ECONOMIC POLICY COUNCIL MEETING 17 DECEMBER ON AGRICULTURE COMPETITIVENESS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01117R001104440002-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: February 22, 2011
• Sequence Number: 2
• Publication Date: December 17, 1986
• Content Type: MISC

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ROUTING AND RECORD SHEET
SUBJECT: (Optional)
Economic Policy Council Meeting 17 December on Agriculture Competitiveness
FROM:
EXTENSION
NO.
Deane E
Hoffmann
NIC 05701-86
.
NIO/Economics
DATE
17 December 1986
TO: (Officer designation, room number, and
building)
DATE
OFFICER'S
COMMENTS (Number each comment to show from whom
RECEIVED
FORWARDED
INITIALS
to whom. Draw a line across column after each comment.)
EXECUTIVE REGISTRY
17
EC 1986
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D/Exec Staff
4.
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For DDCI Meeting 17 December
DDCI
at 1300.
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7.
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10.
11.
12.
13.
14.
DC1
EXEC
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15.
FORM 610 USE PREVIOUS
1.79 EDITIONS
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1230, 17 December 1986
TALKING POINTS
The EPC background paper warns that we should be careful not to
undertake policies that would jeopardize our agricultural talks in the new
GATT round or reduce our leverage.
-- I would turn that around, I don't think that we can make real
progress overseas without showing other countries that we are
moving to get our own house in order.
Our agricultural policies of the last year have caused some real
problems.
-- Our wheat subsidies, problems with Canada and
Australia--countries with essentially free agricultural
markets.
-- Our rice subsidies caused serious problems with Thailand and
Malaysia.
We cannot solve our agriculture problems with the European Community
through negotiations alone.
-- The political pressures for continuation of their subsidy programs
are stronger than they are in the US.
-- Any reform ultimately is going to come as a result of budget
pressures.
-- The Community Agricultural Policy sops up two-thirds of the EC
budget and will be responsible for a budget overrun of up to $4
billion in 1987.
Any price changes caused by a shift in the US program within the limits
Congress would allow will not significantly ease this budget problem for the
EC. Indeed, by making reforms ourselves, we strengthen the hand of those in
the Community that argue for change.
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CONFIDENTIAL NOFORN
TALKING POINTS
A unilateral and large reduction in US agricultural subsidies would not
undercut our negotiating position with the EC or Japan; indeed, it might
strengthen the hand of those pushing for reform.
-- Chronic EC budget problems are the primary force for reform of the
Common Agricultural Program.
-- The CAP sops up two-thirds of the EC budget and will be responsible
for a budget overrun of up to $4 billion in 1987.
-- Any price changes caused by shifts in the US program will not
significantly change the EC's budget problem.
-- Although a reduction in the Export Enhancement Program (EEP) would
make it less expensive for the EC to compete, it would not in
itself reduce the EC budget costs enough to undercut pressure for
reform.
CONFIDENTIAL
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CONFIDENTIAL NOFORN
The Director of Central Intelligence
Washington, D.C. 20505
National Intelligence Council
NIC 05701-86
17 December 1986
MEMORANDUM FOR: Deputy Director of Central Intelligence
FROM: Deane E. Hoffmann
National Intelligence Officer for Economics
SUBJECT: EPC Meeting 17 December at 1300 on Agriculture
Competitiveness
1. Background: The meeting is to discuss a Department of Agriculture
proposal for the domestic farm subsidy program for FY 1988. This is
obviously largely a domestic issue pitting OMB and its proposal for deep
cuts in agricultural loan rates (subsidies) against Agriculture with a less
ambitious program. The only Agency action would be to refute a possible
argument that unilateral US reductions would take pressure off the EC to
implement reforms (see attached talking points). This argument was made by
the USTR at the EPC last week.
2. We do not yet have a copy of the background and options paper.
3. I included a background paper on the CAP done by EURA and the
agricultural program put forth at the EPC last week. I will bring back the
updated proposal when I return from this morning's EPC meeting.
Attachments:
A. Memo to the EPC on Farm Program Policy Options
B. EURA Paper on EC Reaction to Reduction of Agricultural
Subsidies by the US
CL BY SIGNER
DECL OADR
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['UN~ IUEN I IAL
WASHINGTON
December 3, 1986
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
SUBJECT: Farm Program Policy Options
I. INTRODUCTION
The Food Security Act of 1985 was designed to make major program
crops (wheat, feed grains, soybeans, cotton and rice) more
competitive in the world market place and to provide a gradual
transition to a more market oriented agriculture by reducing
price supports (loan rates) while maintaining farm income
supports (target prices).
The Act has been successful in promoting exports, particularly
rice and cotton. However, because of the continuing world glut
of most basic agricultural commodities, prices have declined
considerably. Coupled with large U.S. crops, this has
dramatically expanded the cost of those programs to the taxpayer.
Program outlays for FY86 were projected at $17.2 billion, but
ended up at $25.8 billion, and are likely to be in the same range
for FY87 (FY80 cost was $2.8 billion). As the market returns
decline, and government payments increase, participation in the
programs has become an economic necessity for most commercial
farmers.
Economic stress continues in the agricultural sector despite the
large outlays. Many farmers borrowed against increasing land
values in the late 1970's and now cannot achieve positive cash
flow because of the debt, while their assets have eroded with
compounded debt and declining land values. 10% to 25% of
commercial farmers, depending on their region of the country, are
in real financial difficulty and the commodity programs cannot
save most of them.
II. THE NEED FOR REFORM
? Since farmers must produce the crops to qualify for payments,
the programs artificially stimulate production, which
continues at near record levels despite large acreage
set-asides.
Set-asides have encouraged our competitors to expand
production and reduced U.S. farm efficiency, since fixed costs
are distributed over fewer acres.
CONFIDENTIAL
Declassify on OADR
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CONFIDENTIAL
The large subsidy element in farm programs (especially rice,
where farmers are guaranteed nearly three times the world
price) distresses some of our allies who compete against us in
world markets without such support.
? Mandated payment limitations are weak and avoidable. Larger
farmers get larger payments; some receive multi-million dollar
payments.
? The cost is tremendous and budget exposure is open-ended. We
do not know how much farm programs will cost the taxpayer
until well into the fiscal year.
? Nonetheless, any changes will have a substantial time lag.
Crop year 1987 programs are already in place which will create
large FY88 outlays.
III. AVENUES FOR REFORM
A. De-coupling
Currently, farmers must produce to protect their historical
production base and to qualify for payments and supports. For
example, a corn farmer might now invest $135 variable costs to
produce an acre of corn from which he will earn only $100 in corn
sales in order to qualify for $150 in government supports. Both
the taxpayer and the farmer would be better off if the farmer
grew something else. De-coupling refers to making payments on an
historical basis and eliminating the production requirement.
This has several advantages.
? Production decisions can be based on economics instead of the
need to qualify for payments.
? De-coupling would permit set-asides to be phased out so that
farmers who can produce efficiently at world prices are
allowed to do so on their full acreage.
? The marketplace would determine what is grown and where,
enhancing U.S. competitiveness.
? Distortions such as over-intensive use of inputs (fertilizer,
etc.) would diminish.
? Budget costs would largely be known in advance.
? Separating the payments from production and prices can make
it possible eventually to phase them out or base them on
need.
? Government's daily involvement in production agriculture
would be much reduced.
L
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rn"IFIDENTIAL
? Our trade policy negotiating position could be enhanced.
? There is Congressional interest - a Boschwitz-Boren
de-coupling proposal received 42 votes in the Senate in 1985.
B. Payment Limitations
Deficiency payments, the difference between target prices and
loan rates times production, are limited by statute to $50,000
per person. Congress recently added a $200,000 limit to cover
most other direct payments, in particular the so-called "Findlay
loan payments" (the Secretary of Agriculture has limited
authority to lower loan rates to make U.S. products more
competitive, but is required to make direct payments -- "Findlay
loan payments" -- based on the dollar amount loan rates were
lowered times production). These limits have been ineffective in
holding down costs, since Findlay loan payments have been
substantial and crop loan forfeitures have been exempt. In
addition, a loose definition of "person" has fostered a
proliferation of overlapping partnerships and other farm
reconstitutions in order to qualify for multiple payment limits.
More than 250,000 new farm "persons" have been created in the
last two years largely to avoid the limits.
A tightening of payment limitations would reduce outlays
somewhat, would curb abuse and limit payments to very large
farmers while not affecting small farmers. In rice and cotton,
more than half of the payments go to farmers receiving more than
$50,000 each. Vigorous payment limitations would reduce the
subsidy element and the incentive for over production for these
crops.
IV. OTHER CONGRESSIONAL APPROACHES
A. Mandatory Controls
Some congressional leaders espouse a new program of high price
supports and mandatory acreage controls. The Harkin-Gephart
"Save the Family Farm Act" would allow farmers of each program
crop to more than double loan rates from their current levels.
In the short term, this would raise prices but it would require a
combination of export subsidies and large set-asides that would
devastate the farm supply industry and raise costs for the entire
processing and food chain, and the consumer. It would price us
out of world markets, consigning U.S. agriculture to a future of
negative growth, since the domestic market is growing more slowly
than farm productivity. It would require import protection,
flying in the face of our commitment to freer world trade. Yet
since the benefits come quickly and the damages are delayed, such
proposals are politically attractive to some. and should be taken
seriously.
rol"71pEMTIRL
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T!AL
B. Marketing Loans
Marketing loans permit a farmer to use his crop as collateral for
a loan at a mandated amount per bushel or pound and at maturity
to pay the loan off at the then current market price, which may
be much lower. This ensures U.S. prices are competitive, but
results in large potential subsidies. The 1985 act included
marketing loans for rice and cotton only. Some legislators are
proposing extending them to wheat, soybeans and feed grains.
This could drive world prices down even further and cost an
additional $5-6 billion per year. Since the U.S. is already the
dominant world supplier of these items, exports would increase
only marginally.
V. OPTIONS FOR REFORM
The EPC Working Group on Agricultural Coordination considered and
rejected options such as:
seeking a total rewrite of the farm bill;
? seeking legislative changes in the dairy, tobacco, and peanut
programs.
The Working Group has identified two potential reforms of the
farm program that deserve consideration:
? Strengthening payment limitations; and
? Decoupling production decisions from Federal payment
eligibility.
A. Payment Limitations
Option 1: Do not enact administrative changes or seek
legislative changes but support and encourage
Congressional efforts on farm reconstitution.
Advantages
? Chances of passage may be better if the initiative does
not come from the administration.
? Will not be popular with farmers yet Congress seems
inclined to do it; why not let them?
Disadvantages
? Administration would not be fully using available tools
to curb the proliferation of farm entities.
? Not clear that Congress will enact the desired changes.
I- I
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Option 2: Administratively tighten the definition of "person."
For instance USDA can tighten rules on partnership
arrangements to qualify for a separate limit.
Advantages
? Some large payments would be reduced, with
potential budget savings of $100 million to $200 million
annually.
? Proliferation of farm entities would be curbed.
? Promotes fairness.
Disadvantages:
? Not as far reaching as option 3.
? New rules would undoubtedly affect some legitimate
partnerships and corporations.
? Strong Congressional objections could be expected as the new
rules are implemented.
Option 3: Seek legislation for a $50,000 payment limitation that
includes all direct payments, with a separate $100,000
(or $200,000) limitation on non-recourse loans.
Tighten "person" definition through administrative and
legislative actions.
Advantages
? Very large payments such as those received by some rice
and cotton growers, would be eliminated.
? Outlays would be reduced by at least one billion per year.
? Production incentives would be reduced on large farms.
Disadvantages
? Congress has recently rejected making the $50,000 limit
all-inclusive and is likely to do so again.
? Most farm groups will strongly oppose such limits.
Those representing rice and cotton, especially, will use
everything they have to kill a tight limit.
? Not economically correct signal; treats small
farms better than large farms.
DI AL
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flPi DENTIAL
B. Decoupling
Option 1: Seek legislation to reduce target prices by an
additional ten percent (10%) per year through 1990 and
to permit farmers to qualify for deficiency payments
with no requirement to grow the program crop. Farmers
would be allowed to grow what they wished on the
acreage base for that crop.
Advantages
Is a significant step toward farm program reform.
Reduces production incentive in marginal production
areas.
? Reduces budget exposure by an estimated $10 billion over
four years.
Disadvantages
? Other direct payments and loans (especially marketing
loans) still provide substantial production incentive.
? Not as dramatic a step toward policy reform as option 3.
Would be opposed by specialty crops growers.
? Paying farmers for growing nothing will generate some
negative publicity.
Option 2: Seek legislation to replace existing direct payments
with a transition payment that approximates a farmer's
1987 direct payments. Phase transition payment out
over five years, and increase the limit on loan rate
reductions from 5% to 10% per year.
Advantages
? Moves rapidly to market oriented production
and allows for an eventual end to government
involvement.
Budget exposure would largely be known in advance;
outlays reduced yearly.
? Subsidy element would be clearly identified (this can be
a disadvantage with farm groups who do not want to be
considered "on welfare").
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Pr."S
TIAL
Disadvantages
? Many farmers and their representatives would object to
having their price guarantee removed.
? The total phase-out of payments would raise fears that
farmers would be "abandoned."
May be viewed in Congress as too radical an
alternative in the face of a battle over mandatory
controls.
? Pays some farmers for growing nothing.
An alternative approach to decoupling, is to simply continue our
policy of 1985 and accelerate the reduction of target prices.
Option 3: Seek legislation to reduce target prices by an
additional ten percent per year through 1990.
Advantages
? Reduces budget exposure by an estimated $10 billion over
four years.
? Reduces production incentives over time thereby gaining
greater market orientation.
Disadvantages
? Does not by itself achieve any policy reforms.
Unlikely to pass and would be used to criticize the
Administration for "insensitivity to the farm crisis."
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CONFIDENTIAL
EC Reaction to a Unilateral Reduction of Agricultural Subsidies by the US
--EC leaders would almost certainly reserve any substantive reaction to
such a US move until all the details of the US plan were revealed, its
exact ramifications understood, and its prospects for adoption gauged. The
EC would look to see whether the plan was a bona fide reform effort with
domestic political backing, or a cosmetic tinkering with agricultural
policy. Of prime importance to the EC would be the effect of the plan on
US production and stockpiles of grain and other surplus commodities that
compete with EC exports
--US moves to cut its own agricultural subsidies probably would have
little direct impact on the long-raging debate in the Community on reform
of the Common Agricultural Policy (CAP). The need for reform is
increasingly recognized, yet the political will to agree on specific
actions has been lacking. Foreign pressure would probably play a minor
role in the debate, which has been overwhelmingly dominated by member state
domestic political interests and EC institutional questions.
-Strong farm lobbies have made the CAP an important political
issue in many member states. With elections scheduled over the
next two years in West Germany, the UK, France, Italy, and
Denmark, many of these governments are unlikely to want to take
on this issue.
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CONFIDENTIAL
-The most powerful force for CAP reform has been the chronic EC
budget crisis. The CAP is likely to come under unprecedented
pressure in 1987 because the EC is expected to overrun its budget
by up to $4 billion with no additional financial resources
available. The CAP sops up over two-thirds of the budget and is
increasingly resented by the Commission and some members.
--Still, a US move to cut its own direct and indirect agricultural
subsidies would strengthen the hand of those forces pushing for reform in
the EC: primarily the EC Commission, and to a lesser extent, the UK. It
would help keep the international limelight on the subject, and increase
pressure on the EC to take comparable action. Those dragging their feet on
reform might not be able to hide behind the argument that the US currently
spends more subsidzing its farmers than the EC does.
--On the specific issue of export subsidies, the EC would
enthusiastically welcome a reduction in the US program but almost certainly
would not follow a unilateral US lead and reduce its own subsidies. The
Community contends its own subsidies merely serve to meet the gap between
high internal EC prices and lower world prices. In fact, highly dependent
on exports to keep surpluses of grain from becoming even more unmanageable,
the EC would view cuts in US subsidies as an opportunity to expand its
share of world grain markets.
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