Analyst says American programs guarantee higher prices despite forecasts for lower commodity returns
RIDGETOWN, Ont. — Subsidies under the 2014 U.S. farm bill are not farmer friendly for Canada, particularly when combined with low commodity prices, says a government policy analyst from Michigan State University.
“Every cent of budget costs paid to our farm programs is a subsidy against which Canadian farmers must compete,” David Schweikhardt told the Southwest Agricultural Conference in Ridgetown Jan. 6.
“This bill is going to guarantee payments for relatively high prices for the first three or four years of the bill.… We’re going right back to where we were in the middle of the last decade, when U.S. prices were said to distort international trade.”
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Schweikhardt said U.S. farmers have until March 31 to join the program. A wide range of crops are covered, including corn, wheat and soybeans.
Farmers have a choice between Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) for each crop they produce. Schweikhardt said many will go with ARC because it is likely to provide greater levels of support in the first few years of the program.
The PLC sets reference prices for the program, which covers the 2014-18 marketing years. Payments are made whenever prices fall below those numbers.
The reference prices for corn, wheat and soybeans are $3.70, $5.50 and $8.40, respectively, for all five years.
The ARC is more complicated, using an Olympic average of a county’s previous five-year prices and yields and throwing out the low and high prices and yields. The program guarantees 86 percent of the resulting benchmark revenue figure.
Using actual numbers for a specific county, Schweikhardt said farmers would be guaranteed $4.56 for corn for 2014 and 2015, $4.14 in 2016, $3.41 in 2017 and $3.18 for 2018.
The respective numbers for wheat were $5.61, $5.61, $5.56, $5.06 and $4.73, while those for soybeans were $10.46, $10.46, $9.63, $8.46 and $7.22.
The PLC provides a price guarantee for all five years, but the ARC often provides higher levels of support for the first two or three program years. Farmers can weigh their options, choosing ARC for some crops and PLC for others.
Schweikhardt said the bill is like a “slap in the face” for countries like Canada, but there’s no particular concern within Congress or the agricultural lobby.
“These subsidies could be viewed as counter to the WTO (World Trade Organization) rules,” he said.
“You might well ask, how can the U.S. go into negotiation for the next WTO round with any kind of straight face?”
The U.S. occasionally lose trade challenges.
One example involves a Brazil challenge over cotton, in which the U.S. is paying more than $100 million a year in compensation, Schweikhardt said. The alternative would have been to halt the unfair practice or give Brazil the right to set up countervailing tariffs in any area it wished.
Schweikhardt said the level of market prices will determine whether the subsidies will kick in.
As well, the question of unfair government support in the U.S. will be moot if prices are strong over the next four years.
“You can hide a lot of sins with high commodity prices, but they all come back when prices go low.”
There is some indication that grain and oilseed prices will soften, driven down by falling demand from countries such as China, Schweikhardt said.
David Kohl, economist and professor emeritus at Virginia Tech, agreed.
He advised farmers to look at fixed costs, including the renegotiation of land rental and lease agreements this winter, because there are signs that interest rates may rise by mid-summer.
He warned that large farmers who have expanded aggressively in recent years may face the greatest risk. Most farmers are efficient producers, but many lack sufficient skills in marketing and risk management, he added.
“In the agricultural industry, the worse mistakes are often made during the best of times,” he said.
The 2014 U.S. farm bill is designed to deal with a downturn in prices. Schweikhardt said it took more than two and a half years to negotiate and demonstrates its political importance and the strength of the U.S. farm lobby in the face of the most dysfunctional U.S. Congress since 1948.
House of Representatives leader John Boehner, Senate majority leader Harry Reid and president Barack Obama had to come to a consensus for the legislation to pass.
Schweikhardt said the farm bill also affects Ontario sugar beet producers because U.S. producers remain protected through a system of import controls.
However, he said that could change in the future because of the decision to re-establish relationships with Cuba.
