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Agriculture AN EIGHTH DISTRICT PERSPECTIVE SUMMER 1988 The GATT Focuses on Agricultural Trade Nations throughout the world have chosen to actively The GATT manage the production and trade of agricultural products The GATT has been called the United Nations of world by governmental policies rather than rely on free market trade. Its goal is to liberalize world trade through the forces. For example, the United States uses quotas to limit reduction of trade barriers. It was founded in 1947 when the importation of sugar and dairy products as a means of 23 nations signed the General Agreement on Tariffs and maintaining high domestic support prices. It also uses export Trade which was to be part of the International Trade subsidies to sell commodities abroad. Japan supports its Organization (ITO), a United Nations agency. The ITO was politically influential farmers through quotas on imports of never approved because of U.S. opposition, but the GATT rice, beef, citrus and other products. The European survived to become an independent institution. It now has Community (EC) uses variable levies on farm imports to 96 member nations. maintain high domestic prices and subsidies to stimulate farm The GATT serves two primary roles. First, it functions exports. as a forum for member countries to discuss trade practices These trade-distorting practices have spawned serious and recommend improvements in GATT procedures. The problems. Trade conflicts have strained relationships between eighth round of trade talks began in September 1986 and is scheduled to continue into 1992. It is known as the the United States, the EC, Japan and other countries. For Uruguay Round because the initial meeting was held in Punte example, EC subsidies on pasta exports to the United States del Este, Uruguay. Subsequent meetings, however, are held led to a retaliatory U.S. tariff on pasta imports. The conflict at the GATT headquarters in Geneva, Switzerland. A mid was eventually resolved but not without a political cost. term review meeting to present a progress report is scheduled World economic growth and efficiency are sacrificed to for December 1988 in Montreal. protectionist policies. Poor agricultural nations that might The second GATT role is that of arbitrator in trade disputes be the low-cost producers of many agricultural products are among member nations. Most complaints are handled unable to compete financially with the production and export directly among concerned nations with the assistance of subsidies of rich nations. Agricultural trade policies have GATT experts. When necessary, a GATT panel can rule on been costly to developed countries as well. It is estimated a dispute and demand compensation for the aggrieved nation. that the United States and the 12-country EC spent more For example, in October 1987, a GATT panel ruled that than $48 billion in 1986 for agricultural support programs. Japanese import restrictions were “GATT inconsistent” for These costs do not include the additional expense to a group of 10 minor agricultural products such as prepared consumers that results from the farm policies. meats, tomato juice, canned pineapple and others. Because the cost of these interventions was likely to escalate, members of the General Agreement Agriculture and the GATT on Tariffs and Trade, commonly known as The GATT’s success in reducing barriers the GATT, agreed to discuss agricultural to agricultural trade has been extremely trade practices in the current round of limited. Despite numerous appeals to the THE negotiations. In the past, GATT negotiations GATT, farm trade barriers have grown. FEDERAL have succeeded in lowering protectionism in RESERVE GATT has failed to liberalize agricultural RANK of the trade of manufactured goods. Agricultural trade because it treats agriculture differently ST. II >1 IS trade, however, has been exempt from most than most other forms of trade. It allows GATT guidelines. nations to use trade practices for farm FEDERAL RESERVE BANK OF ST. LOUIS products that would be considered “GATT inconsistent” for most other traded goods. For example, the use of import quotas and other restrictions on import quantities is not allowed by the GATT. The United States, however, demanded an exception to this guideline for agricultural and fisheries products at the inception of the GATT because many U.S. farm policy tools would have been ineffective without quotas. The exception allows quantitative restrictions for agricultural or fisheries products if domestic production restraints are used. The stipulation that domestic production restraints be used has proved too vague to significantly inhibit the use of quotas. The United States further weakened this already loose restriction when it requested, and was granted, a waiver to the constraint that domestic production be limited. This waiver has weakened the GATT’s clout and has made it more difficult for the United States to effectively criticize other nation’s trade practices. The GATT rules prohibit both direct and indirect export subsidies. Again, however, there is an exception for agricultural and other “primary products” as long as a nation does not gain a “more-than-equitable” share of world trade compared to a “previous representative period” through the use of export subsidies. Enforcement of the subsidy law has been hindered by the difficulty in determining what constitute equitable trade shares and representative periods. SUMMER 1988 negotiations will be difficult because many nations feel the need to be self sufficient in food production for national defense reasons and use import controls to stimulate domestic production. Furthermore, negotiating the reduction in agricultural protectionism will be difficult because of the wide diversity of price support programs across the world. In July 1987, the United States proposed that all subsidies and barriers that distort agricultural trade be phased out over a 10-year period. The U.S. proposition, in turn, stimulated other countries and groups to offer agricultural trade proposals for consideration by the GATT. Currently, the GATT is attempting to form a consensus around a proposed negotiating framework for use during the balance of the Uruguay Round. The GATT hopes to announce its approach at the December 1988 mid-term review. Some observers fear that the recent surge in commodity prices will alleviate some of the pressure on GATT nations to liberalize agricultural trade. The higher commodity prices reduce the budgetary expenditures related to national price support programs. These lower costs, in turn, may lessen the political expediency of agreeing to ambitious reforms, particularly in those nations where strong political opposition from farm groups is anticipated. Alternatively, the higher commodity prices might provide a “window of opportunity” during which reductions in government support to farmers could be made with a lower political cost. The Uruguay Round The United States and other countries have recognized that the existing GATT guidelines are flawed and have contributed to the lack of progress in agricultural trade liberalization. At the start of the current GATT round, member nations agreed to examine all barriers to agricultural trade including domestic agricultural policies that often have substantial trade effects. Member nations will now consider changing the guidelines that have treated agricultural trade differently. Numerous difficulties face GATT negotiators in their attempts to liberalize agricultural trade. Many trade-distorting practices are linked to domestic price support programs. For example, the U.S. support program that purchases dairy products to support milk prices would be unable to function without quotas on dairy product imports. GATT negotiators are limited because, generally, they do not have authority to change domestic programs. Additionally, GATT —Kenneth C. Carraro Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official positions of the Federal Reserve System. 2 FEDERAL RESERVE BANK OF ST. LOUIS SUMMER 1988 EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Prices and Costs1 C O N S U M E R P R IC E IN D E X (% ch a n g e ) N onfood Food Mar. 1988 0 .4 % 0.4 Apr. 1988 May 1988 Average Year-To-Date 19882 for 1987 0 .4 % 0.7 0 .3 % -0 .4 0 .4 % 0.3 1 .9 % 1.5 Same Month Year Ago 4 .1 % 3.3 P R O D U C T IO N C O S T S FO R F A R M E R S (% change) A g ric u ltu ra l m a c h in e ry and e q u ip m e n t F e rtiliz e r M a te ria ls A g ric u ltu ra l ch e m ic a ls and ch e m ic a l p ro d u cts G asoline 0.6 2.5 1.4 -0 .4 1.0 1.5 0.9 6.0 -0 .1 -1 .8 -0 .5 4.9 0.0 0.8 0.5 1.7 1.5 5.8 3.8 10.1 1.5 9.6 7.9 1.5 P R IC E S R E C E IV E D BY F A R M E R S (% cha n g e ) A ll p ro d u cts Livestock C rops 0.0 -0 .7 0.9 0.0 0.0 0.9 3.1 2.7 4.5 0.4 0.0 1.2 5.5 7.8 2.7 4.7 2.7 7.4 F EE D ER C A T T LE W h o le sa le p rice - K ansas C ity ($ /cw t.) $85.20 $86.50 $82.88 $ 7 5 .3 6 5.0 13.0 F EE D ER PIG S W h o le sa le p rice - So. M isso u ri ($/head) $48.65 $52.16 $46.85 $ 4 6 .6 9 4 7 .6 -9 .3 B R O ILE R S W h o le sa le p rice - 12-city ($/lb.) 48.10<t 48.70$ N.A. 4 7.42$ 2 2 .4 0.1 TURKEYS W h o le sa le p rice - E astern U .S ., 8-16 lb. yo u n g hens (C/lb.) 47.00$ 46.90$ N.A. 57.81$ -2 9 .5 -1 9 .6 CORN W h o le sa le p rice - No. 2, ye llo w - St. Louis ($/bu.) $ 2.09 $ 2.10 $ 2.13 $ 1.76 8.1 10.4 SOYBEANS W holesale price - No. 1, yellow - Central Illinois ($/bu.) $ 6.30 $ 6.71 $ 7.31 $ 5.33 23.1 32.4 $ 3.10 $ 3.14 $ 3.20 $ 2.89 - 13.5 6.0 $24.05 $24.00 $22.50 $ 1 3 .8 9 11.3 9 5 .7 -1 2 .2 -1 3 .0 W HEAT W h o le sa le p rice - No. 1, hard w in te r K ansas C ity ($/bu.) LO N G -G R A IN RICE W h o le sa le price - A rka n sa s ($ /cw t.) C O T TO N A ve ra g e p rice re ce ive d by U.S. fa rm e rs ($/lb.) 57.70$ 59.40$ 56.40$ 6 0.87$ Percent Change U.S. Exports C o m (m il. bu.) S o yb e a n s (m il. bu.) W h e a t (m il. bu.) R ice (rough e q u iva le n t, m il. cw t.) C o tto n (thou, bales) Mar. 1988 Apr. 1988 May 1988 Average for 1987 165.3 74.8 150.5 5.9 779.0 167.3 65.1 156.4 5.0 571.0 N.A. N.A. N.A. N.A. N.A. 134.9 6 5 .0 99.9 6.4 5 4 7 .8 Year-To-Date 19882 1 2 .1 % -1 5 .1 32 .0 2.0 -2 0 .8 Same Period Year Ago 9 .1 % 20.8 115.1 -1 5 .3 -1 3 .5 3 Non-Real-Estate Farm Debt Outstanding Banks Outstanding ($ millions) U n ite d S tates E ig h th D is tric t1 4 3 2 A rka n sa s K e n tu cky M isso u ri T e n n e sse e $ 2 8 ,1 6 4 1,879 350 368 950 239 PCAs3 Percent Change 3/87 - 3/88 3/86 - 3/88 -1 6 .7 % -2 2 .3 -1 2 .7 -3 5 .1 -1 8 .3 -2 2 .8 -2 .2 % -7 .2 -3 .9 -6 .4 -2 .0 - 11.7 Outstanding ($ millions) Percent Change 3/87 - 3/88 3/86 - 3/88 $ 9,479 NA 153 155 103 201 9 .1 % NA -2 .5 -1 1 .2 -1 1 .8 -0 .9 -2 6 .5 % NA -2 8 .3 -3 5 .9 -5 7 .7 - 16.9 Agricultural Bank Loan Performance5 Percent of Net Loan Losses at Agricultural Banks Percent of Farm Loans Overdue at Agricultural Banks 3/88 U n ite d S tates E ig h th D is tric t4 A rka n s a s K e n tu cky M isso u ri T e n n e sse e 2 .9 % 4.0 2.0 6.2 2.8 4.7 3/87 3/86 4 .7 % 7.1 5.7 7.1 5.4 5.3 6 .8 % 8.6 6.9 6.9 8.6 6.3 3/87 3/88 .1 5 % .08 .07 .12 .09 .09 .2 7 % .20 .10 .11 .36 .02 Agricultural Production Loan Interest Rate6 Banks E ig h th D istrict A ve ra g e PCAs 5/88 5/87 10.5% 1 0.1% 3/88 3/87 11.0% 11.0% 1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted. 2 Percent change from December of previous year, based on the most recent month available. 3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration. 4 Includes all of AR and parts of IL, IN, KY, MO. MS and TN 5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans. 6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements. Source: Farm Credit Banks of St. Louis. 3/86 .4 0 % .28 .24 .17 .37 1.00