The "De-coupled" Approach to Agriculture

History and Analysis of the "De-coupling" Policy Proposals, September 1988

By Mark Ritchie
Published March 21, 2012

AgricultureWorld Trade Organization (WTO)

BACKGROUND

Although the concept of "de-coupling" was widely debated as far back as the 1940's, it disappeared from most domestic and internaUonal farm policy discussions during 1910's and early 1980's. It has recently been revived, spearheaded by Senator Rudy Boschwitz (R-MN) on the domestic front and U.S. GATT negotiator Daniel Amstutz on the trade policy front. They are both promoting "de-coupling" as an alternative to current U.S. farm policy. They believe that the 1985 Farm Bill has failed to achieve the most important objectives, reducing taxpayer costs and raising exports, and see "de-coupling" as the logical solution.

Farm program costs under the 1985 farm Bill (1986, 1981, and 1988) have averaged nearly $22 billion per year, compared to roughly $11 billion per year under the 1981 Farm Bill and less than $3 billion per year under the 1977 bill.

Although total farm exports in 1987 were up slightly over 1986, they were still 30% under the $40 billion dollar levels of the early l980's. Moreover, the combined exports of our three most important crops, corn, wheat and soybeans, have fallen steadily since the passing of the 1985 Farm Bill. Exports of corn, wheat and soybeans, which were $16 billion in 1981, fell to $10.96 billion in 1986, and then down again to $10.3 billion in 1981. Even these meager results have come at a very high cost to U.S. taxpayers, with requiring export subsidies that have added billions to our budget deficit. In a recent deal for example, the Soviet Union paid only 40% of the cost of production for U.S. wheat; the rest was subsidized by U.S. farmers and taxpayers.

Although some Republican farm policymakers have recently argued that budget costs and exports will eventually improve, powerful forces within the academic and agribusiness communities are not convinced. They have launched a high visibility lobbying campaign to promote "de-coupling" farm policies at both the domestic and global level. Their hope is to drastically cut the costs of the U.S. farm program while restoring exports to their previous levels.

Cargill Grain Corporation, the chief architect of this "de-coupling" promotion campaign has pulled together a dozen of the largest U.S.-based agribusinesses to form an Agriculture Policy Working Group (APWG) to lobby for "de-coupling". A number of economists have been recruited to lend academic credibility, including Stan Johnson from Iowa State, Willy Meyers from the Food and Agricultural Policy Research Institute (FAPRl), and George Rossmiller from Resources for the Future. This combination of agribusiness financing and academic endorsement is likely to make "de-coupling" the major Republican farm policy proposal in the 1990 Farm Bill debate.

Alongside of this domestic legislative effort, the grain companies have convinced the Administration to make "global de-coupling" their primary objective at the General Agreement on Tariffs and Trade (GATT) agricultural negotiations in Geneva. Like domestic "de-coupling", the global approach includes an end to all farm programs except direct welfare-type payments, the lowering of farm prices, and an end to all import regulations. The U.S. "global de-coupling" proposal has sparked an important debate in the GATT trade talks making it one of the two major positions receiving serious consideration.

On both the domestic and international fronts, "de-coupling" has emerged as a major, though highly controversial option.. This paper looks at the specifics of these proposals, their likely implications and the emerging support and opposition that will determine the fate of "de-coupling" during the next decade.

DEFINITION AND UNDERLYING PHILOSOPHY

So what is "de-coupling"? Unfortunately, there is no one simple answer. The term has been used to both to describe an economic philosophy, and as a title for specific legislation and trade proposals. It is worthwhile to examine both the underlying philosophy and the specific proposals in search for a comprehensive understanding of "de-coupling."

Cargill Corporation, the main force behind the revival of domestic and global "de--coupling," is the most articulate in defining "de-coupling." Cargill President, James Spicola, said that a "de-coupling" farm program would be one where there are no income supports except those 'provided through direct payments that are neutral to production and trade. Cargill's Vice-President for Public Affairs, Robbin Johnson, expanded on this, suggesting that "de-coupling" could include, "'reasonable income protection divorced from prices, planting, or marketing decisions." Warning that this income protection "should be only temporary or transitional," Johnson argued that "any payments need to be treated, in trade negotiations and in domestic implementing legislation, as structural adjustment assistance designed to unwind the distortions caused by past farm policies."

Daniel Amstutz, former head of Cargill's Commodity Trading Division, now serves as the chief U.S. agriculture trade negotiator at GATT. He is the author of the "global de-coupling" GATT proposal made by the U.S. Amstutz defines "de-coupling" as a government-paid farm income support program where payments are "independent of the current or future value of a farmer's production and marketings, input use or commodity prices." This means if less or none of the commodity is produced or if prices are low or high, a "de-coupled" payment will not vary. Amstutz also argued, in the same speech, that farm programs must be limited to "providing transitional income support for farmers. "De-coupled" payments could be aimed at income support goals such as assisting farmers in a transition period. Or, on a one-time lump sum basis, "de-coupling" payments could facilitate resource adjustment, helping farmers change jobs."

Senator Rudy Boschwitz, chief sponsor of the domestic "de-coupling" legislatlon, defines it this way, "The goal of "de-coupling" is to make the farmer's planting decisions entirely neutral from the government program. Several conditions must be met before the planning decision becomes neutral.

* The income support payment, which we call a transition payment, must be made relative to an historic measure of base and yield.
* The payment must be independent of what is planted in the current year. The farmer can grow whatever he wants and still get the payments.
* The amount of the payment must be known in advance so the farmer can depend on it. There must be no annual acreage reduction requirement as a condition for getting the payments.

Boschwitz has acknowledged that "de-coupling" will cause a sharp rise in government costs along with significant drop in farm prices. "Initially, the program would cost more than current programs, but would decline to levels that are less than current law. To make the program attractive to farmers and to elicit a real market response, the loan rates in this program would need to be very low, $1.00 or less a bushel on corn, with correspondingly low rates on other crops."

Resources for the Future (RFF), one of the agribusiness-funded think tanks promoting "de-coupling" spelled out some of the current farm programs that would not be acceptable under "de-coupling." In their "Briefing Book on De-Coupling", RFF argues that the only true "de-coupling" proposals would both prevent trade distortions and have no significant impact on resource allocation. According to RFF, "de-coupling, by eliminating the difference between world and domestic prices, eliminates both trade distortion and the misallocation of resources. Not all policies that eliminate trade distortions, however, necessarily eliminate resource misallocations. Supply control is a good example of a program that reduces trade distortion effects by maintaining domestic resource misallocation."

In addition to their belief that supply management programs would not be allowed under "de-coupling", RFF also makes a strong case that "de-coupling" would require the abolishing of an U.S. import control programs. "The sugar loan and import quota and the dairy price support and import quota are the most highly trade distorting of U.S. agricultural policies."

ln the same report, RFF also cited the "distorting" impacts of existing soil and water conservation programs, like the Conservation Reserve Program (CRP). Specifically, they criticize the CRP in this way, "by reducing plantings, the (CRP) program has a net effect of reducing production, consumption, and trade while increasing domestic and world prices."

Based on the comments and writings of the major supporters, a "decoupled" farm policy would include the following:

* All current farm programs which are tied to production would be eliminated. This would include deficiency payments, CCC price support programs, marketing orders, and all existing domestic quota programs.

* All programs of acreage reduction and supply management would be eliminated, including short, medium, and long-term land set-aside programs.

* CCC loan rates and domestic market prices would be drastically lowered, resulting in a corresponding drop in the world prices. (Senator Boschwitz estimated that corn prices would need to be cut to $1 per bushel, with other crops lowered to similar levels.)
* Government payments to farmers would be available either on a one-time basis or phased out over 5 to 10 years.
* Farmers would receive government payments based on previous production levels. The larger your production in the past, the greater your payments would be. These payments would be made without conditions or requirements.

* All export subsidy programs, including export enhancements and deficiency payments, would be banned.

* There would be no restrictions on what crops could be grown by farmers on their land. For example, non-program crops could be grown on any available land. In addition, soil and water protection programs which affect production, consumption, trade, market prices or resource allocation would be banned.

* The cost of this program would be very high at first, but then would decrease as payments were phased out.

* Quotas and tariffs, which are used to regulate imports of beef, dairy products, peanuts, tobacco, sugar, fresh produce wheat, corn, soybeans, cotton, rice and other commodities would be prohibited.




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