Brazil, the Fundamental Problem, and Canadian Farm Policy

Do we need an agricultural policy at all? Yes. Food is essential; food security is important. Food is the second largest contributor to Canada's net balance of trade. Agriculture is a driver of the Canadian economy, especially in rural Canada.

What do we need to understand? Agriculture is not normal commerce. There are three fundamental problems that make the rule of supply and demand work differently than normal commerce.
1) We generally cannot control our supply; weather determines yields and supply.
2) Demand for our output is not responsive. Just because price drops, you don't eat five or six meals a day.
3) There is an enormous imbalance in market power. A great many relatively small producers provide raw material for a very small number of large processors and an even smaller number of even larger distributors to a massive number of individual consumers.

What is the business environment for Canadian agricultural producers? Because of the fundamental problems above, we are price takers, not price makers. Moreover, because we produce the same commodities as the U.S., but in smaller volume, and the U.S. is our number one trading partner, the business environment for agriculture in U.S. is the price maker for the commodities Canadian farmers produce.

What is the thrust of U.S. farm policy? Dealing with massive over-production. The U.S. produces 25% of the world's food surplus, but has only 5% of the world's population. The U.S. solution has been to push that surplus onto world markets, or lately to expand domestic consumption through non-food uses. But, as technology increases productive capability around the world, the world doesn't need the U.S. surpluses. Countries that were net importers of food have emerged as net exporters. More will do the same in the years ahead. Before, the U.S. was the least cost producer in the world and could compete merely on price. No longer. Others can now produce their own food cheaper. The U.S. response has been to construct agricultural policies that maintain production (thus cheap inputs for processors, exporters, domestic users, and consumers), but compensate producers as prices plummet as a result of that over-production. U.S. farm policy has purchased world market share through domestic subsidies that artificially maintain production.

What has been the result? Artificially low prices for all commodities covered by 20 years of successive U.S. Farm Bills. This is where Brazil can instruct Canadian agricultural policy advisors, if they want to understand. Brazil launched a WTO complaint against U.S. Farm Bill subsidies on upland cotton. Brazil does not import U.S. cotton. Brazil won the complaint, and successfully defended the decision on appeal. The WTO found that U.S. domestic subsidies depress world prices. The fact that Brazil does not import U.S. cotton, but was able to prove injury through artificial depression of world prices is the key point. U.S. domestic subsidies depress world prices. Those same domestic U.S. subsidies that were found not in compliance with WTO commitments also apply to commodities Canadian farmers produce. Because the U.S. is the price maker for Canadian agricultural commodities, prices for all Canadian commodities covered by 20 years of successive U.S. Farm Bills have been artificially depressed.

What is the focus of U.S. agricultural subsidy policy? Grains and oilseeds. The U.S. understands that grains and oilseeds are the foundation upon which most other value-added agricultural processing is based; be it hog production, cattle feeding, poultry production, ethanol, bio-diesel, corn wet milling, corn dry milling, wheat milling, soybean crushing, or a host of other endeavours. U.S. domestic subsidies channel about 92% of total direct payments and support payments to grain and oilseed producers. U.S. domestic subsidies for grains and oilseeds ensure that the foundation for the entire U.S. agriculture and food industry is firm. U.S. domestic subsidies are commodity specific and triggered by price. U.S. government payments to U.S. farmers will increase 41.5% to US$22.7 billion in 2005, up from US$13.3 billion in 2004 and the highest since the record US$22.9 billion in 2000. Almost all of those payments go to U.S. grains and oilseed producers. As a note of interest, the WTO cap on such U.S. domestic support for 2005 is US$19.4 billion.

Won't Doha Round WTO negotiations resolve the problem? No. Even a wildly successful WTO agreement does not address the three fundamental issues outlined above that make agriculture different from normal commerce. Secondly, Doha negotiations are aimed at expanding world trade in food when deficient supply is not the problem. Over-production is the problem. We cannot export our way to happiness because others will have more than they need as well. Doha negotiations have been focused primarily on eliminating export subsidies, expanding market access, and reforming domestic supports. In that order. That is where the problem lies. What is the point of exporting more volume at prices artificially depressed below cost of production? The primary problem, as the Brazilian upland cotton case proved, is that U.S. domestic subsidies and supports depress world prices for all commodities covered by U.S. Farm Bill programs. That is the issue that must be addressed, but isn't.

What are the lessons to be incorporated into APF2? It's a North American (including Mexico) policy environment. The U.S. is the price maker for North America and the world; we are a price taker. U.S. farm policy makes price. U.S. farm policy supports one sector only, the grain and oilseed sector. U.S. farm policy is not whole-farm, but is grain and oilseed commodity specific. Therefore, the single biggest issue in developing Canadian farm policy must be dealing with the negative impact of U.S. farm policy.