The ACRE program: a disaster in waiting

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  • The ACRE program: a disaster in the waiting #FarmBill

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  • The ACRE program is a Pandora's box invitation for countries to file WTO complaints against the U.S.

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  • ACRE program is a federal budget nightmare because it creates potential for payments that could amount to $10 billion/year

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The ACRE Program: A Disaster in Waiting

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Introduction

The US Average Crop Revenue (ACRE) program was introduced as part of the 2008 Farm Bill. ACRE was marketed as a farm revenue safety net program, but in reality ACRE payments are largely driven by decreases in agricultural commodity prices from recent levels. As a result, the ACRE program is much more likely to generate subsidy payments for farmers of major crops like wheat, corn, and soybeans than the Countercyclical Payments program (which was introduced in the 2002 Farm Bill) or the long-standing loan rate price support program for which it currently substitutes. In fact, the ACRE program has the potential to be a federal budget nightmare because of the potential it creates for frequent and large subsidy payments that could amount to as much as $10 billion in some years and average as much as, or more than, $6 billion a year. The congressional deficit-reduction super committee should therefore pay special attention to the budgetary risks posed by Farm Bill initiatives that place ACRE, or ACRE-like programs like the recently proposed Agricultural Risk and Revenue Management (ARRM) program, at the center of a new and "reformed" US farm program in place of the $5 billion subsidies that farmers currently receive through the Direct Payments program.

In addition to having the potential to be a major fiscal problem, the ACRE program also could be a serious problem with respect to US commitments under the provisions of the 1994 Marrakesh agreement that established the World Trade Organization (WTO) and introduced a specific agreement on agricultural trade and domestic policies. The likelihood of future large ACRE program subsidy payments could create issues for the United States in terms of its commitments with respect to the current commodity-specific and overall levels of domestic supports (called "amber box" aggregate measures of support).

A more serious WTO problem is associated with the inherent structure of the ACRE program, which violates underlying commitments made by developed countries to refrain from introducing new programs that tie subsidy payments directly to current price and output levels. In addition, in periods when market prices for the subsidized commodities are declining, other countries are likely to file WTO complaints about serious prejudice under Article 6 of the WTO Agreement on Subsidies and Countervailing Measures (SCM) on the basis that the ACRE program is contributing to "price suppression," lowering world prices, and adversely affecting their farmers. Such arguments would indeed be warranted.

The case histories associated with WTO disputes over price suppression resulting from domestic subsidies like ACRE that are tied to current production and market prices (especially the "Brazil cotton case") strongly suggest that plaintiffs are likely to be successful and, as a result, the United States will be subject to more trade penalties. Those penalties can take the form of countervailing trade restrictions on other sectors of the US economy (typically export sectors) as well as the agricultural sector. Alternatively, they can generate absurd "Alice in Wonderland" compromises through which US taxpayers fund programs, to the tune of $147 million a year, that improve the global competitiveness of Brazil's cotton producers because American cotton producers insist on continuing to receive (and Congress insists on providing) subsidies that violate US WTO commitments.

The ACRE program is an expensive taxpayer liability. It is also a Pandora's box invitation for other countries to successfully file WTO complaints against the United States that will damage US global trade relations and cost firms producing agricultural and many other commodities access to important export markets. On both grounds, the ACRE program needs to be terminated as soon as possible and should under no circumstances be replaced by look-alike programs.

Vincent H. Smith is a visiting scholar at AEI and Barry K. Goodwin is the William Neal Reynolds Distinguished Professor in the Departments of Economics and Agricultural and Resource Economics at North Carolina State University

 

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About the Author

 

Vincent H.
Smith
  • Vincent H. Smith is Professor of Economics in the Department of Agricultural Economics and Economics at Montana State University and co-director of MSU’s Agricultural Marketing Policy Center. He received his Ph.D. from North Carolina State University in 1987 and his bachelor’s and master’s degrees from the University of Manchester in 1970 and 1971. Dr. Smith’s current research program examines agricultural trade and domestic policy issues, with a particular focus on agricultural insurance, agricultural science policy, domestic and world commodity markets, risk management, and agricultural trade policy. He has authored nine books and monographs and published over 100 articles on agricultural and other policy and economic issues. His work has been recognized nationally through multiple national awards for outstanding research programs. In 2008, he became a Distinguished Scholar of the Western Agricultural Economics Association. Currently he is a Visiting AEI Scholar and co-director of AEI’s agricultural policy initiative. Dr. Smith is married and he and his wife, Laura, have two children, Karen and Meredith.
  • Email: uaevs@montana.edu
  • Assistant Info

    Name: Neil McCray
    Phone: 2028625826
    Email: neil.mccray@aei.org

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