Saturday, February 11, 2012

Our new "insurance" infatuation...  

May be a forbidden love. While every ag group seems to have their own farm bill proposal, I think it is safe to say they mostly boil down to this: you can have the direct payments, just guarantee these whopping profits we've been making the last few years.

Of course, subsidizing a lavish crop insurance system could actually raise farm program costs if prices slide, but we'd have the moral high ground for once when prices are acceptable to our new expectations. In fact, farmers don't generally have a good handle on crop insurance costs.
With direct payments at risk, the agriculture industry last year began pressing for more federal support for crop insurance. It’s already one of the fastest-growing benefits for the agriculture industry, with subsidies for insurance premiums rising to more than $7 billion in 2011 from a little more than a $1 billion in 2000.  [More]
 But there is a slight problem. To my thinking, these are clearly counter-cyclical payments, and therefore market distorting. If prices can drop and you don't feel pain, you're not getting a real market signal about how much of what you're growing buyers want.

Guess who else thinks this way: our arch WTO nemesis, Brazil.

In a move that is liable to ruffle a few feathers in Washington, Brazil's government has sent letters to the agricultural committees of both the U.S. Senate and House of Representatives, reminding them that leading proposals for a new farm bill actually increase subsidies and therefore could break World Trade Organization rules.
The message is clear: Brazil is willing to challenge the U.S. in Geneva if the new legislation increases market-distorting subsidies, just as it successfully did in the case of cotton subsidies seven years ago.
Back in October, Roberto Azevedo, Brazil's ambassador to the U.S., visited Washington and met with Debbie Stabenow, chairwoman of the Senate Agriculture Committee, and Frank Lucas, chairman of the House Agriculture Committee where he first voiced Brazil's concerns. They also talked about how the new bill could settle Brazil's claim over cotton subsidies -- the U.S. pays $147 million a year to Brazilian cotton farmers as a means of avoiding wider trade retaliation.
The unusual measure of communicating directly with a foreign legislature was taken after analysis of three farm bill proposals, from the National Cotton Council (NCC), from the American Farm Bureau Federation and from four senators, all of which increased market distortions, said Azevedo.
Among the issues raised was that government-subsidized crop insurance could also be considered market distorting under WTO rules and that none of the proposals significantly altered the GSM-102 export credit guarantee program, which the WTO has also condemned. [Apologies for the liberal exerpt from here]

I think they have a case, and they certainly have handed our farm schemes a few setbacks [e.g. cotton]. The reason is also pretty simple. No matter how it is packaged, US farmers want a federal risk protection program. But when the possibility of painful losses is eliminated by insurance or target prices or whatever, we don't react to the market. No matter how that risk is mitigated, it is de facto distorting.

In addition, our wishful proposals are going to cost too much. There is simply no way to provide the kind of "safety hammock" we want for less than we are spending now, unless fewer farmers/crops split the pot.

Somehow, I doubt that will fly.

I await our collective "Plan B", although we may have to have the WTO make us do the hard work.

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