U.S. farm policy reform without corresponding multilateral trade reform and market access would result in lower production and incomes for many U.S. agricultural producers over the next 15 years, according to a study conducted by the Australian Bureau of Agricultural and Research Economics.
Among the program crops, the largest reductions in production would occur for cotton and rice, which would decline by 11 percent and 13 percent respectively by 2020 if the United States undertook reform alone.
Soybeans, corn and wheat would incur relatively small declines in production by 2020, just under 1 percent for soybeans and around 3 percent for wheat and corn, due to lower current levels of support for these commodities compared with rice or cotton.
Reduced U.S. production in sectors such as corn could potentially have a noticeable upward effect on world prices and partially offset the effect of removing domestic support.
In addition, the establishment of mandatory requirements to use renewable fuels (including ethanol) and the provision of tax concessions for the production and consumption of ethanol in the United States are expected to raise the demand for corn by the ethanol industry, which may translate into higher corn prices and a diversion of corn away from other domestic uses.
As corn prices rise, it is likely that livestock producers would increase their demand for other feed grains that can be used as livestock feed rations. The resulting higher prices for other feed grains may lead to acreage shifts out of other crops, particularly soybeans, rice and cotton.
U.S. consumers would then be paying higher prices, not just for products derived from grains, such as high fructose sweeteners, but for soybeans, rice and cotton as well.
Higher prices for corn and other feed grains could also reduce the share of U.S. exports of grains and oilseeds on the world market.
In addition, if U.S. farm support was removed and there was no accompanying world trade liberalization, U.S. gross producer incomes from program crops would fall significantly by 2020, the study says.
The largest declines would occur in rice and cotton — at 15 percent and 19 percent respectively — while gross incomes from wheat, soybean and corn production would decline by 3 percent to 5 percent in 2020, the study forecasted.
As domestic support for cropping sectors is reduced, demand for land for cropping would fall, making land more attractive for beef cattle grazing, and land allocated to this activity would be expected to increase.
In addition, fruit and vegetable production would expand by 5 percent in 2020, as land would be reallocated away from program crops and sugar.
Eventually, any expansion of beef cattle production would result in a fall in cattle prices. Hence the gross income received from beef cattle production in the United States under this scenario is expected to decline by almost 3 percent in 2020.
The economic situation for U.S. program crops would improve if reform were accompanied by multilateral trade liberalization, according to the study. The effects on individual commodities are likely to vary, depending on the extent of support provided in other countries or the market access barriers facing U.S. exporters.
If future reforms in the rest of the world are less market-oriented and market access benefits are somewhat modest, U.S. rice production is estimated to contract by around 10 percent by 2020, while cotton production would decrease by 13 percent.
If reforms are more market-oriented in other countries, rice production would decline only fractionally, while cotton production would decline 14 percent. Wheat production would increase slightly (around 1 percent)
The study assumes that multilateral trade reform, reductions in tariffs and declines in production in other regions, in particular the European Union, would increase world prices. As a result, U.S. producers' gross incomes from program crops would typically be less adversely affected than if the United States undertook reforms alone.
For example, with more market-oriented multilateral trade liberalization, the estimated gross value of U.S. rice production would increase marginally by 2020, while wheat production would increase by around 5 percent.
Multilateral trade liberalization would also provide further incentive for U.S. beef cattle producers to expand, particularly in the more market-oriented scenario. In that scenario, U.S. beef cattle production is estimated to increase by close to 5 percent in 2020.
Improved market access under multilateral trade liberalization scenarios would also lead to increasing demand for U.S. beef exports. Where there are substantial market access gains, gross income from beef cattle production in the United States is expected to increase by around 3 percent in 2020, according to the study.
Multilateral trade liberalization is also expected to lead to a rise in world prices for poultry and pig meat, contributing to slightly higher estimated gross incomes for U.S. pig and poultry producers.
When there is substantial multilateral trade reform, higher world prices would lead to a slight increase in the gross incomes for U.S. fruit and vegetable producers in 2020.
The entire study can be found at http://www.abareconomics.com/publications_html/trade/trade_06/us_ag.pdf.