Washington Insider - Monday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

EPA Inspector General Report Could Provide Basis for Greater Regulation of Farm Runoff

The Environmental Protection Agency's inspector general last week released a report on the agency's continuing problems with trying to reduce the size of the annual "dead zone" in the Gulf of Mexico. The dead zone technically is called the "hypoxic zone," an area of the Gulf with low oxygen levels caused by the rapid growth of algae that is the result of excessive amounts of nitrogen and phosphorus carried into the Gulf by the Mississippi and Atchafalaya rivers.

These nutrient discharges are known to arise mostly from agricultural sources and to a lesser extent from industrial and municipal sources. The U.S. Geological Survey attributes 70 percent of the nutrients that enter the Gulf of Mexico to agricultural activities.

The IG's report recommends a better system to monitor and track progress in reducing nutrient discharges into the two river systems as well as "a uniform and comprehensive measurement and accountability system for setting goals and tracking progress at the state and watershed level."

What this means in practice remains to be seen. But it is becoming increasingly apparent that EPA will be focusing more intently on farm fertilizer runoff in the Mississippi River watershed in the future. Given that this watershed is one of the world's largest, reducing runoff will be a formidable task and one likely to affect a large segment of the U.S. Farm Belt.

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House Republicans Plan Continuing Resolution to Keep Government Funded

Congress returns today from its five-week summer recess, and many observers believe members will not want to spend much time in Washington before being turned loose to return to campaigning. For that to happen, much of the activity over the next couple of weeks will be somewhat streamlined, something unusual for the 113th Congress.

Last week, House Majority Leader Kevin McCarthy, R-Calif., told Republicans that he plans for the House to pass a simple continuing resolution in September to ensure there is no government shutdown this fall. A CR is intended to continue government spending in fiscal 2015 (which begins Oct. 1) at approximately the same levels as in the current fiscal year until Congress approves more specific new appropriations bills.

In his memo to lawmakers, McCarthy suggests that the CR that comes to the floor will extend current federal spending for most government programs until the post-election, lame duck session, rather than into 2015.

Aides in both chambers said they expect the House will take up the measure first, likely within just days of returning to work today for what is expected to be roughly a two-week session.

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Washington Insider: CRS on Trade Issue for Congressional Oversight

The Congressional Research Services recently suggested to Congress that it might want to "continue monitoring the effect of farm bill policy changes on Brazil's World Trade Organization case against U.S. cotton subsidies." The reason, it said, is that it is still "unclear" whether the policy modifications in the new Act will satisfy Brazil and support a settlement of the long-lingering cotton case.

CRS noted that "trade press reports indicate that Brazil is not satisfied" with the U.S. cotton policy reforms and that the United States has "signaled" its willingness to pay Brazil additional compensation to definitively end the dispute. However, these reports also suggest that the two countries "differ on the amount of compensation required to resolve the matter," CRS said.

In the recent farm bill debate, advocates of the new program "sought to address the results of Brazil's 2002 challenge of U.S. cotton programs and the GSM 102 export credit guarantee program available to a range of agricultural commodities" –– a case which Brazil won. Over the years, as the United States declined to make program changes to Brazil's satisfaction, the WTO authorized Brazil to impose $829.3 million in trade retaliation, but those sanctions that were suspended under a 2010 framework agreement that included large annual payments to the Brazilian cotton industry.

The 2014 Act did fundamentally change the earlier cotton programs by repealing direct payments, countercyclical payments, and the Average Crop Revenue Election program, CRS says and it offered a new crop insurance program for upland cotton –– the Stacked Income Protection Plan.

CRS says this shift in primary supports from payments to crop insurance was advocated in part because the original WTO panel did not find crop insurance payments as a cause of serious prejudice to Brazil's interests. "No necessary causal link between the crop insurance program and significant price suppression was shown," the report says.

Still, observers say that the CRS suggestion about monitoring potential fallout from the still unresolved cotton case is not surprising since industry representatives from Brazil have sharply criticized the new program as highly protectionist.

In fact, Brazil is still said to be considering an "evaluation" of the new subsidized insurance programs for a variety of crops in terms of their potential consequences for Brazilian producers and their markets.

Observers also note that while the threat of massive sanctions against U.S. exports makes exporters from many industries very nervous, it also makes many Brazilian consumers nervous as they depend on these imports –– and, so they were willing to enter into a temporary payments deal to give the United States time to change the law.

Thus, CRS is right to suggest that the situation is highly complex and should be monitored closely by Congress. Brazil appears to think it still is in a strong position to push back against what it claims are even more protectionist U.S. programs –– even though those that caused the problem in 2002 are now gone. However, Brazil apparently is not eager to use its heaviest artillery, the $829 billion in sanctions that can affect Brazilian prices.

Similarly, the United States wants to avoid angering the politically powerful U.S. cotton industry to the extent it is willing to consider, apparently, continuing a system of embarrassing payments rather than try to modify the new programs to meet Brazil's demands.

None of this is news to any of the participants, and hasn't been for a long time. Perhaps the most important unknown is how willing Brazil is to push back broadly against the new farm bill programs, including cotton –– a decision that would take considerable courage, but which could change the dynamics of U.S. policies.

So, the cotton case continues to have implications for producers and should be watched carefully as this confrontation drags on, Washington Insider believes.

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