Given recent market developments, resolving this issue in future negotiations may be too late for many Canadian farmers. While the Uruguay Round left both the U.S. and the EU with the capacity to heavily subsidize exports, Canadian grain producers today pay the full costs of transporting grain. Those additional costs are being felt and reflected in farm income numbers. Canadian farmers cannot absorb another subsidy war that would leave U.S. and EU producers relatively unaffected. We can't compete with those treasuries.

Third is domestic support. As a major exporter, Canada should support further reductions in amber support levels, the elimination of the blue box payments, and spending caps on decoupled income supports. It is important to recognize that even decoupled income supports, when provided in an excessive manner, influence production decisions and therefore distort trade.

There will be long-term consequences if Canadian producers are placed at a competitive disadvantage in the marketplace. It is important for Canada to ensure secure, adequate funding for safety nets, infrastructure expenditures, and research. Programs such as NISA and crop insurance must not be subject to countervailing duties or reduction commitments.

Number four covers other trade-related issues. Beyond the WTO agriculture negotiations, several other trade-related issues arising from multilateral discussions will affect the sector. As, I hope, a strong proponent for the complete elimination of export subsidies, Canada will face pressure to accept restrictions on the operation of state trading enterprises such as the Canadian Wheat Board. However, Canada must vigorously resist being drawn into making such concessions.

While it is recognized that STEs, especially on the import side, can distort the marketplace, numerous investigations into the Canadian Wheat Board's operation have always shown it to be a fair trader. With an institution such as the Canadian Wheat Board being such a key component in the Canadian marketplace, Canadian producers cannot afford to accept restrictions that would place them at a commercial disadvantage or limit the Wheat Board's ability to operate a price-pooling system.

Countries should not be allowed to use sanitary or phytosanitary barriers to block access to their domestic markets. Science should be the guiding criterion on these issues.

Developments arising from both the WTO Committee on Trade and Environment and international negotiations related to the Biosafety Protocol will affect Canadian agriculture. These issues must be addressed from the standpoint of ensuring an international, competitive agrifood industry.

By adopting clearer, universally applicable rules, the various trade agreements attempt to create a more predictable and stable trading environment. Future negotiations offer the potential of increased market access opportunities and a reduction of various trade barriers, making Canadian exports more competitive in the world market. The agrifood industry holds significant potential in both commodity exports and value-added activity. However, if we are to realize future gains, Canada's objective must be to achieve freer, more predictable, and transparent access to international markets, and the complete elimination of export subsidies.

The Uruguay Round took a major step in this area when input restrictions were converted to tariffs. However, due to the level at which some tariffs were established, the aggregation of products, and the creative ways in which some countries have administered their commitments, we have not achieved the access we had originally anticipated.

In the coming round, Canada needs to achieve the maximum possible increase in minimum access commitments, and these commitments must be disaggregated—that is, applied to specific products or tariff lines rather than the broad grouping of commodities.

The elimination of in-quota duties is also necessary. The purpose of a minimum access commitment is to permit the importation of an amount of product. Yet some countries continue to apply tariffs to the in-quota amount. In-quota duties are inconsistent with freer trade goals. Their application should be prohibited.

Canada also must strive to achieve the maximum possible reduction in tariffs. To achieve real gains in access, higher tariffs should be subject to larger cuts. A 50% cut in a tariff of 20% is a significant gain, but a 50% cut in a tariff that is over 200% still leaves a prohibitive tariff.

Some countries are administering their access commitments in such a way that they are not filled or access is skewed to favour certain suppliers. Canada must pursue clear and binding rules for the administration of tariff-free quotas.

The practice of tariff escalation must be stopped. Many countries apply a much higher tariff to value-added imports than to the raw product. An example of that is the Japanese oil tariff. Canola seed enters Japan without duty, but canola oil is still subject to a prohibitive tariff. Refined canola oil is subject to an even higher tariff than crude oil. This places our value-added industry at a disadvantage.

The use of export subsidies must be prohibited. The Uruguay Round attempted to bring some discipline into the use of export subsidies, but they continue to depress world prices, even at the end of the implementation period. As an example, the European Union is currently providing the equivalent of $36 U.S. per tonne to subsidize wheat exports,

the export subsidy on barley is over $78 U.S. per tonne, and oat exports are being subsidized by almost $70 U.S. per tonne. This is allowed under the current agreement.

The United States has budgeted $320 million U.S. for its export enhancement program in 1999. In contrast, Canada has completed eliminated its only export subsidy for grain and oilseeds. While this may have set a good example for other WTO members, it has forced our producers to compete in heavily subsidized markets without tools of their own.

Export subsidies depress world prices. They must be eliminated.

It is also important that other measures that can—and, we contend, have—become substitutes for export subsidies be subject to discipline.

Export credit is a very useful tool for all exporters, including Canada. However, the escalation of its use without clear rules could spark a trade war.

Food aid is a commendable activity. We support the provision of food aid to assist hungry people around the world. However, when used in commercial markets, it becomes an export subsidy. We were very concerned when the United States government purchased large amounts of wheat from its producers and donated it to Indonesia. In 1996 Indonesia was Canada's fourth-largest commercial customer for wheat. Clear and enforceable rules need to be implemented on the use of food aid.

For example, European farmers receive the equivalent of $175 Canadian per acre just to plant a crop. In addition, European wheat producers are guaranteed a price of $205 Canadian per tonne. That is well above projected world prices. This has resulted in the highest ever government stocks of wheat in the European Union. High stocks result in lower prices for everyone else.

The next round of negotiations must result in maximum spending cuts in amber support programs. It must also result in the elimination of the blue box category of support programs. This category was created late in the Uruguay Round to allow some countries, primarily the European Union, to implement changes to domestic support programs. Most of the European Union's production-stimulating support falls into the blue box.

Sanitary and phytosanitary rules and the trade of genetically modified organisms must be based on sound and proven science. I recently heard a trader say, "Give me a high tariff anytime. At least that is predictable." The growing use of environmental and health concerns to block access to international markets is totally unpredictable and unjustified. Clear rules must be implemented on the basis of science, not emotion or politics.

I want to close by stressing again that we have high hopes for this round of trade negotiations. Producers, handlers, marketers, and exporters are all working together to take advantage of a more open international market that is not distorted by unfair trading practices.

Our presentation nails down and clarifies some of the expenditures. In 1995, for example, Canada's total amber support was 15% of the WTO spending limit. In the United States—and it's here in the text—it was 26.9%. In the European Union it was 60.4%. In Japan it was 73%. So it's very obvious from that that other jurisdictions with whom we play in the international market are supporting their producers substantially more than we are in Canada. I just wanted to set that straight.

We know the Europeans pay an average subsidy of $175 an acre just to grow the grain. We know that then they put on export subsidies of as much as $2 a bushel. Where do we have to go in the model so that we can compete? To me that seems horrendous; $230 is unbelievable.

A Guide to the Seattle Round of Multilateral Trade
Negotiations on Agriculture

prepared jointly by the members of the

Canadian Agri-Food Trade Research Network

Jean-Philippe Gervais - Laval University

Karen Huff - University of Guelph

Bill Kerr - University of Saskatchewan

Karl Meilke - University of Guelph

Peter Phillips - University of Saskatchewan

James Rude - University of Saskatchewan

Robert St. Louis - Laval University

November 20, 1999

Table of Contents

The launch of the ninth round of multilateral trade negotiations since the end of the Second World War, is scheduled to begin when trade ministers meet in Seattle in late November 1999. It is clear the launch will be "noisy" with various special interest groups pushing their positions, both in favour of and against further trade liberalization. At the same time World Trade Organization (WTO) member governments will be presenting their initial negotiating positions. Against this backdrop it is important to understand that trade negotiations only have one true purpose - to create the trading rules that will benefit consumers and producers around the world - whether the countries are big or small, rich or poor. Canada, as a medium sized economy that is highly dependent on trade, has much to gain from a rules based trading system. This is true in manufacturing, services and agri-food.

Taking a long view of trade liberalization, it is apparent that the global trading system is in an extremely interesting transition period. Following the Great Depression and after World War II industrial tariffs averaged about 40% - now they average about 4%. In some sense, the work started in the 1940's to lower tariffs on industrial goods is nearly complete. While it is not entirely correct to say agri-food was excluded from the trade liberalization process until the Uruguay Round of trade negotiations (completed in 1994), not much of substance was accomplished until then.

The agricultural trade situation is now at the point where industrial goods trade was 50 years ago - just starting the process towards trade liberalization. However, since agri-food trade can also be considered "trade in goods" most of the lessons that were learned from liberalizing trade in industrial products continue to hold.

The Seattle Round of trade negotiations will include negotiations on tariffs and market access for services and agri-food products. It will not be known until after the Seattle meeting if industrial tariffs will be included in this round of negotiations. However, in addition to these traditional areas of negotiation, a whole host of new issues need to be addressed. At the time of the Uruguay Round, issues like the environment, labour, competition policy and biotechnology were not necessarily considered to be "trade issues" or were only beginning to show up on the radar screen. On these emerging issues, which may not even be appropriate topics for trade negotiations, the negotiators are starting at ground zero.

The purpose of this document is to provide the reader with a road map through the agri-food trade issues and discussions that will form an important part of the Seattle Round of trade negotiations. This document is not intended for the trade policy specialist, or the individual who is following the agri-food negotiations on a daily basis. Instead, it is designed to enlighten the individual who wants to understand the core issues framing the agri-food negotiations. For readers wanting more detail on a particular issue, a set of additional readings is provided for most topics. Each section of the document is written as a self-contained piece, but interested readers will have a better understanding of the whole negotiation process if the entire document is read.

Canada has been and continues to be an active participant in trade agreements. Canada was both a founding contracting party to the GATT and a founding member of the World Trade Organization (WTO). Over the last decade, Canada has concluded regional trade agreements with the United States, Mexico, Chile and Israel. It is currently involved in trade negotiations around the formation of the 18-country Asia-Pacific Economic Cooperation (APEC) forum and the 34-country Free Trade Area of the Americas (FTAA) process. Agri-food will play a significant role in each of these regional integration agreements.

Canada imports and exports a wide variety of agriculture and food products (Table 2.1). A large proportion of Canada's agri-food imports consists of products that are not grown here, or are produced only seasonally. This includes products like fruits and nuts ($2.56 billion), vegetables ($1.71 billion), plantation crops ($1.52 billion), and sugar and products ($0.51 billion). Canada's agri-food exports are dominated by sales of grain ($6.37 billion), oilseed and oilseed products ($2.97 billion) and animal feeds ($0.89 billion). Intra-industry trade is extremely important in the red meat sector with exports totalling $2.46 billion and imports $0.97 billion. The red meat, and grains and oilseed sectors are highly integrated with international markets in the United States and abroad. The value of exports and imports in these sectors make up a considerable portion of the value of Canada's farm cash receipts. For the supply-managed sectors of dairy, poultry and eggs, however, trade is limited and only makes up a small proportion of the value of production.

Table 2.1: Canada’s Agri-Food Trade by Commodity Group, bil. dol., 1997

International trade can be thought of as a production technique - a way to produce imported goods indirectly, by first producing goods for export, and then exchanging them for imports. This method of production results in income gains for the trading countries and for the world as a whole. The "gains-from trade" arise from four primary sources:

• trade allows domestic consumers to purchase imported goods that are expensive to produce at home, but cheap to import;
• trade allows domestic producers to specialize in the production of goods that they are especially adept at producing and are highly valued in the international market place;
• trade inhibits uncompetitive pricing by firms that might be monopolies in the domestic market without trade; and
• trade allows countries to grow faster than if they were constrained to only produce for domestic consumers, and this is especially true for smaller countries.

The case for trade liberalization does not depend on other countries following suit – freer trade leads to a more efficient allocation of resources and increases consumption possibilities at reduced cost regardless of what other countries do. Introducing trade protection, because other countries have trade barriers, makes no more sense than filling up one’s harbour because other countries have rocky coasts. Trade liberalization benefits all countries -- and especially the country that undertakes the liberalization. The largest gains from freer trade accrue to those countries eliminating the most protection!

If the gains from freer trade are so obvious; then why do countries engage in protectionism, and why is trade liberalization so controversial? In most cases the answer lies in the fact that the gains from freer trade are widely dispersed across many millions of consumers, while the losses from freer trade are concentrated in a few protected sectors. Highly protected firms, and the employees of these firms tend to be well organized and they lobby hard to maintain their trade protection. Consumers are not very well organized and have difficulty getting their voices heard in the halls of Parliament.

Largely for the above reason, countries prefer to liberalize trade multilaterally rather than unilaterally. In this way, governments can point to the "gains" achieved as other countries reduce their trade barriers as an offset to the "losses" incurred as they reduce their own border protection.

From a pragmatic perspective, trade negotiations often revolve around issues of managed trade, and economic arguments must account for this. WTO rules are designed to protect the interests of smaller and less powerful nations from the discriminatory actions of larger nations. These trading rules instil confidence in the world trading system, give governments the ability to trade off economic concessions, and reduce the temptation to provide favours to special interest groups.

Since the end of World War II eight rounds of multilateral trade negotiations have resulted in industrial tariffs dropping from an average of 40 percent, to their current average level of about 4 percent. Unfortunately, agri-food products have been largely excluded from the trade liberalization agenda until the Uruguay Round that was concluded in 1994. No one expects the upcoming trade negotiations to lead to instantaneous removal of all trade barriers in the agri-food sector. In addition, the benefits of trade liberalization should not be oversold. Liberalization will involve adjustment costs in some sectors. However, a phased-in removal of border protection will reduce these adjustment costs and provide economic benefits to Canada.

The Uruguay Round Agreements laid out a timetable for the continuation of the trade liberalization process, particularly for agri-food and services trade. A new round featuring both of these areas will be kicked off at the Seattle Ministerial in November 1999. No termination date for these new negotiations has been specified. However, Article 13 of the Agreement on Agriculture contains a time-limited "Peace Clause." The Peace Clause restricts the use of countervailing duties by member countries to counteract domestic support measures deemed to conform to the Agreement on Agriculture. The Peace Clause expires in 2003. Although its impending expiration could encourage a faster conclusion to the new round of negotiations, the United States is unlikely to be able to negotiate anything substantive without "fast-track authority". In the United States, all trade agreements require congressional approval. Fast-track authority allows the administration to present a negotiated agreement to Congress for a yes or no vote without amendments. The White House is not likely to obtain this authorization until after the next presidential election, which implies the fall of 2001 at the earliest. As a consequence, the early days of the negotiations are apt to be focused on the technical issues surrounding trade liberalization, with the difficult political compromises put off until the United States administration has fast-track authority.

There is considerable debate over the scope of the negotiations for the new round. World Trade Organization members like the United States and the European Union tend to prefer a round encompassing all Uruguay Round agreements, while some developing countries would prefer a round with a narrower focus. The advantage offered by a comprehensive round is the possibility this allows for making trade-offs between competing interests in the negotiations. However, comprehensive rounds may take longer to negotiate making a limited round more attractive. Perhaps the most important decision made in Seattle will be the scope of the negotiations.

In addition to traditional negotiations in the areas of market access, export competition and domestic support, the Seattle Round will have to address a number of new issues. Discussions surrounding reforms to tariff rate quotas are likely to include tariff rate quota administration, as well as increases in minimum access and reductions in tariffs. Export subsidy reductions will be negotiated, as will disciplines for the practices of price pooling, and the use of export credits and food aid. The role of state trading enterprises (e.g. the Liquor Control Board of Ontario and the Canadian Wheat Board) in trade is also likely to be examined during this round. A new issue concerning domestic support that may be negotiated concerns the multifunctional role of agriculture. The area of biotechnology will also be topical given European concerns over hormone treated beef and the use of genetically modified crops such as soybeans and canola. Negotiations in this area will need to examine the Agreement on the Application of Sanitary and Phytosanitary Measures, the Agreement on Technical Barriers to Trade and possibly the Agreement on Trade Related Aspects of Intellectual Property Rights.

One further issue that may complicate the next round of negotiations is the possible accession of China, Russia and the Ukraine to the World Trade Organization. All three of these countries have large agricultural sectors. For some commodities these countries are major importers of agri-food products from Canada, while for other products they are competing exporters.

Obviously, the Agreement on Agriculture has the most direct impact on agriculture. This section examines the agenda for the next round of trade negotiations on agriculture in terms of the scope for reform, the limitations of the current disciplines and possible negotiating issues. There are three key components to the Agreement on Agriculture: market access, export competition and domestic support. These three major components form the basis for the discussion in this section. Sections 5.1, 5.2 and 5.3 explore the negotiating issues for the core elements of the three basic disciplines. In sections 5.4, 5.5 and 5.6, the emerging issues concerning each of the three basic elements of the agreement are examined.

The Agreement on Agriculture represented a fundamental change in the rules governing trade in agricultural products. Prior to the completion of the Uruguay Round, the GATT offered numerous exemptions for agriculture, including exemptions from rules prohibiting the use of export subsidies and quantitative import measures. The Agreement on Agriculture was a first step towards removing the exemptions from the rules that applied to agriculture.

Under the Agreement on Agriculture, member countries agreed to convert non-tariff barriers (including quantitative import restrictions, variable import levies, discretionary import licensing, and voluntary export restraints) into tariffs. These tariffs were bound and reduced. Members were also obliged to provide for a minimum level of imports for products that were previously protected by non-tariff barriers through the establishment of tariff rate quotas.

The WTO members agreed to reduce both expenditures on export subsidies and the quantity of agricultural products exported with subsidies. They also agreed to prohibit the introduction of any new export subsidies for agricultural products.

Finally, domestic policies were recognized as potentially trade distorting and a legitimate concern for trade liberalization. Disciplines were imposed on trade distorting domestic policies through the requirement that countries reduce their Aggregate Measure of Support (AMS). Table 5.1 summarizes the details of the disciplines on market access, export competition and domestic support that resulted from the Agreement on Agriculture.

Table 5.1 Summary of Trade Liberalization under WTO Agreement on Agriculture

5.1 Current Elements of the Agreement on Agriculture: Market Access

One important element of the Agreement on Agriculture was the creation of tariff rate quotas to liberalize access to domestic markets and increase minimum access for imports of agricultural goods. Tariff rate quotas are two-tiered tariffs which allow a certain quantity of imports to enter the domestic market at a relatively low tariff (in-quota tariff) while a much larger tariff is imposed on any imports exceeding the agreed minimum access commitment (MAC). While the Agreement on Agriculture resulted in some liberalization of agricultural trade, much remains to be done. The new round of negotiations will determine the size and speed of minimum access increases and tariff reductions, as well as the rules that will guide the implementation of the new minimum access commitments. Moreover, the current disciplines of the WTO contain some serious limitations. Some of the obvious difficulties with the current agreement are:

• the tariffs member countries employ are significantly higher than the true tariff equivalents of the non-tariff measures they replaced;
• the tariffs a country actually applies are often below the bound tariff rates, giving the importing country an opportunity to increase its border protection with no recourse by exporters;
• the 36 percent average tariff reduction was an arithmetic average of individual tariff items, which allowed a country to maintain high levels of protection for selected sectors; and
• developing countries chose to bind maximum tariffs without calculating tariff equivalents for individual commodities.

There also exists a wide range of possible reforms to the administration of tariff rate quotas, of which 1,366 have been reported to the WTO. However, on average, only 63-64 percent of the minimum access amounts are actually being imported. Clearly, the current system has not liberalized trade to the extent anticipated. The rules for awarding import licenses also introduce scope for discrimination in the allocation of import access between countries. Different countries allow different levels of access within their minimum access commitments by choosing different levels of aggregation on which to apply the tariff rate quotas.

Further, the administration of tariff rate quotas by member governments legitimizes the role of state intervention in trade and makes managed trade an accepted feature of the WTO. The agreement on import licensing procedures says import licensing should be simple, transparent and predictable. This objective is clearly not met in light of the existing discriminatory practices. The existing quota allocation schemes pose a threat to further liberalization because of the vested interests of quota holders. Administration of tariff rate quota licenses creates incentives for governments to use import allocation schemes in order to compensate special interest groups.

There are three areas related to market access where negotiations can be focused. First, the negotiating parties can reduce in-quota tariffs. In most cases, this will have little influence on trade but will make import licenses more valuable. Second, WTO members can negotiate significant reductions in over-quota tariffs. However, because of the amount of "water" in the over-quota tariffs, significant reductions may not lead to improved market access. Finally, members could agree to expand the quantity of imports allowed at the lower in-quota tariff rate. The issues of expanding minimum access commitments and tariff reductions are intertwined and negotiators will have to evaluate them simultaneously. The combination of expanding minimum access and significant reductions in tariffs has the potential to greatly improve market access for all agri-food products.

The negotiating process can take different forms. The simplest form of bargaining is the "request and offer" approach, with negotiations progressing by one country and one item at a time. Formula approaches range from across the board cuts to non-linear cuts which reduce tariffs more for heavily protected sectors. Tim Josling, a Stanford professor, suggests that members could adopt the Uruguay Round tariff base and decrease tariffs, on average, by 72 percent from the old base level. Alternatively, members could decide on an across the board cut in all tariff lines (e.g. 50 percent) with no exceptions. Countries could decide to adopt a non-linear reduction of tariff levels where higher tariffs are reduced at a larger rate than lower ones. A significant expansion of minimum access commitments could make over-quota tariffs less relevant. Any trade liberalization agreement that retains tariff rate quotas should be accompanied by reform of the import license allocation scheme (see section 5.4).

5.2 Current Elements of the Agreement on Agriculture: Export Subsidies

Export subsidies are among the most disruptive instruments for the operation of world markets. They punish domestic consumers and taxpayers, as well as low cost exporters. For this reason, export subsidies are prohibited for industrial products. Currently, export subsidies are legal under the GATT for some agricultural products. However, under the Agreement on Agriculture, the use of export subsidies must be reduced and no new export subsidies are allowed. As well, the Agreement on Agriculture provides a clearer definition of what constitutes an export subsidy.

Wheat and wheat products use approximately one-half of the export subsidy commitments available for all agricultural commodities, with the European Union, Canada and the United States selling over 90 percent of all wheat exports that make use of export subsidies. The commitment to reduce export subsidies has been reasonably effective. Canada has eliminated the Western Grain Transportation Act, which provided export subsidies through subsidized rail rates, and although the United States wheat Export Enhancement Program still has legislative authority, export subsidies have not been granted for a number of years. Currently, the European Union is the only region still actively using wheat export subsidies, and they are not constrained in their use of this destructive instrument due to the availability of unused credits from 1995 and 1996 (years of high wheat prices when export subsidies were low or not needed).

For dairy products, export subsidy commitments are only starting to influence trading behaviour. Indeed, the limits for butter far exceed any expectations of subsidized export volumes. For skim milk powder, subsidizing countries are employing previously unused credits on exports from early years in the implementation period, when prices were high; to allow them to exceed the annual volume limits in recent years.

A significant achievement of the Agreement on Agriculture was the introduction of disciplines on agricultural export subsidies. However, in implementing the reductions the commitments were based on historically high levels of support. As a result, the disciplines are not as tight as they could be. There is still a considerable distance to go before agricultural export subsidy commitments have been eliminated. In addition, agricultural export subsidies have often been targeted to particular importing countries. This targeting violates the non-discrimination principle of the GATT and, as such, their elimination will bring agriculture closer to the spirit of liberal trade.

The discussions during the Seattle Round will centre on the question of whether export subsidies should be prohibited entirely or whether the negotiations should only seek further reduction commitments. The United States and the Cairns Group favour export subsidy elimination. How willing the Europeans will be to talk about export subsidy elimination depends upon how close world prices are to their domestic prices. Under the CAP reforms agreed to under Agenda 2000 (Berlin Agreement), intervention prices in the European Union will decline and this may reduce the need to use export subsidies.

Article 10 of the Agreement on Agriculture, which deals with the circumvention of export subsidy commitments, only vaguely addresses issues like export credits and food aid. Price pooling and state trading enterprises have also been raised as additional concerns. These emerging issues are discussed in sections 5.4 and 5.5.

5.3 Current Elements of the Agreement on Agriculture: Domestic Support

The third main component of the Agreement on Agriculture provides disciplines on domestic support. All domestic programs are categorized either as subject to reduction (amber programs) or not subject for reduction (green and blue box programs, or support which is less than 5 percent of the value of production). For these non-exempt programs, a quantitative measure of the level of intervention is calculated using an Aggregate Measure of Support (AMS). Developed country WTO members are required to reduce their AMS to 80 percent of their 1986-88 levels by the turn of century. It is ironic that although the domestic support commitments provide an innovative advance for WTO disciplines, in almost all cases the base level of support in 1986-88 was significantly higher than current levels. Consequently, the reduction commitments are largely meaningless. Table 5.2 provides an overview of current support as a proportion of the base level commitments.

Table 5.2 1995 Domestic Support as a Percentage of the 1995 Commitment Level (Ceiling) for Select WTO Members

The reasons why contemporary domestic support, as measured by the AMS, is so much lower than support in the base period are twofold. First, government transfers have declined in some developed economies as budgetary problems have forced governments to spend less in general, and less on agriculture, in particular. Second the nature of support has changed. During the base period, a significant share of government intervention involved market price support, which supported producer incomes indirectly by raising domestic producer and consumer prices relative to world prices. This type of support has more potential to distort trade because both domestic production and consumption are affected. The trend in domestic agricultural policy reform is to compensate producers’ incomes directly with government payments, which are based on fixed criteria such as historic production. This direct income support is not counted in the AMS calculations. Although there has been a change in the composition of support, total transfers for all OECD members, from tax payers and consumers to the farm sector have increased over the past decade. The "total support estimate" for the agri-food sector in OECD countries was US $326 billion in 1986-88 and has risen to US $362 billion in 1998 (OECD 1999).

The agreement on domestic support is weaker than other elements of the Agreement on Agriculture. This is partly because the negotiating parties could only agree to reduce aggregate domestic support for the entire agri-food sector and no commodity specific disciplines were provided. Furthermore, the base level of support was high relative to subsequent time periods, following reforms undertaken during the Uruguay Round negotiations. As well, there are a number of exceptions to reduction commitments for domestic support. Article 6:5 (blue box) of the Agreement on Agriculture exempts direct payments under production limiting programs. The blue box was the result of bilateral arrangements made between the United States and the European Union under the Blair House Agreement. Most WTO members, with the exception of the European Union, see the blue box as a provisional measure. Annex 2 of the Agreement on Agriculture (the green box) recognizes that not all forms of domestic support are trade distorting and exempts this type of support from reduction commitment (see section 5.6 for a more complete description of the green box and its limitations). Despite the fact that the domestic support commitments do not bind, the commitments are necessary to avoid the temptation of backsliding, and to promote policy reforms that are more production neutral.

The key question for the next round of agricultural trade negotiations is whether to strengthen or abandon the attempt to constrain domestic policies. If the negotiators choose to strengthen the domestic support commitments they will have to answer the question of how to address the growing share of support which is not subject to reduction commitments. Is the blue box a provisional measure, which should be discontinued? Article 6:5 makes no explicit reference to the blue box exemption as being a temporary measure, but the understanding of most WTO members is that this was the intent of the Blair House Accord. The fate of the blue box will largely depend on the outcome the European Unions’ attempt to reform its domestic agricultural policy. The reform proposals of Agenda 2000 and subsequent Berlin Agreement do not change the nature of the compensatory payments sufficiently so that they will qualify under the current green box criteria. The European Union will likely want to reopen the negotiations on Annex 2 of the Agreement on Agriculture to address the blue box issue and concerns about the multifunctional role of agriculture.

Within this general setting the negotiators will have to deal with a number of specific questions. Should the AMS disciplines be applied on a commodity specific basis? Applying disciplines on a commodity specific basis would make the current domestic support commitments bind for highly protected sectors where they do not bind at an aggregate level. What is the appropriate base period? The 1986-88 base was a period of very high support. Changing the base period to the late 1990s would help to make the disciplines bind. Even maintaining the same base and doubling the Agreement on Agriculture’s reduction commitments would begin to have an impact.

5.4 New Elements of the Agreement on Agriculture: Market Access

The Uruguay Round introduced tariff rate quotas as a provisional measure to move towards more transparent and open trade in agri-food products. However, since the right to import takes on considerable value with a tariff rate quota scheme, member countries had to develop ways of allocating these valuable import rights. This process is called tariff rate quota administration. There are five prevalent methods to allocate import licenses in agriculture:

• Import licenses can be auctioned off to the highest bidder. Although this is the most common method referred to in the economic literature, it is seldom used in reality as only 5.9 percent of all import licenses in agriculture are allocated in this way. Auctions are desirable, as their use should prevent inefficient exporters from selling into the domestic market.
• The allocation scheme most widely used is the license on demand system. Under this procedure, potential importers apply to governments for the right to import. Besides the cost of filling out formal application forms to obtain licenses, there is no other hurdle to prevent inefficient (high-cost) importers from obtaining licenses, and this can result in not all of the quota being used (quota under-fill). United States Department of Agriculture economist David Skully found that only 41 percent of tariff rate quotas reported to the WTO are filled at a rate above 80 percent under a license on demand scheme.
• The third allocation scheme proceeds on a "first come-first served" basis. Although this method is generally non-discriminatory, it can result in licenses being allocated to high-cost exporters.
• The historical allocation scheme is one commonly used in Canada. It is inefficient since it does not favour the creation of new trade partnerships between firms from different countries.
• Finally, import licenses can be allocated to producer groups and state trading enterprises (STEs). While tariff rate quotas administered by importing STEs have a fill rate equal to 79 percent, under such a system, one-third of import licenses administered by producer groups did not produce a fill rate above 20 percent in 1995-96.

It should be noted that quota administration methods vary by country and commodity, as well as within a country since most countries have not committed to any single method. The above discussion raises important questions for the upcoming negotiations. Should an import license represent an obligation to import rather than an opportunity? The obligation to import by holders of import licenses would be similar to supply management systems where production quota holders have an obligation to produce. The allocation of import licenses within the tariff rate quota system will be even more important if tariff rate quotas are expanded. The expansion of minimum access commitments and the lowering of the in-quota tariffs will create incentives for organized groups, or firms, to lobby the government for these licenses as long as the profits associated with the ownership of import licenses are large. Hence, there exists an urgent need to evaluate efficient methods of allocation, which will minimize profit-seeking activities and lower the market power of license holders.

The level of tariff rate quota aggregation, by commodity, should also be brought to the negotiating table. In practice, the inappropriate aggregation of commodities and the strategic allocation of import licenses can easily prevent any imports of a specific commodity from entering a country.

Preliminary research results indicate auctions are not always the most efficient way to allocate import licenses. In addition, exporters argue that auctions are a hidden tax on imports. Importers would argue that licenses should be allocated in order to support efficient trade among countries and not used as an income redistribution mechanism. Hence, the upcoming negotiations need to specify if all members will be required to use a similar range of allocation methods and if the rules for quota allocation should be written into the country schedules.

Increases in market access can take various forms. One proposed negotiating strategy is the zero-for-zeromethod. The basic idea behind zero-for-zero is that WTO members would agree to eliminate the use of tariffs and export subsidies on certain commodities. The best candidates for the zero-for-zero option are those where international trade is already relatively barrier free. Commodities for which discussions on the zero-for-zero proposal might receive support are oilseeds and oilseed products, malting barley, and pork.

The United States has raised state trading enterprises (STEs) as an issue to be included in the Seattle Round of trade negotiations. STEs are not clearly defined within the WTO and they typically are not transparent in their operations. State trading enterprises can be involved in both the importing and exporting of agri-food commodities. In general, many of the same issues apply to importing state trading enterprises as exporting STEs.

For importing state trading enterprises, the major concern is that exporters will not have true access to consumers in the importing country, and that the imports of state trading enterprises will not reflect consumer tastes, reflecting instead government policy objectives. While WTO member countries are concerned about the ability of importing STEs to bypass negotiated minimum access commitments, this problem has not been confirmed empirically. When imports are controlled by STEs, tariff rate quota fill rates have been the highest among all import licensing schemes. What do these high fill rates imply? The high fill rates may be misleading indicators of future incremental access. The high levels of current access may be due to the fact that these imports are a continuation of long established trading arrangements. The important question is how successful will STEs be in providing new access? The role of the STE in the domestic economy may be an indicator of how successful exporters will be in obtaining future access. If the STE was established as a matter of administrative convenience to administer tariff rate quotas, then there is a better chance for successful future access. However, if the STE was established to manage domestic markets and to provide industry support, then the prospects for additional future access are not good. If the gap between the domestic price and the world market price is large, it seems likely that the STE will continue to support domestic producers by limiting import competition. Likewise, if the role of the STE is to make profits for the importing country, or itself, by exploiting the difference between domestic and world prices, then the prognosis for future access is also not promising.

Article II (4) of the GATT prevents importers from charging mark-ups beyond the bound level of tariffs and thus provides pricing and trading discipline on state trading enterprises. However, some observers argue that in non-market economies price may not play the role of a resource allocation mechanism. The relationship between the customer and the foreign trader is broken when the state trading enterprise fully controls the type, quality and quantity of the imported product. In this case the preferences of the government are substituted for the preferences of the consumer. The benefits of a tariff system are further diluted if the STE is also controlling imports in order to support domestic producer prices. The difficult challenge facing the WTO negotiators is to agree on a clearer definition of STEs with strong enough notification requirements to provide pricing transparency.

5.5 New Issues for the Agreement on Agriculture: Export Competition

Exporting state trading enterprises(STEs) will also come under scrutiny during the Seattle Round of negotiations. Article XVII of the GATT regulates the behaviour of state trading enterprises. The definition used for the purpose of informing the WTO that a country has a state trading enterprise is:

"Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports."

This is a functional definition, which is broad enough to include more than just government owned enterprises that participate in trade. In the past the United States Commodity Credit Corporation has been notified as an STE because of its participation in international grain trade. However, the activities of the European Union Cereals Intervention System, which is also involved in international grain trade, has not been reported to the WTO as a state trading enterprise.

One concern with exporting state trading enterprises has been that governments could use them as a channel for hiding export subsidies. One potential way for this to occur is through cross subsidization (price discrimination) between export and domestic markets. The question is whether price discrimination can be considered an export subsidy? Price discrimination by state trading enterprises is allowed under the GATT according to an interpretative note to Article XVII:1, which states that STEs are allowed to charge different prices in different markets provided the practice is done for commercial reasons to meet the market conditions in export markets.

Under Article XVII, state trading enterprises are required to behave in accordance with commercial considerations. However, there is no definition of what the term "commercial considerations" means. The negotiators will focus on defining precise rules for acceptable behaviour.

Another negotiating issue concerns the transparency of state trading enterprises. A common criticism of STEs is that they do not provide sufficient pricing information to determine whether they subsidize exports. But then, neither do private traders. As a result, there is a concern that if state trading enterprises are compelled to release this information, they will be placed at a competitive disadvantage vis-à-vis private traders. Since sectors of the economy other than agriculture also have state trading enterprises, this is an issue that cannot be dealt with solely through the Agreement on Agriculture.

Price pooling is the practice of averaging prices (revenues) across markets. This is an export subsidy issue because high domestic prices can be used to cross subsidize low export prices. Price pooling can also be used to pool revenues across time and across markets. Although Articles I and III discourage discrimination, the GATT does not explicitly prohibit price discrimination or pooling. Rules on state trading enterprises condone price discrimination as long as it is a normal commercial practice.

Price pooling was one of the issues in the WTO Panel on Canadian dairy export practices. It was alleged that Canada's multi-class pricing system constituted an export subsidy with higher domestic prices subsidizing exports at much lower world market prices. On May 17, 1999 the WTO Panel ruled against this practice based on the argument that it constituted an export subsidy in terms of payments-in-kind and that it constituted a producer-financed export subsidy. Subsequently, a WTO Appellant body upheld the ruling that the program constituted a producer-financed export subsidy but overturned some of the initial panel arguments.

Price pooling is also an issue for exporting state trading enterprises such as the Canadian and Australian Wheat Boards. Price pooling is a long established practice by these agencies and so far, it has not been subject to GATT disciplines. However, increased scrutiny of exporting STEs may make price pooling and price discrimination a negotiating issue. Several questions will need to be addressed:

• Under what conditions is price discrimination a normal commercial practice?
• Can cross subsidization between markets be disciplined?
• What constitutes a producer-financed export subsidy?
• What is a payment-in-kind?

There is great concern that member countries will try to circumvent the restrictions on the provision of export subsidies. Two other candidates for circumvention are the provision of export credits and food aid. Export credits include subsidized interest rates, lengthened repayment periods and other relaxed credit conditions. Food aid can involve grants of money or the direct provision of foodstuffs. Unlike trade in industrial products, agriculture lacks disciplines on export credits. For industrial products, the Agreement on Subsidies and Countervailing Measures (SCM) prohibits all export subsidies, including some types of export credits. For industrial products, subsidization occurs when credit guarantees are provided at premiums below the long term costs of the program, and with subsidized interest rates. The WTO refers to the OECD’s Arrangement on Export Credits for detailed disciplines.

Agricultural export subsidies are disciplined by the Agreement on Agriculture which only requires members to work towards an international agreement on disciplines for export credits, export guarantees and export credit insurance programs. OECD negotiations on an arrangement covering export credits for agricultural products have been unsuccessful to date.

With regards to food aid, concerns have arisen over the possibility of exporting countries using this as a means of surplus disposal. The provision of food aid leads to inefficiencies by distorting production and consumption decisions in both the donor and recipient countries. Article 10 of the Agreement on Agriculture requires that donors of international food aid to ensure "that the provision of international food aid is not tied directly or indirectly to commercial exports of agricultural products." Food aid transactions should be carried out in accordance with the FAO "Principles of Surplus Disposal and Consultative Obligations". Members must notify the WTO of use of food aid on an annual basis if such aid is granted.

Once again, it may be necessary to re-open the discussion of Article 9 of the Agreement on Agriculture. Should the provisions for industrial products regarding export credits also be applied to agriculture? How do export credits and food aid affect trade flows and international prices? This issue is further clouded by the fact that the OECD is the most likely forum for negotiations on export credits. The principles for the provision of food aid may also need to be renegotiated. This either needs to be done through the FAO or through modifications to Article 10 of the Agreement on Agriculture.

5.6 New Issues for the Agreement on Agriculture: Re-Instrumentation of Domestic Support

One of the objectives of the Agreement on Agriculture was to encourage countries to use less trade distorting domestic policies and this resulted in the creation of "green box" programs. While green box programs are less trade distorting than price or income supports, these programs may still have the potential to encourage the expansion of output. Opening the green box to renegotiation would provide the opportunity to tighten the current criteria, but it would also open the door for countries to argue that the green box should be expanded to include more questionable policies.

Annex 2 of the Agreement on Agriculture defines the domestic support measures that are deemed to have minimal trade distorting effects and are therefore exempt from domestic support reduction commitments. The basic requirement for green box eligibility is that the program only consists of publicly funded support and it must not have the effect of supporting producer prices. In addition to these basic criteria, specific criteria apply for different types of direct payment programs.

Green box eligibility has been a major influence in recent developed country policy reforms. While a considerable share of developed country agricultural support was already classified as green, because of its public good nature (e.g. research and food inspection), some WTO members have reformed their domestic policies to comply with the green box criteria. For example, in 1996, after the introduction of the Federal Agricultural Improvement and Reform (FAIR) Act, 88 percent of total reported domestic support for the United States was categorized as green.

The green box criteria are based on the idea that if producers cannot affect the size of the direct payment, because it is based on fixed criteria, then they will behave in accordance with market considerations. In principle this concept is sound, but circumstances may exist where decoupled direct payments reduce the constraints limiting a farmer’s production potential. Market factors or other conditions may dictate that a producer would behave differently than if there were no payment.

The principles behind the green box were never elaborated in any detail. So for this round of negotiations the primary objective should be to ensure that the original reasoning for the green box still exists and to ensure that programs that countries claim are green do indeed meet those criteria. Even though some types of support may be minimally trade distorting should there be an upper limit on this type of support? Are all trade neutral programs currently in the green box? Should the green box be widened, narrowed or left alone? Should the Peace Clause, which exempts green box measures from countervailing duties, be maintained?

Several WTO members, with high levels of agricultural intervention, have expressed a desire to re-open the green box to address non-trade concerns such as multifunctionality. Multifunctionality refers to the spillover benefits to the environment, rural communities and the landscape that are associated with agricultural production. The argument is that the market does not compensate for these "benefits" and that domestic policies should be allowed to encourage the provision of these benefits through increased agricultural production. Norway, Switzerland, Japan, Korea and the European Union are promoting the concept of multifunctionality, at least in part, as a way to maintain high levels of support and protection for their agricultural sectors.

Is multifunctionality a legitimate issue? If so, what is the appropriate method to compensate for this positive externality? The provision of agricultural support is a very indirect and costly method to induce the provision of positive externalities. Policies that directly target the provision of the benefits, and not agricultural production should be more effective. Increased agricultural production has the draw back that it also produces negative, as well as positive spillovers. The negotiating issue is whether multifunctionality is already addressed in the green box or whether the green box has to be opened up for further negotiation.

Section 6: The Relationship between the Agreement on Agriculture
and Other WTO Agreements

The World Trade Organization is responsible for administering international agreements that cover three functional areas: trade in goods, trade in services and trade in ideas (or intellectual property). The cornerstone of the WTO is the General Agreement on Tariffs and Trade (GATT). The basic principles of the GATT: non-discrimination and predictability through bound commitments and transparent trade policy also form the basis for the agreements on services and intellectual property.

There are a series of other agreements that deal with trade in goods that provide additional details to the GATT. Two agreements provide additional disciplines for the clothing and agriculture sectors, which historically have had difficulty adhering to the principles of the GATT. Other agreements clarify the rules governing the application of trade laws and the administration of technical regulations. The Agreement on Agriculture is one of the agreements regulating trade in goods. The Agreement on Agriculture elaborates on the GATT (e.g. domestic support commitments) while continuing to provide exceptions to the GATT (e.g. export subsidy provisions).

Negotiations on agricultural issues will revolve around the Agreement on Agriculture. However, these negotiations will touch on some of the other agreements. For instance, negotiations on state trading enterprises will require a re-examination of Article XVII of the GATT. The Agreement on the Application of Sanitary and Phyto-Sanitary Measures (SPS) deals with issues of animal and plant health, and food safety. The Agreement on Technical Barriers to Trade(TBT) applies to food imports and encompasses questions relating to consumer protection issues such as labelling. These two agreements will also be central to the negotiations on agriculture.

6.1 Sanitary and Phyto-Sanitary Measures

A new Agreement on the Application of Sanitary and Phyto-Sanitary Measures (SPS) was negotiated during the Uruguay Round. The SPS Agreement seeks to ensure that import restrictions are imposed only to the extent necessary to ensure food safety and animal and plant health. Member countries are encouraged to use internationally approved standards. Trade measures put in place for sanitary and phyto-sanitary reasons must be based on scientific criteria and be subject to a risk assessment. The measures employed are to be the least restrictive necessary to achieve the desired risk reduction. The intent was to prevent the SPS system from being captured by producer-based protectionist interests.

The first major test of the SPS was over the European Union’s ban on the importation of beef produced using growth hormones. The WTO disputes panel ruled against the European Union because they felt there was no scientific justification for the ban, and that the risk assessment criteria used by the EU in the hormone case was inconsistent with other EU risk assessment procedures.

The WTO only recognizes producers as a driving force for trade protection. In the hormone case, the European Union was dealing, to a considerable degree, with an issue of consumer-based protectionist pressure. Due to some high profile breakdowns in the food safety system in the European Union, consumers are distrustful of the scientific community, making the science-based criteria of the SPS a political issue. The European Union was faced with using a traditional producer oriented set of rules, which may have been inappropriate for the problem of consumer-based protectionist pressure. However, the EU's case was weakened when they were unwilling to accept country-of-origin labelling to resolve the dispute, leaving some to wonder if producer protectionism was entirely absent from their decision making.

The SPS appears to have worked as intended in the hormone case, but it can be argued it didn't address the problem faced by EU policy makers. As a result, the European Union decided to ignore the WTO ruling and accept retaliation. The failure to comply with the Panel decision can be considered a breakdown in the political compromise that forms the basis of the WTO. While the European Union has asked that the SPS agreement be re-opened to take account of consumer preferences, the SPS may not be the correct forum. Instead, the WTO may have to consider rules for dealing directly with consumer-based protectionism, or decide to leave these decisions in the hands of private firms.

6.2 Technical Barriers to Trade

The Agreement on Technical Barriers to Trade (TBT) was based on an earlier GATT code. Technical barriers to trade constitute a wide range of regulatory measures that can affect trade in agricultural products. The Agreement encourages the use of international standards and calls on national testing and certifying bodies to avoid discrimination against imports. As far as possible these bodies are encouraged to recognize other countries’ tests and certificates. In addition, when regulations are imposed, account should be taken of importers’ cost of compliance in relation to the benefits expected from the regulation.

In the area of trade in agri-food products there are a number of consumer protection issues that lie outside those of food safety. These relate to protection of consumers from fraud and the availability of consumer information. The labelling of food is one potential area of contention. The costs of labelling may be small, but the establishment of systems to validate food safety labels can be very costly, particularly when a firm is selling internationally. The costs can easily exceed the benefits received by consumers. As consumers increasingly wish information on non-visible product characteristics, such as animal welfare codes and production practices e.g. pesticide use, governments may wish to impose country-of-origin labelling requirements. Disputes over TBT issues may become more prominent and the criteria may need clarification.

6.3 Intellectual Property Protection

At the insistence of developed countries, an Agreement on Trade Related Aspects of Intellectual Property (TRIPs) was negotiated during the Uruguay Round. Intellectual property relates to the realm of ideas. Creators of ideas are given the right to protect others from using their inventions or designs. These rights are known as "intellectual property rights". They take numerous forms including patents, copyrights, brand names, registered trademarks, etc. The motivation for the inclusion of the TRIPs agreement within the WTO was to provide a means of encouraging countries to protect the intellectual property rights of foreigners. The Agreement provides non-discrimination principles, rules for enforcement and dispute settlement procedures. When fully in force the Agreement will require members to apply minimum standards of protection of intellectual property.

The proportion of the value of goods attributable to intellectual property has been rising over the last two decades. Intellectual property is the basis of the high tech industries that have become the engines of growth in developed economies. Piracy reduces the returns to investing in the development of intellectual property and, thereby lowers the incentive to invest.

There are a number of contentious issues in agriculture relating to the protection of intellectual property. The patenting of life forms is an emotive issue in many developing countries who fear that food costs will rise to unacceptable levels if royalties have to be paid on agricultural inputs such as seeds and drugs. While most countries appear to be putting the legal system in place to comply with their TRIPs commitments, there is less evidence that they have either the will or technical capability to enforce the laws they have put in place. As a result, the TRIPs may be reopened for negotiation.

6.4 Biotechnology

There is one new issue that encompasses the SPS, the TBT and the TRIPs Agreements. It may also require that the WTO deal, for the first time, with consumers as a source of protectionist pressure. This is the issue of biotechnology.

Biotechnology represents a major technological change. It has the potential to bring great benefits. As with any technical change, it may also bring with it additional risks. A technological change has effects not just in the production sector, but also in the minds of consumers who may not have sufficient information to judge the technology on human health, environmental or moral grounds. Concerns arising over new technologies are likely to lead to calls for protection. In addition, biotechnology greatly increases the ability of those developing new agricultural products to capture the returns to their investments. As a result, agricultural biotechnology has considerable TRIPs implications, for both developed and developing countries.

The European Union is currently attempting to deal with a difficult political situation where a segment of consumers with strongly held preferences are demanding protection from genetically modified foods and other organisms of agronomic interest. The EU appears to have decided to go slow on domestic approval of genetically modified foods. Import measures will be required to augment the domestic approval slowdown. The form this protection will take is, as yet, unclear. It may be regulations under SPS or it may be compulsory labelling under TBT. In the United States, Canada and some other countries, where significant consumer resistance to the new technology has not (at least yet) been manifest, licensing is proceeding at a rapid pace. US firms are already protesting European Union restrictions and can be expected to take their case to the WTO.

The negotiations on biotechnology may be some of the most difficult of the new round due to the strongly held preferences of consumers on one side, and the large vested interests in the production of biotechnology on the other. It is further complicated by the fact that there is no clear definition of what is a genetically modified food. Finally, the interests of wealthy developed country consumers might be quite different from those of their poorer developed country counterparts.

6.5 Administered Protection: Anti-Dumping Regulations

All of the WTO members realise that the current anti-dumping measures are open to manipulation by protectionist interests and that they provide a mechanism that can be used to harass trading partners. It is also a mechanism through which protectionist pressure can be channelled and, hence, is popular with politicians.

Countries who feel they bear the brunt of protectionist harassment want to have anti-dumping rules changed so they are less easily used for this purpose. This is particularly important in agriculture. Dumping margins are frequently calculated using "constructed" cost estimates. The vagaries of weather and the cycles that are endemic in the agricultural sector often mean that producers must sell at a price that does not cover their full cost of production. This is a normal business practice. Farmers on both sides of an international boundary may be selling below cost, yet the one exporting is vulnerable to an anti-dumping action. There is no predatory behaviour; the price at home is the same as abroad.

6.6 Administered Protection: Countervailing Duties

Anti-dumping actions are focused on the alleged uncompetitive actions of private firms, while countervailing duties are focused on the alleged subsidization of firms by governments. The Agreement on Agriculture established actionable and non-actionable programs. During the implementation period green box programs are largely exempt from countervailing duties. As with anti-dumping, the domestic procedures used in countervailing duty cases may leave them open to manipulation by protectionist interests for the purposes of harassment.

The methods used by governments to calculate the degree of injury suffered by an industry in an importing country and for determining the size of countervailing duties to be applied are not standardized. This lack of transparency leaves firms vulnerable when they accept subsidies and makes it more difficult for governments to design subsidies. Standardization in the application of countervailing duties will be a negotiating goal of some exporting nations.

Section 7: Issues Beyond the WTO - Environment, Labour,
Intellectual Property and Competition Policy

Agri-food trade has come under increasing scrutiny in a wide number of international trade arrangements that go beyond the traditional areas covered by the WTO. With increasing concentration of production and rising international and intra-sectoral trade, demand for new international rules has increased. The array of different regulatory forums has also mushroomed, at first working to liberalize markets and more recently to limit trade. Where consumer and citizen concerns are not being satisfied within domestic regulatory systems, groups are seeking more effective international regulations, often targeting the WTO to gain access to its binding dispute settlement mechanism. In particular, citizens and others are looking for new international regulations related to the environment, labour standards, intellectual property rights and competition rules.

Continued and improved market access for agri-food products is now more uncertain than in many years, with weaknesses in the domestic regulatory systems causing significant friction in various multilateral forums. The WTO is likely to be asked to address at least some of these concerns.

7.1 The WTO and the Environment

With almost universal support, the Convention on Biological Diversity (1992), provided the base for an agreement between the Food and Agricultural Organization (FAO) and the Consultative Group on International Agricultural Research (CGIAR) centres to place most of their acquisitions into an "in-trust" international network of collections managed by the FAO. More contentiously, in the late 1990s is the push to use the BioSafety Protocol process, under the auspices of the Convention on Biological Diversity, to compensate for the limited domestic regulation in many countries. Negotiations are currently underway to create a legally binding international agreement that governs the transboundary movement of living products of modern biotechnology in order to protect and conserve biological diversity.

The Kyoto Accord has established targets for greenhouse gas emissions, which while not sectorally specific, have significant potential to influence agri-food production and trade. As both a major source of greenhouse gases and a potentially large repository or sink for gases produced by others, the agri-food sector will be affected by any decisions to implement this Accord.

At the Singapore WTO ministerial meeting, a working group was established to study the linkages between trade and the environment to lay the groundwork for expanding the role of the WTO on environmental issues. A number of key questions will need to be addressed including:

• To what extent is international harmonization of environmental policies possible?
• To what extent is international harmonization of environmental policies desirable?
• If the WTO is to act, how can it relate to both national policies and existing international conventions, especially given the failure of the United States to ratify the Convention on Biological Diversity?

7.2 The WTO and Labour Standards

As agri-food trade grows, labour mobility and labour standards are likely to rise in importance. Although a number of regional agreements contain provisions to facilitate general international mobility of labour within their regions and place some restrictions on competitive lowering of labour standards, the WTO has been less active in this area. The International Labour Organization and other United Nations agencies tend to monitor and promote mobility and protection from exploitation.

The WTO has begun to address labour mobility in the General Agreement on Trade in Services (GATS), which entails provisions providing for limited mobility of skilled professionals. As agri-food trade becomes more industrialized, value-added services will become increasingly important, potentially making labour mobility more important for agri-food firms. Meanwhile, the national treatment and subsidy provisions of the WTO provide blanket provisions which limit the relaxation of labour standards by individual companies in order to compete in trade; what the WTO rules do not cover is the general lowering of a country’s labour standards to compete (i.e. ‘shooting for the bottom line’). Any negotiations in the labour area will raise serious concerns by developing countries that universal labour standards are a tool being used by rich countries to erect disguised barriers to trade.

At the Singapore WTO ministerial meeting a working group was established to study the linkages between trade and labour issues, and to lay the groundwork for expanding the role of the WTO in regulating labour markets. The fundamental question that will need to be asked is what can the WTO add to what is already being done at the International Labour Organization?

7.3 The WTO and Intellectual Property Rights

Innovations in the production of agri-food are driving many of the concerns about market access, and also triggering new debates about the role of intellectual property rights in the agri-food industry. There are currently four main sources of protection for intellectual property rights that influence trade in agri-food. Currently, 38 countries have adopted some form of plant breeders’ rights consistent with the International Union for the Protection of New Varieties of Plants (UPOV), and another 10 countries have national policies.

At the same time, seven key international treaties administered through the World Intellectual Property Office (WIPO) establish much of the legal base for international trade in branded products and technologies. These agreements address rights and registration processes related to patents, trademarks, and appellations of origin. Although the WIPO had 171 members as of June 30, 1998, protection of intellectual property has been somewhat spotty, as only a few countries have acceded to all of the agreements. Furthermore, although WIPO offers conciliation services, there are no formal dispute settlement systems within the various treaties.

The Trade-Related Aspects of Intellectual Property (TRIPS) Agreement of the WTO, covers a number of areas relevant to agri-food development: trademarks including service marks; geographical indications including appellations of origin; patents including the protection of new varieties of plants; and undisclosed information including trade secrets and test data. At its base, the Agreement provides for certain basic principles, such as national and most-favoured-nation (MFN) treatment, and some general rules to ensure that procedural difficulties in acquiring or maintaining intellectual property rights do not nullify the substantive benefits that should flow from the Agreement. In essence, the Agreement provides minimum standards of protection to be provided by each member, deals with domestic procedures and remedies for the enforcement of intellectual property rights, and makes disputes between WTO members about TRIPS obligations subject to the binding dispute settlement procedures.

Even with the apparent international expansion of property rights to intellectual property, the system is not as simple as it might appear. A number of unresolved issues will need to be handled before many countries will engage in further negotiation, including:

• the accession of Russia and China to the WTO;
• the implementation of the Agreements in developing countries; and
• the commitment of many signatories to extend patent rights to whole organisms, or to implement an effective sui generis system.

7.4 The WTO and Competition Policy

As agri-food production continues to integrate both vertically and horizontally, pressures increase for some form of international anti-trust regulations. The WTO addresses competition concerns through the Anti-Dumping Agreement, which as discussed in section 6.5 poses significant difficulties for the cyclical parts of the agri-food sector. Furthermore, as agri-food markets have opened to trade, domestic tests of market power are increasingly outmoded. The problem is how to ensure that anti-competitive actions of large vertically and/or horizontally integrated enterprises do not go unchecked, but that legitimate competition between countries, often based on innovations, is not impeded. This has led to discussions about developing a competition code with some discussions being held at the OECD.

At the Singapore WTO ministerial meeting a working group was established to study the interaction between trade and competition policy, including anti-competitive practices, in order to identify areas for further work. This group will draw upon the work of the United Nations Conference on Trade and Development (UNCTAD) and other appropriate intergovernmental fora. A number of key questions will need to be addressed, including:

Canada’s initial negotiating position is similar to its stance during the Uruguay Round (Table 8.1). The "balanced approach" of protecting supply management and liberalizing markets for export oriented goods is continued. Canada is seeking working parties on biotechnology, trade and the environment, and transparency.

The US negotiating position will be aggressively seeking liberalization in all three elements of the Agreement on Agriculture. One area where the United States negotiators will focus that is of particular interest to Canada, is state trading enterprises.

The European Union is in the process of a second round of reforms to its Common Agricultural Policy (CAP) and continuing expansion negotiations.The European Union does not see the need for a major review of the specific instruments provided in the Agreement on Agriculture. The European Union will adopt a go-slow approach at least until it has been able to implement its own internal reforms.

The Cairns Group wants freer, fairer and more market-oriented trading conditions, and for trade in agricultural products to be on the same footing as trade in other products. They are seeking the elimination of export subsidies and trade-distorting domestic support, as well as major gains in market access.

Japan wants to redress "the imbalance in rights and obligations under the WTO rules between exporting and importing countries." The Japanese will continue to seek protection of domestic producers. They will seek to support agriculture on the basis of promotion of its multifunctional nature and resist tariff reductions on the grounds of food security.

While the less developed countries do not possess a united negotiating strategy, many developing countries see implementation issues left over from the Uruguay Round as a priority for the new round. There is a concern that the benefits of the existing multilateral agreements continue to elude developing countries. A recent declaration of the G-77 ministers states that the objective for agriculture should be "to incorporate the sector within normal WTO rules, addressing the particular problems of predominantly agrarian and small island developing economies and net food-importing developing countries". Also, service sector negotiations should be limited to liberalization of "sectors of special interest to developing countries and to movement of natural persons, while taking account of the impact of electronic commerce". Developed countries should allow duty free access to the products of the least developed countries.

Table 8.1: A Summary of WTO Member Negotiating Positions for the Seattle Round

Aggregate Measure of Support (AMS). Price support can be provided either through administered prices (involving transfers from consumers) or through certain types of direct payments from governments. For the purpose of current total AMS calculations, price support is generally measured by multiplying the gap between theAn index that measures the monetary value of the extent of government support to a sector. The AMS, as defined in the Agreement on Agriculture, includes both budgetary outlays as well as revenue transfers from consumers to producers as a result of policies that distort market prices. The applied administered price and a specified fixed external reference price ("world market price") by the quantity of production eligible to receive the administered price. For the agricultural sector as a whole, the value of support for each product, including the implicit subsidy of price support measures and other product-specific subsidies are added together to arrive at the total AMS. AMS includes actual or calculated amounts of direct payments to producers (excluding green box payments), input subsidies (fuel tax rebate, for example), and the estimated value of revenue transferred from consumers to producers as a result of policies that distort market prices (market price supports).

Amber Box Policies. These are trade distorting domestic support programs that are subject to reduction commitments.

Anti-dumping Duties. These represent retaliatory duties placed on imported goods that are deemed to have been "dumped" on the domestic market by foreign firms. Dumping implies that the importer is selling at a price below its own market price and by doing so is injuring the domestic industry.

Applied Tariff. This represents the actual tariff rate that is imposed on incoming goods. The applied tariff is often not equal to the bound tariff rate.

Biotechnology. The Canadian Environmental Protection Act (1985) defines biotechnology as the application of science and engineering in the direct or indirect use of living organisms or parts or products of living organisms in their natural or modified forms. A number of countries or international organizations have developed or are developing regulations based on different, more or less general, definitions. These have become established irrespective of their scientific validity.

Blair House Agreement. This is an agreement on oilseeds between the US and the EU signed in 1992. Under the Blair House Agreement, limits have been put in place on EU production of oilseeds. It was also during this meeting that the US and the EU hammered out their differences on the disciplines that would be applied to domestic support and export subsidies in the Agreement on Agriculture.

Blue Box Policies. Blue box payments are a special category of direct payments. Although they do not qualify as exempt under the green box (essentially because they are product-specific payments), such payments are nevertheless treated as exempt from reduction because they are made under "production-limiting" programs, such as production quotas implemented in the framework of supply management.

Bound Tariff Rates. These are maximum tariff rates resulting from GATT/WTO negotiations or accessions that are incorporated as part of a country’s schedule of concessions. These bound rates are enforceable under Article II of the GATT. If a WTO member raises a tariff above the bound rate, the affected countries have the right to retaliate against an equivalent value of the offending country’s exports, or receive compensation, usually in the form of reduced tariffs on other products they export to the offending country.

Common Agricultural Policy (CAP). On 30 June 1960, the European Commission tabled proposals for the creation of a common agricultural policy (CAP). After six months of intensive negotiations, the first decisions on the construction of the CAP were taken. A year later, by January 1962, the general orientations of the CAP were consecutively introduced, built upon the three pivotal principles of market unity, Community preference, and financial solidarity. The CAP has been by far the most important Common Policy and a central element in the European Union's institutional system. It has been the forerunner of the single market (which ensures free movement of goods, services, capital and people, in the Member States of the Union). The objectives of the CAP set out in Article 39 of the Treaty of Rome are to increase productivity, to ensure a fair standard of living for the agricultural Community, to stabilize markets, to assure food supplies, and to provide consumers with food at reasonable prices. Support prices for agricultural products in the European Union since its inception have generally been well above world market levels.

Countervailing Duty (CVD). When the industry support programs of another country are deemed to have injured the domestic industry in an importing country, countervailing duties can be applied to the incoming imports of that good from the country in question. As such, they are viewed as a retaliatory measure.

Dairy Export Incentive Program (DEIP). This is the US export subsidy program for dairy products.

Export Enhancement Program (EEP). The export enhancement program is the program the United States government uses to provided export subsidies to sales of agricultural products. In the mid-1980's these subsidies were large and often paid in-kind rather than in cash. In addition, the subsidies were often targeted to certain importers. In recent years, the United States has made limited use of the EEP program and export subsidies, when paid, have been in cash.

Export Subsidies. These are special incentives, such as cash payments, extended by governments to encourage increased foreign sales; often used when a nation’s domestic price for a good is higher than the world market price as a result of domestic support programs.

Federal Agriculture Improvement and Reform (FAIR) Act. The FAIR Act was signed into law in April of 1996. This Act made fundamental changes to U.S. agricultural policies. The Act eliminated deficiency payments, provided for 7 years of predetermined direct payments to farmers, eliminated most acreage use restrictions (set-asides), suspended the Farmer-Owned Reserve program, and eliminated dairy price support starting in the year 2000. Funds for commercial agricultural export programs are reduced. The conservation and wetland reserve programs were extended.

Fast-Track Authority. Trade agreements negotiated by the US Administration require Congressional approval. With fast-track authority, the White House can present a negotiated agreement to the Congress for a yes or no vote without amendments. Fast-track prevents a trade deal from being altered by various protectionist interests within the US. It allows the US to negotiate with other countries in good faith.

Food Aid. Food aid includes: donations, foodstuffs, development projects, and financial assistance. Food aid supply is determined partly by the UN Food Aid Convention, which sets a pledging floor to which individual donor countries commit themselves for a number of years.

General Agreement on Tariffs and Trade or GATT. An agreement originally negotiated in Geneva, Switzerland, in 1947 among 23 countries to increase international trade by reducing tariffs and other trade barriers. The agreement provides a code of conduct for international commerce and a framework for periodic multilateral negotiations on trade liberalization and expansion. Before the formation of the WTO, adherents to the GATT were referred to as "Contracting Parties". The term GATT also refers to the institution responsible for organizing and overseeing multilateral trade negotiations and dispute resolution that was superseded by the WTO.

Genetically Modified Organism (GMO). The term Genetically Modified Organism applies to organisms in which the genetic material has been altered by genetic engineering, including the offspring of such organisms to which the characteristics developed due to such engineering have been passed on.

Green Box Policies. These are domestic support policies that are not subject to reduction commitments under the Agreement on Agriculture. These policies affect trade minimally, such as activities related to research, extension, food security stocks, disaster payments, the environment, and structural adjustment programs.

Greenhouse Gases. Gases such as carbon dioxide, methane and water vapour which contribute to the greenhouse effect. See also, Kyoto Accord.

European Union Cereals Intervention System (CIS). In order to maintain high domestic prices for grain, the CIS guarantees a minimum, or intervention price that it will pay for cereals. This system has resulted in the stockpiling of grain surplus to the domestic market at domestic support prices.

Kyoto Accord. An agreement signed by major industrial countries under the United Nations Framework Convention on Climate Change in 1997 in Kyoto, Japan to reduce greenhouse gas emissions by 2010.

Market Access. This represents the extent to which a country permits imports. A variety of tariff and non-tariff barriers can be used to limit the entry of foreign products.

Minimum Access Commitment (MAC). Countries employing a tariff rate quota regime for certain products have agreed to give importers some access to their domestic markets. The minimum access commitment represents the agreed upon share of domestic consumption that is to be imported under the TRQ within-quota tariff.

Most Favoured Nation (MFN) Status. This represents an agreement between countries to extend the same trading privileges to each other that they extend to any other country. For example, a country will extend to another country the lowest tariff rates it applies to exports from any third country. A country is not obligated to extend MFN treatment to another country unless both are members of the WTO, or unless MFN is specified in an agreement between them.

Over-Quota Tariff. When a tariff rate quota is in place, the over-quota tariff refers to the higher tariff rate that is applied to imports after a certain quantitative limit (minimum access commitment or quota) has been reached.

Payment-in-Kind. A payment-in-kind is any kind of none cash payment provided by a government. Examples include: subsidized credit, tax forgiveness, and subsidized freight rates.

Peace Clause. Article 13 of the Uruguay Round Agreement on Agriculture contains a time-limited "Peace Clause." This so-called peace clause restricts the use of countervailing duties by member countries to counteract domestic support measures deemed to conform to the Agreement on Agriculture. This includes all green box policies and certain blue box policies where specific criteria are met.

Price Discrimination. Price discrimination involves selling the same product for different prices in different markets.

Price Pooling. This is the practice of averaging prices and in effect, revenues, across markets. It is an export subsidy issue because high domestic prices can be used to cross subsidize low export prices. Price pooling can also be used to pool revenues across time and across markets

Regional Integration Agreement (RIA). The World Trade Organization (WTO) provides for the formation of Regional Integration Agreements among select countries through Article XXIV of GATT, as clarified by the WTO Understanding on the Interpretation of Article XXIV of the GATT 1994, subject to certain rules and conditions. Specifically, duties and most other normal barriers to trade should be reduced or removed on substantially all trade in goods originating within the region, and non-members should not find conditions of trade with the region any more restrictive than before the region was established. The Understanding recognizes the contribution of regional agreements to the overall expansion of global trade and clarifies the criteria and procedures for the assessment of agreements and improves their transparency.

State Trading Enterprise (STE). Under a GATT understanding, state trading enterprises are defined as "governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence, through their purchases or sales, the level or direction of imports or exports". Canada has notified the Canadian Wheat Board, the Canadian Dairy Commission, the Freshwater Fish Market Corporation, the Ontario Bean Producers' Marketing Board, and the provincial liquor boards as state trading enterprises.

Subsidy- in-Kind. See payment-in-kind.

Supply Management. Restrictions on the quantity of product domestic producers can sell.

Tariffication. This describes the process of converting non-tariff barriers to trade into bound tariff equivalents. This was done under the Uruguay Round Agreement on Agriculture in order to improve the transparency of existing agricultural trade barriers and to facilitate their proposed reduction.

Tariff Equivalent. Under the Agreement on Agriculture, members agreed to convert non-tariff barriers (NTBs) to trade into bound tariffs that would provide the same level of protection as the nontariff measure. These are known as the tariff equivalents.

Tariff rate Quota (TRQ). This term refers to the application of a higher tariff rate to imported goods after a certain quantitative limit (minimum access amount or quota) has been reached. A lower tariff rate applies to any imports below the minimum access amount.

Tariff rate Quota Administration. Under the Agreement on Agriculture, members were left with a great deal of discretion in deciding how to administer and implement their tariff rate quotas. The resulting lack of consistency and transparency in the way TRQ access is being administered by various countries is a cause for concern among WTO members since the right to import takes on value with a tariff rate quota scheme. It is expected that the Seattle Round will result in stricter rules for the administration of import quotas.

United States Commodity Credit Corporation (CCC). A federally owned and operated corporation within the U.S. Department of Agriculture created to stabilize, support, and protect farm income and prices through loans, purchases, payments, and other operations. Programs administered by the CCC include the export enhancement program, GSM 102 and 103 (export credit programs), and non-recourse loan programs.

Uruguay Round Agreement (URA). This refers to most recently completed multilateral trade agreement negotiated under the auspices of the GATT. The negotiations began in September 1986 in Punta del Este, Uruguay, and concluded in April 1994 in Marrakesh, Morocco. The Uruguay Round Agreement is an umbrella agreement that consists of 29 individual legal texts including the Agreement on Agriculture. The URA resulted in the establishment of the WTO.

Water in the Tariff. The "water" in the tariff measures the difference between the price of a good on the domestic market and the price of an imported good that has paid the full duty. Suppose the domestic price of a good is $150 and the border price, before duty is $100. If the duty is 100 percent the imported price of the foreign good is $200 and the water in the tariff is $50.

Western Grains Transportation Act (WGTA). The WGTA provided subsidized rail rates for transporting prairie grain to the port of Thunder Bay and Vancouver. It was argued by other countries, particularly the US, that the WGTA was an export subsidy for Canadian grain. The WGTA has been eliminated.

Within-quota Tariff. Under a tariff rate quota regime, the within-quota tariff refers to the tariff rate that is applied to imports of a good that fall below the minimum access amount.

Section 1:

Hart, M. 1998. Fifty Years of Canadian Tradecraft: Canada at the GATT 1947-1997. Ottawa: The Centre for Trade Policy and Law.

Josling, T. 1998. Agricultural Trade Policy: Completing the Reform. Washington, D. C.: Institute for International Economics.

Josling, T. E, S. Tangermann and T. K. Warley. 1996. Agriculture in the GATT. New York: St. Martin's Press.

Ontario Ministry of Agriculture, Food and Rural Affairs. 1999. The Upcoming Round of WTO Agricultural Negotiations. January 1999.

Section 2:

Section 3:

Bhagwati, J. 1989. Protectionism. Cambridge: The MIT Press.

Krugman, P. R. 1992. "Does the New Trade Theory Require a New Trade Policy?" The World Economy 15(4):423-41

Roberts, R. D. 1994. The Choice: A Fable of Free Trade and Protectionism. Englewood Cliffs: Prentice-Hall.

Section 4:

General reading for the built-in agenda:

Section 5:

Bagwell, K and R. Staiger. 1999. "An Economic Theory of GATT." American Economic Review 89:215-248.

Bhagwati, J. 1982. "Directly Unproductive, Profit-seeking (DUP) activities." Journal of Political Economy 90: 988-1002.

Bhagwati, J. 1999. "Regionalism and Multilateralism: An Overview." Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements, ed. J. Bhagwati, P. Krishna and A. Panagariya. Cambridge: MIT Press.

Fulton, M., M. Veeman and B. Larue. 1999. International Trade in Agricultural and Food Products: The Role of State Trading Enterprises. Trade Research Series, Economic and Policy Analysis Directorate, Agriculture and Agri-Food Canada.

Harrison, A. 1996. "Openness and Growth: A Time-Series Cross-Country Analysis for Developing Countries." Journal of Development Economics 48: 419-447.

Ingco, M., 1995. Agriculture Trade Liberalization in the Uruguay Round: One Step Forward, One Step Back. Supplementary paper prepared for a World Bank Conference on The Uruguay Round and Developing Countries, Washington D.C., 26-27 January.

Josling, T. 1998. The Uruguay Round Agreement on Agriculture: A Forward Looking Assessment. OECD Workshop on Emerging Trade Issues in Agriculture. Paris.

Josling, T. 1998. Agricultural Trade Policy: Completing the Reform. Washington, D. C.: Institute for International Economics.

Summers, L. H. 1999. "Regionalism and the World Trading System." Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements. ed. J. Bhagwati, P. Krishna and A. Panagariya. Cambridge: MIT Press.

Waino J, G Hasha, and D. Skully. 1998. "Market Access Issues." Agriculture in the WTO: Situation and Outlook Series. WRS-98-4, ERS, USDA.

Section 6:

Boltuck, R. and E. R. E. Litan. 1991. Down in the Dumps. Brookings Institution: Washington, D.C.

Congressional Budget Office (CBO). 1994. How the GATT Affects U.S. Antidumping and Countervailing Duty Policy? September.

Huang, H. C., H. B. Huff, and I. H. Uhm. 1996. "Microeconomic Analysis for Determination of Injury – Recent Beef Trade Disputes Adjudicated by the Canadian International Trade Tribunal." Journal of World Trade 30(2):133-160.

Kerr, W. A. 1999. "International Trade in Transgenic Food Products: A New Focus for Agricultural Trade Disputes." The World Economy 22(2):245-259.

Meilke, K. D., R. Sarker. 1997. "Four Case Studies of Agri-Food CVDs and a Proposal for Reforming National Administered Protection Agencies." Agricultural Economics 17():147-164 .

Moschini, G. and K. D. Meilke. 1992. "Production Subsidy and Countervailing Duties in Vertically Related Markets: The Hog-Pork Case Between Canada and the United States." American Journal of Agricultural Economics 74(4): 951-961.

Perdikis, N., W. A. Kerr and J. E. Hobbs. 1999. Can the WTO/GATT Agreements on Phyto-Sanitary Measures and Technical Barriers to Trade be Renegotiated to Accommodate Agricultural Biotechnology? Paper presented at the Transitions in Agbiotech: Economics of Strategy and Policy Conference, NE-165, Washington, D.C., June.

Roberts, D. 1998. "Preliminary Assessment of the Effects of the WTO Agreement on Sanitary and Phytosanitary Trade Regulations." Journal of International Economic Law ??(?):377-405.

Schmitz, A, R. S. Firch and J. S. Hillman. 1981. "Agricultural Export Dumping: The Case of Mexican Winter Vegetables in the US Market" American Journal of Agricultural Economics 64(4): 645-654.

Tarvydas, R., J. D. Gaisford, J. E. Hobbs and W. A. Kerr. 1999. Agricultural Biotechnology in Developing Countries – Will It be Technology Transferred Through the Market or Piracy. Paper presented at the Transitions in Agbiotech: Economics of Strategy and Policy Conference, NE-165, Washington, D.C., June.

Tharakan, P. K. M. 1999. "Is Anti Dumping Here to Stay?" The World Economy 22(2): 179-207.

Thornsbury, S., D. Roberts,K. Deremer and D. Orden. 1999. "A First Step in Understanding Technical Barriers to Agricultural Trade" in Peters, G. H. and von Braun, J. (eds.) Food Security, Diversification and Resource Management: Refocusing the Role of Agriculture. Oxford: Ashgate, pp.453-463.

United States International Trade Commission. 1995. The Economic Effects of Antidumping and Countervailing Duty Orders and Suspension Agreements. Publication 2900, June.

Yampoin, R. and W. A. Kerr 1998. "Can Trade Measures Induce Compliance with TRIPs?" Journal of the Asia Pacific Economy 3(2):165-182.

Section 7:

Other governments have resisted the WTO’s attempt to stop them from providing decent income support to their farmers. In contrast, Canada’s Liberal government has led the charge to eliminate farm income supports, and has reduced income support for Canadian farmers by three times the amount required by the WTO!

The WTO is forcing Canada to abandon many of the policies that have given Canada the highest quality of life in the world. So far, the WTO has ordered Canada to: start dismantling our agricultural supply management system, the system that provides Canadian farmers with income security in an unstable global economy. The most recent ruling may force Canada to allow imports of US milk which does not meet Canadian food safety standards.

Three policy issues currently dominate Canadian agriculture - supply management, grain transportation and farm safety nets. The resolution of these issues is likely to be affected considerably by factors external to the country's agricultural sector, including the recent weakness in the Canadian macro economy, falling real prices in world commodity markets and changes in international trading rules.

Canada has emerged from the prolonged recession of 1990 and 1991 into a period of slow growth, especially in the domestic market. Modest GDP growth is expected for the next two years, with the February 1994 federal budget assuming a 3 percent growth in 1994 and 3.8 percent in 1995. In early 1994, the prime lending rate declined to a 30-year low (it has subsequently increased). With slow growth in the economy, very high unemployment levels (more than 11 percent) and low energy prices, the inflation rate is expected to remain well under 2 percent for the next two years. The low inflation rate has occurred despite a 16 percent depreciation in the value of the Canadian dollar against the US dollar, failing from US$0.89 in 1989 to under US$0.72 in the spring of 1994. Domestic demand has remained very weak but cost pressures have also been dampened.

Both federal and provincial governments have continued to run very large annual deficits during the past two decades. The deficit, aggravated by the recession, reached about 7 percent of GDP in 1993. Pressure is mounting on both levels of government to take stronger action to reduce the deficit and to do this via spending cuts rather than continuing the recent practice of raising taxes. The deficit continues to influence government programmes and has, for example, resulted in reductions in subsidies to industrial milk producers and for grain transportation.

The Canadian economy is heavily dependent on trade. As a result of recent trade agreements, the Canada-US Free Trade Agreement (CUSTA) and NAFTA and now the Uruguay Round of GATT negotiations, the economy is becoming even more open to trade. Increased competition following the implementation of these trade agreements has forced restructuring in the food processing sector in particular to compete in North American and global markets. The Canadian economy in total, and increasingly its agricultural and food sector, is heavily tied to trade with the United States market.

Structural change in the Canadian agricultural sector continues in response to pressure from declining real prices and reduced government support. The average farm size has continued to increase in the past 20 years, growing by 29 percent to 242 ha, and the number of farms has declined by more than 24 percent. Structural adjustment in the dairy sector has been even faster than the average for the sector as a whole; the number of dairy farms has declined by 42 percent in the past decade. However, despite marked decreases in the number of farms, employment in the agricultural sector declined slowly from about 500 000 in 1970 to about 450 000 in 1991.

Another important aspect of structural adjustment has been the diversification of farm labour to off-farm employment. Off-farm income now accounts for about 60 percent of total farm family income, particularly for the smallest farms. This trend has enabled average farm family incomes to remain very close to the average income for all families in Canada.

Total farm debt rose quickly during the first half of the 1980s, as farm prices were strong from relatively high world cereal prices and a weak Canadian dollar. When these two factors reversed in the mid-1980s, bankruptcies rose by more than 400 percent from the 1979 level to reach their peak in 1985. Since 1986, total farm debt has remained relatively stable and farms in payment arrears have declined from about 12.5 percent of all farms to 6.5 percent in 1993. Bankruptcies have stabilized at an annual level of 0.2 percent of all farms. The improvement in the farm debt situation should continue as the prime interest rate has dropped from 14 percent in 1990 to 5.5 percent in early 1994. More recent increases could slow the recovery.

Agricultural and food exports are a very important source of income, generating about C$21 000 per full-time farmer. However, there are significant regional differences; exports are much more important in western Canada. In July 1993, recognizing the importance of trade to growth in the sector, the federal and provincial agriculture ministers set an objective to increase agricultural exports to C$20 billion, a 65 percent increase, within the period 1992-2000.

In the past few years, growth in Canadian agricultural exports to the United States has been the most rapid among all export destinations, especially for processed food products: the United States accounted for about 45 percent of agricultural exports in 1992.

On the other hand, the value of Canadian agricultural exports to Japan, other Asian countries and the EC fell during the 1988-1992 period. Also, the former USSR sharply reduced Its imports of Canadian agricultural products in 1992 and again in 1993. As a result, Canadian agricultural and food trade destinations now parallel more closely those for non-agricultural trade, that is they are heavily tied to the United States.

Expenditures by both federal and provincial governments for support of the agricultural sector in 1992/93 were estimated to be C$7.04 billion, about 60 percent from federal and 40 percent from provincial governments. This represents about 31.5 percent of the agrifood GDP and about 2.9 percent of total federal and 1.9 percent of provincial government expenditures.

In the mid-1980s, government expenditures increased sharply in response to the abrupt decline in world grain and oilseed prices and were highly concentrated in the prairie provinces. For example, in Saskatchewan, federal and provincial government agricultural support expenditures exceeded the total agrifood GDP output in two of the past eight years. In Manitoba and Alberta, federal and provincial government expenditures exceeded 50 percent of the agricultural GDP in four of the past eight years.

Because of low grain prices, most government expenditures are for income support - commodity programmes, transportation and storage subsidies, tax rebates and programme operation. The majority (about two-thirds) of all government payments go to farms with sales of more than C$1 00 000. Relatively little assistance has been directed to new government priorities such as expanding international trade, enhancing market development programmes or protecting the environment. Equally limited are expenditures currently devoted to traditional public sector activities such as research and food safety.

A second important means of support to the agricultural sector is provided through regulations such as import restrictions, production controls and price supports. These instruments are used mainly for the supply-managed commodities (largely dairy products, poultry and eggs). In this case, the agricultural sector receives support through transfers from domestic consumers. An estimate of the importance of this support can be obtained from the value of PSEs. The OECD estimates that, in 1993, the net PSE for dairy, poultry and eggs totalled C$3.1 billion, or 76 percent of the value of production for dairy products and 37 percent for poultry.

Government expenditures, while remaining a large percentage of the agricultural GDP, declined from C$8.93 billion in 1991/92 to C$7.04 billion in 1992/93 and are forecast to drop to C$5.98 billion in 1993/94. Further declines are likely. As part of a general deficit reduction programme, the federal government reduced the subsidy for industrial milk producers and western grain transportation for 1993/94 and 1994/95 by 10 percent. Expectations of generally strengthening world prices, devaluation of the Canadian dollar and support prices based on moving averages will also contribute to reductions in safety net payments.

Because agriculture is a shared responsibility between the federal and provincial governments, programmes must often be developed jointly. Under the Canadian constitution, interprovincial and international trade are the responsibility of the federal government, while marketing and education are provincial responsibilities. This division increases the need for consultation to develop national commodity marketing programmes and may result in some duplication of programmes between the two levels of government.

The Agriculture Policy Review (see The State of Food and Agriculture 1991, p. 73-74) initiated a comprehensive reassessment of all facets of Canadian agrifood policy in December 1989, involving extensive consultation with federal and provincial governments and industry. The review introduced two new safety net programmes - the Gross Revenue Insurance Plan (GRIP) and the Net Income Stabilization Account (NISA). Other task forces that reviewed supply management for dairy and poultry production and grain transportation provided a number of recommendations, but there was no broad consensus for their introduction. Furthermore, the delay and uncertainty surrounding the GATT agreement dampened the potential for change in both supply management and grain transportation.

Dairy and poultry supply management. The marketing of milk and poultry in Canada is regulated through compulsory producer marketing boards. The basic elements of this supply management system are the control of domestic production, border controls and an administered pricing system. Its policy objectives are to maintain a minimum level of domestic self-sufficiency," the regional sharing of production and processing and prices based on the cost of production.

The current form of supply management in Canada was largely introduced in the 1970s. Supply management programmes operate through a complex series of regulations. For example, imports of industrial milk and processed dairy products (with at least 50 percent dairy content) have quantitative restrictions under the Import Control List. There are tariffs on products with fixed import quotas (e.g. 20 400 tonnes of annual cheese imports). Industrial milk producers require production quotas to be eligible to produce milk and receive direct subsidy payments. Prices to producers for industrial milk are set by a cost-of-production formula and these are maintained through dairy product prices which are supported by a government offer-to-purchase programme for butter and skim milk powder. Industrial milk production is based on a national-level quota which is allocated on a historical basis to each province which, in turn, allocates quotas to individual producers. Producer levies are assessed to pay for surplus product disposal, largely for export. Processors pay variable prices for industrial milk depending on its end use. Processed dairy product producers may also face plant allocation quotas.

In the Uruguay Round of GATT negotiations, Canada had sought to maintain the current supply management system through a strengthened Article XI, paragraph 2(c). The level of tariff equivalents replacing quantitative restrictions on imports, however, is not likely to require fundamental changes to the supply management programme. CUSTA includes no specific measures relating to the liberalization of trade in supply-managed products, but discussions with the United States were held regarding the introduction of the new tariffs permitted under GATT and the implementation of the GATT panel (October 1989) which ruled that the Canadian import restrictions on ice-cream and yoghurt were inconsistent with GATT.

A task force on orderly marketing, headed by the Parliamentary Secretary to the national Minister of Agriculture, is currently studying options that are compatible with GATT and address the industry's ability to respond and compete. Recently, ministers reaffirmed their commitment to the maintenance of orderly marketing systems for dairy products and poultry. They established ad hoc review committees for each commodity to address the operation of tariff rate quotas under the Uruguay Round Agreement, future federal-provincial agreements, institutional structure and other operational and programme issues. The task force plans to submit recommendations to ministers in the autumn of 1994.

Grain transportation. The majority of Canadian cereals and oilseeds are produced in the prairies and exported as primary commodities. Regulated transportation of grains and oilseeds from western Canada has a long history and now forms an integral part of agricultural policy in Canada. In 1983, the Western Grain Transportation Act (WGTA) institutionalized several ad hoc compensation programmes of the Crow Benefit with payments made directly to the railroads. The WGTA also required the producers' share of the freight cost, 42.8 percent of the total in 1993/94, to increase gradually through time.

The federal government commitment under the WGTA will be decreased by 10 percent in crop years 1993/94 and 1994/95. The February 1994 budget further reduced its commitment by 5 percent to C$615 million.

A number of studies have shown that the WGTA subsidy has resulted in higher on-farm prices for cereals in western Canada. As a result, livestock production in western Canada has been reduced. To offset the negative impact of this cereal transportation subsidy on livestock producers, provincial governments introduced subsidies for livestock producers .70 The last of these programmes, however, was terminated in 1994 as a result of provincial budget pressures and the expectation of a change in the method of payment for the WGTA programme.

In June 1993, the federal government proposed (but did not pass) legislation to change the current method of payment from that of paying the subsidy to the railroads (in compensation for reduced producer rates) to that of paying the subsidy directly to the producer through the farm safety net system. This would result in transportation rates to producers increasing to the full compensatory level. The Producer Payment Panel was established to make recommendations on how the WGTA benefit should be delivered to producers. It proposed that payments to producers be made initially on an acreage basis and eventually (after seven years) be part of a national farm safety net programme for all producers in Canada. The conclusion of the Uruguay Round of GATT negotiations has given an additional incentive to change the WGTA. This is because the transportation subsidy for cereals that go through the west coast and Churchill ports is classified as an export subsidy under GATT.

Safety net programmes. The Farm Income Protection Act (1991) established the basis for current safety net programmes in Canada. The programmes are: i) voluntary (producers agree to participate); ii) cost-shared through producer premiums and cofunded by the two levels of government; iii) market-oriented, using triggers based on moving averages of market variables; iv) based on performance triggers for payments such as prices, costs, gross revenue or net income; and v) actuarially sound, with premiums set to maintain the integrity of the fund for the programmes.

There are three main types of programme which support grains, oilseeds, red meats and horticultural products. The first type of programme, the National Tripartite Stabilization Programme (NTSP), makes payments to cattle, hog and lamb producers and a number of horticultural and speciality crop producers when market prices adjusted for costs drop below 80 percent of a five-year moving average.

The second type of programme is the Gross Revenue Insurance Plan (GRIP) which consists of a yield protection (crop insurance) and price/revenue protection. GRIP makes payments to cereal, oilseed and speciality crop producers when the producer gross revenue from the market falls below a certain percentage (which varies by region from 70 to 90 percent) of the target revenue. This target revenue is based on the previous 15-year moving farmgate average price (with a three-year lag), adjusted for inflation, and on individual long-term average yields. Premium rates are set by an independent actuary and fluctuate from year to year depending on historical payouts and future price trends. Net payouts from the programme (i.e. total payouts less premium) were C$1.586 billion in 1991/92, C$972 million in 1992/93 and are estimated to be C$350 million in 1993/94. However, payouts are likely to increase slightly in 1994/95.

The third type of programme, the Net Income Stabilization Account (NISA), enables producers to make cash withdrawals from their individual accounts when their net income from eligible products (currently cereals, oilseeds, speciality crops and horticultural products) falls below the previous five-year average or when their taxable income falls below C$1 0 000. Producer contributions to their individual accounts of 2 percent of eligible sales are matched by federal and provincial governments. In addition, producers can contribute up to another 20 percent of their eligible sales (to a maximum of C$250 000), which is not matched by the government.

Budget pressures, loss of international competitive performance, substantial inequities among products and regional coverage and trade actions by the United States have led governments and producers to seek better solutions for safety net programmes. The Uruguay Round Agreement also emphasized the need to move from commodity-specific, coupled price support programmes to a support that is broadly based and decoupled In response to these concerns, federal and provincial agriculture ministers proposed that all safety net programmes be converted to a whole farm approach similar to a NISA programme. Several programmes have already ended - the NTSPs for beef, lamb and pork producers were terminated in 1994. Red meats are to be added as eligible commodities for NISA. The province of Saskatchewan has indicated that it will opt out of GRIP in 1995.

At a major industry policy conference on safety nets in February 1993, it was agreed that the industry would move from the current GRIP and NTSP to include all commodities (except those under supply management) in a whole farm income protection programme. Companion programmes, such as disaster assistance and price supports, would also be part of the safety programme. A National Safety Nets Consultation Committee was established with a secretariat, steering committee and technical working groups. In July 1994, the Minister of Agriculture agreed as an interim measure that, for the 1994 year, NISA would be extended to all commodities except those under supply management, in provinces wishing to extend this coverage. A further refinement of options will be proposed to ministers in November 1994.

The red meat NTSPs are being terminated at the request of producers. A key factor has been the trade actions or threat of trade actions by the United States. A significant share of Canadian production of live cattle and hogs and red meats is exported to the United States. A countervailing duty on Canadian live hogs entering the United States since 1988 has meant that little of the government subsidy is retained by Canadian hog producers. Programmes for Canadian beef producers have also been the subject of a Section 22 investigation by the United States International Trade Commission but no further action has occurred.

Canadian beef producers have proposed replacing the NTSP by a whole-farm approach programme (similar to NISA). A companion programme will be the Risk Management Agency which will operate commodity futures market programmes. A pilot project is expected in the autumn of 1994. Pork producers are considering this option and other cost-of-production or enhanced NTSP approaches.

The Canadian economy is adjusting to the trade liberalization which has resulted from CUSTA, NAFTA and the Uruguay Round as well as previous rounds of GATT. Also, the globalization of markets for investments, services and information as well as the trend towards more deregulation all increase the pressure on the economy to adjust and compete. To meet the agricultural export target of C$20 billion in 2000, the agrifood processing sector must also become more competitive. Essential actions are to improve integration of the primary sector within the total food system and to provide an adequate supply of competitively priced products. Income support programmes have not always furthered this objective.

Supply management. Supply management for poultry and dairy products in Canada was instituted to improve producer prices, production stability, producer bargaining power and regional equity. Programmes have been effective in promoting these goals but, at the same time, they may have increased production costs, reduced efficiency and restricted growth in demand and consumption.

Under supply management programmes, the quotas for the right to produce have generated high values, requiring considerable capital investment. These values are bid up, as the most efficient farmers purchase quotas from the less efficient. An industrial milk producer would require an investment of about C$13 000 per cow or C$600 000 for an average farm. With the higher risk and restrictions on credit available to the enterprise, this is probably one of the main reasons for the smaller average herd size in Canada (34 cows) compared with many of its competitors such as New Zealand (164 cows), Australia (104 cows), the United Kingdom (63 cows), the United States (50 cows) or the Netherlands (41 cows). Data on production costs show that important economies of size exist. Thus, quotas reduce competitiveness because of the smaller herd size.

Productivity estimates using yield per cow show that Canada remains significantly below the United States. Comparisons of the cost of production in adjoining areas of Canada and the United States indicate that the average total cost of production is about 25 percent higher in Canada. However, the cost of production among producers is quite variable. For example, the lowest-cost 20 percent of Canadian producers have costs below the average United States producer.

Future reductions in the tariff equivalents established under GATT could result in lower domestic producer prices for supply-managed commodities. An initial adjustment would be a decline in the value of production quotas. As a result, the adjustments to obtain economies of size would be made easier by the reduced investment requirements under the production quota regime.

Production quotas for supply-managed products cannot be traded among provinces, which prevents production shifting to the most efficient producers and regions. Proposals by a national committee" to have a national milk pool for both producers and processors were not accepted by industry stakeholders. Neither have the national supply management supervisory agencies been able to devise acceptable principles for reallocating quotas among regions. Some minor regional adjustments have been made to accommodate markets where population has expanded the fastest, such as the province of British Columbia, and where quota cuts would have affected the viability of the processing sector (e.g. the Maritime Provinces). The Ontario Chicken Marketing Board substantially increased its production quota (by 24 percent) in 1994. British Columbia has already opted out of the national quota programme and has increased its market share. These extreme measures appear to be required to make regional production reallocations.

The poultry boards have been very conservative in the allocation of production quotas, despite a rapidly growing demand for poultry meat. Per caput poultry consumption in Canada has remained at about 75 percent of the United States level during the past few years. The conservative setting of quotas has limited promotions by supermarkets and new product development by the processing sector because there is no guarantee of adequate supplies. The highly processed products have had the highest growth but the supply management programme has reduced opportunities for participation.

The high support prices for milk have been an important factor in reducing dairy product consumption and hence milk production quotas (industrial milk quotas were reduced by 17 percent prior to the 1993/94 dairy year). Retail dairy product prices were 15 to 40 percent higher in Canada than in the United States (1991 estimates), resulting in significant cross-border shopping by Canadian consumers. Retailers in some provinces have also been prevented from using special prices for milk.

The pricing system for dairy products has limited the extent of the market orientation in the sector. For example, it has tended to encourage the production of butterfat, despite a clear preference by consumers for low-fat products. In all other OECD countries, the price of butter relative to skim milk powder has declined much more rapidly, reflecting this shift in consumer preference. This results in distorted consumer signals being sent throughout the whole inputs, production and processing sector. Producers have resisted a shift to multiple component pricing, which would allow a much more market-oriented pricing of milk.

The regulatory environment at the primary level has also had an impact on the downstream industries which have been protected against imports of processed dairy products and faced considerable regulation of pricing practices, sources of supply and ability to export. The liberalization of the manufacturing sector of North American markets will enable increased imports of processed food products containing dairy and poultry ingredients and Canadian food processing firms will find themselves at a cost disadvantage when purchasing these agricultural inputs. The competitiveness of the sector will be most affected in the further processing of dairy and poultry products where there has been little incentive or ability to expand.

Grain transportation subsidies. The WGTA was introduced to maintain low transportation costs for cereals and oilseeds and to improve the bargaining power of producers. It has been an important means of income transfer to cereal and oilseed producers, but it has undoubtedly been capitalized into land prices. At the same time, however, it has created a number of production distortions and increased costs. It is central to a series of changes required to lower costs and improve the efficiency, viability and competitiveness of the entire grain transportation and handling system in Canada.

The WGTA increases domestic cereal and oilseed prices, shifts production in western Canada towards unprocessed bulk commodity exports - the slow-growth component of international trade - and reduces opportunities for value added processing and employment in the prairies. It has also limited adjustment to commodities which are not eligible for the transportation subsidy but which would be of higher value to the economy. As a result, structural adjustment in the prairies has been delayed, diversification has been limited, economic returns have been reduced and rural outmigration has been accelerated.

If the WGTA compensation was paid as a decoupled, direct payment to producers instead of to the railroads, the result would be a decline in farmgate prices for cereals and oilseeds. This decline in prices, coupled with the projected reduction in government safety net assistance, could substantially reduce the area currently devoted to cereals and oilseed production. It has been estimated that, under those conditions, up to 2 million ha currently in cereal and oilseed production could no longer even cover the cash costs of production." This land is likely to shift either to forage production for cow and calf operations or to new, lower-cost management for cereals and oilseed production which would increase total economic benefits. This change in the WGTA benefit payment would also improve the grain producers' competitive position in the eastern prairies compared with the adjoining areas in the United States, which would increase the potential for exports from Canada to this region.

Safety nets. Because of the differences in support levels among commodities and the fact that the NTSP and GRIP are commodity-based programmes, the safety net programmes in Canada have caused some production and marketing distortions. Producers have shifted production to crops with relatively higher support levels, regardless of current or expected market prices.

For example, the introduction of GRIP increased wheat area at the expense of feedgrains because of the relatively higher support level (based on 15-year moving average prices) compared with expected market prices. For certain speciality crops with thin markets, the potential oversupply has required changes in support levels to prevent major market disruptions. The province of Saskatchewan moved to a "basket of commodities" approach to avoid such problems.

The current safety net programme has affected the competitiveness of Canadian agriculture. High levels of support for certain commodities have maintained those commodities at the expense of both the search for more profitable alternatives and structural adjustments in the sector.

The movement of safety nets from commodity-based support programmes such as GRIP and the NTSP to income-based programmes would improve equity among products and regions and remove many of the production and marketing distortions. The NISA programme, which is the first attempt to design an income programme in Canada, permits the targeting of a more desirable performance measure than prices. Moreover, because of its sector-wide availability and non-distortive impact, NISA is likely to be considered a "green" programme in terms of future trade actions.

In summary, much of the emphasis in Canadian agricultural policy during recent years has been to ensure equity and stability for producers. While achieving these objectives, the programmes have affected structural adjustment for the industry and reduced its competitive position in domestic and international markets. This lack of competitiveness has been most noticeable in the rapidly growing international trade in processed food products. moreover, the large income-support expenditures are difficult to maintain in a period of sizeable fiscal deficits and there Is a recognized need to provide programmes that improve competitiveness and environmental sustainability.

Contents:

Executive Summary

Preface

Prologue: The Crisis

Part 1: The government's explanation: EU subsidies

Part 2: The real explanation for the income crisis

Appendix 1: World wheat and coarse grain stocks/use ratios

Appendix 2: Wheat, course grain, and total oil production: 1980-99

Table F: Percentage change in trendline wheat production using selected start years.

Footnotes

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The unprecedented and dramatic net farm income collapse has Canadian federal and provincial ministers of agriculture scrambling to find an explanation. Most often, their explanation is that the crisis is caused by agricultural subsidies, primarily European. These politicians have pledged to work through trade negotiations to rid the world of subsidies and, thus, restore prosperity to Canadian farmers. Those who blame the farm income crisis on European Union (EU) subsidies put forward the following analysis:

EU subsidies » increased EU production » oversupply » depressed prices » farm income crisis

They point to significant increases in EU production as evidence for their analysis. But what if production is also increasing in countries that have very low subsidy levels? That is exactly what is happening. Let's begin by looking at wheat production increases. Five Major producers - Canada, the EU, U.S., Argentina and Australia - accounted for 87% of world wheat exports in 1998/99. The table below lists trendline changes in wheat production for these five major exporters. It demonstrates that while production rose in the heavily subsidized EU countries, it rose at comparable rates in relatively unsubsidized countries such as Australia and Argentina and (at a lower rate) in Canada. In the next most highly subsidized country after the EU - the U.S. - production of wheat declined. If production is increasing in relatively unsubsidized countries at a similar rate to that of highly subsidized EU countries, any casual link between subsidies and increased production is broken

Wheat production: 1980-99

European Union +42%

Australia +44%

Argentina +26%

Canada +11%

United States -7%

The absence of any relationship between subsidy levels and production rate increases is even more striking when one looks at course grains and oils. For course grains (barley, corn, sorghum, oats, millet, rye and mixed grains), EU production over the last 20 years (1980-99) is up just 0.4%. Australia, Canada, and argentina reported increases of 46%, 3%, and 9% respectively. In production of edible oils, EU production increased at ¼ the rate it increased in Canada and Australia and 1/7 the rate of Argentinean increases. There seems to be no major grain or oilseed sector where production increase rates in the EU have significantly exceeded those in non-subsidized countries Clearly, the assertion that subsidies cause increased production must be augmented by the assertion that the absence of subsidies also causes increased production. Had EU subsidies been lower or non-existent over the past 20 years, there is little evidence that its current production would be lower, that world grain prices would be higher, or that the worldwide farm income crisis would be less severe.

The purpose of the preceding analysis, developed in detail in this brief, is to refute the argument that European subsidies cause the current income crisis. Once accomplished, farmers hope that this will force elected leaders, trade officials, and other decision-makers to grapple with the real causes of the income crisis and with the real solutions. The market is failing farmers, it is failing all around the world, and it has been since at least the late 1970s. The market is failing to return a fair and adequate share of the consumer dollar to farmers. And it is failing to allocate to farmers a reasonable return on labour, management, and equity from our agri-food system's huge revenue stream. Moreover, this market failure is entirely predictable. It is a direct result of dramatic market power imbalances between agri-food industry multinational corporations and the family farm that must do business with these firms. Modern food production takes place in a chain which includes oil, fertilizer, seed, chemical, and machinery companies on the input side and grain companies, railways, packers, processors, retailers, and restaurants on the "downstream" side. Almost every link in the chain, nearly every sector, is dominated by between two and 10 multi-billion-dollar multinational corporations:

Three companies retail and distribute the bulk of Canadian gasoline and diesel fuel;

Three produce most of the nitrogen fertilizer;

Nine companies make our pesticides;

Four companies are gaining control of our seed market;

Three produce most of our major farm machinery.

The situation is the same on the "downstream" side of the food production chain:

Nine grain companies collect Canadian grain;

Two railways haul it;

Two companies dominate the beef packing sector and a handful dominate pork;

Three large firms manufacture 87% of the pasta in Canada;

Four corporations mill 80% of Canadian flour;

Three companies manufacture the bulk of the soft drinks sold;

Four companies produce most of the cereal;

Five companies control food retailing in Canada;

A handful of restaurant chains control an increasing portion of the restaurant business.

The single significant exception to the pattern of extreme concentration outlined above is the farm link. In Canada, that link is made up of over 270,000 relatively small family farms. In addition to the small number of firms that dominate each link, their size stands out. Total 1998 Canadian gross farm revenues were $29 billion. Cargill's revenues were $75 billion that year. Philip Morris Inc. (Post, Kraft, Oscar Mayar, Kool-aid, Jello, Maxwell House, Marlboro, Miller) had revenues in 1998 of $109 billion. Nestlé (Stouffer's, Maggi, Libby's, Nescafé, Perrier, etc.) had revenues of $76 billion. While these revenues are large in relation to total revenues for all Canadian farmers, they are staggering compared to the revenue of any individual farm family. If one looks objectively - without preconceptions about the marvels of the market - at the agri-food chain, one would immediately have doubts that extremely numerous and relatively tiny family farms could extract fair and adequate revenues and profits from a chain dominated by firms a thousand to a million times larger. These doubts are borne out when one compares farmers' profit levels to those of agribusiness corporations. While farm families struggle with large losses, the huge corporations that dominate the other links in the agri-food chain continue to earn large profits. "Return on equity" is a common measure of profitability. It is calculated by dividing net income (profit) by average equity (assets minus debt). An accurate and startling picture of relative profitability emerges when one compares return on equity rates for farmers to those in the other links in the chain. While farmers earned just 0.3% return on equity in 1998, agribusiness corporations earned 5%, 20%, 50%, and even higher rates. This brief contains detailed data on the revenues, profits, and return on equity rates for most of the major agribusiness corporations operating in Canada. While the farmers growing cereal grains - wheat, oats, corn - earn negative returns and

an explanation of pork packer profits during the recent hog price crisis;

a brief analysis of fertilizer pricing practices;

information on the farmers' declining share of the consumers' grocery store dollar; and

comparisons of farm and corporate profitability for 1998 and over a five-year period.

The National Farmers Union is confident that those who read this brief will share our conclusion that the cause of the current farm income crisis is not foreign subsidies, but instead, market failure caused by enormous imbalances in market power. Once farmers, government officials, and other Canadian citizens understand this, we can then move forward toward solutions that safeguard family farms and rural communities.We hope that you will read this brief in full.

The NFU is the only voluntary, direct-membership national farm organization in Canada. The NFU is non-partisan and works toward the development of economic and social policies that will maintain the family farm as the primary food-producing unit in Canada The NFU believes that agriculture should be economically, socially, and environmentally sustainable. The decimation of rural communities, growing environmental problems, declining farm numbers, and the present farm income crisis cast doubt on the sustainability of the current high-input, export-oriented, expansionist model. The farm income crisis also begs a clear analysis and a sound explanation. Only when this is accomplished can Canadian policy-makers move toward the real, long-term solutions which Canadian farm families so desperately need. This brief has three parts: it briefly illustrates the severity of the current income crisis; it demonstrates that the crisis is not caused by European Union subsidies; and it demonstrates that the crisis is caused by dramatic imbalances in relative market power between farmers and the agribusiness corporations with which they must transact. Also included are data on the profitability of nearly every one of the major agribusiness corporations operating in Canada. In addition, this brief calculates comparable measures of profitability for Canadian family farms (possibly the first time that such numbers have been calculated).

The NFU welcomes questions and comments on this brief. Please contact Darrin Qualman, NFU Executive Secretary, at telephone (306) 652-9465 or fax (306) 664-6226.

Net farm income has returned to Depression-era levels. Agriculture and Agri-Food Canada (AAFC) projects 1999 realized net income for Saskatchewan farmers at $96 million(1). This works out to just $1,783 per farm, a level not seen since 1938. Worse still, AAFC projects negative realized net farm incomes for 2001, 2002, and 2003, with losses worse than those during the depression (see Figure 1, below):

Figure 1: Saskatchewan Realized Net Farm Income (per farm and adjusted for inflation)

Source: Agriculture Economic Statistics, Statistics Canada Cat. # 21-603E;

Consumer Price Index, Statistics Canada Cat. # 62-010;

Historical Overview of Agriculture, Statistics Canada Cat. # 93-358

While Saskatchewan provides the starkest illustration of the farm income crisis, the crisis is not confined to that province. In nearly identical fashion, realized net farm income has fallen to 1930s levels for grain and hog producers in Alberta, Ontario, and across Canada.(2)

In the 1930s, it took a worldwide economic collapse, a stock market crash, mass unemployment, and a prairie-wide drought to drive net farm income to negative values. Today, stock markets are booming, employment levels are fair, the weather is generally good, and crops are average or better. The current farm income crisis is unprecedented in times of economic prosperity and stability.

The unprecedented and dramatic net farm income collapse has Canadian federal and provincial ministers of agriculture scrambling to find an explanation. Their explanation of choice is that the crisis is caused by domestic agricultural subsidies, primarily European.(3)

Provincial and federal governments were unanimous in making substantial reductions in European Union (EU) domestic subsidies their main priority at the December 1999 Seattle Ministerial meeting of the World Trade Organization (WTO). They remain focused on reductions in EU subsidies in upcoming negotiations.

Canada's August 19 Initial Negotiating Position on Agriculture states that "Global trade distortions have had, and continue to have, a major impact on Canadian farm incomes." The federal government states that "certain forms of domestic support can stimulate production." The document goes on to assure farmers that "Canada will seek the maximum possible reduction or elimination of production and trade-distorting support."

In its January 1999 discussion paper, The Upcoming Round of WTO Agricultural Negotiations: What's on the Table?, the Ontario Ministry of Agriculture, Food, and Rural Affairs states that "policies which support domestic prices, or subsidize production encourage overproduction."

The Saskatchewan government states that a major cause of the farm income crisis is: "The continued use of domestic production subsidies by the EU and US that isolate their producers from market conditions and result in overproduction and glutted world markets."

Those who blame the farm income crisis on EU subsidies explain the causation as follows:

Subsidies cause increased production, oversupply, and, hence, declining prices and incomes.

Subsidies distort production. Farmers make planting choices based on subsidy levels and not on supply and demand signals communicated through market prices. Hence, farmers produce too much of some commodities.

Subsidies allow farmers to produce and sell at lower prices and, hence, drive down prices.

This section of this brief takes a critical look at these three assertions and at the argument that subsidies, European or otherwise, cause oversupply, low prices, and the current farm income crisis.

To begin, is there oversupply? Stocks/use ratios are a fundamental and oft-quoted measure of supply and demand. The ratios compare the stocks on hand (in elevators, storehouses, railcars, farm granaries, etc.) at the end of a given year to the amount used in that year. A low stocks/use ratio denotes low supply and should trigger price increases.

Let's begin with wheat. The world stocks/use ratio for wheat was 40.4% in 1968/69.(5) The ratio fell to just 21.3% in 1972/73 and sparked a dramatic price rise which led to a period of farm prosperity that lasted until the early 1980s.

Given current low wheat prices, one would expect high wheat stocks/use ratios (high ratios = large supply relative to demand = low prices). To the contrary, ratios for the last four years have been at, or near, record lows. According to the USDA, the world wheat stocks/use ratio for 1995/96 was 19.0%-the lowest level in 40 years, possibly longer.(6) The following year, it increased only slightly, to 19.1%. The USDA estimates that the ratio was 23.0% for 1998/99 and will be 21.9% for 1999/00, but even these are far below the levels of the mid-1980s when wheat stocks/use ratios hovered between 25% and 35%.

In order to continue to argue that current low wheat prices are caused by surplus, one would have to assert that stocks/use ratio percentages in the high-teens and low twenties (as they are now) denote surpluses. Taking this position however, one would then be forced to admit that there have not been more than one or two years in the last 40 when there has not been a surplus. One must then ask: If "non-surplus" years have been so rare over the past 40 years, how common will they be in the future?(7) If farm prosperity requires even lower stocks/use ratios than we have today, and if those lower ratio years are extremely rare, how often can we expect prosperity in the future?

Seen another way, is it wise to construct a world food system such that farmers cannot expect prosperity unless world supplies fall below levels needed to sustain its population for 69 days? [19% stocks/use ratios translate into a 69-day supply of food on hand.]

The situation for coarse grains (oats, barley, corn, sorghum, rye, millet, and mixed grains) is identical to that for wheat. The world coarse grain stocks/use ratio in the 1980s averaged 21.4%. In 1995/96, it fell to 11.3%-a 40 year low.(8) It has increased since then but the USDA projects that it will not exceed 17.6% in the near future. Despite these relatively tight stocks, barley, corn, and other coarse grain prices remain extremely low.

The assertion that there is an oversupply of grain is extremely questionable. The assertion that there exists oversupply of a magnitude sufficient to cause the worst farm income crisis since the 1930s is clearly false.

Despite the preceding evidence, some would continue to argue that there is oversupply. Let's grant that assertion for a moment and ask: If there is oversupply, is it caused by EU subsidies?

Canadian ministers of agriculture and others who blame the farm income crisis on EU subsidies put forward the following analysis:

EU subsidies » increased production » oversupply » depressed prices » farm income crisis

They point to significant increases in EU production as evidence for their analysis. But what if production is also increasing in countries that have very low subsidy levels?

Let's begin by looking at wheat production increases. Five major producers-Canada, the EU, U.S., Argentina, and Australia-accounted for 87% of world wheat exports in 1998/99.(9) The graphs on the following page show actual production levels and the trendline for production changes since 1980 for these four countries and one federation (please see Figures 2a-2e):(10)

Figure 2a-2e: Wheat production changes and trendlines in selected countries: 1980-99

Production data courtesy of USDA. Data can be accessed at:

http://jan.mannlib.cornell.edu/data-sets/international/93002/

While wheat production rose in heavily subsidized EU countries (Figure 2a), it rose at comparable rates in relatively unsubsidized countries such as Australia (2b) and Argentina (2c) and (at a lower rate) in Canada (2d). In the next most highly subsidized country after the EU-the U.S.-production of wheat declined (2e). In light of this, it is hard to assert that subsidies cause increased wheat production. If production is increasing in relatively unsubsidized countries at a rate similar to that of the highly subsidized EU countries, any causal link between subsidies and increased production is broken. The link is further severed when one notes that production decreased in the heavily subsidized U.S. market. Year-to-year production varies widely due to changes in weather, seeded acreage, yield, etc. As a result, when assessing changes in production it is more instructive to look at the linear trendlines calculated over a number of years rather than to compare one specific year to another. The graphs on the previous page include 1980-99 trendlines. Table A, below, lists trendline changes in wheat production between 1980 and 1999:

Table A: Wheat production level trendline changes for major exporters: 1980-99

European Union +42%

Australia +44%

Argentina +26%

Canada +11%

United States -7%

While EU wheat production, calculated on a trendline, rose 42% since 1980, Australian production rose 44% and Argentinean production rose 26%. Canadian production was also up 11%. Highly subsidized U.S. production fell 7% since 1980.(11) Similarly, there is no correlation between subsidy levels and increases in coarse grain (barley, corn, sorghum, oats, millet, rye, and mixed grains) production for these same countries. Table B, below, lists trendline changes in coarse grain production between 1980 and 1999:

Table B: Coarse grain production level trendline changes: 1980-99

European Union +0.39%

Australia +46

Argentina +3%

Canada +9%

United States -22%

The most highly subsidized countries had the smallest increases in coarse grain production or, in the case of the U.S., a decrease in production. A similarly ambiguous picture emerges when one looks at "total oils" (soybean, cottonseed, peanut, rapeseed, canola, sunflowerseed, coconut, palm, olive, and fish oils). Table C, below, lists trendline changes in total oil production since 1980:

Table C: "Total oils" production level trendline changes: 1980-99

European Union +73%

Australia +294%

Argentina +522%

Canada +283%

United States +70%

Table C demonstrates that EU oil crop production increased at just 1/4 to 1/7 the rate of some relatively non-subsidized countries. Likewise, increases in highly subsidized U.S. production lagged far behind rates of increase in relatively non-subsidized countries. Like coarse grains, oil crop production increases and subsidy levels are inversely proportional There seems to be no major grain or oilseed sector where production in the EU has increased significantly faster than production in non-subsidized countries. Clearly, assertion #1 (see Page 3), that "Subsidies cause increased production", must be augmented by the assertion that the absence of subsidies also causes increased production. Had EU subsidies been lower or non-existent over the past 20 years, there is little evidence that its current production would be lower. Thus, the assertion that subsidies are the cause of increased production becomes meaningless.

The second of the three assertions (see page 3), that "Subsidies distort production", is similarly unsupported by evidence. The argument behind this assertion is that subsidies cause farmers to transfer acres into the production of subsidized crops-wheat, corn, and soybeans, for instance-and out of non-subsidized crops. If this were true, one would expect that some crops-those that farmers transferred acres away from-should be in relatively short supply and relatively highly priced. There seem to be few such crops. Stated another way: What crops would farmers transfer their acres into if subsidies ended immediately? Peas? Flax? Canola? Judging by the prices of these commodities, they are already "overproduced." Western Canadian farmers are relatively unsubsidized. Over the last decade, they have scrambled to find and grow relatively high-value crops. In the early 1990s, many turned to peas with some initial success. Within a few years, however, pea acreage increased to such an extent that prices fell from $6/bushel to $3. If subsidies ended, would more European or U.S. acres shift to field peas? What effect would this have on already depressed prices? Canola prices are well below $6 per bushel.(12) With the exception of one short period in 1986/87, prices are at a 25-year low. If subsidies ended, would more acres shift to canola? Would the acres shift to other oil crops which compete with canola for markets? It is incorrect to assert that in the absence of subsidies, acreage would revert to those crops where more production is needed, because no such crops exist. In light of this, the argument that subsidies are production distorting largely disappears.

Assertion #3 (see Page 3), that "Subsidies allow farmers to produce and sell at lower prices and, hence, drive down prices," is merely a thinly disguised version of assertion #1, that: "Subsidies cause increased production." In identical fashion to the first assertion, the third assumes that in the absence of subsidies, farmers could not afford to produce and sell-or would not do so. Assertion #3 implies that the absence of subsidies would result in farmers producing less or somehow extracting higher prices. The evidence from Canada, Australia, Argentina, and elsewhere, detailed above, demonstrates that this assertion is incorrect.

Despite the evidence presented above, some would still assert that domestic subsidies cause overproduction, oversupply, depressed prices, and the current farm income crisis. These people would further assert that the solution to the current farm income crisis is to force the EU (and the U.S. and other countries) to dramatically reduce or eliminate their subsidies. Let's grant these assertions for a moment and ask: Is it likely that we can force the EU to drastically curtail or eliminate its agricultural subsidies? The NFU is fortunate to work internationally.(13) NFU officials have had the opportunity to meet, work, and talk with farm leaders, politicians, and trade officials from around the world, including Europe. European officials are blunt: they say that they have seen the countryside in northern North Dakota and some other parts of the United States: vast tracts of farmland and few farms or communities. They know that the western Canadian countryside is heading in a similar direction at an accelerating rate. Europe enjoys a vibrant and well-populated countryside. European citizens and politicians want to see small farms in the country, dairy cattle grazing in mountain valleys, and thriving rural communities and they will do what it takes to ensure that those farmers, cow herds, and towns survive and prosper. European officials say that they will do everything necessary to protect their farmers. They tell us that they have seen what naked market forces do to farmers and to the countryside, and they refuse to abandon their farmers and rural communities to such destructive forces. The EU will energetically resist attempts by Canada, the U.S., and others to force it to significantly reduce or eliminate support to its farmers. There is reason to doubt that we can force the EU to significantly cut subsidies.

Despite the arguments above, some would still assert that the solution to the current farm income crisis is to force the EU (and other countries) to significantly reduce or eliminate subsidies and that we can succeed in doing so at the WTO and in other venues. Let's grant those assertions for the moment and ask: How long might it take? The last round of WTO agricultural negotiations-the Uruguay round-began in 1986 and ended in 1994 (8 years later). The Uruguay-round agreement committed WTO members to modest subsidy reductions over periods ranging from six to 10 years. Today, 14 years after the start of that round, we have yet to see significant subsidy reductions. We have entered a new round of WTO talks. In a January 20, 2000 letter from Agriculture Minister Lyle Vanclief to NFU President Cory Ollikka, Vanclief states: "Notwithstanding the failure to launch a new comprehensive round of trade talks in Seattle, negotiations on agriculture and services are already mandated by existing WTO agreements, so that discussions on both will start early in the new year [2000]." Given the deadlock in Seattle, it is reasonable to expect that this round of WTO agricultural talks will take at least as long as the last round. Thus, a new agreement on agriculture is at least eight to 10 years away. As in previous agreements, subsidy reductions will be phased in over 10 or more years. It is unlikely that we will see significant reductions in agricultural subsidies before 2015, if ever. And even if world production does decrease as a result of subsidy reductions (as some argue it will) those production decreases will come still later. Any price increases that might follow are unlikely before 2020. Canadian farmers face record and near-record low prices. They are struggling with Depression-era net incomes. These farm families tell federal and provincial governments that they need immediate financial assistance or they face bankruptcy. These farmers cannot hang on for even two years, let alone twenty.

To summarize: For those who assert that ending EU subsidies will curb production, end oversupply, increase prices, and solve the Canadian farm income crisis, this paper responds:

There is no evidence that EU subsidies are the cause of the crisis;

Even if there were, there is little hope that we could force the EU to reduce subsidies;

Even if we could, it will happen too late to save Canadian farmers, the vast majority of whom need immediate help.

Part 2: The real explanation for the income crisis

he purpose of the preceding analysis is to refute the argument that European subsidies cause the current income crisis.(14) Once accomplished, this will force elected leaders, trade officials, and other decision-makers to grapple with the real causes of the income crisis and, hopefully, the real solutions. Before we turn to those real causes, I want to pause and examine why the EU subsidy explanation is so attractive. Many of the elected leaders and business people who gave us the recent parade of trade agreements, deregulation initiatives, and privatization schemes are market ideologies. They believe-a priori and often in spite of evidence-that markets work. If markets work, how do elected and corporate leaders explain the economic carnage on family farms? They cannot concede that markets sometimes fail. They must, therefore, blame "market distortions" and "market barriers"-state trading enterprises, tariffs, and subsidies. Hence the attraction of the EU subsidy explanation. The markets would work for farmers, these leaders declare, if only we could clear away the barriers and distortions. Hence, they charge off to the WTO to rid the world of tariffs and subsidies and free the invisible hand of the global market economy to dispense prosperity and freedom to the industrious and efficient.

The real explanation: market failure due to an imbalance in market power

The market is failing farmers, it is failing worldwide, and it has been since at least the late 1970s. The market is failing to return a fair and adequate share of the consumer dollar to farmers. And it is failing to allocate to farmers a reasonable return on labour, management, and equity from our agri-food system's huge revenue stream. The EU spent approximately $90 billion in 1999 to protect its farmers from chronic market failure. The U.S. spent approximately $24.5 billion to protect its farmers.(15) In Canada, federal and provincial governments have chosen not to protect farm families from this market failure. Federal agricultural spending has fallen to half the levels of ten years ago. The result is widespread bankruptcy, the rapid loss of family farms, decimated rural communities, and damaged regional economies. Market failure is apparent to anyone who wishes to look. Moreover, it is entirely predictable. It is a direct result of dramatic market power imbalances between agri-food industry multinationals and the family farms that must do business with these firms.

Imagine food production as a chain-a long, horizontal chain. At the left end is a link which represents oil and natural gas companies. Moving to the right, at the next link, oil is refined into diesel fuel and fertilizer companies turn natural gas into fertilizer (anhydrous ammonia, one of the most widely-used fertilizers, is created directly from natural gas). Moving farther along the chain to the right, we have the chemical company link, the machinery companies, seed companies, and banks. All these links together are the "input" or the "upstream" links. In the middle of the chain is the farmer link. This is where farmers combine the inputs-energy, seed, technology, and capital-with soil, rain, and sun to produce food. Moving farther to the right, we find the "downstream" links: grain companies, railways, processors, packers, brewers, retailers, and restaurants.

Figure 3, overleaf, shows the modern food chain, the companies that dominate each link, and the revenues, profits, and return on equity rates each earns.

* Due to the large size of Figure 3 it is not included in the electronic version of this brief. Please contact the NFU national office at (306) 652-9465 for a copy of this figure *

When one examines the corporations arranged along this chain, several aspect stand out. Most important is that nearly every link, nearly every sector, is dominated by between two and ten multi-billion-dollar multinational corporations. The single significant exception is the farm link. In Canada, that link is made up of nearly 300,000 small, family-owned "firms." In the U.S., where many of the same input and processing companies dominate, the farm link is made up of over two million family-owned firms. The size of agribusiness corporations relative to farms also stands out. Total 1998 Canadian gross farm revenues were $29 billion. Cargill's revenues were $75 billion that year. Philip Morris Inc. (Post, Kraft, Oscar Mayar, Kool-aid, Jello, Maxwell House, Marlboro, Miller) had revenues in 1998 of $109 billion.(16) Nestlé (Stouffer's, Maggi, Libby's, Nescafé, Perrier, etc.) had revenues of $76 billion. While these revenues are large in relation to total revenues for all Canadian farmers, they are staggering compared to the revenue of any individual farmer. If one looks objectively-without preconceptions about the marvels of the market-at the agri-food chain with its huge imbalances in market power, one would immediately have doubts that extremely numerous and relatively tiny family farms could extract fair and adequate revenues and profits from a chain dominated by firms a thousand to a million times larger.

A handful of firms dominate each sector

In addition to their advantage in size, the small number of firms which dominate each "link" adds to their market power:

Three companies retail and distribute the bulk of Canadian oil, gasoline, and diesel fuel.

Three fertilizer companies control 71% of Canada's nitrogen fertilizer production capacity:

- Agrium (North America's largest nitrogen fertilizer producer) controls 45%;

- Canadian Fertilizer Limited (a joint venture of Western Co-operative Fertilizers Ltd. {Agricore and SWP} and CF Industries {a consortium of U.S. co-operatives}) controls 14%; and

- Saskferco (50% Cargill and 49% Gov't of Sask.) controls 12%.(17)

Nine companies make and market almost all of the insecticides, fungicides, and herbicides used in Canada. Moreover, product specialization, patenting, and high registration costs limit the number of firms which sell a given type or category of pesticide. For example, Monsanto (Roundup) and one or two other companies sell the vast majority of non-selective herbicides in Canada. Worldwide, the top ten companies control 85% of the $45.4 billion market and six firms control 63%.(18)

Four companies (DuPont/Pioneer, Monsanto, Novartis, and Dow) control 69% of the North American seed corn market and 47% of the soybean seed market. At the end of 1998, Monsanto controlled 87% of the U.S. cotton-seed market (it has since divested some cotton-seed interests in an attempt to win approval of its takeover of Delta and Pine Land).(19) While Canadian canola figures are unavailable, it is probable that Monsanto's control of that market is between one-third and one-half. Monsanto sold 88% of the transgenic seeds in the U.S. in 1998. Approximately 60% of Canadian canola is transgenic.

Three companies dominate the Canadian and North American farm machinery sector: Case/IH, New Holland, and John Deere. Soon there will be two, when Case/IH and New Holland merge. The Case/IH/New Holland side of this duopoly will have annual revenues of approximately $18 billion.

Five banks control Canadian agricultural credit along with some participation by the federal Farm Credit Corporation and a network of relatively small Credit Unions. The combined profits of Canada's five chartered banks were $6.75 billion in 1998.

"Downstream," farmers face similar market concentration:

Two railways, CN and CP, haul western Canadian grain. Their 1998 profits exceeded the combined realized net income of the 79,000 farmers in Manitoba and Saskatchewan. While two railways (a duopoly) would have significant market power, the distance between their mainlines means that most farmers are captive to one or the other (a monopoly). Further, the recently announced merger of CN with U.S. carrier Burlington Northern Sante Fe would create an $18.5 billion per year super-carrier. Finally, there is real doubt that Canada's other railway, CP, can survive with its tracks sandwiched between CN's to the north and BNSF's to the south. CP rail may go the way of Canada's junior air carrier, Canadian (formerly CP Airlines). If this happens, western farmers will be left with just one railway.

Nine grain companies control grain collection in Canada. While this number seems relatively large and the prospects of competition reassuring, analysts predict that mergers and takeovers will soon leave only four. At an April 13, 1999 meeting of the Canada Grains Council, Agricore CEO Gordon Cummings predicted that American multinationals ConAgra, ADM, and Cargill will survive "and if we do things right, one Canadian-owned [company will survive]." He predicts that the consolidation will occur within two to five years following the conclusion of the next round of WTO talks.(20)

Two companies, IBP and Cargill, dominate the beef packing sector with 74% of Canadian capacity (37% each).(21) These companies also dominate the U.S. beef packing sector with 32% and 19% of packing plant capacity respectively. Thus, these companies dominate the entire North American beef packing sector. Their profit levels reflect this dominance.

While there is a relatively large number of large food processors in Canada and worldwide, there is substantially less competition than would first appear. This is because regional and product specialization means that in a given area, only two, three, or four firms process and market a given product.

Three large firms manufacture pasta in Canada:

Borden (Catelli, Lancia) with 39.2% of Canadian pasta plant capacity and $3.4 billion in annual sales worldwide;

RJR Nabisco (Primo) with 25.3% of Canadian plant capacity and $25 billion in sales of processed foods worldwide; and

Italpasta with 24.1% of Canadian capacity.

Four corporations mill 80% of Canadian flour:

Archer Daniels Midland with 46.3% of Canadian wheat flour milling capacity;

Robin Hood Multifoods with 19.6%;

Dover Industries with 6.5%; and

Parrish and Heimbecker with 6.4%.

In Canada, three companies manufacture the bulk of the soft drinks sold, four companies produce most of the cereal, a handful handle coffee, and a small number make frozen french fries. It is beyond the scope of this brief to exhaustively list the market shares for each firm and each product in the agri-food-processing sector. Suffice it to say, like the rest of the agri-food chain, the production and distribution of a given food product is almost always dominated by a few, very large corporations.

Five companies control food retailing in Canada:

Weston/Loblaws/Westfair (Superstore, Loblaws, Loeb, Provigo, IGA, SuperValu, Lucky Dollar, Extra Foods, The Real Canadian Wholesale Club, Your Independent Grocer, No Frills, Valu-Mart, etc.);

Safeway;

Metro-Richelieu;

Empire/Sobeys;

Pattison/Overwaitea.

Again, the relatively large number of retailers is deceiving because two or three companies dominate most regions:

Pattison/Overwaitea and Safeway market most of the food in British Columbia;

Weston/Loblaws/Westfair and Safeway dominate food retailing on the prairies;

The Ontario market is dominated by Weston/Loblaws/Westfair, Sobeys, Metro-Richeleu, and A&P

Metro-Richelieu, Empire/Sobeys, and Weston/Loblaws/Westfair (Provigo) divide the Quebec market;

And two companies-Empire/Sobeys and Weston/Loblaws/Westfair (Atlantic SaveEasy, Atlantic Superstore, Dominion, IGA)-share the Maritimes.

A handful of restaurant chains control an increasing portion of the restaurant food trade. MacDonald's had worldwide revenues of $18.3 billion in 1998. Tricon (KFC, Taco Bell, and Pizza Hut) has 29,700 franchised locations in 100 countries and gross revenues of $12.5 billion.

The small number of very large corporations that dominate each link in the agri-food production chain means that these firms can exert significantly more upward pressure on their selling prices and profits and more downward pressure on their buying prices than would be the case in competitive markets. At many links, market power is much closer to monopoly levels than it is to levels found in competitive markets. This extreme concentration of market power enables these firms to extract extremely high profits. This is especially true when they transact with players several orders of magnitude smaller, such as farmers.(23)

When farmers look at the large size and the small number of firms that dominate each link in the agri-food production chain, they become concerned. Those concerns are borne out when one looks at the profit levels at other links in the chain. The farm income crisis is a crisis only on the farms. While farm families face large losses, the huge corporations that dominate the other links in the agri-food chain continue to earn large profits. "Return on equity" is a common measure of profitability. It is calculated by dividing net income (profit) by average equity (assets minus debt). An accurate and startling picture of relative profitability emerges when one compares return on equity rates for farmers to those in the other links in the chain. While farmers earn five-year average return on equity rates of just 0.7%, agribusiness corporations earn 5%, 10%, 30%, and, in several cases, over 40%. Please see Figure 3 to compare 1998 and five-year return on equity numbers for farmers and leading agribusiness corporations. Some explanation is needed regarding return on equity calculations for farmers. Net farm income (realized or otherwise) is not the same as corporate "net income" (also called "profit"). Corporate net income (profit) is calculated after everyone-workers, managers, and the CEO-is paid. In contrast, net farm income is calculated before any allowance is made for the labour or management contributions of farm family members. To calculate return on equity numbers for farms that are comparable to those in industry, one must subtract the estimated value of farm family labour and management from published net farm income numbers. Thus, return on equity is calculated as follows:

Total net income value of farm family labour and management

Capital - Debt

Other than the value of farm family labour and management, all the figures needed to calculate return on equity are included in Statistics Canada's Agriculture Economic Statistics (Cat. # 21-603). The challenge is to accurately estimate the value of farm family labour and management. This brief will leave that task to agricultural economists. As a proxy, this brief will use a crude but extremely conservative estimate: $30,000 per farm with sales over $100,000 (83,140 of Canada's 276,548 farms as of 1996 census) and zero for those farms with sales under $100,000.

Calculated using the formula and assumptions listed above, the 1998 return on equity rate for Canadian farms is 0.3% and the five year average is 0.7%. This rate is for all farmers. Although segregated data are not available, grain producers almost certainly earned large negative returns on their equity in 1998 and over the five-year average. Moreover, once economists generate a more precise and less conservative estimate of the value of farm family labour and management, it is almost certain that new calculations of farmers' returns on equity will show negative rates. Total "profit" (net income minus the value of f labour and management) for all farmers for 1998 was $366.8 million-$1,326 per farm.

It is intuitively obvious that grain, hog, and many other farmers earn near-zero or negative returns on equity. To have a positive return on equity, one must have profits. This means that there must be money left over after everyone is paid for labour and management. On many farms, one or both spouses work off the farm to buy clothes and food. Thus, it would seem that not only is there no money left over when everyone is paid for labour and management, but also that there is not even enough money to pay everyone for labour and management. If a business cannot even meet payroll, it surely has no profit and it surely has a negative return on equity.

These tiny or negative returns are unique to farmers. The other players in the chain reap large profits and, hence, high rates of return on equity. While the farmers growing cereal grains-wheat, oats, corn-earn negative returns and are pushed close to bankruptcy, the companies that make breakfast cereals reap huge profits. In 1998, cereal companies Kellogg's, Quaker Oats, and General Mills enjoyed return on equity rates of 56%, 165%, and 222% respectively.(24) While a bushel of corn sold for less than $4, a bushel of corn flakes sold for $133. In 1998, the cereal companies were 186 to 740 times more profitable than the farms. Maybe farmers are making too little because others are making too much.

In Canadian retailing, George Weston Ltd. (Superstore, Loblaws, Loeb, Provigo, IGA, SuperValu, Lucky Dollar, Extra Foods, The Real Canadian Wholesale Club, Your Independent Grocer, etc.) earned a 1998 return on equity rate of 37.3% and profits of $773 million. This one company's profits were double that of all Canadian farmers combined ($366.8 million: see three paragraphs previous). Its return on equity rate was 124 times higher than that of farmers.

In 1998, Campell Soup made a profit of $971 million and a return on equity rate of 76%. Philip Morris, the world's largest food, beverage, and tobacco company, earned $7.9 billion in profits and a 33% return on equity. Another processing giant, ConAgra (Butterball, Hunt's, Orville Redenbacher, Healthy Choice, Knott's Berry Farm, Wesson, barley malting, grain handling, input sales, etc.) made $901 million in profits and a 22% return on equity.

Some companies lose money and record negative return on equity rates in a given year. Recently, this has been the situation for some Canadian grain companies. In 1999, Sask. Wheat Pool lost $12.9 million (SWP's year end is July, 1999). This is not the norm, however. Sask. Wheat Pool's average return on equity for the previous five years (1994-98) was 7.74%. Unlike farmers, the huge agribusiness corporations that make up the bulk of the agri-food production chain consistently enjoy high and positive returns on equity.

Consumers pay trillions for food. The prices they pay increase each year. The corporations that make, transport, package, process, and sell the food make billions in profits. The corporations that make tractors, fertilizer, and pesticides make billions. There is no shortage of money in the agri-food system; there is merely a maldistribution of money. The farm income crisis is caused by that maldistribution, not by EU subsidies.

Agribusiness corporations earn 5%, 10%, 20%, and higher returns on equity. If farmers earned just a 5% return on their equity, Canadian realized net farm income would be $9.3 billion in 1999 instead of the projected $2.8 billion. Even a 3% return would largely solve the problem. If farmers enjoyed returns on equity comparable to those enjoyed by other players, there would be no farm income crisis.

Returns and market power

Firms wielding immense market power squeeze farmers from both sides. We will begin by looking at examples in the "downstream" side of the food chain. The market power of the retailers, processors, railways, and grain companies that dominate the downstream side of the agri-food chain allow them to take large and increasing portions of the consumers grocery store dollar and, hence, large profits. See Figure 4 below:

Figure 4: Wheat and bread prices: 1975-99

Source: Consumer Prices and Price Indexes, Statistics Canada Cat. # 62-010 and StatFacts 10.03, Saskatchewan Agriculture and Food.

Processors and retailers can reach into the food system revenue stream and extract very high returns. As their power increases, less money makes it back to the farm level. In 1975, 13% of the retail value of bread went to farmers; today, a mere 4% does. The farmers' decreasing share is a direct result of processors' and retailers' increasing market power. The farm income crisis is caused by these firms using their market power to take an ever larger share of the grocery store dollar and, thus, to choke off the flow of money to farmers.

Farmers are also squeezed from the other side by powerful input suppliers. When an abnormally large amount of money does make it back to the farm level, the large size and small number (the market power) of the machinery, fertilizer, and chemical companies that dominate the input side of the agri-food chain allows them to quickly draw those increased returns out of farmers' pockets.

During the 1994/95 and 1995/96 crop years, Canadian crop prices rallied. Wheat prices increased from $3.82 in 1993/94 to $4.66 in 1994/95 and $5.71 in 1995/96. Prices for corn, soybeans, and other crops increased similarly. Input suppliers moved quickly, however, to extract a very large portion of farmers' increased returns. Figure 5, below, charts wheat price increases and anhydrous ammonia (nitrogen) fertilizer price changes:

Figure 5: Wheat and anhydrous ammonia fertilizer prices: 1990-99

Sources: Alberta Average Farm Input Prices, Alberta Agriculture, Food, and Rural Development. StatFacts, 10.03, Saskatchewan Agriculture and Food

As grain prices moved up, fertilizer companies increased prices in step. Fertilizer companies priced according to what the market would bear and used their market power to extract increasing returns from farmers. Fertilizer prices rose 75% while the cost of producing it, mainly the cost of natural gas, remained unchanged. Companies in other input sectors raised their prices in a similar manner.

Since 1974, farmers have tripled their gross incomes and their net incomes have declined. The explanation begins to emerge when one learns that over the same period, farmers' expenses increased 4½-fold. Seen another way, since 1974, gross farm income has increased from $9 billion to $29 billion. Corporations which sell inputs used their market power to capture 100% of that increase.

The market power of retailers, processors, grain companies, and railways means that little money makes it back to the farm; the market power of chemical, fertilizer, seed, and machinery companies means that little of what makes it back, stays.

Hog farmers: a case study in the effects of market power imbalance

Canadian hog farmers have been hard hit by falling prices. The price decline began in October of 1998 and has continued over the past year. At its worst-November and December 1998-hog prices fell to $25/hundred pounds (cwt) (dressed weight) in Manitoba and $22/cwt in Ontario. These prices are down markedly from the $70-$90/cwt range for the same months in previous years.(26) While current prices have improved from their lowest levels, they remain below $60/cwt-far below the cost of production and $20 below recent averages.

Political leaders, many economists, and the media blame the hog situation on oversupply and the collapse of the Asian market. Figure 6, below, paints a more ambiguous picture. Canadian pork exports to Asia did decline, but they did so almost a year before the current price collapse. By the October 1998 beginning of the hog price crisis, exports had recovered significantly and have since risen to levels surpassed only by four months of record exports in 1997. 1999 exports are far above 1996 levels, yet prices are far lower. It is hard to believe that a relatively small change in Asian exports, a market that consumes just 7% of Canadian pork annually, could cause prices to fall far below anything seen in the last 23 years.

Figure 6: Canadian hog/pork exports to Asia: 1996-99

Source: Data provided on request from Agriculture and Agri-Food Canada: Trade Evaluation and Analysis Division.

Nor is the hog price downturn easily explained by looking at the retail price of pork. Figure 7, below, demonstrates that while hog prices have remained the same over the past 23 years, packers and retailers have used their market power to increase the price of pork chops to the consumer by over 200%:

Figure 7: Hog and pork chop prices: 1976-99

Sources: Consumer Prices and Price Indexes, Statistics Canada Cat. # 62-010 and Livestock Statistics, Statistics Canada Cat. # 23-603.

The current industrial pork production, processing, and distribution system is treating neither farmers nor consumers fairly. Farmers are forced to accept hog prices farm below the cost of production and consumers are asked to pay ever-increasing prices for pork.

Early in 1999, the National Farmers Union began working with its partners on a project called "Pork Links." In the midst of record-low hog prices, the Saskatoon Child Hunger and Education Program (CHEP), the Council of Canadians (C of C), and the NFU helped link family farm hog producers directly to urban consumers (many on low incomes). The program continues to grow and its economics are enlightening. Urban families can buy locally-grown pork at a 33% saving and rural families can sell hogs at twice market price.

Table D: Pork Links vs. commercial system

Commercial System Pork Links

Farmer's price $100-$120 $217

Processor (cut & wrap) unknown $80-$95

Retailer's share unknown n/a

The consumer pays $450 $307

The Pork Links program, like the comparison of grocery store pork and farmgate hog prices (see Figure 7, above), demonstrates that hog farmers are receiving a tiny and declining portion of the grocery-store dollar. If hog farmers had maintained the 30% share of the grocery-store dollar that they enjoyed in the 1970s, current hog prices would be $1.10- $1.20 per pound (versus the 22¢ to 60¢ farmers received over the last year) and consumer prices would not be a penny more than they are now. Seen another way, on the 21 million hogs marketed in an average year, a 30% share of the grocery store dollar would mean an additional $2.1 billion annually to hog farmers in increased farmgate returns.

Like the grain price downturn, analysts often point to an oversupply of pork and hogs as the cause of the past year's price declines. If we grant, for the moment, that oversupply was the cause, it is instructive to look at how the other links of the pork production and distribution chain fared during this alleged glut of pork.

Maple Leaf and Fletcher's are two of Canada's largest pork packing companies. The current pork price crisis began in the fourth quarter (Oct.-Dec.) of 1998 and continues today. Low prices have forced hundreds, possibly thousands, of Canadian farmers out of hog production over that time. The table below lists profits for Fletcher's and Maple Leaf:

Table E: Packer profits during hog price downturn (millions of dollars)

1996 Annual 1997 Annual 1998 Annual Oct/Dec 98 Jan/Mar 99 Apr/Jun 99 Jul/Sep 99 Past four quarters

Maple Leaf $42 $47 ($23) loss $19.2 $10.1 $23.3 $20.3 $72.9

Fletcher's $0.6 $6.1 $3.7 $4.2 $1.6 $(0.7) $1.2 $6.3

For the 12-month period of fiscal 1996, Maple Leaf made $42 million in profits. In 1997, it made $47 million. In 1998, it lost $23 million. In the most recent 12 months for which information is available (Oct. 1998 to Sept. 1999)-a period that overlaps the worst part of the hog price crisis-Maple Leaf earned record profits of $72.9 million.

In its first quarter (Jan.-Mar. 1999) report, Maple Leaf alludes to low pork prices as a significant factor in its profitability, stating: "Maple Leaf Pork benefitted from favourable commodity markets." In its second quarter (Apr.-June 1999) report, Maple Leaf notes that "Maple Leaf Foods International recorded excellent results due to strong demand from global markets, particularly in Asia." In its third quarter (July-Sept. 1999) report, Maple Leaf says: "The Meat Products Group and the Agribusiness Group both reported strong year-over-year earning increases." Maple Leaf's "Agribusiness Group" sells animal feed, including hog feed. In that same report, Maple Leaf also credits its profitability partly to "strong pork sales into Japan."

Similarly, Fletcher's Fine Food recorded profits of $6.3 million for the 12-month period that overlaps the hog price crisis so far. This significantly exceeds the average profit for the previous three years ($3.5 million). The $6.3 million in profit works out to a return on equity of approximately 7.7%.

However, Fletcher's management is not completely satisfied with its profits. Surprisingly, CEO Fred Knoedler cites "a shortage of hogs in Western Canada" as one factor holding back Fletcher's revenues and profits (November 10, 1999 news release). The hog price crisis becomes "curiouser and curiouser" when one learns that farmers are suffering due to hog surpluses and packers due to hog shortages.

The pain of the hog price crisis is not spread equally among all the participants in the hog/pork markets. Farm families wrestle with bankruptcy while packing plant stockholders enjoy record incomes. Record packer profits seem inconsistent with the contention that there is a glut of pork on the market or that export markets are closing. Record profits are, however, consistent with the contention that increasing market power allows packers to take lavish profits while, at the same time, pushing down prices to farmers and wages to workers. Canadian packers have also forced workers to take a 40% wage cut. The two main costs in a packing plant are pigs and people. Packers are getting their people 40% cheaper and their pigs up to 25% to 50% cheaper. Thus, record profits are not surprising.

Trade agreements such as the Canada-U.S. Free Trade Agreement (CUSTA), the North American Free Trade Agreement (NAFTA), and the World Trade Organization (WTO) agreement are designed, we are told, to level the playing field. A level field sounds desirable and fair. But is it sufficient?

Is a level field alone sufficient to give all players in the game an equal chance of scoring? What if some players are far larger and more powerful, perhaps a million times larger? The extreme imbalance in relative profitability obvious in the current agri-food system comes despite an increasingly level playing field. If the aim is to solve the farm income crisis and ensure that farm families and rural communities can survive and prosper, governments and others should focus, not on the tilt of the field, but on the size of the players.

By leveling the playing field, it is not just that the WTO and other trade agreements ignore the size of the corporate players. By erasing borders and globalizing markets, these agreements enable and encourage the already-dominant players to grow ever larger. Corporations merge and take over competitors in an attempt to "maintain global competitiveness." Canadian banks tried to do so; Cargill and Continental, Case and New Holland are doing so.

WTO negotiations hold few solutions for farmers. They will neither end subsidies nor solve the farm income crisis. They may level the playing field but at the same time they will craft rules that allow for, and encourage, larger, more powerful players. And these negotiations threaten the few protections farmers now have-marketing agencies and effective safety net programs. Corporate power is the cause of the income crisis: the WTO negotiations are aimed at vastly increasing that power. The effects on farm families are easily predicable.

Farmers have been forced to accept the vast majority of the risks in the food production chain-weather, commodity prices, insects, and market collapse-and have, at the same time, been largely excluded from participating in the profits. Because large, urban-based corporations take the profits before they can make their way back to farms and rural communities, those farms and communities are becoming poorer and less numerous. There were 430,522 Canadian farms in 1966. Today, only 276,548 remain. We falsely call this a crisis, as if it is an unintended consequence. In reality, low farm incomes and rural depopulation are integral parts of the agricultural market structure that corporate and elected leaders in Canada and around the world have created.

Traditionally, farmers relied on governments to regulate the marketplace. Unfortunately, the rapid increase in the size and power of agribusiness corporations has been accompanied by a marked decrease in governments' willingness to oversee or regulate the markets in which those corporations operate. Governments enthusiastically sign trade agreements which tie their hands at the same time that globalization has fostered an explosion in corporate growth, wealth, and power. Thus, having little market power and with politicians increasingly hesitant or unable to use political power, farmers have watched their incomes and prospects decline sharply over the last two decades.

If our Canadian government remains unwilling to consider the possibility that the markets are failing, that deregulation and privatization are hurting farmers, and that extreme imbalances in market power make reasonable farm profit unlikely, then the problems outlined above-the problems at the root and heart of the farm income crisis-are insoluble. Government may dole out taxpayers' money to replace farm income dollars snatched by powerful multinationals but this will be merely a delaying tactic at best. The Canadian government-if it continues to pursue policies that turn farmers over to unbalanced and dysfunctional markets-will preside over the end of the family farm, the depopulation of rural Canada, and the betrayal of generations of Canadians who worked the land and built the nation.

Most executives, journalists, economists, and politicians point toward false problems and encourage farmers toward false solutions. Farmers are encouraged to blame themselves, farmers across the border or across the sea, their marketing agencies, their own government, or foreign governments. Thus, farmers have dissipated their energies fighting among themselves, bewailing their governments, and attacking agencies which give farmers some power in the marketplace.

Those who argue that EU subsidies cause the farm income crisis are the most recent in a long line of those who invoke false problems in an attempt to deflect farmers toward false solutions. The real problem for farm families is an imbalance in market power and a resulting imbalance in the distribution of profits in the agri-food system. For 25 years, political and corporate leaders have succeeded in sabotaging farmers' attempts to understand and solve that problem. That must now change.

Respectfully submitted by the National Farmers Union

Appendix 1: World wheat and coarse grain stocks/use ratios:

CROP YEAR WHEAT STOCKS/USE RATIO % COARSE GRAINS STOCKS/USE RATIO %

1999/00 21.9 17.0

1998/99 23.0 17.6

1997/98 23.8 15.6

1996/97 19.1 13.8

1995/96 19.0 11.3

1994/95 21.6 15.9

1993/94 25.3 14.8

1992/93 26.6 19.6

1991/92 23.0 16.6

1990/91 25.8 17.3

1989/90 22.7 15.7

1988/89 22.9 19.2

1987/88 28.6 26.7

1986/87 34.7 29.5

1985/86 34.8 27.3

1984/85 34.0 18.7

1983/84 31.3 14.8

1982/83 28.8 24.5

1981/82 25.5 20.6

1980/81 25.7 17.1

1979/80 28.1 19.3

1978/79 32.6 19.0

1977/78 27.6 18.4

1976/77 34.1 17.1

1975/76 25.0 14.9

1974/75 22.8 14.8

1973/74 23.1 12.2

1972/73 21.3 13.3

1971/72 26.6 16.6

1970/71 24.4 14.6

1969/70 32.2 17.5

1968/69 40.4 18.4

1967/68 34.7 18.1

1966/67 32.0 16.5

1965/66 21.9 16.4

1964/65 30.6 20.9

1963/64 29.8 23.5

1962/63 31.5 22.5

1961/62 30.0 23.6

1960/61 35.9 25.4

Sources

1960/61-1964/65: PS&D View, United States Department of Agriculture, available online at:

http://usda.mannlib.cornell.edu/data-sets/international/93002/

1965/66-1996/97: StatFacts, Saskatchewan Agriculture and Food, 10.06 [StatFacts cites USDA]

1997/98-1999/00: World Agricultural Supply and Demand Estimates, United States Department of

Agriculture, January 12, 2000, www.usda.gov/oce/waob/wasde/latest.pdf

Appendix 2: Wheat, coarse grain, and total oil production: 1980-99

Page 7 contains comparisons of trendline wheat production changes for various countries for the period from 1980 to 1999. When one calculates a trendline for 1980-99 wheat production changes one finds that production is up 42% in the EU, 44% in Australia, 26% in Argentina, 11% in Canada, and down 7% in the U.S. [Please see Table A, page 7.]

As explained in the footnote on page 7, the trendline percentages change depending on the year one chooses as the start year for the trendline calculation. The selection of 1980 is, to some extent, arbitrary. It gives a long time period-20 years-but not so long that it confuses matters unduly by bringing major changes in technology into the equation.

The data in Table F demonstrates that where a start year other than 1980 is used, the subsequent numbers better serve to illustrate the point that production increases in the EU are matched or exceeded by non-subsidized countries.

For instance, if one looks at production changes on a trendline calculated over a ten-year (1990-99) period, EU production is up 14% while Argentina and Australia post increases of 39% and 84% respectively. Over any reasonable period that one could choose to measure relative production changes, EU wheat production increases are matched or exceeded by a significant number of non-subsidized countries. The same is true for coarse grains and total oils.

Table F: Percentage change in trendline wheat production using selected start years.

YEAR Canada TREND U.S. TREND Argentina TREND EU 15 TREND Australia TREND

1980 10.96% -6.93% 26.23% 42.05% 43.86%

1981 3.65% -7.32% 17.93% 37.75% 34.07%

1982 2.46% -2.33% 10.48% 30.40% 38.86%

1983 3.65% 4.07% 26.98% 25.74% 21.98%

1984 4.75% 6.59% 40.00% 20.35% 42.29%

1985 -2.11% 13.36% 61.93% 24.87% 59.07%

1986 -5.63% 18.75% 57.60% 23.06% 70.22%

1987 1.85% 17.50% 54.76% 21.13% 85.01%

1988 1.83% 16.08% 49.48% 17.60% 78.92%

1989 -16.95% 6.19% 39.16% 14.69% 81.46%

1990 -23.79% -0.55% 38.72% 13.62% 84.48%

1991 -19.53% 10.12% 43.78% 14.68% 94.28%

1992 -12.01% 0.79% 39.95% 20.47% 64.26%

1993 -4.02% 4.53% 32.14% 22.22% 71.60%

1994 1.11% 7.79% 18.26% 17.66% 83.81%

1995 -8.17% 9.24% 12.73% 11.18% 19.80%

1996 -15.30% 1.98% -24.71% 0.87% -2.76%

1997 2.98% -6.90% -14.95% 2.24% 15.87%

1998 2.46% -9.56% 10.43% -6.88% 7.14%

1999 0% 0% 0% 0% 0%

Those wishing to see the production data for these and other countries can visit the internet website: http://jan.mannlib.cornell.edu/data-sets/international/93002/ or contact the National Farmers Union.

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(1)

(Executive Summary) All sources and references provided in main brief

(1) Agriculture and Agri-Food Canada, Farm Income, Financial Conditions, and Government Assistance Data Book, January 2000 update: http://aceis.agr.ca/policy/epad/english/fi4cast/fiindx.htm Realized net income (as opposed to total net income or net cash income) is the most stable and accurate measure of farmers' net income.

(2) In provinces such as Ontario and Quebec, the income crisis for grain and hog producers has been statistically masked by the high percentage of farmers producing supply-managed commodities (milk, chickens, turkeys and eggs) and the relatively stable income those farmers enjoy. Those farmers are paid based on their costs of production and have largely been spared from the current income crisis.

(3) This paper deals with domestic subsidies, not export subsidies. Export subsidies have been dramatically reduced and, while still detrimental, are no longer a major feature of the agricultural trading system. The current debate centers on large domestic subsidies. So, too, will this paper.

(4) Saskatchewan Agriculture and Food, Federal Income Support for Saskatchewan Agricultural Producers, October 1999.

(5) All stocks/use data from United States Department of Agriculture (USDA). See Appendix 1 for a complete listing of stocks/use ratios.

(6) Reliable stocks use data is available from the United States Department of Agriculture going as far back as 1960/61 - 40 years. Before that, reliable data is unavailable from any source. Thus, while recent levels are the lowest recorded in the period for which there is reliable data, they may be the lowest over an even longer period.

(7) Note that "surplus" and "scarcity" are used only in the narrow economic sense. The author sets aside, for the moment, the hundreds of millions of children, women, and men who have died, and continue to die, despite large world food "surpluses"

(8) See note 6.

(9) Agriculture and Agri-Food Canada, Bi-weekly Bulletin, Sept. 4, 1998

(10) Wheat, course grain, and total oils production data courtesy of USDA. Data can be accessed at: http://jan.mannlib.cornell.edu/data-sets/international/93002/

(11) These numbers change depending on what year is chosen as the start year for the trendline calculation. The selection of 1980 is, to some extent, arbitrary. This interval gives a long time period-20 years-but not so long that it confuses matters unduly by bringing major changes in technology into the equation. Appendix 2 lists comparable trendline values for a range of possible starting years. Those who care to look at that appendix will note that in most cases where a year other than 1980 is used, the resulting numbers better serve to illustrate the thesis of this brief.

(12) February 4, 2000 net price at Saskatoon (AgPro) for immediate delivery was $5.33/bushel.

(13) The NFU was a founding member of the Via Campesina, an organization of farm and peasant organizations in 35 countries. For the past four years, the NFU has served as the North American region coordinator for the Via Campesina.

(14) Blaming low farm incomes on EU subsidies is just the latest case of politicians and others searching for false explanations. In the 1970s and 1980s, whenever farm incomes dropped, experts were ready with advice for farmers: expand, specialize, diversify, add-value, quit growing wheat, grow high value crops, embrace new technology, use marketing tools. The implication was that farm incomes were low because farmers were doing something wrong. Today farms are much larger, farmers are using global positioning system (GPS) equipment and computers, growing chickpeas and lentils, raising wild boars and fainting goats, using genetically-engineered seeds and high-tech seeding and harvesting equipment, value-adding, and marketing. For this investment and innovation they have been rewarded with the lowest net farm incomes since the 1930s. Since the stock of traditional excuses for low farm incomes has been exhausted, a new explanation was needed: EU subsidies. Canadian farmers are relieved: while politicians and others still blame farmers, at least they are blaming European, and not Canadian, farmers.

(15) U.S. and EU subsidy estimates courtesy of the Canadian Wheat Board. All figures in this paper in Canadian dollars, at a conversion rate of 68" to the U.S. dollar.

(16) Philip Morris claims that one dollar in ten spent in a U.S. grocery store is spent on Philip Morris products.

(17) Fertilizer Production Capacity Data: Canada, Canadian Fertilizer Institute, December 1999. Percentages based on 12,793 million tonnes of annual nitrogen fertilizer production capacity. This figure includes total production capacity of plants producing ammonia, urea, ammonium sulphate, ammonium nitrate, urea ammonium nitrate solution, and ammonium phosphate.

(18) "The Gene Giants," Rural Advancement Foundation International, Communiqui, 3/30/99.

(19) "The Gene Giants," Rural Advancement Foundation International, Communiqui, 3/30/99.

(20) "Survival of the fittest", Alan Dawson, Manitoba Cooperator, April 22, 1999: p. 1.

(21) Data collected by Jim Bateman for the Manitoba Department of Agricultural Economics. Available on request.

(22) Dr. William Heffernan, Consolidation in the Food and Agriculture System, February 5, 1999: p. 17.

(23) Note that when one large corporation deals with another, their market power is relatively balanced-Philip Morris can negotiate on equal footing with Cargill. Where corporations can exert their tremendous market power to their advantage is when they deal with a large pool of relatively small and unorganized suppliers or buyers: in the food system, this means farmers or consumers. This helps explain the attraction of "farm gate to dinner plate" vertical integration to corporations like Archer Daniels Midland, ConAgra, and IBP. If these corporations can buy from the farmer and sell to the consumer, they need never deal with another powerful multinational. They can use their market power against farmers at one end and against consumers at the other. While their integration is not yet complete-they still must deal with food retailers at one end-it is clear that these corporations are attempting to vertically integrate to minimize their transactions with powerful multinationals like themselves and to maximize their transactions with farmers and consumers where they can use their market power to best advantage.

(24) "Fortune 1000 Ranked Within Industries," Fortune, April 26, 1999: p. F-58.

(25) Farmer's net in Saskatoon. Source: Saskatchewan Agriculture and Food, StatFacts. 10.03.

(26) Hog prices from Livestock StatisticsLivestock Statistics, Statistics Canada Cat. # 23-603.

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Three University Agriculture Economics professors, Dr. Hartley Furtan from the University of Saskatchewan, Dr. Daryl Kraft, from the University of Manitoba, and Dr. Ed Tyrchniewicz, University of Alberta have written a report measuring the benefits of the Canadian Wheat Board and single-desk selling. They looked at the marketing of Canada Western Red Spring (CWRS) from 1980/81 to 1993/94.

Specifically, the study addressed:

How well the CWB did in comparison to the U.S., EU, Argentina and Australia, calculating

the value of the Canadian Wheat Board monopoly,

How the Canadian Wheat Board compares in marketing costs, and

How the CWB has fared in a rapidly changing world trade environment using Brazil as a test case.

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Canadian Wheat Board delivers a premium to producers.

The Canadian Wheat Board, through its single-desk marketing, can extract a premium for western Canadian wheat. The CWB was able to give farmers an average premium of $13.35 per tonne or $265 million per year, from 1980/81 to 1993/94.

During 1985/86 to 1993/94, after the U.S. Export Enhancement Program was introduced, that premium increased to $28.39 per tonne. At the maximum EEP, the CWB extracted a premium of $36.39 per tonne. (see Table 1)

The premium linked to single-desk selling increases when export subsidies are in use because a single-desk seller can price to market. Nearly half of the buyers were not eligible for subsidies, and therefore the Canadian Wheat Board could extract a higher price from them than from the countries where the buying price is depressed by subsidies. Multiple sellers would not be able to 'price differentiate', and would not be able to extract a premium in non-subsidized markets. With multiple sellers, the stree t price would reflect the lowest price being offered anywhere at that time.

The Study notes that "under a dual market with multiple agents, the premiums identified earlier would not exist."

Canadian Wheat Board markets grain at a low cost.

The Canadian Wheat Board can borrow at government rates, allowing it to minimize the cost of grain marketing. It notes that the risk management costs per tonne (marketing costs) were $3.85 per tonne. From 1980/81 to 1993/94, the average risk management costs for flax and canola were $17 per tonne and $19 per tonne. The report estimates the CWB saved farmers at least $5.53 per year in marketing costs.

Since 1985, the Canadian Wheat Board has delivered western Canadian farmers an extra $34.00 to $41.00 per tonne. For a producer with 1000 acres of wheat, that can mean as much as an extra $41,000 in income per year.

The CWB has been able to retain market share in Brazil, while the U.S. has been squeezed out.

The report states: "The single-desk selling system in Canada is viewed as something that facilitates transactions and is regarded by Brazilian buyers as a key to the confidence and reliability of purchasing wheat from Canada."

Brazil has moved from a centralized buying agency to a free market over the past twenty years. In that time, Canada has been able to maintain its 20 to 25% of the Brazilian market, whereas sales from the U.S. have fallen to negligible levels.

Table 1

CWB Premium on Export Sales of 1,2 and 3 CWRS

Pool Competitive Average Maximum

Year Markets (1) EEP (2) EEP (3)

1980-81 16.93 - - - -

1981-82 13.36 - - - -

1982-83 12.86 - - - -

1983-84 9.10 - - - -

1984-85 8.86 - - - -

Average (80-85) 12.22 - - - -

1985-86 13.58 13.58 13.58

1986-87 12.80 27.51 32.12

1987-88 15.18 30.08 39.72

1988-89 21.25 31.94 36.16

1989-90 14.68 24.51 32.01

1990-91 12.49 25.66 34.42

1991-92 10.10 35.65 43.36

1992-93 13.70 35.91 53.77

1993-94 12.39 30.64 42.34

Average (85-94) 13.94 28.39 36.39

1. Competetive Market premium = estimated premium the CWB received relative to the

U.S., E.U. and Argentina.

2. Average EEP = (CWB price) versus (U.S. commerical price less the ave. EEP)

3. Maximum EEP = (CWB price) versus (U.S. commercial price less the maximum EEP)

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Some groups have argued that the study attributes the quality premium to the Canadian Wheat Board single-desk selling. The National Farmers Union would like to note the Canadian Wheat Board reaps those quality premiums because it can assure high, consistent quality by being a single-desk seller. This involves blending for consistent quality, and implies the need for a large sourcing area.