a Rates for fixed payments to be phased down. Higher number represents 2002 payment rate, lower number 2006 rate.
na Not applicable.
Sources: Agriculturelaw (2001); House Agriculture Committee (2001); ERS (2001a and previous); Senate Agriculture Committee (2001).

markedly. However, as will be shown below, that decline would be offset by increases in countercyclical payments when prices are low.

The loan rate would remain unchanged for key commodities under the House bill, decrease for soybeans and minor oilseeds, and increase for sorghum. In aggregate, government support in the form of loan deficiency payments would be similar to those under existing legislation.

The Senate Committee bill provides for increases in the loan rate for all farm program commodities except soybeans. The loan rate would be significantly higher for wheat and corn, which means that loan deficiency payments overall would increase strongly at times of low world prices, over the levels under the current legislation. Since loan deficiency payments are directly proportional to current production, this would mean a significant increase in this form of highly market distorting, directly production encouraging support.

Rates of countercyclical support are calculated according to these formulas:

It should be emphasised that under the Senate Committee bill, the countercyclical payments as well as the fixed payments would be made on larger bases than under the House bill, and on 100 per cent of bases rather than on 85 per cent.

The relative differences between the loan rates, target prices and unit fixed payments between the two bills would result in significant differences in the forms in which farmers would receive support. The higher target prices under the House bill would mean higher countercyclical payments, and the higher loan rates under the Senate Committee bill would translate into higher loan deficiency payments. Under the Senate Committee bill, the declining fixed payments over time would be accompanied by comparably increasing countercyclical payments, while fixed payments rates are still high.

The target prices under the House bill would be very similar to the levels of target prices that applied immediately before the 1996 FAIR Act did away with them. They would be lower under the Senate Committee bill. However, back then there were no fixed payments.

Considering government payments for commodity support under the two bill, analysis of a low and a high price scenario at tow points in time for the main farm program commodities -- namely corn, wheat, soybeans and cotton -- provides insight into the effects of the two bills.

The key result is that in the near future, payments in the commodity programs under both the House and the Senate Committee bills are likely to far outstrip support under existing FAIR Act legislation. Even if prices are high, support would still be higher in most scenarios.

Under the Senate Committee bill, fixed payments would be phased down over time but they would be compensated for by increased countercyclical payments at times of low market prices. It is estimated that under most conditions, government payments for commodity support in most conditions under the House bill would be somewhat higher than under the Senate Committee bill. However, highly distorting loan deficiency payments would be far higher under the Senate Committee bill than under the House bill. Overall, there is probably not a great deal between the two bills in terms of market distortions.

For 2002, two alternative scenarios are assumed for market prices -- one with low prices and the other with moderately high market prices, as shown in the table below. These prices apply for the calculation of countercyclical payments. However, it is important to note that for the determination of loan deficiency payments it is assumed that the loan repayment prices are 10 per cent below farm prices for grains and soybeans, and 25 per cent below for cotton.²

Then, by applying the support arrangements in the House bill and the Senate Committee bill respectively, the levels of the various major forms of payment, countercyclical payments, fixed payments and loan deficiency payments are estimated. These are shown in figure K.

• there would be substantial countercyclical payouts under the House bill but not under the Senate Committee bill;
• there would be much larger loan deficiency payments under the Senate Committee bill;
• there would be larger fixed payments under the Senate Committee bill;
• both the House bill and the Senate Committee bill would provide vastly more support than extension of the FAIR Act; and
• total commodity payments are estimated to be somewhat higher under the House bill -- but this is subject to price assumptions.

• there would be much lower countercyclical payments under the House bill than if the prices were low, and there would be no countercyclical payments at all under the Senate Committee bill;
• despite relatively high prices, there would be some loan deficiency payments under both bills and the existing legislation, with those under the Senate Committee bill largest;
• the same fixed payments would apply as with the low price scenario as these payments do not change along with changes in market prices;
• total commodity payments under the Senate Committee bill are estimated to be higher than under the House bill, predominantly because of higher fixed payments; and
• even under this high price scenario, total support under either the House or the Senate Committee bills would be substantially above that under a continuation of the FAIR Act.

To assess the changes in the effects of the bills over time, the same low and high price scenarios are examined at 2006. The same price assumptions as in the 2002 scenarios are used, along with production projections from FAPRI (2001). Application of the provisions of the alternative bills for 2006 provides the estimates for major payments for wheat, corn, soybeans and cotton shown in figure L.

• Under the House bill, fixed and countercyclical payments in 2006 are the same as in 2002, and loan deficiency payments would change with production.
• Under the Senate Committee bill by contrast, fixed payments would be phased down over time but they would be fully compensated by countercyclical payments under the low price scenario.
• Loan deficiency payments would be much larger under the Senate Committee bill at 2006 than under either the House bill or existing legislation, in all conditions except very high prices.
• The Senate Committee bill is likely to involve lower government payments than the House bill in later years, under both low and high price assumptions.

As indicated in the section on the Senate Committee bill above, the countercyclical provisions in that bill have now been omitted and replace by increased direct payments from the government.

Overall, the United States is currently almost self sufficient in milk and milk products. It imports quantities of some products, in particular cheese, that are small relative to domestic consumption, and it exports others, primarily skim milk powder, with the aid of export subsidies. Higher support for milk would increase production and have significant effects on US import demand. With the present support arrangements, US exports can only compete internationally with export subsidies. These are strictly limited, in both volume and value under the WTO Agreement on Agriculture. Consequently, additional support for milk would reduce import demand for dairy products. So the United States would find it more difficult to negotiate increases in access to its own market for dairy products in the current WTO negotiations on agriculture.

When viewed broadly, the House bill as applied to farm program crops would ensure that US producers could confidently expect that, as well as receiving substantial fixed payments for just being program crop farmers, their returns would be almost fully insulated against any reductions in market prices. There would be no further phasing down of the fixed payments they have received since 1996 -- in fact those payments would be higher than those set for 2002 in the FAIR Act -- and countercyclical payments and loan deficiency payments would compensate them for any reductions in world market prices. Effectively, the situation of program crop farmers would continue to be much the same that it has been in recent years with the FAIR Act plus the benefits from the four emergency programs since 1998.

In a more long term perspective, the various forms of support in the House bill would lock in target prices that are much the same as applied immediately prior to the FAIR Act of 1996. However, farmers would not face the annual acreage reduction programs that helped offset some of the market distorting effects of US support up to 1996.

As the Senate Committee bill is currently under debate in the Senate, it is not possible to be definitive about its effects. This would be especially the case if there are major changes to critical parameters, such as loan rates.

In the above analysis of the Senate Committee bill, overall government outlays for commodity support would be somewhat lower than for the House bill under most conditions. However, the incidence of loan deficiency payments would be far greater in the Senate Committee bill than in the House bill, especially at times when world prices are low. Even if the fixed and countercyclical payments are significantly market distorting, and it is argued in the next chapter that they are, they would not be as market distorting as loan deficiency payments on a dollar for dollar basis. Because of the higher incidence of loan deficiency payments in the Senate Committee bill and their highly distorting nature, there is probably not a great deal of difference between the two bills in terms of overall market distortions.

If, however, loan rates were to be reduced markedly in the process of passing the Senate bill or in the subsequent reconciliation process some of the most market distorting elements of that bill would be alleviated.

Neither the House bill nor the Senate Committee bill does anything to address the causes of the excess supply problems that have occurred in the US sugar industry in recent years as a direct result of government support. They perpetuate the present arrangements that will continue to stimulate production. However they provide the Secretary of Agriculture with power to implement allotments, which are effective supply controls, to avoid over production. Such allotments were part of the sugar arrangements in the 1990 farm bill but were discontinued in the 1996 bill. Supply control is a last ditch and highly inefficient approach to addressing policy created market distortions.

For decades, the US government has provided substantial support for major farm program crops of wheat, feed grains, rice and cotton, while substantial protection has been provided for sugar and dairy through price support. Although important in US agriculture, these activities account for less than a third of the value of total agricultural production. That is, government support within agriculture is very disparate between industries. The forms of support have varied over time, but the effective outcome has been consistent:

• support levels for program crops rose when world prices fell, and vice versa -- that is, they have been countercyclical with respect to world prices.
• an attempt to break the countercyclical nature of support payments for program crops in the 1996 farm bill was undermined by 'emergency packages' that were instituted to again provide additional payments when world prices fell sharply from 1997.

The process of developing a new farm bill to replace the 1996 FAIR Act that expires in September 2002, is well under way, the House of Representatives having passed its version of a new farm bill while the Senate Committee bill has been released. The process of agreeing on a new farm bill still has some way to go. However, it either the House version or the Senate Committee bill were adopted, it would do much to institutionalise the countercyclical nature and the commodity orientation in past farm bills, with one important exception -- it would extend and entrench more support for oilseeds, primarily soybeans. Overall, it would also result in a marked increase in the budgetary cost of agricultural support relative to past levels.

Some obvious questions arise from these observations. Why is it that far greater support is provided to some US agricultural activities than others? Why is such support so persistent and why is it countercyclical to world prices? What are the implications of that support for the American economy, for the economies of other countries and for global economic well being? In short what are the matters of economic and social principle that influence these policies and what do they owe to politics and political expediency?

In market economies such as the United States, resources are allocated between competing activities according to their profitability. With some exceptions that are discussed below, the most efficient use of available resources that leads to the highest possible aggregate level of national income is achieved as the market outcome without any government protection or assistance. Resources flow to areas of highest profitability.

Widely differing levels of government support and protection between commodities generally result in marked distortions away from the optimum use of resources, both within agriculture and more broadly within the economy. Government support encourages more resources into high cost supported parts of the economy -- that is, areas of the economy that would not be as profitable without the support -- and away from naturally more competitive, lower cost activities. In instances where the support results in prices to consumers that are above world market levels, it also reduces consumers' living standards.

Conditions that foster the most efficiency use of resources nationally are fully consistent with the exercise of comparative advantage internationally. Under that principle, countries will maximise their own incomes through specialisation in producing items where they have comparatively lower costs than other countries and through exchanging their products for those in which others have comparatively lower costs.

This well established principle, applying the rule of comparative advantage to the domestic economy, applies in agriculture as it does in other sectors. Supporting a particular agricultural commodity -- for example, wheat -- more than other commodities and sectors means that more land, capital and labor will be employed for wheat production than is efficient, leaving less for competing commodities. Similarly, supporting agriculture as a whole by more than other economic sectors results in an inefficient allocation of resources between sectors, with more resources flowing into agriculture than would maximise overall economic returns to the society, and less into manufacturing and services sectors.

Generally, protection results in overall economic losses for the domestic economy, for trading partners and for the world economy. Protection is often implemented through restricting access to markets. However, it also manifests itself in many other ways, such as through the use of distorting subsidies that increase production and exports and depress world prices.

Not only do the market access limitations and subsidies depress world prices and prevent the benefits from specialisation and trade from being realised, they can also destabilise world prices by preventing the responses of producers, as well as consumers, to world market price signals. Generally, market access limitations and/or domestic and export subsidies are tools that are designed to support domestic prices or domestic producers' unit returns at stable levels that are above world market prices. Such insulation of producers and often also of domestic consumers from world market price signals acts to prevent the normal responses of producers and consumers to price movements. Producers usually respond to low prices by reducing production while consumers respond by increasing consumption. By preventing internal responses, insulation from world prices means that the natural responses that bring supplies and demand back toward equilibrium in world markets are thwarted and world market prices are made more variable (Tyers and Anderson 1992). That higher variability, in turn, transfers a greater burden of adjustment onto producers and consumers in other countries.

The above principles provide a basis for minimising government intervention in markets, including those for agricultural products. However, there are some instances where limited industry protection may be warranted from an economic point of view.

There are a number of specific instances when particular conditions apply where protection policies might be argued to provide national economic benefits. However, it must be appreciated that much of the protection that is provided is instituted for political reasons and not to meet these economic conditions.

There are two broad classes of economic arguments for national governments to provide protection or assistance to particular industries.

One of these is focused on increasing the gains from trade that a national economy can obtain at the expense of other economies. They are:

• the optimum tariff or export tax argument; and
• strategic trade policy arguments.

The other arises where there are differences between values held by a society and valuations that are determined via the market. Instances include:

• the existence of externalities; and
• when income distribution differs from what may be considered to be socially optimum.

In addition to the above reasons for government intervention, governments can provide assistance for social reasons such as when farmers face extraordinary events such as floods and abnormally severe droughts, as to assist the process of industry adjustment due to policy or market changes.

Although such things as externalities can be used as a reason for government intervention to bring about a more socially optimal outcome, an improvement does not necessarily follow from the intervention. That is because the cost of addressing the externalities or other factors may in some cases by greater than the benefit from addressing them.

If a country is large enough as a buyer or seller in world markets for particular commodities for its policies to affect world market prices, it could improve its terms of trade (the prices received for its exports relative to prices paid for its imports) by imposing import duties or export taxes respectively. The argument is that if a large importer of a particular commodity imposes import tariffs, the world price drops in response to its reduced demand, and the tariff-levying country benefits from lower import prices -- in effect exploiting its market power as a large importer and causing losses to exporters.

A corresponding argument can be made for taxing exports in large exporting countries. This reduces their exports and raises the world price, thus benefiting the exporting country at the expense of overseas importers. These terms of trade arguments rest on the assumption that supply in world markets is inelastic; that is, producers in other countries and producers of substitutes, both at home and abroad, do not strongly respond to changes in prices --a condition that is generally not met in agricultural markets.

Importantly, gains form terms of trade effects are at least partially offset by domestic resource allocation distortions caused by the tariff or tax. In fact, the optimum level of the tariff or export tax is that at which a further increase in the tariff or tax would result in a resource misallocation loss of the same magnitude as the additional terms of trade benefit. Under such conditions, any further increases in the tariffs or taxes would actually reduce the economic benefits.

The optimum tariff/export tax argument is not applicable to the bulk of support policies in the US farm bill. The United States is a net exporter of farm program crops, and the support for domestic producers stipulates exports rather than reducing them, which would be the effect with an export tax. In the past, when the United States implemented acreage reduction programs, such programs could have been construed as analogous to export taxes. As such they limited the extent to which the support measures for these export crops would have resulted in an economically costly reallocation of resources toward them.

There are arguments why area reduction programs are themselves inefficient -- farmers will normally set aside only their poorest land, and the higher world prices will encourage production by farmers in competing countries. It appears that the arguments against area reduction programs in the United States have won the day, politically at least, as they have been discontinued since 1996.

The import restrictions in place for sugar, dairy and also for cotton, are aimed at sheltering domestic producers competition, rather than depressing world prices in order for the US economy to benefit from cheaper imports.

Since the early 1980s, efforts have been made by some economists to adapt trade theory to better reflect forces that were considered not to be adequately covered in conventional trade theory and are increasingly shaping trade during modern times. Much of this 'new trade theory' has been framed in the context of economics of scale and use of market power and government policy to reinforce the competitive advantages of domestic industries (Krugman 1990).

The main applications of this new trade theory have been in industries that have large economies of scale, where there is a small number of large firms and where there are high levels of innovation. Krugman indicated 'if on had to provide a concrete example of what the new trade theory is about it might be this: conventional trade theory views world trade as taking place entirely in goods like wheat: new trade theory sees it as being largely in goods like aircraft.'

Although there are many aspects to strategic trade policy, most involve economies of scale and the strategic use of government protection both to exclude competition on domestic and foreign markets. One of the more controversial elements of this theory is attributed to Brander and Spencer (1985) where government subsidies can act as a deterrent to entry of new participants into the industry in other countries. Such conditions can enable firms in the supporting country to extract above normal profits.

While economies of scale are important in some forms of agriculture, they are not a direct product of government support and many of the links between strategic trade policy and being able to extract economic returns above normal profits from the market are tenuous if they exist at all. Exceptions to this rule may be in new technologies such as genetically modified crops. Support for US crop production has been going on for decades, is now entrenched and focuses on traditional crops. It has no, or little, relationship to sizes of farms, would have depressed world prices, and although it has reduced competition from other suppliers internationally, it would have done this at a cost to the US economy -- hardly a 'benefit' from strategic trade policy.

Arguably the most convincing economic argument for government intervention in any kind of market is if there are externalities, causing the market overcome to diverge from the social optimum. Externalities occur when economic activities have side effects which are not taken into account in buyers' and sellers' decisions. Environmental impacts are generally the most important type of externality. In many instances, agricultural activities may generate few externalities, either negative or positive. In others, however, substantial externalities can accompany agricultural production. On the negative side these can include such things as salinisation or water pollution and loss of natural biodiversity and native habitats. Positive externalities can include such things as landscape enhancement of carbon storage that helps address the greenhouse effect.

In the absence of markets for environmental damages and services that can be used to establish prices that reflect their values, government intervention may be warranted to achieve greater benefits for society. In this context, what constitutes 'society' is relevant, as efforts to take account of these externalities in the interest of regional or national groups can influence levels of production and trade. A positive impact on a regional group, for example, may sometimes be obtained at a greater cost to the nation and to people in other countries.

Many US industries that are highly supported, such as the grain industries would be relatively competitive internationally, even without support. Production would still be located in current production areas and many of the landscape values attributed to agriculture would remain. In this respect, US protection for those industries would do little to enhance that particular externality, assuming this is of actual net benefit. On the other hand, support could encourage more intensive production inducing negative environmental externalities such as erosion and pollution. An example is pollution of the everglades as a result of nutrient run off from sugar farms.

The United States is clearly trying to address issues such as erosion and loss of natural species and habitat through its Conservation Reserve Program (CRP) while efforts are also being made through the EQIP program to reduce pollution, particularly from intensive livestock operations. The social benefits from the CRP depend on how erosive CRP land is, the net effect on carbon storage as it affects greenhouse gas abatement policies and other benefits such as habitat reestablishment. There may also be side effects such as higher market prices to producers of the crops that would otherwise be produced on CRP land. Against these benefits are the costs associated with not using the land for cropping.

Under the EQIP program, funding for which would be greatly increased under either new bill, the emphasis is on environmental and conservation improvements on farm, with a large part of the funding being for environmental concerns related to livestock production, largely effluent disposal and treatment. The improvements are on a cost-share basis between governments and farmers. This is at a substantial cost to taxpayers, many of whom would not be directly affected by the environmental concern. It would also involve significant costs of revenue collection and dispersion.

It would be much more efficient to address the problem through economic instruments that ensure that the full costs of mitigating the environmental damage are internalised into the cost of production. This could be achieved by imposing pollution taxes or -- in cases where a number of farms contribute to particular environmental damages -- through tradable pollution permit systems.

Many governments pursue an objective of greater equity in income distribution through measures such as progressive taxation and means tested support for needy groups. In practice, most support to farming in the United States does not appear to be directed toward achieving greater equity in income distribution. In fact, the support methods that have become entrenched, have had the opposite effect.

By far the greater part of US farm support goes to the relatively small number of the largest commercial farms that generally have farm incomes substantially above the national average. In 1999, there were only 175 000 farms in the United States that were classified as commercial farms. These farms had average household earnings of US$135 400 (including government payments) -- more than twice the national average family income of US$51 900, and they received an average of US$41 200 in government payments.

In contrast, there were 655 800 farms classified as of intermediate size with average household earnings of US$43 400 which was below the national average. These farms received an average of US$9250 in government payments (US Department of Agriculture 2001, appendix 1 and p. 24). The 6 per cent of farms that had the lowest incomes, with a household income average of US$9500 received only 1 per cent of government payments. Clearly US support payments to farmers have done more to exacerbate differences in incomes than to reduce disparities (figure M).

The much larger payments to large than to smaller farms arise primarily because the support has be related to production levels. Even with the change from payments for program crops through deficiency payments that were related to plantings and yield bases, to 'decoupled' payments based on past area and yield bases, most payments go the largest producers. This is simply because those are the people who have the largest area and yield bases.

In addition to support through government payments, assistance through price support such as that to milk and sugar producers, is relates to production, with most support going to the largest farms.

Special payments in exceptional circumstances such as abnormally severe floods or droughts can be used as income support to avoid or mitigate social hardship. Also, support can be provided to assist in the process of transition from one activity to others where market or policy changes result in substantial disruption to people who are affected. For example, when the government decides to discontinue protection for an activity, temporary support can be provided to help producers to adjust or to find alternatives. Support of this kind can be beneficial from a social perspective if it is well targeted and limited in duration, so as not to create dependency or prolong economically unsustainable activities.

The emergency packages for US farmers that were enacted in recent years fit this description in name, but not in content. Proclaimed as buffering the impact of falling world prices on farmers, their status as extraordinary and implicitly one-off measures has been eroded by the fact that four successive emergency packages have been voted since 1998. The claim for these packages as 'emergency' does not appear warranted in the context of the history of US support for the commodities covered. Such support has been strongly countercyclical as shown in figures C and D, and the additional support since 1998, at a time when world prices declined markedly was consistent with previous behavior that has been fundamentally protectionist.

There is one very important difference between the situation under which the emergency packages were provided since 1998 and similar previous situations, such as occurred from 1985 to 1987 and in the early 1970s. In those earlier periods, extensive short term ARPs were used along with the increases in assistance. Those ARPs helped to offset the production stimulating, market distorting effects of the support, contributing to the later recovery of market prices. By offsetting the distortions arising from high US government support in the first instance, these ARPs would have contributed to a more efficient use of resources, both in the United States and globally.

Nevertheless, ARPs were part of a clearly inefficient way of addressing the problems of low market prices and high stocks that accompanied support induced surpluses. The most efficient solution would be not to have provided the support in the first instance. Farmers tended to set aside their worst land and US farmers could feed that they were contributing more to addressing the supply imbalance than farmers in other countries who did not have to set land aside. They felt that their freedom to farm was impeded. Whether that sense of contributing more to overcoming the global imbalance might be warranted depends on the extent of the respective market distortions caused by US support an support elsewhere, and whether similar area reduction programs were employed by others who provided market distorting support. It would not be reasonable to expect, for example, that farmers in countries that did not support their producers and did not therefore contribute to the imbalances should be subject to such programs.

The changes in support arrangements for US program crops in the 1996 farm bill blurred the arguments that could be advanced for use of ARPs to offset policy induced market distortions. As discussed in chapter 2, ARPs were discontinued from 1996. This occurred at the same time as the clearly production stimulating previous deficiency payments arrangements were discontinued and replaced by production flexibility contract (AMTA) payments. It may have been considered that these AMTA payments were decoupled and therefore minimally market distorting, and therefore, as the support did not distort markets, ARPs were not necessary to offset distortions.

This argument has little credibility as several other forms of clearly market distorting assistance were maintained for farm program crops, including loan deficiency payments, loan rate support and cotton competitiveness subsidies. However, even the premise that the AMTA payments are minimally distorting is open to strong challenge.

The substitution of the 'decoupled' AMTA payments for deficiency payments in the 1996 farm bill gave some promise that the United States could be trying to break the largely countercyclical nature of farm program support that had become well established. The idea behind the 'decoupled' payments was that they should be independent of production, internal or external prices or input use. Because they were previously determined and unalterable as production and market conditions changed, it could be argued that they did in fact break the links between support and production. In short, it was argued, production should be much the same with these payments as it would be without them. That is, the payments should be minimally market distorting.

The theoretical under pinning of the contention that decoupled payments are minimally market distorting arises because, if all support were decoupled, farmers would be responding at the margin to the world market price and they would produce the same as if there were no intervention. As the payments are not related to any of the primary variables influencing production of particular farm products, farmers will invest that money in areas that provide them with the highest returns. That may be in farming where they are supposed to be receiving world prices or it may be in other outlets for investment -- or the farmer may use the payments for consumption.

Sceptics about the degree to which these payments are in fact minimally distorting point out that they increase the farmers' wealth and income, giving them greater capacity to invest in farming and to obtain credit for investment (Young and Westcott 2000). The payments counteract the effects of risk, reducing a deterrent to investment in farming. The change to 'decoupled' payments invariably occurs to replace forms of support that have applied for many years and which are reflected in greater accumulated capital stocks in farming than would have occurred had the earlier support not occurred, sustaining farmers' access to more intensive technologies and production systems that would have been available had the support not been available in the first instance.

Perhaps the most important qualification concerning the use of 'decoupled' payments is their political feasibility over the medium to long term. If farmers who receive 'decoupled' payments believe that they can subsequently increase their support levels by exerting political influence either to reestablish former coupled support systems or to update their payment bases, they will have an incentive to plant and produce more than would be the case if they were receiving world prices alone. That is, the payments would not be effectively decoupled. In this context, farmers' expectations are paramount. If they expect support systems to be periodically changed, they are likely to behave differently than if they expect the new decoupled system to endure for many years.

The US support systems have been in a constant state of flux since the 1930s. Consequently the probability of US farmers, and legislators, accepting and consistently applying a truly decoupled support system for a sufficient period for farmers to form expectations that the system is truly decoupled and unchangeable, is remote. As discussed below, US government behavior since 1998 has already severely compromised the real decoupling effects in what is loosely called 'decoupled' support.

When the AMTA payments were introduced in 1996, they appeared to be provided in ways that were reasonably consistent with the requirements for decoupling. Nevertheless, they could never be implemented in a fully decoupled way because other forms of support such as loan deficiency payments and cotton competitiveness subsidies meant the US producers were not responding to world market prices.

The precise requirements for decoupled payments that are exempt from limits or cuts under the WTO Agreement on Agriculture are as follows:

'Decoupled income support

1. Eligibility for such payment shall be determined by clearly-defined criteria such as income, status as a producer or landowner, factor use or production level in a defined and fixed base period.
2. The amount of such payments in any given year shall not be related to, or based on the type or volume of production (including livestock units) undertaken by the producer in any year after the base period.
3. The amount of such payments in any given year shall not be related to, or based on the prices, domestic or international, applying to any production undertaken in any year after the base period.
4. The amount of such payments in any given year shall not be related to, or based on the factors of production employed in any year after the base period.
5. No production shall be required in order to receive such payments.'

(WTO 1995)

The AMTA payments as provided in the United States appear to meet these requirements. They have been made on area and yield bases that were fixed pre-1996, and they have not varied with production, prices or input use. Farmers did not have to produce in order to receive them. As such, the United States has notified these payments to the WTO as decoupled.

However developments have occurred since 1996 that throw doubt on the extent to which these payments are in fact minimally market distorting as opposed to meeting the conditions as set down in the WTO Agreement. With the enactment of the emergency support packages in 1998 and subsequent years, greater emergency payments were made at times when prices fell (figures D and E). These payments were distributed to farmers on the same area and yield bases as the AMTA payments. The US government has subsequently notified these additional payments to the WTO as being eligible for inclusion in their Aggregate Measurement of Support (AMS) that consists of forms of domestic support that are acknowledged to be market distorting and which are subject to agreed reductions.

The most important questions about whether so called decoupled payments are market distorting or not arise from whether incentives remain in the support system that encourage farmers to plant larger areas or produce more in order to receive greater future benefits from government payments. A key condition in the WTO definition of decoupling in this context is condition (a), which stipulates that eligibility for payments shall be determined by clearly defined criteria 'in a defined and fixed base period.'

So far, the payments that are deemed to be decoupled have been based on clearly defined criteria in clearly defined base periods of area yield bases prior to 1996. However, in both the new House and the Senate Committee bills, provision is made to give farmers the option of updating their acreage base levels to the average from 1998 to 2001. This means that those farmers who had planted more after 1996 on the expectation that their lobby groups could convince Congress to update their future bases, and through that to expand their future payment amounts, would have increased their returns from the so called decoupled payments in perpetuity. In addition, the Senate Committee bill provides for farmers to update their yield bases. If farmers expected such a change, they would have had incentives to farm more intensively in the period after 1996 to secure greater future government payments.

It becomes an important issue both in terms of compliance with the WTO rules on decoupling and in terms of the amounts of market distortion inherent in what are considered to be decoupled payments, if farmers perceive that they can change their payment bases. Some people may argue differently about what they consider to be a fixed base period. From 1996 until the present time, the original base period for US AMTA payments was fixed. However, both the House and the Senate Committee versions of the new farm bill would change it to another 'fixed' base. Just how fixed is 'fixed' in the WTO context. More important in terms of the actual distorting properties of these payments is the fact that farmers perceive that they can change future bases by their current planting decisions. The experience with the United States so far strongly suggests that farmers would be well advised to plant more in the future to expand future government benefits. This means that the system contains production related incentives that mean it is not in fact decoupled.

Another relevant issue regarding the WTO status of the proposed payment arrangements under the House of Representatives version of the new farm bill arises from the precise way in which the area bases are determined for the countercyclical payments. As with the decoupled payments, the area bases for the countercyclical payments are set at 85 per cent of the areas in the defined base period. This might mean that the countercyclical payments might be considered to be exempt from any WTO limits or cuts under what are termed production limiting arrangements. Under paragraph 5 of Article 6 of the WTO Agreement on Agriculture:

'direct payments under production-limiting programmes shall not be subject to the commitment to reduce domestic support if:

1. such payments are based on fixed area and yields; or
2. such payments are made on 85 per cent or less of the base level of production.' (WTO 1995).

These countercyclical payments might qualify on either count, although the ability of farmers to update their bases might compromise the meeting of the first criterion. The ability to set the base at 85 per cent or less of the base level of production, or in the case of the US House bill arrangements 85 per cent of the area, which given the actual base yields could effectively mean 85 per cent of production, is highly artificial. The base in the case of the US payments is merely a number from which to calculate payments. It does not mean that the countercyclical payments are really production limiting.

While it is highly questionable that the 'decoupled' payments as applied in the United States are minimally distorting, this does not mean the there have not been any gains in efficiency of resource use within US agriculture as a result of the replacement of individual commodity base related deficiency payments by the AMTA payments.

The ability of US program crop farmers to producer virtually whatever crops they liked after 1996, free from obligation to plant particular crops in order to safeguard crop specific program benefits, would have improved the allocation of resources between crops within the United States. This has probably been important in relatively marked changes that have been occurring in cropping patterns. In particular, there have been marked changes in the balance of plantings between wheat and soybeans. Areas under wheat have declined and those under soybeans have increased. There are now substantially larger areas of soybeans in states like Kansas and North Dakota where wheat was a more dominant crop previously and is still the dominant crop, but not to the same extent. So farmers are changing crops more in response to profitability.

However, the important question that arises with whether the decoupled payments are market distorting is not only whether they reduce distortions between crops within a country as a result of support but also whether they result in greater plantings and production of the supported crops in aggregate. It is extremely difficult in the context of US broadacre cropping where production structures, machinery stocks and other production capital, and values of crop land have been built up and maintained under constant conditions of market insulation and support, to determine whether changes to one of the several forms of support, from deficiency payments to so called decoupled payments from 1996, would have reduced market distortions. However, if farmers were truly exposed to market prices, one could have expected some, even a marked, reduction in production in response to the reductions in market prices between 1996 and 2000 that were around 33 per cent in nominal terms and even more in real terms for wheat, feed grains and oilseeds. What actually happened has been that US production has been maintained at high levels relative to those before 1996 (figure A).

The fact is that US broadacre crop farmers have not been exposed to the consequences of the low market prices -- the emergency packages plus the AMTA payments have shielded them from any need to change. Further, based on experience, many would have known that they stood a good chance to increase future payment bases if they planted more, and more intensively -- a chance that now looks like becoming reality. These factors would have contributed to reductions in plantings having been minimal despite the large reduction in market prices. At the same time yields have been increasing along with advances in technology and possible also in anticipation of increased yield bases, boosting production.

These increases in yields have been occurring despite the large reductions in prices. It could be expected that, if other factors were held constant, marked reductions in prices facing farmers would result in less intensive use of inputs, bringing about downward pressures on yields. That has not occurred (figure N), partly, no doubt, because of improvements in cost saving and yield increasing production technologies in recent years. However, improvements in technology have been continuous and would have helped boost production before 1996 as well as after that date. A further contributing factor could have been that farmers have had the resources to better utilise the advances in technology because of the payments that they have been receiving, including the AMTA payments and those arising from the emergency packages. The additional wealth and higher incomes that arise from those payments enhance the capacity of farmers to upgrade machinery and to adopt more sophisticate production techniques.

Aggregate areas planted to grains and soybeans have been relatively static since the early 1990, including the period since 1996, but the price reductions that might have been expected to result in downward pressures on plantings were the greatest since 1997 (figure O).

Total US plantings of grains and soybeans have been approximately constant since about 1987, which followed a period when total areas planted to these crops were markedly higher (figure P). There were two major contributors to the step down in planted areas in the late 1980s. One was very high annual acreage reduction programs in 1986 and 1987 at a time when the US government was trying to divest itself of large, burdensome stocks. The other was the application of the Conservation Reserve Program (CRP) that was established in the 1985 farm bill, which ahs enabled areas to be kept under conservation for periods of between ten and fifteen years. The CRP expanded in the late 1980s, around the same time that area reduction programs began to decline (figure P). Areas of cropping land that were enrolled under that program increased from 2 million acres in 1986 to 34 million acres by 1990, and fluctuated between approximately 30 million acres and the present cap of 36.4 million acres during the 1990s.

Whereas the total areas under grains and soybeans, the crops that account for the bulk of US broadacre farming, have been relatively constant for more than a decade, there have been considerable increases in some of the crops that use smaller areas, notably cotton and sugar beet.

With cotton, US plantings have increased by over 50 per cent since the mid-1980s. The characteristic pattern with US cotton plantings has been that they have expanded following rapid increases in world market prices. However, when world prices drop once more there is a period when plantings consolidate at higher levels than applied before the foregoing price increase. At the same time, it is evident that government support for cotton has been highly countercyclical with respect to world prices (figure Q). There was a sharp upturn in government payments from 1998 to 2000 at a time of markedly declining world prices, and it is clear that US plantings have not responded to the lower market prices, having risen since 1999. It appears that the high government support in recent years has contributed to higher US plantings.

In the context of US agriculture, sugar beet is a relatively small crop with plantings of only 1.56 million acres in both 1999 and 2000. Over the past decade, plantings have risen by about 9 per cent with most of the increase being sine 1996. It is likely that the changes in the 1996 farm bill contributed to the increase. When deficiency payments based on current crop bases were replaced by AMTA payments for the major cereal crops, the inflexibilities in planting choices associated with the individual bases were largely eliminated. Sugar been was an attractive alternative crop in areas where farmers could obtain access to processors. This was because farmers who previously planted farm program crops could still receive their AMTA payments and plant sugar beet that continued to receive very high levels of price support. The higher plantings and production of sugar beet contributed to surpluses of sugar that developed within the United States in 2000 and put the support arrangements under pressure.

If the main determinant of the lower world prices that have been evident for grains, soybeans and cotton were advances in production technology in the United States and elsewhere, the lower prices would not represent a problem for US farmers provided they were able to readily adopt the advances. If the lower prices were due to lower world demand, there would be a need for farmers to adjust their farming operations to the new market realities -- providing market insulating support would prevent this adjustment and merely add further to the extent to which prices are depressed. However, to the extent that government policies insulate farmers from the need to adapt their supplies to the changing market circumstances, those policies will be responsible for the reduced market prices.

There is substantial cause for concern that the present forms and levels of support for farm program crops in the United States are providing such insulation and contributing to the lower prices. Of course, US policies are only a part of the problem. Often US policy makers make statements that the United States should not unilaterally disarm when the Europeans have higher agricultural support. When problems are bad in a particular place, it is often possible to find some places where they are worse. Does that mean that there should be a race to the lowest common denominator, which would just destabilise world markets and depress prices more? In fact, as is shown in chapter 2, US support levels for the major farm program crops are now similar tot hose in the European Union while those for sugar and milk are higher. Protection levels in places like Japan and the Republic of Korea are much higher and are highly market distorting, but those countries clearly do not have anything like the comparative advantage that the United States has in agriculture.

The perceived solutions in the House and Senate Committee bills are likely to become an important part of the problem. The high support is likely to sustain low market prices for which the 'solution' will be automatically higher support, given the automatic nature of such higher support under the arrangements that have been advanced.

There is nothing in the above principles that provides justification on grounds of economic efficiency for high levels of commodity base support for the set of US agricultural industries that are highly supported, namely the farm program crops, sugar and dairy. Why then are levels of support high for those items and why do they persist? Also, why have efforts at reform such as the move to what looked like decoupled support at declining levels in the 1996 farm bill, been thwarted? The answer appears to lie squarely with the politics of self interest.

Tulloch (1975) advance the concept of the 'transitional gains trap'. He tried to explain why government programs do not seem to help farmers more than temporarily. He concluded that the support becomes capitalised into the value of fixed farm assets, principally land. When farms are sold, as many would be over a period of many years, the purchaser of the farm pays a higher price for the farm because of the support. Effectively, the purchaser pays for an expected stream of earnings from two sources -- earnings from the market and those from government support.

The enhance stream of benefits to producers becomes significantly dissipated in the greater use of purchased production inputs, and to a degree, higher prices for those inputs. Also, the higher value of land encourages more intensive use of the land and the application of more capital intensive production structures.

If the support were withdrawn, however, the values of the activities would fall by the government support element of the total earnings stream Hence, the wealth of established farmers would be reduced and established capital and input intensive production systems could not be sustained. So, when farmers depend on government support for a substantial part of their income and for maintenance of their wealth, they exert as much political pressure as they can for its perpetuation. If that pressure were successful, the support could become institutionalised. It can become accepted as necessary or even rationalised as being desirable -- despite the fact that it is being provided at a cost to the society as a whole.

While farmers themselves might be expected to exert political pressure to maintain their support, their relatively small numbers in countries like the United States might be expected to limit the capacity of their own political pressure to succeed. However, as Anderson (1986, p. 15) observed, a small group of farmers with a vital common interest in maintaining support can face little organised opposition form others in society, such as broad, disparate groups like consumers and taxpayers, within which there are numerous individuals who face only small costs individually as a result of the support. Furthermore, if the country is a net importer, such as is the case for the United States with sugar and some milk products, the government can provide support covertly through import controls, including tariffs, thereby averting the political costs of providing overt assistance through the budget.

As indicated in chapter 2, many of the present US support systems for the program crops and sugar have evolved from New Deal legislation in the 1930s. The same applies in large part for dairy. (Manchester and Blayney 2001, p. 4). Why the major broadacre crops like wheat, feed grains, rice and cotton and not other crops became heavily support appears to be related to the nature of the New Deal legislation. As Orden, Paarlberg and Roe (1999, p. 2) observed, during the Great Depression 'President Franklin D. Roosevelt's New Deal Administration sponsored 'temporary' remedial measures to control supplies and purchase surplus production of storable farm commodities. When the emergency ended, the New Deal farm programs proved not to be so temporary.' It appears that the quality of storability for the farm program products that helped in supply management, was a contributing factor to them being set upon a path of support and regulation that has lasted to this day.

Support for milk in the United States clearly springs from other reasons. Manchester and Blayney (2001) point out that milk is a flow product with multiple uses -- qualities that encourage centralisation of milk supply management functions. They also maintain that costs of balancing a fluid milk market must be covered by some means, which is where classified pricing comes in. It does not follow that these qualities necessarily result in high government support for milk production -- New Zealand has provided minimal support for its large dairy industry for many years. However, the propensity to centralisation of supply management functions, the ability with modern refrigeration and storage to manage supplies and the abilities to control prices through restricting competition from imports of dairy products and on movements of milk between regions, all lend themselves to this product being a candidate for protection if sufficient political influence is exerted. Such political influence has clearly been exerted for a long time in the United States.

Gardner (1987 -- from Orden, Paarlberg and Roe 1999), concluded from a long term analysis of US support policies that relative support increases systematically when supply and demand for a commodity are less responsive to an increase in price, which increases the effectiveness of supply controls and lessens the economic costs arising from government intervention. In developed countries, both demand and supply for grains are generally considered to be relatively unresponsive to changes in price. He also concluded that protection rises among commodities with increased exposure to international trade, and the overall level of support for agriculture rises when farm income declines relative to nonfarm income. In addition, he found that support levels increase with the size of the average farm unit, with the geographic concentration of production and with the stability of its location over time.

In the US context, the grain, cotton, rice and sugar industries have been geographically concentrated for a long time -- the grain industries over an extensive area in the corn belt and the great plains, the cotton industry in Texas, Arizona, Mississippi and Georgia, rice in Arizona, California and the Mississippi delta, the sugar beet industry in the Red River Valley and the sugar cane industry in Florida and Louisiana. Dairying has also been highly concentrated in the Minnesota-Wisconsin region, some of the north east states and California.

In recent years, farm incomes have been approximately maintained. However, this has occurred against a backdrop of reduced prices for major crop products, primarily for grains, cotton and soybeans, that have been compensated for by the substantial surge in support that has occurred (figure I in chapter 2). By 2000, direct government payments had risen to 49 per cent of total net farm income (ERS 2001).

The only factor that is in any way at variance in recent years with Gardner's observations is that he established a link between the propensity toward high support and supply and demand for a commodity being relatively unresponsive to an increase in price, which increases the effectiveness of supply controls. Since 1996, supply controls through area reduction or similar programs have been discontinued, with the only supply controls in effect occurring as a byproduct of conservation programs.

It appears that the United States could now be breaking with precedent in not resorting to supply controls when internal stocks are high and/or prices low, instead providing additional support payments to assist domestic producers. So, instead of efforts to support market prices through supply controls, the additional support is tending to maintain or increase production, further depressing market prices as is evident from figure A. This change may be based on the premise that some of the additional payments are decoupled and therefore considered to be minimally market distorting. As discussed above, the US payments that are considered to be decoupled are not even properly decoupled in terms of their effects, and much of the additional support in recent years has been in forms that are clearly market distorting.

As mentioned regarding Tulloch's ideas about the transitional gains trap, and Anderson's observations about the effectiveness of small, determined well focused groups in influencing policies, it is perhaps understandable that, once established, protection for agricultural products can be extremely difficult to reduce or eliminate -- even though gains would flow to the wider economy from such reforms. That has so far proven to be the case with the US farm program commodities and with milk and sugar, and it looks like the net of protectionism is now being cast even wider to more fully include soybeans as well. The widening net of protectionism and political pressures for higher support since 1998 and the high support that would arise from the new House or Senate Committee bills are consistent with Gardner's (1987) observation that support for agriculture in the United States increases when farm incomes decline relative to non farm incomes.

Why is it that the policy making bodies in the United States, that is the US Congress and, to a lesser extent, the Administration, have persistently passed highly protective policies for these commodities? The answer to this question probably lies in a combination of the effectiveness of the lobbying efforts by the protected industries, the nature of policy development for agriculture within the Congress, the development of mutual dependence between groups interested in farm support and other groups, and even vested interests within the US Department of Agriculture in maintaining ongoing functions.

The Committee system in the two houses of Congress lends itself to the writing of agricultural law by people who know most about agriculture. Membership of the Committees is usually highly oriented to those who have experience with agricultural issues and who often have close links with farming. So they tend to empathise with the situation of farmers. An example is comments made on a proposed conservation amendment in the passage of the present House bill. Juday (2001), reported comments by two Representatives that 'non-agriculture committee members were insufficiently experienced and educated in things agricultural to offer valid opinions on farm policy'.

Perhaps even more importantly, the process that Congressional representatives have to go through to be elected is costly and candidates depend on campaign funding from those that support their efforts to be elected. So, as Carter (1994) observed, they become obligated to their backers. Farm groups are renowned for directing their lobbying efforts to where they are most effective, supporting candidates on both sides of politics and ensuring that their interest are clearly conveyed to them. As mentioned with respect to the transitional gains trap, such people stand to lose if Congress votes to reduce support for established rural industries. So they pursue strategies to ensure as far as possible that Congressional representatives will be sufficiently obligated to them to maintain their protection.

Another factor contributing to perpetuation of protective policies arises from the support systems that have been constructed over time. Those systems have become part of the environment of policy development. Concepts like the loan rate and forms of supplementary commodity based support like deficiency payments or production flexibility contract payments have become established, not only within legislation but also in the processes of debate in policy formations. So when the time comes for new farm bills to be developed, much of the discussion and debate is about levels at which such variables are to be set and about modification to those variables to meet current or foreseen market and budgetary situations. As those variables are all to do with intervention and support, new farm bills tend to be variants on old ones, modified to meet what are considered to be the protective priorities and budgetary circumstances each time around.

The development of the concept of countercyclical payments in both the House and Senate Committee versions of the new farm bill is a case in point. Before the 1996 farm bill, the US government made deficiency payments to farm program crop participants. These payments varied inversely with market prices. In the 1996 farm bill, these deficiency payments were replaced by pre set production flexibility contract payments that were considered to be decoupled -- they did not vary with changes in market prices. However, when market prices later fell, it must have been considered that a countercyclical element was required -- that was provided through the emergency payment packages from 1998 to 2001. Both versions of the new farm bill would reinstitutionalise many of the support characteristics of the former deficiency payments by adding automatically varying countercyclical payments to a fixed payment component for so called 'decoupled' payments. In effect, little will have changed since when there were deficiency payments, with one important difference -- there would be no supply control through acreage reduction programs.

Over the years, the United States has been a strong advocate of agricultural reforms internationally, with the primary focus on expanding market access. This is consistent with an appreciation of the importance of increasing access of US products to export markets. As pointed out in a recent US Department of Agriculture (2001a) study designed to take stock of food and agricultural policies for the new century, trade expansion is critical. This is partly because the United States has a mature developed country market with low populations and consumption growth potential.

Paths to trade liberalisation can be both bilateral, involving reductions in trade barriers between groups of countries, and multilateral, involving agreement by a wide cross section of countries. This latter approach is currently being pursued mainly through the World Trade Organisation. Bilateral agreements such as NAFTA are usually designed to provide benefits to their limited membership through wider market access. In some instances bilateral agreements can advance progress toward more open markets globally. However, in others, their main effect is to divert trade away from more efficient third countries, resulting in overall negative effects on nonmembers and on the world economy (Frankel 1997, p. 229). Whether they have positive or negative global effects depends on how they are structured and on the degrees to which barriers to trade are broken down between bilateral trading groups. Trade liberalising multilateral reforms that cover most trading nations and the bulk of world trade, on the other hand, unequivocally advance economic benefits globally. It is in the context of multilateral reforms in agriculture that the comments in this section are made.

The United States has been a key advocate of multilateral trade reform in agriculture. In fact, it would not be too much to claim that its leadership in multilateral efforts to advance economic benefits from agricultural trade is critical. The United States and the European Union between them account for about half of world temperate zone agricultural exports and it is difficult to imagine a multilateral agreement working if they did not want it to.

At present, multilateral agricultural negotiations are proceeding in the WTO under provisions set down in the WTO Agreement on Agriculture that came into effect in 1994 as an outcome of the Uruguay Round negotiations.

In the past, the outcome of multilateral trade negotiations rested largely on agreement being reached between a few economically powerful countries, in particular the United States and the European Union. These countries clearly remain critical players. However, the dynamics of these negotiations changed with the Uruguay Round. There, the Cairns Group of both developing and smaller developed countries that advocate more open, less distorted trade, played an important role. Importantly, many developing country members are also exerting increasing influence on WTO negotiations.

Traditionally, the United States has taken an opposing stance in multilateral trade negotiations to the European Union, Japan and the Republic or Korea that have tried to defend their highly protectionist agricultural policies. In this, the United States has pursued common cause with the Cairns Group that clearly wishes to push toward more open markets that are less distorted by protectionist government policies. The positions of other developing countries in multilateral negotiations vary depending on their circumstances. However, they are united in one important respect -- they wish to obtain access to more open markets, especially in the developed countries.

These positions are evident in the present negotiations. However, there is also a sense that the United States is playing a double game of trying to make others open up markets and reduce agricultural protection while concurrently expanding subsidies to its own farmers. This latter element has been brought to the attention of other participants in the negotiations particularly by:

• the large 'emergency' support packages provided to US agriculture in each year from 1998 to 2001;
• the ease with which those packages passed through the US Congress;
• the hugely expensive version of the new farm bill that has been passed by the US House of Representatives and advanced by the Senate Agriculture Committee in 2001; and
• lack of any substantive US efforts to open its own markets for its most highly protected products, dairy and sugar.

It is widely held that more open markets are a good thing -- they enable firms and national economies to benefit from greater specialisation in areas of lowest comparative cost; they enable firms to obtain benefits from greater economies of scale; and they provide consumers with access to a greater variety of products at competitively determined prices. One of the main motivators in setting up a multilateral forum in the General Agreement on Tariffs and Trade (GATT) in 1947 was that it was patently obvious that the inward looking protective policies of the 1930s exacerbated the great depression and contributed to conflict between nations. More open markets was one of the two foundation principles of the GATT, the other being nondiscrimination. Since 1994, the GATT has been subsumed in the World Trade Organisation (WTO).

While the economic benefits from more open markets are relatively clear, greater openness brings greater competition from lower priced imports with it. That competition brings about pressures for structural changes in domestic competing industries. Those industries can respond by adjusting in size and efficiency or by lobbying governments to offset the effects of the increased competition by subsidies. The main objectives of those seeking assistance through subsidies are either to avoid structural adjustment -- they wish to continue to operate as before -- or even to expand their production and sales.

If governments opt to provide subsidies in forms that support domestic production, an effect will be either to prevent the degree of import penetration of markets, or to increase exports. Both effects reduce world market prices and erode the benefits to competitive producers in either exporting or importing countries. At the same time the subsidies involve a waste of resources by encouraging resources to remain in or to flow into producing items that can be obtained at a lower cost from elsewhere. The subsidies and their distribution also involve extra costs of revenue collection and distribution that impose additional costs on the economies of the subsidising countries.

In short, subsidies erode the economic benefits that can be obtained from more open markets. If widely provided, the economic costs from the distortions that they impart can fully offset or exceed benefits from more open markets. Because of the ability of governments to use various forms of subsidies to offset the benefits from trade that arise from more open markets, a comprehensive approach to trade liberalisation is necessary if economic benefits are to be assured. It is because of this that it was necessary if economic benefits are to assured. It is because of this that it was necessary in the Uruguay Round negotiations on agriculture to address all forms of government intervention that reduce the economic benefits from trade, including impediments to market access, domestic support and export measures.

Reaching agreement in multilateral negotiations on opening markets further, reducing domestic support and reducing export assistance is difficult, especially when some governments are committed to supporting sectors like agriculture. Representatives of countries that are highly protective of their agriculture could argue that it is possible for them to agree on greater access to their markets or reductions in some forms of subsidies only if they can change to some other forms of support.

If that is their bottom line, it means that the opportunities for reforms that can advance the benefits from trade and specialisation are limited largely to changes to forms of support and not levels of support. Some forms of support are less market distorting than others. For example, price support that is kept in place by a combination of barriers to imports and export subsidies would be more market distorting than a production subsidy that provides the same assistance to producers. The reason is that price support imposes costs on domestic consumers as well as distorting production and trade. Changing to a production subsidy would at least avoid the costs to consumers that arise from the price support. However, the production subsidy would still be significantly market distorting, imposing costs, not only on the domestic economy but also globally.

It is clearly difficult for negotiators to agree on degrees to which differing forms of support or protection are marketing distorting. So it is absolute manna from heaven if they can happen upon a form or forms of support that are considered not to be market distorting at all or, at most, minimally distorting. This was the case with the WTO Agreement on Agriculture when it was considered that decoupled payments that were unrelated to production, prices and factors of production and which were made on fixed past bases, were minimally market distorting. As such, these payments were made exempt from limits or reductions for domestic support. The United States reoriented its support for farm program crops toward these measures.

But as indicated in chapter 5, the ways that these so called decoupled payments have been made in the United States cast grave doubts on the minimally distorting characteristic that such payments are supposed to have. These payments have been provided along with other forms of assistance that are clearly distorting, so the system overall is distorting. The recently passed House bill and the Senate Committee for the new farm bill would give farmers the ability to update their bases, violating the very foundations of the concept of decoupling.

If the WTO rules that enable exemptions of domestic support payments on grounds of decoupling or being production limiting are so malleable that the United States can claim these measures, as incorporated in the House bill or the Senate Committee bill as exempt, there are indeed substantial flaws in the conditions for exemptions that currently apply.

The acceptance of the concept of decoupling in the WTO Agreement for Agriculture has meant that countries that provide so called decoupled support have not had to prove to the WTO membership that the many billions of dollars of such support they are providing is in fact being applied in ways that are, in fact, minimally market distorting. All they have had to do is satisfy agreed rules that are supposed to ensure that support is decoupled. While those rules might be reasonable, the experience with their application by the United States casts grave doubts on whether they can be applied in a minimally market distorting way in countries where the rules for providing agricultural support are continuously subject to change. At the very least, the ability of farmers to upgrade their bases under either the House of the Senate Committee version of the bill, should throw the minimally market distorting status of US 'decoupled' payments into doubt, as would the provision of countercyclical payments on the same bases.

In the WTO Agreement on Agriculture, the approach agreed upon to advance the benefits from agricultural trade was threefold -- to commit countries to expanding access to their markets, largely through reducing tariffs and through tariff quotas; to have phased reductions in forms of domestic support that were considered to be market distorting, with such reductions being for agriculture as a whole; and to reduce export subsidies on a commodity specific basis.

This section is about the domestic support commitments of the United States.

Under the WTO Agreement on Agriculture, it was agreed that non exempt domestic support for agriculture was to be aggregated into what was termed an Aggregate Measurement of Support (AMS). It was agreed that this AMS should be measured for a base period that was to be the average for 1986 to 1988 and that the permitted AMS for developed countries, one of which is the United States, should be reduced progressively by a total of 20 per cent over an implementation period from 1995 to 2000. The US AMS in its base period was US$23.9 billion, that was to be reduced to a maximum of US$19.1 billion in 2000.

The AMS consists of two main elements -- market price support and non exempt subsidies or government payments. In the case of the United States, price support has been primarily for milk, sugar and peanuts and in 1998, the latest year for which the United States has notified its domestic support to the WTO, it totaled US$5.8 billion of a total AMS of US$10.3 billion.

Price support is measured as the difference between internal administered support prices and a constant external reference price defined as an import parity price for importing countries and an export parity price for net exporters, multiplied by the quantity eligible for support. That constant external reference price is set at the average for the 1986-88 base period and is maintained throughout the period for which the Agreement applies.

It so happened that the base period (1986-88) was one in which market prices for most agricultural products were the lowest for several decades. As a result, agricultural subsidies were high in that period as was the difference between internal administered support prices and world market prices. This provided countries with very large bases for domestic support reduction, so the agreed cuts might only bite in other periods of extreme levels of support. Because of this, and other reasons discussed in this chapter, the domestic support arrangements have not place any real constraints on US agricultural support.

The way in which the price support element of the AMS is measured is flawed if it is to be considered as a true representation of actual market price support. Domestic administered prices are not clearly defined and, in many instances are not representative of actual internal support prices. Take US milk support prices as a key example. Those prices have been set at well below actual levels of market prices for many years (chapter 3) -- the actual levels are supported by measures other than the federal support price, the main ones being restrictions on imports and export subsidies for dairy products and milk marketing orders.

It is entirely possible for the administered support price to be changed without having any effect on internal prices for milk or levels of actual price support to the US dairy industry. Conversely, internal supported market prices for milk over the past decade have varied over time, independently of the support prices. That is, most of the time the support price is irrelevant. In the 1996 farm bill, the administered support price for milk was reduced from US$10.35 per 100 pounds of milk in 1996 to US$9.90 by 1999. The reduction, when considered in relation to a constant external reference price would have reduced the unit price component in milk's contribution to the AMS. However, actual levels of support of US milk have borne no relationship whatever to the AMS for milk.

In 1998, the latest year for which the United States has submitted its notification for domestic support to the WTO, the AMS for milk was US$15.3 billion estimated by OECD (2001). Both the House of Representatives and the Senate Agriculture Committee versions of the new farm bill would maintain the support price for milk at US$9.90 per 100 pounds.

It is not likely that the price support component of the US AMS would change much from around its 1998 level of US$5.8 billion while the present rules for its determination remain and support prices remain constant as would be the case for milk and sugar if these elements in the House of Representatives version of the new farm bill were adopted. In 1999 a reduction in the support price for milk to its current level of US$9.90 per 100 pounds would be partly offset by an increase in production. This would largely maintain the estimated price support for milk which accounted for about three-quarters of total US price support in 1998. Any changes in subsequent years would depend on production that has been rising gradually. For sugar, the support prices have been constant for many years and would remain so if either the House bill or the Senate Committee bill were adopted. Again, its price support would change only with production.

As the countercyclical provisions have been removed from the dairy section of the Senate Committee bill, the additional price support that those provisions would have provided will not eventuate. However, additional government payments provided under the Senate Committee bill would increase the US AMS.

While the United States contained its total AMS in 1998 to only US$10.4 billion, which was only about a half of its permitted total for that year (US$20.7 billion), the margin for expansion will have shrunk substantially since. The US Department of Agriculture (2001a, p. 57) forecast total AMS levels of around US$17 billion in both 1999 and 2000. The figure for 2000 compares with a US limit of US$19.1 billion.

The reason for the rapidly closing gap between the US AMS and its agreed WTO limit is the sharp increase in direct payment support, primarily for program crops and soybeans through the various emergency packages from 1998 to 2001. The most prominent increases in eligible AMS support are in two areas. One is loan deficiency payments which increased by US$5.6 billion between calendar years 1998 and 2000. The other in market loss assistance payments that were US$2.8 billion in 1998 and which are reported by the US Department of Agriculture (2001a) to rise to US$5.5 billion.

Both loan deficiency payments and market loss assistance are acknowledged to be market distorting. Loan deficiency payments have been incorporated in AMS notifications to the WTO. However, the market loss assistance payments only came into existence from the voting of the first emergency package. In 1998, those payments were incorporated in the notification as non product-specific support along with subsidised crop insurance, multi-year crop disaster payments and state credit programs. The categorisation of this support as non product-specific is significant as, under special rules in the domestic support elements of the WTO Agreement on Agriculture, exemption from inclusion in the AMS is allowed under what is termed de minimis exemption if the sum of non product-specific support is less than 5 per cent of the total value of agricultural production.

In 1998, incorporation of market loss assistance payments of US$2.8 billion raised the level of non product-specific support to US$4.6 billion. That was well below 5 per cent of the value of US agricultural production. With total US production valued around US$200 billion a year, the 5 per cent de minimis threshold for non product-specific support is around US$10 billion. The large increases in market loss assistance payments, along with increasing crop insurance subsidies are likely to test the US limit for non product-specific support. If that limit were breached, these payments, and for that matter the other elements classified as non product-specific payments could no longer be exempt and this would push the United States into breach of its WTO commitments (US Department of Agriculture 2001a, p. 57)

The classification of market loss assistance as non commodity specific is itself partly questionable. Such assistance has been provided on bases that were determined for program crops and applies only to producers of a specific group of products -- grain and cotton. If those payments were not exempt under the de minimis provision, the United States would probably have breached its AMS limits in both 1999 and 2000.

In effect, if either the House or Senate Committee versions of the new farm bill were largely adopted, US compliance with its AMS commitments under the WTO Agreement on Agriculture would depend largely on the status of the main forms of support under that agreement. This is because those bills effectively lock in a combination of the AMTA payments which have so far been considered exempt through decoupling, and market loss assistance payments that are designed to provide extra support when prices drop. The latter were not considered exempt.

Clearly, by labeling a large part of the direct payments under the new farm bill 'decoupled', the US legislators would consider such payments to be largely an extension of the AMTA payments and continue to claim that they are decoupled and therefore, in terms of the conditions in the WTO Agreement on Agriculture, minimally market distorting. As indicated in chapter 5, the application of either the House or the Senate Committee bill would compromise the actual decoupled status of such payments at least in terms of their effects, because producers would have the option to update their bases; and because of wealth effects of the payments on investment decisions.

The countercyclical payments would seem not to be eligible for classification as decoupled because they are related to prices. However, according to WTO rules, it might be claimed that they could be eligible for exemption under production limiting arrangements, as they are paid on fixed areas and yields and the area bases on which the payments are made are only 85 per cent of areas that were actually planted or considered planted in the base period. So, technically, the countercyclical payments might even be claimed to be production limiting for the purpose of seeking exemption from WTO domestic support disciplines. As mentioned in chapter 5, the setting of area bases at 85 per cent of base acres, which is the case at present and in the House bill is highly artificial as changes in that percentage can be offset by higher payment rates and target prices.

Under the Senate Committee bill, this 85 per cent arrangement does not apply, as payments would be made on 100 per cent of base areas and yields. Consequently, the countercyclical payments under that bill would be unlikely to be exempted from the US AMS on grounds of payments being made on 85 per cent or less of base production. It is possible, however, that such payments might be exempt on grounds of being paid on fixed areas and yields.

Against these arguments there is the fact that under the House bill, farmers would have the option to upgrade both their area and yield bases for both decoupled payments and countercyclical payments. The changes could break the conditions of fixed bases both for decoupling and production limiting arrangements. What are fixed bases, when bases can be changed from 'fixed bases' for one period to 'fixed' bases for another period?

From the perspective of ordinary logic, the possibility of exempting the countercyclical payments form WTO limits or reductions appears almost ludicrous. There are no really production limiting programs in place, apart from the conservation reserve program that is designed for another reason, and the countercyclical payments could hardly have any other effect than to increase or maintain production.

What we have witnessed since 1996, is a marked reorientation of US payments for program crops toward measures that comply with US WTO commitments. Since 1998, large additional payments have been juggled so as to enable the US AMS to remain within its agreed limit. With both the new House and Senate Committee bills, serious questions can be raised about whether the countercyclical or even the fixed payments for farm program crops could be exempt from the US AMS.

While the status of countercyclical payments as exempt of nonexempt in determining the future US MS is uncertain, loan deficiency payments will definitely be included. These payments will be large under the House bill and even larger if the commodity provisions of the Senate Committee bill are adopted. There would appear to be a good chance of the US AMS ceiling of US$19.1 billion being breached in periods of low market prices.

Also, another round of agricultural negotiations is in progress and efforts will be made to further reduce allowable levels of market distorting support. High levels of US nonexempt support that are incorporated into US legislation would be likely to constrain the position that the United States could take in advocating further reductions.

Since 1996, producers in other countries have watched what initially looked like a genuine attempt by the United States to restructure and reduce its support to make it less market distorting, for farm program crops at least. But then US policy making reverted to type, providing generous countercyclical support, and if the key elements of House or the Senate Committee versions of new farm bill survive the process, they would cement that support at increased levels. At the same time reform to the highly protected sugar industry has been a nonevent, and the Senate Committee bill, if applied to diary would increase market distorting US support.

Looking back on developments since the early years of the Uruguay Round negotiations which commenced in 1986, significant changes have occurred, some of which may be regarded as positive in terms of US policies being less market distorting, and other negative.

Even where measures that might be considered positive for reducing market distortions have been adopted, they have usually been counterbalances by negative elements:

How do these developments line up with what is proposed by the United State so far for agricultural reform in the present WTO negotiations?

The main elements of the US proposal (tabled in June 2000) to the WTO negotiations on agriculture that commenced at the beginning of 2000 and are continuing, include:

Market access: comprehensive measures to reduce levels of and disparities in tariffs between countries and to ensure effective access of all products to al markets; reduction or elimination of tariff escalation (increasing tariffs as stages of processing proceed, usually aimed at encouraging processing); simplification of tariff arrangements; substantial increases and improved arrangements for tariff quota access; ending exclusive import rights of import state trading enterprises, increased transparency of single desk importers' operations; and improved process covering products developed through new technologies.

Export measures: progressive reduction of export subsidies and subsidised exports to zero; end exclusive export rights in markets controlled by single desk sellers and place conditions on operation of single desk sellers; prohibit use of export taxes; and conduct negotiations for export credits in the OECD.

Domestic support: simplify WTO domestic support into two categories, exempt and non exempt; progressive reduction of non exempt support to a fixed percentage of the value of agricultural production in a fixed base period with the percentage being the same for all members; 'enhance further' criteria for exempt support ensuring that exempt measures are targeted, transparent and minimally distorting; and give special consideration to developing countries' development objectives.

These elements are consistent with US approaches to both agricultural trade and domestic support. There is a clear desire to open markets substantially. The objective of reducing export subsidies to zero is consistent with its own discontinuation of export subsidies on wheat (and their replacement by larger domestic support payments) although it is still subsidising quantities of skim milk powder. Its proposals regarding export state trading enterprises reflect a long standing suspicion in the United States the these bodies use their market power to provide assistance to others' exports. This is despite the fact that most export marketing bodies have only small shares of temperate zone world agricultural markets and their ability to determine prices in any market is limited to freight differentials.

The US approach on domestic support appear to be to obtain more permissive rules for exemptions of forms of domestic subsidies so it can continue to exempt large parts of its own subsidies from its AMS. That way it could meet whatever final bound conditions were agreed on the AMS as a percentage of the value of production for all participants.

Broadly, most, but not all, of the kinds of support measures that are contained in the new House and Senate Committee bills could be accommodated relatively readily if these US proposals were to be adopted. Nevertheless, the extent would depend on whether it could be agreed that some forms of US support are indeed minimally trade distorting. Even as it stands, the United States is highly permissive in interpreting that major forms of support, in particular decoupled support, are minimally distorting. Some others who have to compete with US products, producers of which are assisted by billions of dollars of so called decoupled support, would be likely to have a far different view on whether such support is being applied in minimally trade distorting ways.

There are potential conflicts between the US WTO negotiating proposal and some of the measures in the House or Senate Committee bills. If, for example, market increases and improved arrangements were negotiated for access to the US sugar market under tariff quotas, internal support prices for sugar could only be sustained around their current and proposed support levels if measures were taken to restrict US production. Also, if marked increases and improved arrangements were negotiated for market access to the US market for dairy products and export subsidies were eliminated, additional support for milk as would be provided in the Senate bill could either generate surpluses of milk and dairy products or require some form of production restriction for milk.

It is clear that the United States is committed to trying to obtain more open markets for agricultural products internationally. This is consistent with its position of the world's largest single agricultural exporting country. However, it can not be fully consistent even in its pursuit of that objective while its legislators are so strongly committed to providing support that can only be sustained by locking out imports of politically sensitive products including dairy products and sugar.

With the farm program products, it clearly wishes to expand export market opportunities. This is obviously desirable for competitive producers elsewhere as well as in the United States. However an important part of the US motivation is to provide wider outlets for its own highly subsidised producers.

At present there has been a significant backlash against trade liberalisation in agricultural products in some countries. This is being manifested in the elevation of concepts such as the multifunctionality of agriculture and various other 'non trade concerns' as reasons for maintaining agricultural protection in countries like Japan, the European Union, other western European countries and the Republic of Korea.

The objective with multilateral trade negotiations is to enhance the economic benefits that come from more open, less distorted markets. While the Cairns Group and other concerned developing countries can push to advance the cause of multilateral liberalisation and reform, the critical mass of support for such reform requires the leadership of one of the two largest of the world's agricultural exporters. Given the proclivity of the European Union for agricultural protection and its present preoccupation with expansion eastward, that leadership is unlikely to come from that quarter. US leadership is critical to a successful outcome in the present multilateral agricultural negotiations. The litmus test of the credibility of that leadership is the country's own policies. If either the House bill or the Senate Committee bill is representative of what will eventually emerge as the new farm bill, the credibility of that leadership will be severely tested.

Acreage base The area that a farmer is considered to have previously planted to a given program crop for purposes for calculating entitlements and obligations under commodity programs.

Acreage reduction programs (ARP) Programs whereby farmers refrain from planting a portion of their crop acreage base in return for benefits from various US government programs. Acreage reduction programs have been discontinued since 1996.

Aggregate measurement of support (AMS) The measured level of domestic support used in the WTO Agreement on Agriculture. It is determined for each commodity supported and for agriculture in aggregate. It consists of unit price support multiplied by production, plus direct payments or other subsidies that are not exempted from reduction commitments, less specific agricultural levies or fees paid by producers. The unit price support for commodities is the difference between internal administered support prices and a fixed external price (import parity for importers or export parity for exporters) calculated at its 1986-88 base period level. In the WTO Agreement on Agriculture, the AMS is used for negotiated reductions on a whole of agriculture basis.

AMTA (Agricultural Market Transition Act), 1996 Title I of the FAIR Act, under which certain commodity payments are extended to US farmers. The most important element of the AMTA act was the provision of production flexibility contract payments.

Cairns Group Group of 18 agricultural exporting countries, both developing and developed, formed in 1986, to promote trade liberalisation. Cairns group members account for around one-third of the world's agricultural exports. The group played a significant role in the Uruguay Round of trade negotiations, a major outcome of which was the WTO Agreement on Agriculture.

Commodity Credit Corporation (CCC) A corporation within the US Department of Agriculture created to stabilise support and protect farm income and prices through loans, purchases, payments and other operations. All money transactions for agricultural price and income support and related programs are handled through the CCC.

Conservation Reserve Program (CRP) A voluntary long term cropland retirement program and currently the largest land retirement program in the United States. CRP provides farm owners or operators with an annual per acre rent and half of the cost of establishing a permanent land cover (usually grass or trees) in exchange for retiring highly erodible and/or environmentally sensitive cropland from production for 10-15 years.

Countercyclical payments Government payments for particular commodities that move inversely with world market prices.

Dairy Export Incentive Program (DEIP) A US export subsidy program for dairy products that was introduced in 1985, and is still current. Under this program, US exporters receive payments, determined by competitive bids, for quantity of exports that are targeted to particular market areas.

Decoupling The provision of support to producers that is not linked to variables that affect markets, including production, prices, trade or inputs used in production.

Such support is considered less market distorting than support that is linked directly to those variables. Under the domestic support arrangements of the WTO Agreement on Agriculture, payments that meet conditions set down for decoupling are considered to be minimally market distorting and are exempt from limitations or cuts.

Deficiency payment A payment made to farmers to cover any shortfall between an administratively determined support price and the price obtained from the market. In the case of the United States, deficiency payment were paid prior to 1996. There, the administratively set support price was termed the target price.

De minimis Under the WTO Agreement on Agriculture, support can be excluded from the calculation of the AMS and exempt from reduction commitments for domestic support if that support is below a set proportion of the value of the relevant agricultural production. That proportion is 5 per cent for industrialised countries for each of product specific and nonproduct specific support. For developing countries, the rate is 10 per cent for each of those two categories.

Emergency support packages Special, additional assistance packages for US farmers legislated in each of the four years from 1998 to 2001.

Export Enhancement Program (EEP) A US export subsidy program, that was introduced in 1985 and is still current, under which payments are provided, in cash or in kind, to exporters of certain agricultural commodities that are targeted for exports to particular markets. Subsidies under this program have been used mainly for wheat. However, they have also been used for coarse grains, rice, live cattle, eggs, poultry meat and vegetable oils.

Export subsidy Government payments, or other contributions by governments, provided to domestic producers or exporters if they export their goods or services.

Exemptions (WTO) Under the WTO Agreement on Agriculture, certain measures that meet specific criteria are exempt from domestic support reduction commitments. The measures were agreed to be minimally trade distorting or production limiting.

Externalities Discrepancies between the private and the social costs of an economic activity. In the context of negative external effects from production, externalities exist when a producer's actions inflict costs on other firms or households, without their consent and without compensation -- for example, local air and water pollution from livestock production.

Farm bill Comprehensive farm legislation including many provisions covering subsidies and protection to US farmers, trade measures, and conservation and environmental programs. Farm bill legislation is enacted every few years, the last farm bill having been passed in 1996 (the FAIR act).

FAIR (Federal Agriculture Improvement and Reform) Act, 1996 The 1996 farm bill legislation that expires in September 2002.

Gross domestic product (GDP) The total market value of goods and services produced domestically in an economy at a specific period of time, usually a year.

House bill The version of the new 2002 farm bill as passed by the US House of Representatives on 5 October 2001.

Loan deficiency payments A US support provision introduced in 1985. These payments cover the difference between market prices and the loan rate when market prices fall below the loan rate. As such, they fulfil the same function as marketing loans. The difference in type of support lies in the method of payment. Whereas marketing loan support is provided by farmers repaying loans below the loan rate, loan deficiency payments are direct subsidies paid by the government to farmers. They are only available to producers who have agreed not to obtain price support loans for wheat, feed grains, cotton, rice or oilseeds.

Loan rate The rate in dollars per bushel or cents per pound that the US government is empowered to make loans to producers who participate in commodity programs and who submit their crops as collateral. This loan is normally available before planting. It is also, in effect, the price at which the US government purchases the commodity from producers who choose to discharge the debt arising from such loans by forfeiting their crops.

Market access The extent to which imports are allowed into a country. A country can use an array of tariff and nontariff barriers to limit imports into its markets.

Marketing loan A provision in US farm support arrangements that enables farmers to repay less than the full amount of government loans that are provided at the loan rate. This provision is activated when world prices fall below the loan rate, with the repayment being at the world price, or representative country prices. This effectively provides a subsidy to producers equal to the difference between market prices and the loan rate.

North American Free Trade Agreement (NAFTA) A free trade agreement, signed in 1991, between Canada, Mexico and the United States.

Program crops Crops for which price and income support are provided under US legislation. Major program crops include wheat, feedgrains, rice and cotton. Soybeans also receive some program benefits.

Price support Broadly, the maintenance of internal price at levels above those on the world market as a result of government assistance. For calculating the AMS for specific commodities under the WTO Agreement on Agriculture, price support has a specific meaning. It is the gap between fixed external reference price for the base period (1986-88) and the applied administered support price multiplied by the quantity of production eligible to receive the applied administered price.

Producer support estimate (PSE) An indicator of the monetary value of gross transfers from consumers and taxpayers to support producers, arising from policy measures. When expressed as a percentage, the PSE represents the total of support as a percentage of the supported value of production including support.

Production flexibility contract (AMTA) payments These are payments made to US farmers for farm program crop under Title I of the US FAIR Act of 1996, the Agricultural Market Transition Act (AMTA). AMTA allows farmers who have participate in wheat, feed grain, cotton and rice programs in any one of the previous five years to enter into seven year production flexibility contracts for 1996-2002. Total production flexibility contract payments for each year are fixed. AMTA allows farmers to plant 100 per cent of their total contract acreage to any crop, except with limitations on fruit and vegetables, and receive a full payment. There is no limit to have making and grazing, and planting and harvesting of alfalfa and other fodder crops. Land must remain in agricultural use for farmers to be eligible for these payments.

Production limiting arrangements A category of domestic support within the WTO Agreement on Agriculture. Supported under this category is exempted from the AMS for domestic support under production limiting arrangements if certain conditions are met. Those conditions are: (i) such payments are based on fixed area and yields; or (ii) such payments are made on 85 per cent, or less, of the base level of production; or (iii) livestock payments are made on a fixed number of head.

Protection Government measures, including tariff and nontariff barriers, that raise the price of imported goods and services, or otherwise restrict their entry into a market, thereby strengthening the competitiveness of domestic products.

Quantitative restrictions Explicit limits, or quotas, on the physical amounts of particular products that can be imported or exported during a specific period of time.

Senate Committee bill The version of the new 2002 farm bill as reported out of the US Senate Committee on Agriculture, Nutrition and Forestry on 15 November 2001.

Subsidy An economic benefit that producers receive from their government. It may be direct (for example cash payments) or indirect (for example subsidised input prices or interest on credits).

Target price An administratively set support price at, or around, which level a government aims to ensure prices to domestic producers. Prior to 1996, the US government set target prices for farm program crops. To build growers' returns up to the target price, deficiency payments were made equal to the difference between the target price and market prices, or the target price and loan rates if market prices were below the loan rates.

In the House bill, the target price is used to calculate countercyclical payments. Under the Senate Committee bill, the equivalent of the target price is termed 'income protection price'.

Tariff quota Application of a reduced import tariff rate for a specified quantity of imported goods. Imports above this specified quantity face a higher tariff rate.

Terms of trade The ratio of prices (unit values) of a country's exports to the prices (unit values) of its imports.

Trade liberalisation A general term for the gradual, or complete, removal of existing barriers to trade in goods and services.

World Trade Organisation (WTO) A multilateral trade organisation with a wide membership of trading countries that provides a forum for negotiation of trade agreements and for the resolution of trade disputes.

WTO Agreement on Agriculture The agreement on agriculture that was negotiated in the Uruguay Round and ratified in 1994.

Yield basis The yield per acre assumed in the calculation of program payments. Each farm has a program yield based either on past yields or on average yields for the district.

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1 | For corn, while support has generally mover countercyclically to world market prices, there was one year, 1983, in which there was a large increase in both US support and in world prices. In that year, the United States applied a payment in kind (PIK) program under which producers were provided with payments in the form of commodities from government stocks as incentives to reduce plantings greatly.

2 | This adjustment has been made on advice from FAPRI, University of Missouri: Average loan repayment rates for grains and oilseeds generally are 15-35 cents per bushel below the reported season average farm prices. In the case of cotton, the US Department of Agriculture calculates an adjusted world price that can be 20-30 per cent below the reported farm price (Dr Gary Adams, FAPRI, personal communication, 7 December, 2001). Marketing loan repayment rates are based on local, posted county prices for grains and oilseeds (ERS 2001e). These country prices vary from the annual average farm price both geographically and through time. This variability tends to result in higher loan deficiency payments than implied in the average farm price. For example, even if the season average farm price for a commodity is slightly above the loan rate, typically there will still be some loan deficiency payments because the downside variability in county posted prices means that some producers repay their loans at prices below the loan rate.

© Commonwealth of Australia 2001