Washington Insider-- Wednesday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Congress, Administration Work on Political Hot Potato that is COOL

Congress left a present for Agriculture Secretary Tom Vilsack in the recently passed omnibus appropriations bill. That legislation includes a directive requiring Vilsack to recommend changes in the U.S. country of origin labeling law for meat and meat products that will bring the United States into compliance with and adverse World Trade Organization ruling on the current COOL law.

The United States is in the process of appealing a WTO compliance panel report that sided with Canada and Mexico in the long-running dispute on U.S. country of origin labeling. Congress wants Vilsack to make his recommendations within 15 days after the WTO appeals process is complete, or by May 1, whichever comes first. Most observers doubt that the WTO will complete its legal review of the U.S. appeal by May 1, making it difficult for USDA to offer recommendations with a high level of specificity.

COOL was first authorized by the 2002 farm bill, and both the George W. Bush and Barack Obama administrations worked hard to develop rules to implement the law in a way that does not violate international trade obligations. In the intervening dozen years, no one has yet been able to accomplish that feat, but Congress appears optimistic that USDA can come up with something in the next 135 days that will pass WTO muster.

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USDA, EPA Seek Farmer Buy-In on Pollution Abatement Efforts

Plans to curb phosphorus pollution into the Chesapeake Bay by the Environmental Protection Agency and six states in the bay's watershed have been viewed with great skepticism, if not outright opposition, by farmers and farm groups. Among other things, they worry that once started, these anti-pollution steps could restrict current farming practices, perhaps to the point where livestock and poultry production in the region would become unprofitable.

In what appears to be an attempt to sweeten the pot somewhat for farmers in the watershed, the Commonwealth of Virginia yesterday joined in a program with both EPA and USDA that encourages the trade of "phosphorus credits." The idea is that farmers who have taken measurable steps to reduce the amount of phosphorus leaving their fields and flowing into the Potomac and James rivers that feed into the Chesapeake can sell to others a credit they receive for their actions.

And who might be a customer for a pollution credit? The Virginia Department of Transportation, for one. VDOT says buying the credits from farmers would cost approximately 50 percent less than other, more traditional engineered pollution reduction practices, such as detention ponds and underground filters.

The exact economics have yet to be worked out, but once up and running, the hope is that farmers who curb phosphorus runoff from their operations would find a new revenue stream that would reward them for their activities. If the Virginia program proves successful, other states in the Chesapeake watershed –– and perhaps beyond –– can be expected to offer similar programs in the future.

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Washington Insider: CRS Worries About the Farm Act

The Congressional Research Service provides policy and legal analyses for the U.S. Congress and makes them available to committees and members of both the House and Senate, regardless of party affiliation. It is a legislative branch agency within the Library of Congress and is well-known for its authoritative and nonpartisan reports.

Recently it prepared a new report on the 2014 farm law. Its conclusion that some programs may be more market distorting than previous provisions and may pose compliance issues with the World Trade Organization is attracting modest attention on Capitol Hill.

Farm programs have the potential to violate WTO agreements, CRS says, by distorting domestic markets that then affect international trade.

In its report, CRS focused on new provisions like the Supplemental Coverage Option, Agricultural Risk Coverage and Price Loss Coverage which may directly affect producer planting decisions that otherwise would depend on market conditions and thereby can distort trade and lead to challenges from trading partners and to disputes in the WTO.

"Fully and partially coupled farm programs influence planting decisions both by increasing the overall profitability of farming (as low-price signals are muted), and by changing the relative returns to planting alternative crops," CRS says. "Increased profitability tends to increase total planted acreage and output, while changes in relative returns influence the share of acreage planted to each crop, with consequences that could spill over into international markets."

The SCO, ARC and PLC programs are authorized by the new Act as replacements for the decoupled direct-payment system that subsidized farmers annually from 1996 to 2013 regardless of crop prices or planted acres, and which was considered too politically unpopular to even consider in the 2014 Act.

ARC is a revenue-based commodity program with two optional guarantees: county level or individual farm level revenues. ARC-CO triggers payments when county revenue falls to 86% of the county's benchmark, based on a five-year average of yield and U.S. crop prices. ARC-IC is a whole farm guarantee based on the historical revenue for all its crops. SCO covers a portion of a producer's deductible that is not covered by an underlying crop insurance policy, or a "shallow loss," and is based on county-wide losses. SCO can be combined with PLC but not ARC.

Farmers can select the PLC program for each commodity they plant, such as soybeans, corn and rice, and will receive a payment when the annual national average price for that commodity is below a reference price set in the farm law.

The 2014 law is not fully implemented yet, so its effects have yet to be estimated. In addition, the WTO also hasn't categorized the new programs on the basis of their potential to distort commercial markets. If the SCO, ARC and PLC are classified as "amber box" programs, the most market-distorting category, they would be reported under the $19.1 billion outlay cap the United States accepted as part of the WTO's Uruguay Round Agreement on Agriculture.

If commodity prices are high, as in the recent past, payments to farmers would be small and below that limit, CRS says. In addition, CRS thinks spending is unlikely to exceed $19.1 billion except when there are large payments across numerous safety net programs on top of the $1.3 billion associated with the sugar price supports which were left unchanged by the 2014 law and are categorized in WTO's amber box.

At the same time, observers are watching this year's record corn and soybean markets very closely, since large harvests are weakening crop prices to the point that several economists are predicting much larger payments than originally anticipated. USDA says corn and soybean prices this year are likely to be down 41% and 31%, respectively, below the record highs in 2012 that persisted during the more than two-year farm bill debate — and that were used to craft the new programs enacted earlier this year.

CRS also notes two other potential implications of the new programs." Perhaps more relevant to U.S. agricultural trade is the concern that — because the United States plays such a prominent role in most international markets for agricultural products — any distortion resulting from U.S. policy would be both visible and vulnerable to challenge under WTO rules," the report says.

In addition, the United States may find it politically difficult to negotiate lower spending caps on farm safety programs in future WTO trade negotiations even if there is pressure to do so, as a result of the expectations created by the new farm law programs, the report added.

Many observers have been critical of both Congress and the administration for not taking more interest in trade, especially as increasingly protectionist policies are proposed and debated. And it is unlikely that the CRS report will lead to a groundswell of sentiment about reopening the brand new programs. But, it is certain that any glitch will be noticed quickly, including higher than expected costs.

So, the farm bill debate that was so contentious may not be completely over yet, and should be watched closely as it proceeds, Washington Insider believes.

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