U.S. crop production and acreage are not likely to fall, even in an environment in which crop prices are declining.
This is due to the newly minted U.S. farm policy.
After plenty of (sometimes acrimonious) discussions, the U.S. Congress reached an agreement on a five-year bill this week.
For one thing, the Farm Bill failed to change – let alone repeal - mandatory Country Of Origin Labelling (COOL). That means more debates at the WTO to fight the legislation. More debates equals more delays opening up the flow of live animals between Canada and the U.S.
Many agricultural commodities we produce are priced outside Canada. They’re strongly influenced by supply and demand conditions in the U.S. An increase in U.S. production for a particular crop will lead to lower prices and lower revenues of Canadian producers. Corn has been a really good example lately.
This is why keeping an eye on the recent Farm Bill is important.
The current American economic environment required a reduction in government spending. Cuts to the commodity programs of the Farm Bill were inevitable. They came via the removal of guaranteed payments to American crop producers – with estimated savings of $4.5 billion per year.
These subsidies – which benefitted producers and landowners – weren’t awarded on the basis of market prices or actual production. The new Bill gives up those guaranteed payments, expands crop insurance and assures that producers receive prices and revenues above specified thresholds. The latter is essentially revenue insurance.
U.S. production (volume or crop selection) didn’t used to matter the way it’s about to. Now, American producers will be facing less risk in exchange for smaller outright subsidies. This could affect production and world prices, especially if commodity prices continue to fall below levels observed over the last few years.
Concerns around profit margins in dairy production also triggered reforms. Prior dairy policies offered no protection from rising feed costs. Now, U.S. dairy producers can insure against drops in their margins while facing subsidized premiums.
If market conditions fall, the U.S. will be looking at an expensive Farm Bill because payments to producers will be triggered, and they could potentially exceed the savings quoted earlier. If market conditions remain strong, the impacts will be minimal on both sides of the border.
Stay tuned to Ag Economist for further analysis on the new U.S. farm bill in the weeks ahead.
- J.P. Gervais, Chief Agricultural Economist