMkt Loan and TP on Input Suppliers’ Profits

D at Retail

Qt at Retail

Qt at Farm

MC Mkt. Services

Derived Demand at Farm Level

Price at Farm Level

Price at Retail

ARP and impact on consumers prices

D at Retail

Qt at Retail

Qt at Farm

MC Mkt. Services

Price at Farm Level

Price at Retail

ARP and impact on consumers prices

D at Retail

Qt at Retail

Qt at Farm

MC Mkt. Services

Price at Farm Level

Price at Retail

Mkt Loan and TP impact on consumers prices

ML or TP

Exporter Cost StructureExporter Cost Structure

• Costs functions are characterized by flat MC

• Profits very sensitive to quantity exported

• Usually work on aset margin per unit• Cut costs by type of transportation

Price/Unit

Qt grain per yearQt

Domestic Demand

Domestic Supply

Excess Supply

Demand Exports

Qt Export0

Price0 World Price0

Qt Traded

Qt per YearQS0 QS1

TP or MLRDomestic Supply

Price1 World Price1

Qt Export1

Impact of TP or Mkt Loan on Quantity of Exports

Domestic Demand

Domestic Supply

Excess Supply

Demand Exports

Qt Export0

Price0 World Price0

Qt Traded

Qt per YearQS0

Impact of ARP on Quantity of Exports

Macro Economic Policy Macro Economic Policy and Agricultureand Agriculture

• Fiscal Policy Tools– Government spending– Taxation

• Monetary Policy Tools– Discount rate– Open market actions– Reserve requirements

25Chapter 2 pages 26-28 Knutson, Penn and Flinchbaugh

Monetary PolicyMonetary Policy

• Easy money or expansionary policy– Increases Money Supply leads to lower interest

rates and value of dollar– Buy Bonds – Reduce reserve requirement– Decrease discount rate

• Tight money or concretionary policy– Decrease Money Supply leads to higher interest

rates and value of dollar– Sell Bonds– Raise reserve requirement– Increase discount rate

Interest Rate

Value US$Qt Money

Tight Money Policy Increases the Value of the US Dollar

Interest Rate

Value US$Qt Money

Interest Rate

Value US$Qt Money

Impact of Strong Dollar on Export Demand

Weaker Dollar Impact on Exports

Exchange Rate

Q/yr Q/yr

Dom D0

Supply0

S Export0

QS0QD0QT0

Exporter Trade Sector

Stronger Dollar Impact on Exports

Exchange Rate

Q/yr Q/yr

Dom D0

Supply0

S Export0

QS0QD0QT0

Exporter Trade Sector

Domestic Demand

Domestic Supply

Excess Supply

Demand Exports

Qt Export0

Price0 World Price0

Qt Traded

Qt per YearQS0

• Lower US price

World Price1

Price1

Qt Export1

New Demand Exports

• Inflation in prices of inputs• Ag more dependent on purchased inputs than

in past• Income statement affects of inflation

• Inflation raises Px and real interest rate I

• Inflation raises PY about 66% as much but 5 years later

Supply or Sum MC

Pre-Inflation

Supply or Sum MC

After-Inflation

QT/Year

P/Unit

Total Demand

Increased Cost from A to C, but

Price Increase A to BP0

Cost Price Squeeze

• Increased cost of production shifts Supply or MC from A to C

• Quantity produced falls causing price to increase P0 to P1 or E to B

• But price increase (EB) is less than cost increase (AC)

Macro Economic Impacts Macro Economic Impacts on Agricultureon Agriculture

• Balance Sheet impactsNet Worth = Assets – LiabilitiesNW = PA*QA –DebtLand –DebtMach –DebtOperating Loan

• Inflation increases PA and encourages more debt

• If interest rates on debt are fixed, repay debt with lower real valued dollars

Protecting Food SafetyProtecting Food Safety

• From naturally occurring sources– Cholesterol

• From intentional contamination– Food terrorism

25Chapters 10 and 11 Knutson, Penn and Flinchbaugh

Who is responsible for Who is responsible for a safe food supply?a safe food supply?

• Buyer beware• FDA

– Processed– Food service

• USDA

Food Security DimensionsFood Security Dimensions

• Producing a sufficient quantity (before 9/11)

• Protecting individual food needs (before 9/11)

• Protecting food safety (after 9/11)

• Who’s job is it?– USDA – inspects red meats, poultry,

and processed eggs (1/4 of food) domestic• $74 billion -- $899 million food safety• 8,000 inspectors

– FDA – inspects seafood, cooked, canned and baked products, whole eggs, produce and animal feed (3/4 of food) both domestic and imported. Also inspects animal feed and its label.• $1.7 billion• 1,550 inspectors -- $20.5 million food safety

• Inspection of imported fresh produce

• 1993 – 13.8 billion pounds– 2-3% inspected

• 2000– 20.2 billion pounds– 2-3% inspected

• None of domestic fruits & veg. inspected unless a disease outbreak– If outbreak trace food to its origin

• Food borne illness 1993-1997– 2,751 outbreaks– 12,537 individual cases involving fruits and

vegetables– 6,709 cases involving meats

• Center for Disease Control and Prevention– 76 million people get sick from food each

year– 300,000 are hospitalized– 5,000 die each year

• Fruit and vegetable contamination with E. coli, O157:H7, salmonella and Listeria

• Imported green onions with hepatitis A– Chi Chi’s Mexican restaurant in Western Penn– 550 infected Fall 2003– 3 died

• Other Cases– Cyclospore parasites in Guatemala

raspberries– Salmonella infected sprouts – E. coli tainted lettuce and apple cider

• High levels of pesticides on imported vegetables and fruits also of concern– FDA can not physically inspect all

imports– Lacks testing capabilities for all

chemicals

• USDA meat inspectors– Inspector on site during operating hours at

packing plants– 6,500 slaughter houses in the USA– Monitor meat for signs of fecal matter and

other problems– USDA can not force plant closure– But it can with hold USDA inspection

stamp– USDA can also remove inspectors– Closed 127 plants for violating HCCP plans

• FDA’s 2004 proposed budget – $20.5 million for food safety and counter

terrorism– Expanded number of inspectors by 900

• Brings number up to 1,550 to inspect ¾ food• Counter terrorism is justification

– Inspectors at 90 of 317 official ports of entry

• FDA presumes that all is well until something goes wrong– If someone gets sick, they start tracing

Most Likely Sources of Most Likely Sources of Intentional ContaminationIntentional Contamination

• Salad bars

• Fruits and vegetables (supermarkets)

• Employees (any level of food chain)

Hazard Analysis Critical Hazard Analysis Critical Control Point (HACCP)Control Point (HACCP)

•Background: Federally inspected meat packing plants– 1907-96 Inspections in plant using

senses of sight, smell and touch– 1985: FDA began to apply HACCP to

processed foods (other than meat and poultry)

– 1995: FSIS published HACCP regulations

•Science based system of hazard analysis critical control point (HACCP) procedures designed to minimize and detect pathogens

•HACCP Procedures– Assess system (plant) for hazards– Determine critical control points

required to identify hazards– Establish procedures to

monitor – Take corrective actions

• HACCP Issues– Application at other levels of channel

• Rancher• Feed lot• Trucker• Packer (covered)• Point of sale (retailer/butcher shop/fast food

operator

– Authority for trace back– Application to fresh fruits and vegetables– Impacts on structure

Pesticides and Food Additive Pesticides and Food Additive SafetySafety

• Delaney Clause (1958 Food Additives Amendment)– Zero tolerance– Proved unworkable due to technology

• Food Quality Protection Act of 1996– Reasonable certainty of no harm as

the standard for determining an acceptable level of risk

Crop Insurance/Disaster Crop Insurance/Disaster Relief Relief

• Federally subsidized crop insurance– Actual Production History (APH)

• Most recent 10 years of actual yield histories

– Multiple-Peril Crop Insurance• Various causes of loss

– Federal Crop Insurance Corporation (FCIC)

– Passed in 1938– Has been repeatedly changed since then

• Long History of providing Ad hoc Disaster Assistance– Political 26

BackgroundBackground

• Insurance in agriculture has traditionally been crop yield insurance– Multiple peril (weather, fire, hail, wind,

disease, insects, earthquake, and wildlife) – Based on:

•historical producer yields•coverage level chosen (% of APH)

– FCIC determined/developed market price converts losses into dollars

Background

• Participation in Crop Insurance Program

1980 – 10% of eligible acres

1999 – 70% of eligible acres

Background (Cont.)Background (Cont.)

• Insurance designed to provide protection against substantial losses– Deductible works like car insurance– Most common coverage in Texas has been

at the 65% level [maximum government subsidy] except cotton (50%)

– Higher levels of coverage have been cost prohibitive

Current Insurance Alternatives

• Actual Production History (APH)• Catastrophic Coverage (CAT)• Group Risk Plan (GRP)• Crop Revenue Coverage (CRC)• Income Protection (IP)• Group Revenue Insurance Policy (GRIP)• Adjusted Gross Revenue (AGR) - schedule F• Revenue Assurance (RA)• Pilot Programs:

• Livestock• Fruits and vegetables•

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Dryland Cotton Yield per Planted Dryland Cotton Yield per Planted Acre Acre

(Williamson Co.), 1989-1998(Williamson Co.), 1989-1998

Producers HateProducers HateCrop InsuranceCrop Insurance

Southern Producers“Doesn’t pay”“Premiums too high relative to indemnities”

Midwest Producers“My premiums subsidize producers in marginal areas”

There is truth to both points of view

Is There Friction?Is There Friction?

“There are certain parts of the country that have acres that are challenged by weather and farm practices that are not up to what they should be ...the two Texans who lead the House Agriculture Committee come from such districts and have been joined by others in supporting crop insurance”

Senate Agriculture Committee Chairman Richard Lugar (R-Ind.) October 19, 1999

1998 1999TX Corn 3.67 .64IA Corn .41 .19

TX Sorghum

2.91 .61

OK Sorghum

2.09 1.81

TX Cotton 1.92 .99GA Cotton 1.59 1.71

Comparison of Loss RatiosComparison of Loss Ratiosfor Selected States andfor Selected States and

Commodities, 1998 & 1999Commodities, 1998 & 1999

Agricultural Risk Protection Act of 2000

Major increase in subsidy levels Revenue policies receives a percentage of premium assistance equal to APH Yield history adjustments for catastrophic years

Substitute 60% of t-yield for actual yields less than 60% of t-yield Only applies to yield guarantee, premium still based on actual yields

Administrative fees: CAT – from $60 per crop per county to $100 Buy up – from %calculation to $30 per crop per county Fees waived for limited resource farmers

Programs for livestock The cost of production as price election Premium discounts for good performance “Beefs up” efforts to combat fraud

Average Coverage Level in 1998

56 - 6061 - 6566 - 7071 - 76

50 - 55

Average Coverage Level in 2002

50 - 5556 - 6061 - 6566 - 7071 - 76

100%100%

CAT 55% 65% 75% 85%

Old ARPA

Agricultural Risk Protection Act of 2000

RealitiesRealities

• Crop insurance provides incentive to produce in high risk areas

• Ad hoc disaster assistance undermines crop insurance program– Incentive not to purchase insurance

• Have had to increase subsidy

The Feasibility of Ethanol Production in Texas

Brian Herbst

Chapter 9 Knutson, Penn and Flinchbaugh

Introduction

• Increase Interest in Ethanol– Conflict in Middle East– Houston – Non-attainment area– Methyl Tertiary Butyl Ether (MTBE)– Commodity Prices

Background

• Historic ethanol production• Texas interest

– Added value– Community Development

• Ask by Texas State Legislature to complete the feasibility study– Benefits communities, farmers, and producer

groups

Objective

• The primary objective of this research is to evaluate the feasibility of ethanol production in Texas

Alternative Scenarios

• 2 Feedstocks– Corn– Sorghum

• 3 Locations– Panhandle– Central– Southeast

• 4 Sizes– 20, 40, 60 and 80 MMGY

Methods and Data

• Stochastic simulation

• Capital budgeting

• Monte Carlo simulation using SIMETAR

• Multivariate Empirical Distribution

Stochastic Variables

• Output prices– Ethanol– Dried Distillers Grain with Solubles

• Input Prices– Corn– grain sorghum– Electricity– natural gas

Assumptions

• Discount Rate – 8%• Dividends paid at 30% positive after tax net

farm income• Unlimited financing• Long-term Debt

– 8% interest– 10 years– 50% equity required

Capital Requirements

20 MMGY 40 MMGY 60 MMGY 80 MMGY

Capital Requirement $/gallon

1.50 1.38 1.30 1.25

Total Construction and Start-up

$30 Million $55 Million $78 Million $100 Million

Net IncomeCorn in the Panhandle

-5,000

-4,000

-3,000

-2,000

-1,000

2003 2005 2007 2009 2011 2013 2015 2017

Net Income RiskCorn in the Panhandle

80 MMGY

-40,000,000

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

2003 2005 2007 2009 2011 2013 2015 2017

Mean 5th Percentile 25th Percentile

75th Percentile 95th Percentile

60 MMGY

-40,000,000

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

2003 2005 2007 2009 2011 2013 2015 2017

40 MMGY

-40,000,000

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

2003 2005 2007 2009 2011 2013 2015 2017

20 MMGY

-40,000,000

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

2003 2005 2007 2009 2011 2013 2015 2017

Ending CashCorn in the Panhandle

-70,000

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

10,000

2003 2005 2007 2009 2011 2013 2015 2017

Dividends PaidCorn in the Panhandle

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2003 2005 2007 2009 2011 2013 2015 2017

Real Net WorthCorn in the Panhandle

-10,000

10,000

20,000

30,000

40,000

50,000

60,000

2003 2005 2007 2009 2011 2013 2015 2017

Net Present ValueCorn in the Panhandle

-150,000,000 -100,000,000 -50,000,000 0 50,000,000

Sensitivity TableCorn in the Panhandle

Variable Base 20 MMGY 80 MMGYCorn Price ($/bu.) 2.61 -0.29 -0.21Natural Gas ($/Mcf) 2.39 -1.49 -1.00Ethanol Price ($/gal)

1.086 0.099 0.066DDGS ($/ton) 106.40 32.45 21.63Discount Rate (percentage point change)

8.00 -11.40 -6.74

Net IncomeSorghum in the Panhandle

10,000

12,000

14,000

2003 2005 2007 2009 2011 2013 2015 2017

Net Income RiskSorghum in the Panhandle

80 MMGY

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

2003 2005 2007 2009 2011 2013 2015 2017

60 MMGY

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

2003 2005 2007 2009 2011 2013 2015 2017

40 MMGY

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

2003 2005 2007 2009 2011 2013 2015 2017

20 MMGY

-30,000,000

-20,000,000

-10,000,000

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

2003 2005 2007 2009 2011 2013 2015 2017

Ending CashSorghum in the Panhandle

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2003 2005 2007 2009 2011 2013 2015 2017

Dividends PaidSorghum in the Panhandle

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2003 2005 2007 2009 2011 2013 2015 2017

Real Net WorthSorghum in the Panhandle

10,000

20,000

30,000

40,000

50,000

60,000

2003 2005 2007 2009 2011 2013 2015 2017

Net Present ValueSorghum in the Panhandle

-120,000,000 -100,000,000 -80,000,000 -60,000,000 -40,000,000 -20,000,000 0 20,000,000 40,000,000 60,000,000 80,000,000

Sensitivity TableSorghum in the Panhandle

Variable Base 20 MMGY 80 MMGYSorghum Price ($/bu.)

2.38 -0.06 0.03Natural Gas ($/Mcf) 2.39 -0.27 0.22Ethanol Price ($/gal)

1.086 0.018 -0.014DDGS ($/ton) 106.40 5.90 -4.59Discount Rate (percentage point change)

8.00 -0.97 0.83

Net Present Value Table

Feedstock & Location

Corn Panhandle

Central Texas

Grain Sorghum Panhandle

Grain Sorghum Central Texas

Grain Sorghum Southeast

20 MMGY

-12 M 2% -18 M 1% -1 M 51% -4 M 25% -19 M 1%

40 MMGY

-23 M 3% -36 M 1% -180 K 57% -8 M 29% -37 M 1%

60 MMGY

-26 M 9% -44 M 1% 6 M 71% -4 M 45% -46 M 1%

80 MMGY

-31 M 11% -55 M 1% 11 M 75% -3 M 51% -58 M 1%

Summary

• Corn showed little economic incentive to entice equity investment

• Grain sorghum based ethanol showed some economic incentive in the Texas Panhandle

• Grain sorghum based ethanol in the Central region of Texas shows potential

• Southeast Texas did not show positive results using grain sorghum to produce ethanol

Summary – Continued

• Sensitivity Analysis– A small change in ethanol price can have a big

impact on the economic viability of the plants because of the large volume produced

Future Research

• Different feedstocks

• Different technologies

• Feedstock Prices

Country of Origin Labeling (COOL) and the Cattle

Industry

Source: Derrell S. Peel, Livestock Marketing Specialist, Oklahoma State University

Mandatory COOL

• Proposed Mandatory Rules – Issued October 27, 2003

• Comment Period– Ends December 29, 2003

What is Country of Origin Labeling

• Included in 2002 Farm Bill (PL 107-171)

• Amends Ag Marketing Act of 1946• Covers 500+ retail products

– Beef, Pork, Lamb (whole muscle and ground)– Fresh and Frozen Fruits and Vegetables– Seafood (wild and farm-raised)– Peanuts

• Administered by AMS

What Country of Origin Labeling Isn’t

• Is not animal health or food safety– FDA (food)– FSIS (meat)– APHIS (animals)

• Is not market grading– AMS

Components of COOL

• Retail product must be labeled• Food service excluded

– Including deli’s and salad bars in retail establishments

• Excludes processed foods• Becomes mandatory September 30,

Who Must Label - Retailer

• Retailer has meaning given in Perishable Agricultural Commodities Act (PACA) – a business engaged in the selling of fresh and frozen fruits and vegetables at retail with an annual invoice value of more than $230,000−Approximately 4,500 licensees (37,000

stores)−PACA definition excludes butcher shops, fish

markets, and exporters

• Exempts food service establishments including those within retail establishments (e.g. delis and salad bars)

Consumer Notification Required at Retail

• Country of Origin• Label or notice must:

– Be legible– Be in English– Not obscure other required

information

Exclusions

• Covered commodities are excluded if an “ingredient in a processed food item”

• Regulation defines “processed food item”

• Does not exclude covered commodities just because they have been further prepared for consumption

Processed Food Item – Change of Character

• A combination of ingredients that include a covered commodity that has undergone a physical or chemical change, and has character that is different from that of the covered commodity

• Examples of covered commodities excluded because of change of character:– Oranges squeezed to make orange juice– Pork bellies cured and smoked to make bacon

Processed Food Item – Combination of Substantive

Food Components

• A covered commodity that has been combined with:– Other covered commodities– Other substantive food components, And has a character different than that of the

covered commodity• Examples of covered commodities excluded

because they are a combination of substantive food components:– Bagged salad (e.g. lettuce, carrots and cabbage)– Fruit trays/Vegetable trays (e.g. party trays)– Seafood medley (e.g. shrimp, scallops and clams)– Mixed nuts

Covered Commodities Required to be Labeled

• Examples:– Solution-enhanced and seasoned pork

loin– Cooked beef roast– Canned salmon– Bagged lettuce– Canned roasted and salted peanuts– Breaded shrimp

Covered Products – Muscle Cuts of Beef, Lamb and Pork

• “All muscle cuts of beef, lamb and pork whether chilled, frozen, raw, cooked, seasoned or breaded.”

Beef Products

• Whole muscle meats– Product of U.S.A.– Mixed Origin– Imported

• Ground beef– Each specific origin included in the

blend must be included on the label in alphabetical order

Labeling Requirements

• Product of U.S.A.– Born, Raised and Slaughtered in the U.S.

• Product of Country X– Labeled from entry until final sale– Label only covers importing country (not

other countries of birth or production)

Labeling Requirements cont.

• Mixed Origin (whole muscle)• Examples

– Imported from country X, raised and slaughtered in U.S.

• With records: Born (and raised) in country X, raised and processed in U.S.

– Imported from country Y, slaughtered in U.S.• With records: Born in country X, raised in country Y,

processed in U.S.

Labeling Requirements cont.

• Mixed Origin (ground or blended)• Example

– Ground beef – Product of Australia; Imported from Mexico, Raised and Slaughtered in U.S.A.; Product of U.S.A.

Recordkeeping

• Retailers must label covered commodities– Must keep Point of Sale records for 7 days– Must keep records of origin for 2 years

• Suppliers must provide information about country of origin– Producers, handlers, processors, packers,

importers

• Verifiable (auditable) records– Suppliers must maintain records– Affidavits may be used to certify origin and

existence of records

Recordkeeping - Suppliers

• “Any person engaged in the business of supplying a covered commodity to a retailer, whether directly or indirectly, is required to maintain records to establish and identify the immediate previous source and the immediate subsequent recipient of a covered commodity, in such a way that identifies the product unique to that transaction, for a period of 2 years from the date of the transaction.”

• Suppliers must provide origin information to buyers

• Records must identify previous source and subsequent recipient of product

• Must possess or have legal access to records that substantiate origin claims

• Must maintain records unique to each transaction for 2 years

• “For suppliers that handle similar covered commodities from more than one country, the supplier must be able to document that the origin of a product was separately tracked, while in their control, during any production or packaging processes to demonstrate that the identity of the product was maintained.”

Enforcement and Violations

• Retailers and suppliers are subject to enforcement provisions– $10,000 fine for willful violations

• USDA-AMS will conduct compliance reviews

• USDA-AMS will initiate investigations and enforcement actions

• Other statutes may apply as well

COOL is a Food Labeling Bill

• Food Labeling is covered by the Food and Drug Administration (FDA)

• Code of Federal Regulations– Title 21, Chapter I, Part 101.18 – Misbranding of Food

• “Among the representations in the labeling of a food which render such food misbranded is any representation that expresses or implies a geographical origin of the food except when such representation is a truthful representation of geographical origin”

Implications for Cattle Industry

• Probable minimum cow-calf records– Owner and location– Breeding herd inventory

• Purchased animals• Cull sales• Raised animals

– Number and Sex of Births by year– Animal sales

• Buyer• Date• Animal sex

• Breeding animals are covered by COOL

• Probable minimum stocker records• Put-together groups

– Seller and location of purchased animals• Date and sex of purchased animals

– Animal sales• Buyer• Date• Animal sex

• Must be able to trace animals from different source groups through management sorting and commingling into several sales groups

• Probable minimum feedlot records• Each pen

– Seller and location of purchased animals• Date and sex of purchased animals

– Animal sales• Buyer• Date• Animal sex

• Probable minimum packer records• Each shift or slaughter group

– Owner and location of purchased animals• Date and sex of purchased animals

– Meat sales by slaughter/fab group• Lot number, date and plant

Individual Animal ID

• Required? – No, in fact, forbidden as a USDA mandate

• Necessary? – Maybe not• Helpful? – Definitely

– Especially for stocker and feedlot sectors

Current Status of COOL

• House and Senate Appropriations actions have different language regarding implementation of COOL– These differences are yet to be

reconciled

• Various proposals to modify or repeal COOL

Challenge for the Industry

• Plan for compliance– Rules are uncertain and subject to

change

• Make beneficial use of new information– Use records to improve production

and marketing

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