Canadian farmers dodged a bullet when a U.S. congressional committee could not agree on how to trim $1.5 trillion in U.S. debt over the next 10 years, says an agricultural economist.
Leaders of the U.S. House and Senate agriculture committees had drafted a farm bill that would have become part of the Joint Select Committee on Deficit Reduction’s debt reduction package.
Included in that bill was a proposal to replace the direct subsidy payment program with a shallow loss guaranteed revenue program.
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Vincent Smith, an agricultural economist at Montana State University, said that would be a move from a World Trade Organization friendly program to a non-compliant, production- distorting incentive.
“Canadian farmers are never going to be happy with programs that stimulate agricultural production in the U.S., especially for a commodity like wheat,” he said.
The agriculture committee leaders claim their proposal would cut agriculture spending by $23 billion over the next 10 years, including $5 billion in direct payments.
However, Smith said the shallow loss program, which is a bolstered version of the existing Average Crop Revenue Election program, could cost U.S. taxpayers more money in the long run because revenue guarantees would be based on recent prices, which have been at or near historical highs.
He could see a “nightmare scenario” unfolding if Congress decided to eliminate the ethanol mandate, which is a real possibility.
Corn prices would plummet but U.S. growers would be shielded from the market by the proposed shallow loss program.
That would be a double-whammy for Canadian growers. The demise of the ethanol mandate and subsequent drop in global grain prices would have a huge impact on their pocketbooks, but their American counterparts would continue growing corn, driving prices down further.
Smith said the U.S. Department of Agriculture estimates corn prices would plummet by $1 to $1.50 per bushel, but he thinks the losses could be more profound. He predicted that corn would trade in the range of $3 to $3.75 per bu. Wheat prices would also tank.
He figures that would trigger about $9 billion per year in shallow loss payments to U.S. wheat and corn farmers for at least a couple of years. He doesn’t believe that is sound policy.
“By guaranteeing revenues, you’re weakening the incentives for farmers to innovate, reduce costs and be creative. Effectively over time you create a moribund industry when you do that sort of thing,” he said.
“Where in the world does it say that a farm business should face no risk?”
Smith said his nightmare scenario could easily become reality.
“There is really a push within Congress to move away from the ethanol mandate,” he said.
The push could become a shove if the Republicans win the White
House and the Senate during next year’s elections or if they control both the House and the Senate.
He also believes there is a good chance that the shallow loss proposal or something similar could make it into the 2012 farm bill, which will be formulated in the coming months now that it is no longer part of the Joint Select Committee on Deficit Reduction process.
However, everything is up in the air now that policymakers have gone back to the drawing board. The only thing he can say for certain is that the $5 billion direct payment program is likely on its way out.
