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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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102