The Agricultural Act of 2014 (2014 U.S.
Farm Bill) and its Impact on Agriculture in
Latin America and the Caribbean
Technical Note - April 2014
Victor M. Villalobos A., Director General,
Inter-American Institute for Cooperation on Agriculture
O
n February 7, 2014, President Barack
Obama finally signed the 2014 U.S.
Farm Bill, which had been the subject
of heated discussion in Congress for two years.
This new piece of legislation constitutes the
most sweeping reform of agricultural support
programs in the United States since the Act
was first approved in 1940. Even though the
FB authorizes USD 489 billion in spending for
the next five years, which amounts to nearly
the same amount as in its predecessor, it
includes significant changes in the allocation of
resources; funding for food stamp programs has
been cut and what was previously earmarked
for direct payments is now focused on the
creation of an agricultural safety net and risk
coverage1.
Commodity programs and
comprehensive risk management
One of the most important changes that
will affect agriculture in LAC is the elimination
of the direct payment and counter-cyclical
payment programs, as well as the Average
Crop Revenue Election (ACRE) program,
which, together, accounted for 15% of total
funding for the 2008 FB. Of these three, it
is expected that the elimination of countercyclical payments will have the greatest
impact on domestic and international
commodity (soybeans, peanut, wheat, maize,
The impact of this new
U.S. agricultural policy
in Latin America and
the Caribbean (LAC)
will be, without a doubt,
complex and is, as yet,
unpredictable. This
technical note is a first
attempt at analyzing it.
sorghum, barley, oats, rice, cotton and other
oilseed crops) markets. This program, which
in essence guaranteed minimum prices to
producers, had direct positive effects on
agricultural production in the U.S. and indirect
negative effects on producers of these
commodities around the world, who received
lower international prices for their crops and
did not benefit from similar subsidies.
The elimination of these three programs
offering direct support for production in
the U.S. may reduce downward pressure
on international prices. In the Americas,
1. For further information on the changes analyzed in this note, please consult the technical bulletin published by IICA (www.iica.int)
Argentina, Canada, Chile, Paraguay, Uruguay
and Brazil2 may benefit the most since they
are major exporters of one or more of the
commodities that compete with those from
the U.S. on world markets.
However, the 2014 FB also creates two
new programs. One, Price Loss Coverage,
authorizes a payment to the producer if the
average market price for one crop year/
harvest is less than the reference prices
for each crop. The other, Agricultural Risk
Coverage (yields and prices), guarantees
producers a percentage of revenue, which
can be estimated on the basis of the revenues
of an individual farm or of the corresponding
county. These programs are complemented
with crop insurance, whose premiums are
subsidized at the rate of 65% (85% for cotton)
by the government.
These types of coverage against risk,
based on variations in prices and revenues,
can raise questions regarding the potential
for distortion in production decisions and in
the market, and may, therefore, be a cause
for controversy in the WTO. The argument
in favor of the new programs is that they
are not tied to planting decisions each year,
and that the payments are made based on
a percentage of a fixed area defined at the
moment of implementation of the FB, after the
producers have selected the types of coverage
that are in their best interest.
The argument against them is that
subsidies, which in practice eliminate risks and
guarantee revenue for producers, stimulate
production and lower prices anyway. The
market power of the U.S. in the case of most
of the subsidized products puts downward
pressure on international prices, a situation
which is then transmitted to the markets of
LAC, most of which are price takers. As a
result, commodities are imported into Latin
American at artificially low prices and have
a negative impact on local producers, who
do not enjoy similar government support. At
the same time, commodity exporters must
compete against lower prices on international
markets. The situation could get worse
because, when prices fall, subsidies tend to
increase the downward trend of prices. This
is not a matter of concern as long as market
prices and incomes stay above the reference
values, as they are now.
Supplemental Nutrition Assistance
Program (SNAP)
In addition to the elimination of the
direct subsidies to commodity producers,
the reduction of the food stamps budget
was the second largest cutback in the 2014
FB (some US$8 billion over 10 years). In
addition to reducing monthly assistance
payments received by the beneficiaries, the
modifications to SNAP include reforms aimed
at stopping, as far as possible, abuses in and
misuse of the programs.
One of the most important changes
refers to new aid and regulations aimed
at encouraging beneficiaries to purchase
healthy food such as fruit and vegetables,
and program suppliers to offer a wider range
of products.
This constitutes an opportunity for U.S.
production within the framework of rules that
give priority to the acquisition of regional
fruits and vegetables. However, since
current production levels cannot meet local
demand, this modification of SNAP could be
an opportunity to increase exports from LAC
to the U.S. This would benefit the principal
suppliers in Latin America, including Mexico
(54%), Chile (13%), Guatemala (88%), Costa
Rica (7%) and Ecuador (4%).
2. The joint share of Argentina, Canada, Chile, Paraguay, Uruguay and Brazil in global exports of these commodities is as follows: sorghum
(27%), corn (24%), wheat (20%), cotton (5%), rice (6%) and peanuts (17%).
Specific support programs,
by agricultural activity
Cotton: In response to trade disputes
(mostly with Brazil) caused by the subsidies
for this crop (included in the 2008 FB), the
current FB excludes cotton from these
programs and, in their place, creates a special
type of insurance known as the Stacked
Income Protection Plan, which guarantees
a certain level of protection should current
revenues at the county level, attributable
to cotton growers, be lower than expected.
In order to reduce the direct incentives to
production, the program establishes that all
compensation for cotton losses, as set out in
the FB, may not exceed the total value of the
crop. However, the premiums are subsidized
by the government at a rate of 80% (the
highest among all premium subsidies).
The 2014 FB contains some existing
support and subsidies for cotton to minimize
risks and guarantee producers revenue,
based on reference prices and yields. Their
continuation points to growth in supply and
exports from the U.S., with the corresponding
downward trend, perhaps sharper, in prices,
which will affect the competitiveness of the
countries of LAC, mostly Brazil and to a lesser
degree Mexico, which are the largest regional
producers.
For its part, China, which accounts for half
of all cotton imports worldwide, or countries
such as El Salvador, Honduras, the Dominican
Republic, Guatemala and Peru, which depend
totally or partially on imports to meet domestic
demand for cotton, will benefit from lower
international prices.
Dairy: In a scenario characterized by
high international prices and heavy exports
of U.S. dairy products, the 2014 FB withdrew
three programs that provided direct support
for prices, exports and incomes in the sector.
In their place, and in order to compensate
dairy farmers for the increase in the prices
of animal feed, the FB creates the Margin
Protection Program for Dairy Producers,
which ensures farmers a minimum difference
(margin) between their income and the cost
of animal feed. Even though the premium is
subsidized by the government, the amount
of the margin protection payment is fixed, to
avoid farmers attempting to seek maximum
indemnification.
Compared with the movement in prices
prior to the decade of the 1990s, today’s
prices are much more volatile (from a variation
of a few dollars/t per month, today they can
jump from US$44 to US$66/t from one month
to the next). Thanks to this situation, U.S.
farmers have a clear competitive advantage
on domestic and international markets since
the FB offers them several instruments
(government purchase of milk surpluses,
marketing assistance, etc.) and protection
that partially or totally eliminates risk due to
variations in prices and yields.
The change of policies in the dairy
sector and a high level of activity in the
U.S. export sector pose a challenge for the
competitiveness of the leading exporters of
dairy products in LAC, such as Argentina
(43% of all exports from LAC), Uruguay (24%)
and Chile (7%). At the same time, the need to
compete with cheaper imported dairy products
can affect local farmers, especially if they do
not have instruments to protect their incomes.
Consumers in net importing countries of dairy
products such as Mexico, the number one
destination of U.S. exports (76% of all exports
to LAC), will benefit from milk exports at more
competitive prices.
Sugar: The policy on support for the
sugar sector underwent no changes in the
2014 FB. According to estimates from the
Congressional Budget Office (CBO), the
budget of the support program for the sugar
sector will not vary over the next decade. As
a result, the sector will continue to be the
beneficiary of short-term loans that will ensure
minimum prices and market quotas in order to
be able to control the supply of sugar on the
national market and control imports through
tariff-rate quotas. Given a future scenario of
lower international prices for sugar (they are
expected to drop at an average annual rate
of 4% over the next five years), the minimum
prices paid to U.S. producers will remain
above international prices, as they have in
the past (43% higher from 2008-2014). In
previous years, low international prices for
sugar encouraged greater use of sugar cane
to produce ethanol (mostly in Brazil).
Ethanol:Even though the total amount of
funding available for the Renewable Energies
Program has fallen by 47%, the 2014 FB
continues to promote investment in alternative
technologies for the production of energy and
the production of biomass for biofuels, while
underscoring the need to diversify the raw
materials used in these processes. To this
end, it promotes the development of second
generation energies that use the by-products
of biomass and discourages the use of fodder
such as corn, whose prices were affected
in the past by policies intended to stimulate
the production and consumption of ethanol.
In addition, the 2014 FB extends programs
that provide financial assistance to the
owners of agricultural and forest lands who
wish to produce biomass (excluding grains
and algae), and offers competitive funds,
scholarships and financial assistance for
research on and the development and rollout
of technologies and processes that will lead to
the commercial-scale production of biofuels
and bio-based products.
The elimination of incentives to use corn
in the production of biofuels could reduce
pressure on the national and international
prices of this crop, and lower the cost of
animal feed. The fall in corn prices could also
increase exports from Brazil, not only to the
U.S., but also to the rest of the world.
Attention to emerging issues that
are also priorities in LAC
Beginning in2002, U.S. Farm Bills began
addressing emerging, and not only traditional,
issues.
This change in direction invites
reflection on similar challenges in LAC and
on which aspects of the initiatives spelled out
in the 2014 FB could be used to meet them.
Specifically, the 2014 FB contains provisions
aimed at fostering rural enterprises, generating
added value, attracting young people to the
rural sector, promoting local production and
marketing of food, organic production, etc., all
of which point to the development and longterm sustainability of the agricultural and rural
sectors.
Final remark:
It will be more difficult to compete with a country in which agriculture is “safe.”
Even though the new FB eliminates direct support for the production of commodities, it replaces it with an agricultural safety net whose principal instruments are mechanisms to support
prices and income, agricultural insurance and assistance against natural disasters, which in essence guarantee the profit margins of farmers at a time when the incomes of U.S. farmers have
grown steadily, exceeding the average, thanks to higher prices and lower levels of risk. It can be
expected that these changes will promote the growth of agricultural supply in the U.S., that they
will exert downward pressure on prices and that the competitiveness of producers and exporters of
agricultural commodities in LAC will be affected.