FOREIGN PRESS CENTER BRIEFING WITH J.B. PENN,

UNDER SECRETARY OF AGRICULTURE FOR FARM

AND FOREIGN AGRICULTURAL SERVICES

ON THE 2002 FARM BILL

AND THE IMPLICATIONS FOR WORLD TRADE

Wednesday, May 22, 2002

J.B. PENN: Thank you, Peter [Kovach].

It's very nice to be here. I thank all of you for coming.

The Farm Security and Rural Investment Act of 2002 has been a long time in the making. This farm bill, as they are commonly called, has been under development for about 2 1/2 years. It's been the subject of numerous congressional hearings, exhaustive analysis and extensive debate, as you well know.

The bill was signed into law by President Bush on May 13, and since that time, there has been substantial commentary, especially in the foreign press. My purpose here today is to provide information and help increase understanding of the new law. Also, I hope to perhaps provide some additional perspectives on that law from my vantage point. As Peter indicated, I'd like to make a few overview comments, and then I would be pleased to try to respond to any questions that you might have.

First, a little overview on the legislation itself: The new farm law is very far-reaching in its scope, highly complex in its structure. Many changes were made to the existing program, and several new programs were added.

Now as it concerns domestic support for agricultural producers, the key features are that it continues direct payments that are based on historical plantings and yields. It creates a new system of countercyclical payments based on market prices in relation to pre- specified target prices. It revises and re-balances the so-called loan rate in the Marketing Loan Program for major grains and oil seeds. It adds new payment programs for dairy, honey, wool, mohair and pulses, which includes dry beans, lentils and chickpeas. It makes significant changes to the peanut program for the first time since the 1930s.

And most notably, I think, it expands conservation funding significantly and adds new programs to preserve wetlands and improve soil and water quality on working farms.

But these are the parts of the farm bill that are related to, as I indicated, domestic support and conservation. The new law has 10 titles in all and it affects virtually every program, virtually everything we do at the U.S. Department of Agriculture. All of our areas at the department now are very busily assessing the numerous other provisions in the bill and preparing to implement them in a most expeditious manner. It covers domestic food assistance, such as the food stamp program, school lunch. It covers research, rural development, all of the marketing and regulatory functions, and energy, among other areas.

The farm bill also made minor changes in the U.S. food aid programs, reflecting many of the proposals that the administration had made and submitted to the Congress in the president's budget for fiscal year 2003. The farm bill reauthorizes the three government programs involved in food aid: PL 480; Food for Progress; and 416(b). These are all reauthorized through 2007. It increases the minimum tonnage in the basic humanitarian program to 2.5 million tons, a pretty substantial increase over the previous 2.025 million tons. And this action, we think, solidifies the U.S. government position as the leading provider of food aid in the world. We routinely provide more than half of all the food aid provided in the world. And this bill mandates a $100 million next fiscal year for a global school feeding program.

The bill also increases funds for some of our market-promotion activities, the Market Access Program, as it's known, the Foreign Market Development Program, but importantly, the bill does not change any tariffs or any import quantity commitment.

Now, this new law, as I indicated, has attracted very considerable international attention. I say attention; some people might even say criticism. And much of the commentary has focused on the connection between the new law and our WTO obligation, and the connection between the new law and how it might affect the commitment of this administration in the current WTO negotiation. So I want to address both of these points directly.

First of all, let me address the funding levels in the new law. There is a perception that this new law represents a very considerable increase in spending for our farm sector and that it will violate our WTO obligation. The new law changes annual funding very little from what it's been over the past four years. Congress augmented the previous farm bill, the 1996 FAIR Act, by approving $30.5 billion in total over the past four years, or about $7.5 billion annually, and this new law increases spending $73.5 billion over the next 10 years.

So that's about $7.4 billion. So the new law has an increase in it that is almost identical to the increased funding that we've had over the past four years. So the bottom line is that the new law does not increase funding substantially over what the Congress has been spending on the farm sector over the past four years.

There's also a perception that the support level in the new law exceeds our WTO obligations. This, of course, simply is not true. The message of the new farm law is simply that we will support our farmers fully while maintaining our WTO obligations.

And I want to emphasize that the U.S. domestic support ceiling, the amount allowable under the WTO, is relatively low. Our ceiling is $19.1 billion -- $19.1 billion -- and that is compared to $31 billion for Japan and $62 billion for the European Union. So the European Union has a ceiling that is three times that of the United States. The Japanese ceiling is fully 50 percent higher than our ceiling. So our ceiling is relatively low. We have the funding levels for the new bill, but they will not violate the $19.1 billion ceiling.

Now the estimated cost of the new farm bill is $170 billion over the next 10 years. That's an average of $17 billion a year. A less conservative estimate would put the cost of the new bill at $190 billion over the next 10 years. That's an average of $19 billion a year.

So the point that I want to make is that $19 billion is the average amount. Our ceiling is $19.1 billion. And much of this $19 billion is unarguably green box. There's $5.2 billion each year that is in so-called decoupled direct payments. Those are green box. So it seems to me that just by simple arithmetic, you can see that there is virtually no way that we're going to exceed the $19.1 billion allowable ceiling.

And in addition, there is a lot of increased spending -- a lot of that annual average of $19 billion that is for conservation, for research, for rural development -- all of these are green-box programs.

Well, now if that is not convincing enough, there is an added failsafe mechanism in the law itself that ensures that the WTO limit will not be exceeded. The law mandates the Secretary of Agriculture to use so-called circuit breakers to ensure that we don't exceed the limit. And as we implement this bill, we're going to put in place a process so that we can have ongoing monitoring of the spending and also early-warning alerts that would allow us ample time to take appropriate action.

Now the other point I want to make -- I want to emphasize is related to the farm bill and our commitment to the Doha negotiations. There has been considerable speculation about how the administration views the Doha negotiations after passage of the farm bill. And let me emphasize that our resolve to obtain further trade liberalization has not weakened. We are as committed as ever to a successful conclusion to this round. You can fully expect the United States to exert vigorous leadership, to be actively involved in the negotiations and to be a strong advocate throughout the round for liberalized trade in food and agricultural products.

The administration, U.S. farm groups, the food industry, and key members of Congress involved in agricultural matters are strongly committed to continued significant reductions in global agricultural trade-distorting measures and policies.

Now, the reason that this industry is so keen on liberalized trade is that trade is so important to the economic future of the food and agricultural industry. We are a food surplus exporting country, and ever-greater market access is absolutely critical to the long-term economic health of our industry. We have a very abundant natural resource base. We have an accommodating climate. Our agricultural producers have made very substantial investment in the sector, and they've adopted a long stream of new technologies that have enabled us to produce far, far more than we can consume here at home. We export a very large proportion of our major crops -- some of those covered by this law, such as wheat, cotton, rice, corn and soybeans. And a high proportion of our exports are high-value products, are processed products. In fact, two-thirds now by value of all of our exports are high-value or processed products.

We export the output from one of every three acres; 25 percent of every dollar of gross income comes from exports. So you can see that this industry has to be committed to further liberalization of trade in food and agricultural products.

If anything, the farm bill provides even greater impetus for our negotiators to reach a successful conclusion, especially as it relates to market access. As you all know, there are three pillars to the Doha negotiation. The one is export subsidies. And the U.S. is not a big user of export subsidies. In fact, the European Union is responsible for 90 percent of all of the export subsidies that are used in the world today; they use 25 times the amount that the United States does. In the area of market access, that's where we're looking to have substantial progress, and a successful round in that area would greatly facilitate any required modifications in the third pillar, domestic supports.

Our markets are already relatively open. The global -- the average global tariff for food and agricultural products around the world are 62 percent -- all countries included. Japan, the average is 59 percent; the Cairns Group, 30 percent; the European Union, 30 percent; and in the United States, a very modest 12 percent. So I say again, our markets are already relatively open. So we have much to gain here for the benefit of our producers, and a positive outcome would make a very persuasive case to modify our domestic supports.

Finally, many observers have said that this bill will significantly stimulate production and further depress global commodity prices.

I would offer a couple of observations in that regard.

First, our total cropland acreage space is about 325 to 330 million acres. We have committed that much to the crops that are covered by the farm bill, and it hasn't changed very much for the past several years. Now in 1996, when we adopted the last farm bill, it enabled producers to have complete planting flexibility, and we saw very significant shifts among crops. We had over time, a very substantial decrease in wheat acreage, from 11 to 12 million acres. We had a very substantial increase in oilseed acreage -- especially soybeans, again, on the order of 12 or 13 million acres; and a little expansion in corn acreage. But there are no provisions in this law that would offer the incentive enough to evoke cropping-pattern shifts anywhere near the magnitude that we saw in 1996. So I would not expect to see any perceptible change in the aggregate land base that we now utilize -- the 325 million, 330 million acres.

There are sufficient incentives in this farm bill, as there are in every farm bill that we've had in the past, to lead the more aggressive, larger producers to continue to adopt new technologies that will increase yields. So we could expect to see yields continue to grow. But the impact of just expanded yields on total outputs would only be marginal.