Changes to US farm support

Changes to Farm Support in the US

As the most important exporter of agricultural products in the world US support policy is crucial in determining traded prices for most goods. The US Farm Bill was finalised in February 2014 and marked an important change in policy. 

 

In contrast to the European Union (EU), the US moved from decoupled support to an insurance based system where additional support is provided during periods of low price or low output (i.e. price and yield). 

The US system tends to be more acceptable to the taxpayer than a system of decoupled payments, such as used in the EU, because payments are only granted when there is a need. However, in terms of global trade the US system increases distortion, since during a period of oversupply the incentive to reduce production is weakened.

US contribution to World Trade

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As can be imagined questions have been raised with regard to compatibility with World Trade Organisation (WTO) agreements but the US argues that that the policy is compatible because support is based on historic not current crop areas and yields.

The US agricultural policy is amongst the most complex in the World and even makes the EU scheme look simple in comparison. The budget has been reduced by over $23bn over the next decade and is intended to create jobs and expand opportunity in rural US. Many of the themes are familiar to us; such as the encouragement to new entrants, capping of payments and environmental support and linkage. However, the measures tend to go further than in the EU and provide the grower with more options, for example, there are 10 schemes promoting biofuels.

Key US support for farm production

The basic support scheme is crop specific and farmers must make an irreversible decision to adopt either of the following schemes on a crop-by-crop basis: 

Price Loss Cover (PLC). Under the PLC, a payment is made if the average US price for a crop year falls below a reference price and the payment is paid on a reference yield. The reference yield can be updated to 90% of the average planted yield between 2008 and 2012. The reference price for wheat is set at $202/tonne (£120/tonne) and for maize at $145/tonne (£87/tonne). 85% of a base area specific to the crop is covered plus any generic area derived from cotton.

or 

Agricultural Risk Coverage (ARC). The ARC payments are defined on a county-by-county basis and paid when the actual crop revenue is below the ‘revenue guarantee’ for the year. The ARC guarantees 86% of the county’s ARC benchmark revenue. The benchmark revenue is based on the Olympic average (the average of the previous five years excluding the highest and lowest years).  This is also paid on 85% of the base area specific to the crop and generic area. 

The main distinction between the two schemes is that the trigger for the PLC is crop price while the ARC is crop revenue (i.e. yield and price). There are also price support measures which allow additional price management and funding through loan arrangements secured against the crop.

Currency

In addition to US farm support. the dominance of the US in agricultural markets means that the US dollar, UK sterling and euro exchange rates are important. Sterling has strengthened considerably reducing sterling prices by five to eight percent since last harvest - this is good news for purchases but less desirable for farm outputs.

Impact of exchange rate on sterling prices

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It takes two to determine price

While US grain prices determine traded prices across the world the EU imposes a tariff on imports into the EU. There is variation between grains but the main threat to the UK is import of maize and soyabean to meet animal feed requirements. With US maize currently trading at about £105/tonne , there is potentially an important market threat, if not from the USA, from other maize exporting countries such as the Ukraine. However, the EU variable rate tariff means that grain is unlikely to enter the UK at below £130/tonne and at present freight cost and loading premium lifts this toa slightly higher price. Limited imports of maize are allowed at a fixed premium of €5/tonne.

While US farm support is important the full impact of any distortion is diluted by EU support.

US not the only policy change across the world

China has also announced a significant policy change. To date Chinese policy has encouraged self-sufficiency in cereal grain and imports have been modest (this policy has not applied to oilseeds). China has proposed to end the cereal self-sufficiency policy to concentrate on more labour intensive sectors of production such as meat, vegetables and fruit. In their policy statement they have said that they will stabilise grain production at 550 million tonnes by 2020 and thus below the 602 million tonnes produced in 2013. This could be good news for grain producers across the world.

Although this news may be tempered in that China has also identified an additional 135 million hectares of land that could be cropped. However, the quality of this land  is inferior to that already lost to urbanisation and pollution.

 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973