Last year Brazil won a WTO ruling on cotton against the US. Simply put, the ruling established that US Farm Bill sanctioned government payments to cotton producers distorted world trade and prices to the detriment of Brazilian cotton producers. Now US corn producers may be facing a similar fate.

In August of this year Canadian Corn Producers started a process that includes: (i) a request to the Canadian government to add US grain to the list of products targeted for retaliation by Canada that could result in possible punitive measures (surtax); (ii) a request to the Canadian government to commence WTO dispute settlement procedures regarding the illegality of US government payments to corn producers; and (iii) the filing of an anti-dumping and trade remedy complaint under the Canadian Special Import Measures Act (SIMA).

In November 15, the Canadian International Trade Tribunal (CITT) made the preliminary determination that that there is a reasonable indication that the dumping and subsidizing of unprocessed US corn have caused injury to Canadian corn farmers. A similar determination from the Canadian Border Services Agency (CBSA) is expected soon, and it could lead to the imposition of substantial provisional duties on the importation of US corn.

Simply put, the major argument of the Canadian Corn Producers is that Canadian producers have been facing the combination of artificially low-prices and competition from subsidized US corn. They go on to say that, absent US subsidies, Canadian corn producers are competitive in price and quality. They argued that the elimination of the supply management mechanisms in the US and the increased government support have created the oversupply that resulted in the US dumping prices they face.

In reaction to the Canadian Corn Producer’s complain, the National Corn Growers Association, US Grains Council, and Corn Refiners Association, indicated that “Canada has been expanding livestock, ethanol and corn processing industries that rely on US corn.” In this response one can see the struggle between farmers and agribusiness in accruing the benefits from trade liberalization. One needs only to add the word cheap before US corn in the statement above. The users of grains – not consumers like you and me—are the beneficiaries of the below the cost-of-production, subsidized, US corn.

The response of the Canadian livestock industry is also compelling, “we fully understand the problems corn producers are facing” said Canadian Pork Council (CPC) Vice President. However, imposing the additional tariff to US corn would result in higher prices for the feed used in the production of hogs. and even if they are justified the measure would create a “tremendous imbalance” because producers in the US would still have feed costs based on the low priced corn. So the proposal of the CPC is for the Canadian government to offer compensatory payments to corn producers, rather than the surtax on US corn imports.

To make matters more interesting, Manitoba Pork Council General Manager warns, “The long term fear is that, if the cost of production for the feeder pig business rises and producers start to sell their animals into the U.S. market at below their cost of production, we’re exposing ourselves to the potential for an antidumping suit being brought by the National Pork Producer’s Council in the United States.”

This series of exchanges show very clearly the extraterritorial impacts of our domestic agricultural policy, as well as the complexities of the trade implications. First, our policy of producing grains at below cost of production, allows local users of corn to accrue the benefits of that subsidy. Second, many domestic corn producers in the US are still in farming despite the low priced corn, thanks to support provided by government payments. Next, corn price at below the cost of production is reducing the income of farmers abroad, but it is also that same subsidized corn that is sustaining the development of economic activity based on cheap imported corn as in this case in Canada.
This added complexity brought by the role of the Canadians Pork Producers is one of the elements that sets this corn case apart from the cotton case won by Brazil. Another difference is that while Brazil’s challenge to cotton put subsidies at the center stage, the Canadians are also including in their rationale – in addition to the subsidies – the impact that the elimination of supply management has had on the drop in prices.

Knowingly or not, the Canadians have touch the heart of the matter of commodity prices. Even in the absence of any subsidies, in the short and medium term the price of corn is unlikely to reflect the cost of production. Only after long adjustment in the value of land in the US would commodity prices reflect the actual cost of production. But this will happen not because production has decreased and overproduction disappeared, but because the cost of land dropped, and therefore the same low price corn is now in line with the cost of production.

It should not be difficult to understand that farmers going out of business is not equivalent to assets moving out of agriculture. Farmers may go bankrupt but cropland will remain in agriculture, and will be taken over and kept in production by more economically efficient producers, continuing the process of the concentration of land in the hands of fewer farm operators.

This is the structural failure that exists in agriculture, especially in commodity markets. There is the unrealistic expectation that if markets are set free of government intervention, the resulting outcome would be higher prices and reasonable returns and income for agricultural producers. To manage the market inability to produce socially acceptable prices is the reason we had commodity policies in the US, and should also be the base of the future policy.

A system that manages the utilization of the ever expanding production capacity of agriculture in order for supply to respond to the needs of the market demand seems the ideal tool to manage or avoid challenges like the ones we have seen from Brazil and may see from Canada. In many economic sectors, the process of adjusting production to the realities of the market is part of
the normal modus operandi of business practice. A trading system that recognizes and incorporates this reality would be an effective mechanism to level the playing field in agriculture. DTU