Winter 2006, Vol. 12 No. 1
In this issue...
FAPRI Analyzes the U.S. Proposal to the WTO
John C. Beghin
In addition to our preliminary baseline for the 2006 U.S. and World Agricultural Outlook, this year economists with the Food and Agricultural Policy Research Institute (FAPRI) also undertook an analysis of the proposal to the World Trade Organization (WTO) submitted by the Office of the U.S. Trade Representative in October. The proposal was an effort to jumpstart negotiations leading up to WTO's sixth ministerial conference in December. The Hong Kong conference brought 149 member countries together to further negotiations on agricultural trade reform and other topics.
The U.S. WTO proposal includes changes in export competition, market access, and domestic support. The FAPRI analysis covers the first seven years of policy changes implied by the proposal, during which the most significant reductions in tariffs and trade-distorting domestic support and elimination of export subsidies would be phased in starting in 2007/08.
The U.S. proposal reduces the permitted current U.S. aggregate measures of support to $7.64 billion and limits so-called blue box support to $4.77 billion. These limits imply lower loan rates and support prices and reduced countercyclical payments. The proposal lowers domestic support in the European Union to ï¿½11.4 billion, implying large reductions in actual domestic support in sugar, dairy, cereals, fruits, and vegetables. The proposal includes significant tariff reductions or tariff rate quota (TRQ) expansions. These market access reforms would open the protected rice, sugar, and dairy markets. All export subsidies would be eliminated, which would mostly affect E.U. production and trade of sugar, rice, meat, and dairy products.
Effects on Commodity Prices
The FAPRI analysis finds that these proposed reforms would moderately increase world prices for most commodities, with larger increases for sugar, rice, and dairy. Dairy and livestock would be directly impacted, which in turn would affect feed sectors. U.S. exports of pork, beef, and rice would greatly expand. Corn and wheat exports would grow moderately. U.S. cotton exports would decline.
FAPRI projects that in many cases, the increase in world prices and gains in world markets would not fully compensate for the removal of coupled domestic support in the United States and European Union. Decoupled payments could compensate for the loss of farm income from coupled payments. They would not have to be as large because distortions would be removed and world prices would be higher. Select results of the analysis for major world commodities are given below.
U.S. Proposal versus Hong Kong Declaration
The sixth WTO ministerial meeting ended with a declaration on December 18 that falls short of the U.S. proposal. It does not provide the so-called modalities necessary to implement the proposed reductions in tariffs and domestic support. Countries have tentatively agreed to eliminate all export subsidies by 2013 (the U.S. proposal stipulated 2010 as a deadline). Least-developed countries would have duty-free access to developed country markets on at least 97 percent of tariff lines by 2008; yet that leaves 3 percent of lines potentially blocked for protected markets (for example, U.S. and E.U. sugar). Other tariff cuts will fall within four bands, with higher cuts in higher bands but with thresholds yet to be defined.
Countries agreed to reduce trade-distorting domestic support using a three-tier system, with proportional cuts in total support and aggregate measures of support decreasing by tier; the European Union would be in the top tier, Japan and the United States in the second tier, and everyone else in the lower tier. Cotton export subsidies of developed countries must be eliminated in 2006. The declaration states that other cotton subsidies "should be reduced more ambitiously" but does not provide modalities for achieving this. Special and differential treatment is still being negotiated. Therefore, it is hard to know if the eventual WTO agreement will have as much impact as the U.S. proposal would if it were implemented.
For more details, see "U.S. Proposal for WTO Agriculture Negotiations: Its Impact on U.S. and World Agriculture," and "Potential Impacts on U.S. Agriculture of the U.S. October 2005 WTO Proposal." ♦
Grains and Coarse Grains
U.S. corn exports and feed consumption both increase, contributing to a modest increase in U.S. corn prices (less than 3 percent), driven by larger net imports by the E.U. and South Korea. E.U. tariff reductions induce larger E.U. corn imports. Lower target prices and loan rates and a demand-driven increase in corn prices almost offset each other. U.S. corn use for ethanol and other industrial purposes falls, as do corn ending stocks. Higher U.S. corn prices contribute to an increase in prices for substitute feed grains.
U.S. wheat prices increase moderately (almost 3 percent) because of increased export demand from Japan and China and reduced export supplies of Canada, Russia, and Ukraine. Higher prices result in a slight increase in wheat production, limited by the increase in returns for feed grains. Food use and stocks decline slightly in response to higher prices. In E.U. wheat markets, the livestock sector decreases feed use considerably, which leads to a fall in E.U. wheat prices.
World prices for long-grain rice increase by 8 percent. Medium-grain rice prices increase by 25 percent. These price increases are driven by greater market access in Japan and South Korea. Additional imports by Philippines, Indonesia, and the E.U. also increase long-grain rice trade. China, the U.S., Australia, and Egypt gain market shares in medium-grain rice trade. Long-grain rice exports increase for India, Myanmar, Pakistan, Thailand, the U.S., and Vietnam.
Oilseeds and Products
In oilseed markets, changes are moderate. Higher prices for grain and reduced loan rates and target prices contribute to a slight reduction in U.S. soybean production in most years and slightly higher prices (up 1 percent). Reduced livestock production in Japan and the E.U. causes a reduction in U.S. soybean meal exports. This is offset by an increase in domestic soybean meal consumption driven by larger U.S. livestock production. The policy changes include tariff cuts for oilseeds and oilseed products in China, the E.U., India, Japan, Mexico, South Korea, Taiwan, and Thailand. The world price of soybean oil increases by 4 percent by 2014 following these tariff cuts. The elimination of differential export taxes in Argentina results in increased export demand for soybean products relative to soybeans, contributing to improved crushing margins. Crush increases slightly, as improved crushing margins more than offset the effect of reduced soybean production. World consumption of all protein meal declines in tandem with animal production.
U.S. meat exports increase, driven by expanding Japanese import demand following lower duties. Japan is historically a large consumer of U.S. beef and pork. The elimination of export subsidies and increased market access open E.U. meat markets. World prices of pork and beef products increase significantly while poultry price changes are moderate. World trade of pork, beef, and poultry products increases by 7, 6, and 3 percent, respectively. The E.U. eliminates its beef export subsidy, which affects 76 percent of its total beef exports. These policy changes increase the E.U.'s net beef imports and depress its domestic beef price by 13 percent. In many importing countries, lower domestic prices resulting from tariff reduction are more than offset by higher world meat prices. Brazil, Argentina, Australia, Canada, and the U.S. expand their exports.
Major dairy changes occur in the E.U., Canada, and Japan. Most other countries increase their dairy herds and milk production, but less fluid milk is consumed as it is diverted into manufacturing use because world prices of dairy products increase. In the U.S., dairy production and milk prices increase. U.S. butter imports increase, but cheese imports decline and nonfat dry (NFD) milk exports increase. Without an export subsidy and with reduced intervention prices, E.U. production and exports decrease substantially. Domestic E.U. consumption increases because of lower domestic prices. The E.U. becomes a marginal player in NFD and butter world markets. Australia, New Zealand, Argentina, Ukraine, and India partially compensate for the decline in E.U. exports, which leads to higher world prices for butter, cheese, NFD, and whole milk powder (average increases of 34, 16, 7, and 18 percent, respectively). Canada becomes a net importer of NFD, as export subsidies disappear and tariffs are lowered.
U.S. sugar imports increase with the much larger TRQ, resulting in a 12 percent price decline for raw cane sugar. Domestic sugar production falls and consumption increases. The E.U. would declare sugar as sensitive, which would result in a larger TRQ and reduced tariff. The world sugar price increases by 24 percent on average, driven by proposed E.U. sugar reforms. The E.U. imports over 4 million metric tons of sugar. Net exporting countries, such as Brazil, Australia, Colombia, Argentina, and Cuba, would respond to the higher world price with increased sugar production, lower sugar consumption, and increased exports.
Cotton prices increase by about 2 percent in world markets. Given the modest foreign adjustments in the sector, the primary impact is through the reduction in domestic supports, which lowers U.S. production and exports. After the reduction in U.S. trade, the resulting higher world prices push other exporters to ship out more while importers decrease their net demand on world markets. There is an overall reduction in world trade. Larger exports out of Africa, Brazil, Pakistan, and Central Asia partially offset the lower U.S. cotton exports.
U.S. Net Farm Income
The reduction in U.S. target prices and loan rates reduces crop returns to producers. For some crops, this effect is more than offset by higher prices. Between 2012/13 and 2014/15 under this deterministic analysis, average returns, including all payments, increase for grains and most oilseeds but fall for cotton, peanuts, and sugar. Stochastic analysis led by FAPRI economists at the University of Missouri considers a range of possible market outcomes and yields slightly different average results. Considering a broader range of outcomes leads to circumstances in which the increase in prices may not be adequate to compensate producers for reduced loan program benefits and countercyclical payments, even for grain and oilseeds. ♦