Keith Collins, USDA, Washington, D.C.

American Cotton Shippers Association Annual Meeting

Colorado Springs, CO, May 28, 1999
 

Introduction
 

Thanks to Rodger Glaspie and Neal Gillen for the invitation to join you today at breakfast and discuss the future of U.S. farm policy. I am especially happy to come out and visit with you because I have a very high opinion of ACSA's commitment to the U.S. cotton industry and the thoughtful positions and actions taken over the years.
 

I have been invited to take a longer look at farm policy. In looking ahead, I see three key avenues for farm policy change that I will comment upon. The first path is actions Congress might make in the short term to deal with current farm problems. Over the past year, many producers have seen incomes drop and are facing increasing cash flow, debt and credit problems. For example, for the 1998 crop, cotton gross farm income is the lowest in 10 years. In addition to the general cash flow problems, each commodity group seems to have its own special concerns that it believes need legislative attention. Cattle producers are upset at what they see as anti-competitive markets; dairy producers are concerned about this year's end of their price support program and reforms being undertaken in milk marketing orders; cotton producers are concerned about step 2, and so on. We are in a period of some discontent, and no consensus has yet emerged on how to move forward.
 

The second avenue for policy change is the next farm bill-the 2002 Farm Bill-which will take effect with the 2003 crops. And the third key avenue for change is the next multilateral trade round, which will kick off late this year. I cannot tell you what type of farm policy each of these three avenues will produce next year, in 2003, or beyond. But what I will do this morning is draw some lessons from the recent performance of farm policy, examine the questions now being raised about its adequacy and discuss some of the forces that may define the appropriate government role in agricultural policy in the next decade.
 

Recent policy performance
 

Starting with the current farm bill, we know it had divided support when enacted in 1996, and those who favored it did so for many different reasons. Some liked the greater market orientation, such as planting flexibility and the elimination of acreage reduction programs. Others liked the large fixed farm payments that everyone knew, at least initially, were going to be bigger than what would have been paid out under the old farm bill. Others liked the idea that the payments would be locked in under 7-year contracts and most likely making them immune from future budget cuts. In addition, by capping loan rates and doing other things, the 1996 Farm Bill met the budget savings target laid out by Congress.
 

Regardless of the reasons for passage, the 1996 Farm Bill accomplished one very key thing-it changed the concept of risk management for producers. In looking back over the past 75 years of farm programs, the first era, from 1933-1973, was a period of intense government control in agriculture, high support prices, strong, often mandatory, supply control. Government tried to shoulder much of the risk. A second era, from the late 1960's-1996, saw progressively more flexibility introduced into farm programs, to lessen the adverse consequences of farm programs, with more risk being shifted to producers. For example, the 1973 Farm Bill introduced deficiency payments to separate income support from price support. In the 1985 Farm Bill, Congress introduced marketing assistance loans, froze payment yields and initiated the 0/92 program, the latter two concepts being important steps toward decoupling payments from planting decisions. In the 1990 Farm Bill, flex acres-or triple base-was introduced, which freed farmers to plant what they wanted on a portion of their base acres without affecting payments. And lastly, in the 1996 Farm Bill, payments were fixed, and thus completely decoupled, making it possible to eliminate supply control.
 

I recount this history to demonstrate the 1996 Farm Bill was not necessarily revolutionary, but reflected a long-running trend to decouple program provisions and have producers look to the market to guide production and marketing decisions. This trend was spurred at least somewhat by the environment of high budget deficits during the 1980's and up through 1996. But, I believe, more importantly, it has been driven by an underlying belief that farm programs should help this nation's farmers compete in the world marketplace rather than prop up domestic farm prices at the expense of domestic and foreign sales.
 

As these farm policy changes have occurred, there has been another important trend, a parallel growth in private risk markets. There has been an increased emphasis on crop insurance, and at the same time a continued propensity to provide producers with ad hoc supplemental assistance. The Federal Crop Insurance Act of 1980 designed a crop insurance program that was to be the primary vehicle for disaster protection. That did promise was never fulfilled, and the result was more reform with the Federal Crop Insurance Reform Act of 1994. That legislation tried to address the insurance program's deficiencies by introducing essentially free catastrophic coverage, or CAT policies, and by requiring those who receive farm program benefits to sign up for crop insurance.
 

The rising importance of crop insurance in farm risk management can be seen in the size of program spending. As recently as 1992, crop insurance outlays were one-tenth the size of deficiency payments. In 2002, crop insurance outlays are projected to be one-half the size of the 1996 Farm Bill's direct payments, known as AMTA, or Agricultural Market Transition Act, payments.
 

To summarize thus far, key outcomes of Federal policy evolution have been to reduce market intervention, to make the producer more responsible for managing risk and to provide tools for risk management. But the current state of the tools, and farmers' use of them, is under heavy criticism.

So what is working well and what isn't? Starting with the Farm Bill, planting flexibility has worked well. Farmers repeatedly tell us they like it. Total acreage is rising and falling with market prices and there is more crop diversity in many areas. Oilseeds have seen a virtual explosion, after previously being viewed as globally uncompetitive because of indirect planting limitations resulting from old farm bills. Under the last farm bill, soybean plantings averaged 60.5 million acres. In the first three years under this farm bill, 1996-98, they are averaging 70 million acres. Compared with the early 1990's, sunflower acreage has doubled and canola has gone from 65,000 acres to 1.4 million expected this year. It appears flexibility is here to stay.
 

Marketing assistance loans have worked as a low-level, counter cyclical safety net, although not without controversy. For 1998 crops, Federal spending on loan deficiency payments and marketing loan gains will likely approach $3 billion, well above what was expected at the time of the farm bill's passage. Despite the costs, the program has been well received and appears likely to be around for awhile.
 

AMTA or contract payments certainly received strong support for the first two years of the farm bill. For the first 3 years of the 1996 Act, payments to farmers will total $17 billion, compared with an estimated $12 billion had the 1990 Farm Bill been continued. Even so, the farm bill has been criticized as providing insufficient help in 1998 and now, which led to about half of last year's $6 billion farm emergency relief bill being earmarked to expand AMTA payments.

Despite their pivotal role in income support, the future of AMTA payments is uncertain. They decline annually under the 1996 Act and represent a source of potential funding for other types of safety net programs that may be developed.
 

The performance of crop insurance has been a continuing problem area. In the 1980's, this program had critically serious problems, low participation and excessive costs. During the 1980's, indemnities were 50 percent higher than the combined producer premiums and Federal premium subsidies. After the 1994 reforms, there was a large increase initially in participation and much better actuarial performance. However, a number of concerns have arisen since then. Participation has dropped off over the past couple of years after Congress eliminated the requirement that producers must obtain crop insurance in order to be eligible for payments. And, only 40 percent of coverage is what is called "buy-up," that is, coverage that exceeds the basic, nearly free catastrophic coverage. Many farmers think coverage is just too costly for what they get. And many analysts think low participation in buy-up coverage means insufficient financial protection for most segments of production agriculture. This lack of protection encourages Congress to pass ad hoc disaster payments, which in turn, erodes participation in insurance.
 

Another perceived problem is that subsidies have grown but the increase has not all gone to reduce producers' premiums; some has gone to private insurance providers. And lastly, many producers think crop insurance, particularly revenue insurance, should do more than help stabilize income, it should enhance income. Insurance is not designed to do that and is a poor mechanism for doing so. If you drive a junk car and you wreck it, insurance gives you back a junk car, minus the deductible. Similarly, revenue insurance cannot restore the farm sector to prosperity when it is in a severe downturn.
 

These insurance issues led to the other half of last year's emergency relief package going to crop loss assistance. We will be making nearly $2 billion in payments starting Tuesday, June 2.

The current debate on farm policy has reflected the range of concerns I have just outlined. There are proposals for providing more AMTA payments, higher loan rates, medium-term supply control, step 2 funding and reform, and so on. Later this year, Congress will likely consider another emergency farm aid package. The frontrunner would at this point appear to be an increase in AMTA payments and possibly money for Step 2 along with some money for crop and livestock producers suffering from physical disaster losses. However, another year of great farm financial stress would put us in the middle of a Presidential election race and no doubt intensify the voices calling for a return to strong government intervention. There are also proposals to revise crop insurance, including one by USDA, and Congressional appropriators have made available $1.5 billion per year over four years starting in 2001 for the same purpose.
 

Despite what happens in the near term, I do not think longer term policy will step back from market orientation and from shifting more responsibility for risk management to the producer. I believe international trade agreements and the economic realities of the global marketplace will continue to push farm policy in the direction of market orientation. A positive aspect for U.S. agriculture is that, in general, the transition to a more market-oriented agricultural policy has already occurred.
 

Farm policy in prospect
 

The trends which have manifested themselves in the policies and programs we have today will be very important factors shaping the next farm bill. But other factors will also be important, and I want to address 5 additional key framing forces that will shape the policy debate in 2003 and beyond.
 

(1) Economic Outlook. As you well know, the global economic slowdown has had a significant effect on U.S. agriculture, particularly world textile and apparel trade and therefore on cotton. The strong U.S. economy and dollar have been a lightening rod for imports such as textiles and apparel. Whether the economies of Asia and Latin America return to the levels of economic growth envisioned just a few years ago, or remain below those projections, will be key for future agricultural exports and the well being of the farm economy. Unfortunately, many current long run projections do not show strong growth for U.S. cotton. The Food and Agricultural Policy Research Institute, for example, projects annual cotton exports to be fairly stable at 5.5-5.8 million bales during most of the next decade with planted area about 12.5-13 million acres. USDA's baseline is a bit rosier with exports running from 6.5 to 7.3 million bales but flat domestic mill use after 2005. The upshot is that slow export recovery would likely dispose Congress more favorably toward supporting U.S. agriculture in the future, depending on the budget priorities Congress faces.
 

(2) China and the WTO. Whether and on what terms China accedes to the WTO will also be significant for U.S. agriculture, especially for grains, oilseeds and cotton. The agreement announced on April 8 provides for a cotton tariff rate quota (TRQ) of 3.4 million bales in 2000 increasing to 4.1 million in 2004. Because of China's high cotton stocks, these are not now commercially meaningful. But what is important about China agreeing to large TRQ's is that we hope it reflects their belief that their high internal support programs, such as high cotton procurement prices, are not sustainable. As of now, of course, there is no agreement on textiles; it is one of the last contentious issues.
 

(3) The next WTO Round and Other Trade Agreements. The United States is hosting the next WTO Ministerial in late November in Seattle, which will initiate the next round of trade negotiations. The United States is hoping to conclude a new agreement in three years or by the end of 2002-the last full year of the 1996 Farm Bill. The general goals for the next round include: improve and expand market access; eliminate all export subsidies; and tighten disciplines on domestic support.
 

Under market access, the United States is calling for further cuts in tariffs, including over quota tariffs, as well as enlarging tariff rate quotas. Such changes could directly affect U.S. raw cotton imports.
 

The Uruguay Round Agreement established a new measure of internal support called the AMS, or aggregate measure of support. The AMS combines all trade distorting domestic support programs into one measure, which has to be reduced 20 percent from the 1986-88 level. Currently, we are well below the maximum permitted spending. For 1998, our limit on trade distorting support is $20 billion and we will spend about $12 billion. The AMS excludes AMTA payments but includes loan deficiency payments and marketing loan gains, step 2 payments, and crop insurance costs, which are all considered to be trade distorting programs. Thus, depending on how the AMS is defined and reduced in the next round, and whether it is made commodity specific could limit the range of domestic policy options available for consideration in the next farm bill.
 

Trade agreements may not only define permissible support, they can also contribute to the economic climate at the time of the next farm bill debate. For example, NAFTA partners and the CBI countries are examples of how trade liberalization can affect cotton. These regions are the fastest-growing sources of U.S. textile and apparel imports. Their market share has increased from about 19 percent in 1993 to about 40 percent today. But these imports have had a positive effect on U.S. raw cotton demand. USDA estimated in 1993, the year prior to NAFTA implementation, about one-fourth of U.S. textile imports from the 10 leading sources was returning U.S. cotton. In 1997, that share had increased to nearly 40 percent.
 

Other trade agreements could also liberalize trade in textile and apparel. These include the Free Trade Area of the Americas (FTAA), the African Growth and Opportunity Act directed at Sub-Saharan Africa and NAFTA preferences extended for CBI countries.

(4) Budget Baseline for the Next Farm Bill. Most recent farm bills have been debated during a time of large budget deficits. That may change in 2002, if the Federal Government continues to run a surplus. For the first time in over 20 years, Congress may not have to reduce farm program spending under the next farm bill in order to meet a deficit reduction target. In fact, Congress could possibly change existing budget rules to allow increased spending without declaring an "emergency" or having to find an "offset" to spending increases. That possibility seems more likely if this period of low prices remains long term. Going into the 2002 Farm Bill, the baseline-the starting point for debate because it defines the amount of money available for spending prior to any agreed upon budget cuts or increases-will contain $4 billion in AMTA payments, of which 11.63 percent, or $465 million annually, will be allocated to upland cotton. Loan rates will be capped at current levels and Step 2 payments will be fully funded beginning on October 1, 2002. Step 2 will be fully funded because the 1996 Farm Bill continues the program through the end of the 2002 crop year.
 

(5) New Policy Ideas. A last key force that will shape the post-2002 policy agenda will be new policy ideas that generate a following. The most difficult and controversial area will be income support and the farm safety net. People are examining whole farm and other types of revenue insurance, conservation based payment programs, and more targeted income support.
 

I should also mention that the 1996 Farm Bill also created a Commission on 21^st Century Production Agriculture to advise the President and Congress on the appropriate role of government in the next farm bill. They recently released an initial report and their final report is due out January 1, 2001. A Mississippi cotton producer and former president of the National Cotton Council is one of the 11 Commissioners, and we will all be watching with interest what they come up with.
 

Conclusion
 

In conclusion, I will return to the trends in farm policy as the most important factor in determining future farm policy, which, I have argued, are increasing market orientation and producer responsibility for risk management. But the trends are not happenstance. They have emerged and endured because they reflect national and international policy goals. I think these goals generally fall into two groups, economic goals and social goals. Economic goals are things like greater efficiency and greater competitiveness, which have been associated with market orientation. What do these imply for the role of the Federal Government? In their strict form, they mean little to no market intervention, such as no supply control, decoupled payments if any payments are made, and a safety net consistent with inducing competitive, market-based business decisions. Economic goals also include dealing with market failure. The appropriate role of government in this arena is providing market information so producers can make good risk management decisions; dealing with anti-competitive practices, environmental problems, food and fiber safety, education of producers and basic research; and resolving trade problems created by other countries' policies, such as those we are now seeing in the field of genetically engineered organisms.
 

The second set of goals are social. These include such goals as preserving farm numbers, helping small farms, helping socially disadvantaged farms, helping family farms, and providing income assistance. This goal includes the European issue of multifunctionality. Some countries, including Europe and Japan, are suggesting that the "multifunctional" roles of agriculture are of such significance that market-distorting policies are justified. Many types of programs can address these social goals. Regardless of the social goal that government might choose, groups like the American Cotton Shippers Association, which prosper on an efficient and globally competitive U.S. agriculture, need to ensure programs implemented to achieve the social goals are done in a way that respect the economic goals. This can be done, and we always welcome your views on how to do this. Again, thank you for the invitation today.