ABSTRACT

Direct U.S. agricultural commodity payments are projected to remain near the $20 billion per year level over the next five years. Domestic subsidies have been under intense scrutiny worldwide. In particular, U.S. cotton subsidies have been widely criticized, culminating in a 2003 formal challenge to U.S. cotton policy under the World Trade Organization. Critics claim that U.S. commodity payments have caused overproduction which has caused domestic prices to plummet. Given the United States’ role as a price leader, farmers worldwide have been hurt by low world prices. Critics further claim that eliminating U.S. direct payments would cause planted acreage to decline and would result in rising U.S. and world prices. This paper addresses these claims. Results of a simulation using the POLYSYS model of the U.S. agriculture sector are presented showing that eliminating all U.S. agricultural subsidies results in minor changes in aggregate crop acreages and prices in the U.S. by 2011. There may be more significant acreage adjustments for individual crops, in particular cotton and rice, but a policy of subsidy elimination would not result in appreciable or timely production responses in the aggregate, which is the appropriate level for evaluating such policy alternatives. These results are supported by a simulation conducted by IFPRI using the IMPACT model to estimate the worldwide impacts of removing all direct subsidies and protectionist measures in all developed countries. Results indicate that crop price increases by 2020 would be less than three percent under the subsidy elimination scenario. Of particular importance in evaluating policy alternatives is an explicit recognition of the nature and behavior of agricultural markets and the consideration of aggregate policy impacts.