How can lower loan rates help
U.S. agriculture compete for ex
port markets if our competitors
continue to subsidize their own
producers?
The answer, say many
economists, is that lower loan
rates will help discourage these
subsidies, according to a recent
issue of the Agriculture Depart
ment’s FAKMUNE magazine.
To follow this line of reasoning,
you have to recognize that U.S.
loan rates have an impact far
beyond the domestic market. U.S.
loan rates set a price floor that can
reduce the subsidy burden on
many foreign competitors,
allowing them to undercut our
prices at a relatively low cost a
cost they can afford. In recent
years, the price floor provided by
our loan rates has been high
enough to give even many of the
less efficient agricultural
producers abroad an incentive to
increase production.
The U.S. government was, in
effect, accepting part of the cost of
these foreign subsidies, says
economist Keith Collins of USDA’s
Economic Research Service.
Foreign governments could
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Will Lower Loan Rates Boost Exports?
’ S2?tiS h JISL“ Sl,r “ C 1 will recognize that ttey’U have to 1
„ exp ®f. ure share the consequences of larger
limited by U.S. actions. The U.S. production
l°ir n^ W ! Uld P 01 - The assumption is that many of
market, buying up its fanners these subsidies will become so
wbenever P nces to expensive, so unaffordable, that
ateS- . . the United States is likely to face
f i° rei au P rodac ‘ less competition for markets in the
tion cut mto U.S. sales, the greater j ong
Ifni AT a “ umula , ted b y«? e This is one of the assumptions
hcy P ? rtly implicit in the 1985 farm bill,
shielded foreign producers from Although its validity can only be
the pnce consequences of their tested with time, there has already
own nsmg output been at least one positive response,
c No More Guarantee says Collins. “Canada recently
So what happens if we continue announced substantial reductions
to lower the “guaranteed” price from 1985 in the init i a l prices it will
floor, aUovnng our pnces to adjust pay f arm ers for 1986 wheat and
to market demand. To the extent barley. The Canadians could have
that foreign producers have higher chosen to keep prices up but
costs of production and are less not »
efficient than our farmers, and Another promising sign: recent
that is often the case, we can make declines the value of u s
these subsidies very expensive to dollar on international currency
our competitors, Collins says. markets. These declines make it
To maintain the production r gjj the more likely that the new
incentive, foreign subsidies must price suppo rt policies will succeed
nse as world market pncesMl. stim^ of
e J C w COmeS r dCnt American commodities. The lower
Umted States won t pnce itself out va i ued dollair makes our exports
of the market, or buy up the more competitive and less ex
world s surpluses to support jjensive for foreign buyers whose
pnces, other producmg nations currencies have appreciated
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against the dollar. Similarly, it
lowers the farm prices facing
producers in those competing
countries whose currencies have
appreciated.
Potential Drawbacks
But there are potential risks to a
more aggressive U.S. export
policy, especially in the short
term, adds Collins. Nations may be
tempted to respond by retreating
into protectionism or by
threatening trade wars. There are
also costs to American agriculture
in maintaining a competitive edge
in a more open world market, costs
in terms of resource adjustments,
risks of wider price swings, and so
on.
In addition, Collins points to tlie
potential for mixed signals that
may come from U.S. acreage
reduction programs. These
programs, he says, have
represented an American com
mitment to eliminate surpluses
and raise prices by restricting U.S.
production. The future possibility
of higher prices and the promise
that the United States won’t
unleash its full production capacity
whenever surpluses start rising
may weaken efforts to induce our
competitors to curtail their own
excess production capacity.
The willingness of the United
States to continue to pay for
acreage reduction programs and
Lancaster Farming, Saturday, August 16,1986-E35
for the maintenance of any surplus
stocks may bring the issue of
foreign subsidies down to the
question of “who’s got the deepest
pockets,’! says Collins.
Finally, there is uncertainty
related to the reaction of importing
nations. As a group, these nations
have shown considerable growth in
self-sufficiency over the last
decade. One motive was to protect
themselves from sharp, periodic
price stability to the market.
Lower loan rates mean a “greater
opportunity for price instability,’’
Collins explains. This may en
courage some importing nations to
continue their efforts to reduce
dependence on world markets.
“We don’t know the final out
come of our new, market-oriented
farm policies, and I don’t expect to
see most of our export competitors
actually cutting back on produc
tion,” says Collins. “What I do
expect, however, is a slower rate of
expansion in foreign production by
both importers and major ex
porters.”
In his view the more competitive
stance puts the United States in a
position to take advantage of
renewed growth in world demand,
when it comes. “In essence, our
ability to expand production
greatly, at low cost, sets us up to be
the major beneficiary of future
increases in global trade,” he
contends.