Washington Insider -- Wednesday

By DTN's Washington Insider

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

Congress Still Consideration Reauthorization of Surface Transportation Board

Congress may take up legislation in the coming lame duck session that would reauthorize the Surface Transportation Board for another five years. The Senate Commerce, Science and Transportation Committee has approved the legislation, and the Congressional Budget Office estimates the cost of the proposed reauthorization at $164 million over five years (2015-19), an amount that shouldn't raise too many concerns on Capitol Hill.

The board's main responsibility is to regulate the nation's railroads, including the resolution of railroad rate and service disputes and the review of proposed railroad mergers. Prior to 1995, the board was known as the Interstate Commerce Commission.

Whether Congress will move on this once-routine matter during the lame duck session later this month is not clear at this time. When the Senate committee approved the measure, a number of panel members expressed concerns about some aspects of the bill and indicated they expected changes to be made before the proposal moved to the Senate floor. Add to that the fact that slow rail service has been reported by numerous media outlets over the past several months, and it may well be that members of Congress will want to take a longer look before agreeing to the reauthorization.

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Chesapeake Bay Cleanup Could Take Decades

Intensified and continuing pollution in the Chesapeake Bay watershed could outstrip efforts to substantially reduce nutrient and sediment pollution to the bay, according to the findings of a new report prepared by the U.S. Geological Survey and the University of Maryland Center for Environmental Science.

The six states that share the bay watershed have pledged to implement by 2025 all policies and practices necessary to reduce nitrogen, phosphorus and sediment loading to levels that the ecosystem can handle. The states are mostly on track to meet an interim 2017 goal and water quality monitoring is seeing some improvements.

Complicating matters is the lag time between implementation of pollution-reducing practices and major water quality improvements. For example, on average, 50% of excess nutrients quickly wash off land into streams and rivers. But the other 50% gradually filters into groundwater, a process that takes an average of 10 years to reach streams and rivers. But the process can take as long as 50 years, according to the study.

So much excess phosphorus currently is in the soil of the agricultural area east of the bay where the Eastern Shore's chicken industry is located that water quality improvements will take 20 years to 30 years for groundwater-based pollution to be eliminated — if and when the land application of manure and phosphorus fertilization ends, according to the study.

Timelines that go out decades inject a new level of uncertainty for farmers in the six-state Chesapeake Bay watershed. If pollution abatement efforts undertaken today may not bring about a cleaner estuary for 10 to 50 years, it could take generations of agricultural producers to come and go before positive results are measured, if they take place at all.

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Washington Insider: Scrutiny for New Dairy Program

Among the controversial program shifts in the new farm bill is a Dairy Margin Protection Program, intended to supplant the New Deal era purchase programs that have been in place for decades.

The program is extremely complex and focuses on margins rather than milk product prices. During the debate, it was largely stripped of a program of "supply control' incentives expected to limit costs by pulling back production in periods of weak prices. Nevertheless, it replaces programs that were clearly reducing the competitiveness of U.S. products in some markets.

Still, the program has come under fire from some quarters on the grounds that program payouts are "likely to be frequent and may be very substantial," according to Prof. Colin Carter, a well-known ag economist at the University of California-Davis. Other economists agree. "Should dairy margins fall to the levels of 2009 and 2012, indemnities to dairy farmers could reach $5 billion, according to University of Wisconsin analysts.

Expenditures at that level not only would mean sticker shock for U.S. budget hawks but also could be contrary to current U.S. trade commitments and could "adversely affect the ability of the United States to negotiate new trade agreements (such as through the Trans Pacific Partnership initiative)," Prof. Carter wrote in a recent issue of Choices magazine.

"When dairy margins drop, government payments will be exponentially larger than under the previous legislation," he said.

The National Milk Producers Federation, which helped develop the program that Congress enacted, disagrees and accused Carter of lack of analytic substance. The organization said his criticism failed to cite chapter and verse on World Trade Organization provisions.

However, Carter asserts that WTO members such as New Zealand, "who have a comparative advantage in dairy exports, could challenge the U.S. meld of a subsidy and an insurance program." The scheme could be vulnerable under either the WTO Agreement on Subsidies and Countervailing Measures or through antidumping and countervailing duty laws, he wrote.

Carter's thesis is based on the hypothesis that if a significant spike in prices of corn or other dairy feed triggered "a big subsidy payout to U.S. dairy farmers, then export prices would be lower than domestic U.S. milk prices inclusive of the subsidy." He cited a 1999 decision by the WTO that Canada's dairy exports received implicit export subsidies from its supply management program and concluded, "It is plausible that the new U.S. dairy subsidies could be similarly viewed as constituting an export subsidy even though payments are tied to a dairy's recent historical production rather than current year production."

Dairy farmers are now considering whether to sign up for the new program at local USDA offices and pay a $100 fee to guarantee payments if the national average margin between milk prices and feed costs is below $4 per hundredweight of milk sold. Producers can protect a margin up to $8/cwt. for a higher premium. Industry experts say there are concerns that many producers do not understand the program's complications and may be reluctant to enroll as a result.

Carter called the new dairy program an example of a trend that began with the 1996 farm bill. Whereas the European Union and Japan have reduced trade-distorting support, the 2014 farm bill "not only expands subsidies paid to U.S. farmers but also ties those subsidies more directly to recent and current production and market conditions and, therefore, makes them more production- and trade-distorting," he wrote.

While it is unlikely that the current controversies over farm bill provisions will lead to changes in the near term, they are raising questions regarding longer-term implications including program cost and the possible effects on trade policy of the main subsectors — important issues, in spite of the fact that they have been somewhat in the background of the recent debate. However, they seem likely to come into sharper focus as commodity prices return to more traditional levels following the current bumper crops, Washington Insider believes.

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(GH/CZ)

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