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Agriculture AN EIGHTH DISTRICT PERSPECTIVE FALL 1988 Euro-Bashing: The United States Subsidizes Wheat Exports U.S. wheat exports fell sharply in the early 1980s. Although numerous factors account for the decline, it has been popular to blame the European Economic Community (EC) and its use of agricultural export subsidies. As a result, the United States has retaliated with its own export subsidy— the Export Enhancement Program (EEP). Since it began in 1985, three-quarters of EEP subsidies have been for wheat exports. The stated goal of the EEP is to meet competition from other subsidizing countries, particularly the EC, as a means of expanding U.S. farm exports. By boosting U.S. agricultural exports, the EEP also pressures the EC by making it more costly to subsidize its exports. In this way, the EEP is designed to force the EC to negotiate a reduction in its use of subsidies. At first glance, the EEP appears successful because U.S. wheat exports have increased since 1985. It soon becomes apparent, however, that the cost of the additional exports generated by the program has been extremely high. Additionally, side effects of the program may be detrimental to U.S. agricultural trade interests. Background high price guarantees to farmers. A tariff known as a variable levy’was erected to protect EC farmers from imports of commodities at the lower world prices. The variable levy forces importers to pay a fee equal to the difference between the world price and an established EC support price. Revenues from the levies, in turn, were used to fund part of the CAP. The CAP also established a system of export subsidies known as export restitutions. This subsidy pays EC exporters the difference between the EC market price and the world price. Without this subsidy, EC commodities would not be competitively priced in the world market. Through much of the 1960s and 1970s, EC export subsidies were not particularly controversial because the EC remained an importer of most major commodities. Over time, however, the stimulus of the high price guarantees and the expansion of the EC to include more countries has resulted in surplus production which is disposed of through subsidized exports. In 1982, the EC spent $4.7 billion to subsidize exports. This grew to $10.2 billion in 1987 and is expected to reach $12.9 billion in 1988. The increasing size and scope of EC exports has not affected only the United States but also has made a dent in export sales by other countries. The chart on page 2 shows that U.S. wheat exports grew Program Evaluation strongly in the mid-1970s before peaking at almost 1.8 billion bushels in 1981. From 1981 until 1985, however, wheat The primary goal of the EEP is to increase U.S. exports fell by almost half. During the same period, EC agricultural exports. The chart shows that wheat exports have wheat exports grew from 0.8 billion bushels to 1 billion increased sharply since 1985, the first year of the EEP. Wheat bushels. Not only had the volume of wheat exports fallen exports increased by 60 percent from 1986 to 1987. Before since 1981, the U.S. share of the world’s wheat trade also declaring the EEP an unqualified success, however, more detailed analysis is necessary. had been falling since the mid-1970s. In 1975, the United A study by Kenneth Bailey of the USDA’s Economic States accounted for 43.1 percent of net world trade in wheat. Research Service analyzed five factors that This fell to 25.5 percent in 1985. During the same period, the EC’s share of net wheat influenced U.S. wheat exports over the past trade grew from 3.5 percent to 13.8 percent. three years. He found that the EEP was The growth of EC agricultural production responsible for only one-third of the increase and exports can be attributed to the EC’s from 1985 to 1987 attributable to the five THE Common Agricultural Policy (CAP). The factors.1 These findings allow one to FEDERAL RESERVE CAP was designed 25 years ago when the EC HANK of was not able to produce enough to feed itself ST. IX)l IS and was a major food importer. The CAP 'Bailey, Kenneth, “Wheat Explains Wheat Export Rise?,’' Agricultural Outlook (July 1988), p. 22-25 stimulated agricultural production by offering FEDERAL RESERVE BANK OF ST. LOUIS approximate the cost of stimulating wheat exports with the EEP According to Bailey’s findings, the EEP was responsible for roughly a 285 million bushel increase in wheat exports during the two crop years of 1986/87 and 1987/88. During this same period, the market value of bonuses given as subsidies to exporters for the wheat sales was more than $1.1 billion. These estimates translate into a government, and therefore taxpayer, cost of approximately $3.85 for every bushel of increased exports. This estimate, however, represents only the lower bound for the cost of the increased exports as Bailey’s results only considered five factors behind increased exports. The inclusion of other export-increasing factors would result in an even smaller impact for the EEP. The average U.S. price for wheat during the two crop years of 1986/87 and 1987/88 was only $2.53. In terms of its primary goal, the EEP indeed increased exports, but it did so at an extremely high cost. Some advocates of the program point out that a secondary goal of the EEP is to pressure the EC to eliminate productionbase and trade-distorting farm subsidies as the United States has proposed in the current round of the General Agreement on Tariffs and Trade (GATT). If the EEP succeeded in liberalizing trade, the United States then could reap large gains from future increases in agricultural exports that might offset the cost of the EEP. Instead of capitulating to U.S. pressure, however, the EC responded by increasing its own export subsidies to compete with the EEP. Another indication of the EC’s response to U.S. pressure is its GATT proposal on agricultural reform. The proposal stated that the EC’s two-price structure of high internal prices and low export prices was not negotiable. At least in the short run, the EC is not amicably surrendering. The long run prospects for the EEP’s success in liberalizing farm trade also are unclear. The primary goal of expanding U.S. farm exports with export subsidies appears to contradict U.S. calls for the elimination of trade subsidies. This inconsistency and the fact that the EEP has harmed nations other than those of the EC may cause the United States to lose the support of world opinion. Furtherm ore, EEP strategies may backfire by strengthening the EC’s resolve to resist overt U.S. pressure. The EC correctly contends that the United States has long engaged in subsidizing agricultural exports through the price support mechanism of target prices. Target prices serve as a production subsidy by guaranteeing an above-market price to farmers. Because half of the U.S. wheat production is exported, the production subsidy is clearly an export subsidy as well. This, in connection with the EC’s perception of the FALL 1988 U n ite d S ta te s W h e a t E x po rt s Billions of bushels recently signed U.S. trade bill as protectionist and their expectations that the 1990 U.S. Farm Bill will take an even more contentious approach to trade, may cause the EC to dig in their heels about making trade concessions. The next opportunity to see the effects of the EEP on the EC’s negotiating stance will be at the mid-term review of the GATT scheduled for December 1988 in Montreal. It may show that the confrontational approach of the EEP has increased the willingness of the EC to negotiate, or it may confirm that the EC has adopted an even harder line in the face of U.S. demands. — Kenneth C. Carraro This is the final issue of Agriculture - An Eighth District Perspective. The Bank’s three quarterly regional publications will be merged into one regional publication, Pieces of Eight - An Economic Perspective on the Eighth District. Our goal is to increase the usefulness of the Bank’s analyses of economic activity in the Eighth District. The new format will allow greater flexibility in covering topics and providing data. Pieces of Eight will debut February 1989 and will be published quarterly. Current subscribers of our regional publications will automatically receive the new publication. 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 FALL 1988 FEDERAL RESERVE BANK OF ST. LOUIS EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Prices and Costs 1 C O N S U M E R P R IC E IN D EX (% cha n g e ) N on fo o d Food June 1988 0 .3 % 0.6 July 1988 0 .3 % 1.0 Aug. 1988 0 .3 % 0.6 Average for 1987 Year-To-Date 19882 Same Month Year Ago 0 .4 % 0.3 2 .9 % 3.7 3 .9 % 5.0 P R O D U C T IO N C O S T S FOR 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 c h e m ic a ls and c h e m ica l p ro d u c ts G a so lin e -0 .3 -1 .6 -0 .7 -0 .7 0.3 0.8 0.3 2.9 0.3 -0 .1 -0 .3 2.1 0.0 0.8 0.5 1.7 1.7 9.1 5.1 8.4 1.8 7.7 6.2 -3 .1 P R IC E S R E C E IV E D BY F A R M E R S (% ch a n g e ) A ll p ro d u cts L ive sto ck C ro p s 2.2 -2 .7 8.6 2.9 0.0 4.7 2.1 3.4 2.3 0.5 0.0 1.2 13.4 7.8 21 .4 13.4 1.3 33.3 FE E D E R C A T T LE W h o le sa le p ric e - Kansas C ity ($/cw t.) $77.38 $79.08 $84.65 $ 7 5 .3 6 7.3 6.6 F EE D ER PIG S W h o le sa le p rice - So. M isso u ri ($/head) $31.40 $27.57 $27.39 $4 6 .6 9 -1 3 .7 -4 3 .0 B R O ILE R S W h o le sa le p rice - 12-city (C/lb.) 61.50$ 66.50$ 68.70$ 47.42$ 72.6 30.4 TURKEYS W h o le sa le p rice - E astern U .S ., 8-16 lb. yo u n g hens ($/lb.) 57.10$ 70.80$ 70.50$ 57.81$ 6.0 25.9 CORN W h o le sa le p rice - No. 2, ye llo w - St. Louis ($/bu.) $ 2.77 $ 2.96 $ 2.81 $ 1.76 42 .6 70.3 SOYBEANS W holesale price - No. 1, yellow - Central Illinois ($/bu.) $ 9.13 $ 8.59 $ 8.52 $ 5.33 43.4 61.4 W HEAT W h o le sa le p ric e - No. 1, hard w in te r K ansas C ity ($/bu.) $ 3.79 $ 3.77 $ 3.78 $ 2.89 2.2 4 2 .6 LO N G -G R A IN RICE W h o le sa le p rice - A rka n sa s ($/cw t.) $21.15 $19.00 N.A. $ 13.89 -5 .9 61.7 -8 .7 -1 8 .3 CO TTO N A ve ra g e p rice rece ive d by U.S. fa rm e rs (C/lb.) 61.20$ 58.60$ N.A. 60.87$ Percent Change U.S. Exports C o rn (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 otto n (thou, bales) June 1988 July 1988 Aug. 1988 Average for 1987 133.8 29.3 129.3 4.0 554.0 126.5 29.5 120.2 5.6 N.A. N.A. N.A. N.A. N.A. N.A. 134.9 65.0 99.9 6.4 547.8 Year-To-Date 19882 -1 5 .3 % -6 1 .5 1.4 14.2 -2 3 .2 Same Period Year Ago -6 .3 % -4 5 .7 -2 7 .7 -4 4 .0 18.4 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 issouri T e n n e sse e $ 30,360 2,238 485 401 1,038 273 PCAs3 Percent Change 6/87 - 6/88 6/86 - 6/88 -0 .2 % -1 .8 3.9 -5 .2 1.0 -4 .9 - 9 .2 % -1 6 .5 -4 .4 -3 3 .3 -9 .5 -1 5 .9 Outstanding ($ millions) Percent Change 6/87 - 6/88 6/86 - 6/88 $10 ,1 2 7 NA 183 170 118 216 - 4 .9 % NA 3.8 -5 .7 -4 .6 5.0 -2 0 .3 % NA - 2 3 .1 -2 9 .9 -5 2 .8 -1 1 .8 A gricultural Bank Loan P e rfo rm an ce5 Percent of Farm Loans Overdue at Agricultural Banks 6/88 U n ite d States E ig h th D is tric t4 A rka n sa s K e n tu cky M isso u ri T e n n e sse e 1.8 % 2.4 1.0 4.5 1.9 0.7 6/87 Percent of Net Loan Losses at Agricultural Banks 6/86 2 .7 % 3.9 2.2 4.8 3.5 3.6 3 .9 % 4.3 1.7 5.4 3.9 1.4 6/88 6/87 .3 1 % .16 .07 .24 .21 .39 .5 8 % .42 .22 .34 .62 .35 A gricultural P roduction Loan In terest R ate6 PCAs Banks E ig h th D istrict A ve ra g e 8/88 8 /8 7 10.7% 1 0 .0 % 6 /88 1 1 .0 % 6 /8 7 1 1 .1 % 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. 6/86 .9 7 % .60 .39 .44 .93 .56