US dumping agri-commodities, hurting farmers worldwide

A new NGO report has shed light on the massive extent of agricultural dumping perpetrated by the US, demanding an end to what it calls “a gross distortion of commodity markets” that is undermining the livelihoods of small farmers everywhere.

by Chakravarthi Raghavan

GENEVA: The United States is dumping five primary farm commodities on international markets, in violation of World Trade Organization (WTO) agriculture rules, hurting farmers in the US and the world over, says a new report by the Minnesota-based Institute for Agriculture and Trade Policy (IATP), an activist US non-government organization.

The report was published just ahead of the circulation on 17 February by the chair of the special sessions of the WTO Agriculture Committee Stuart Harbinson of his “first draft” paper on modalities in the ongoing negotiations on reforming agriculture trade.

The IATP report, “US Dumping on World Agricultural Markets: Can Trade Rules Help Farmers?”, is by Mark Ritchie, Sophia Murphy and Mary Beth Lake. It looks at the cost of production of corn, soybeans, cotton, wheat and rice, and compares the costs to the prices at which these commodities are sold on international markets.

In all cases, the commodities were sold below the cost of production, and this “export dumping” is the most damaging of all current distortions in world trade practices, says IATP. The dumping begins right here at home, at the farmgate, where farmers are selling their crops for prices up to 40% below their cost of production, says the IATP report.

“The dumping of commodities on international markets hurts farmers all over the world, including US farmers, by driving down the marketplace price,” said Mark Ritchie, IATP President. “There are international trade rules to address this problem. They need to be enforced.”

The US is a leading voice in deploying “trade remedies” of anti-dumping rules and insists these are a necessary protection against trade partners engaged in “unfair trade.” However, when it comes to agriculture, the US shows no interest in tackling its own policies promoting dumping.

Damaging dumping

Using data from the US Department of Agriculture (USDA) and the Organization for Economic Cooperation and Development (OECD), the report analyzes the costs for five US grown commodities, to compare the cost of production with farmgate and export price.

Oxfam International has done some similar studies and produced numbers for the EU.

Levels of dumping, says the report, hover around 40% for wheat and between 25% and 30% for corn (maize), and have risen steadily over the past four years for soybeans, to nearly 30 percent. This means that wheat, for example, is selling for 40% less than it costs to produce. For cotton, the level of dumping for 2001 rose to a remarkable 57%, and for rice it has stabilized at around 20 percent.

The report found that the structural price depression caused by agricultural dumping has two major effects on developing countries whose farmers produce competing products.

First, below-cost imports drive developing-country farmers out of their local markets. This is happening around the world, in places as far apart as Jamaica, Burkina Faso and the Philippines.

Secondly, farmers who sell their products to exporters find their global market share undermined by the lower-cost competition.

The damage of dumping is not confined to other countries, according to the report. The nearly $1 billion discount documented in this report for exported wheat, for example, comes out of the pockets of US producers. The steady erosion of independent family farms, the near-necessity of off-farm income to ensure a farm family can stay on the land, and the decline in net farm income, all point to the cost of policies that facilitate the sale of commodities at less than the cost of production.

The report found that after many years of accepting agricultural dumping, a few countries have begun to respond with investigations into whether some US agricultural exports are dumped. Brazil is considering a case against US cotton before the WTO. In 2001, Canada briefly imposed both countervailing and anti-dumping duties on US corn imports.

The IATP report refers to the ongoing negotiations at the WTO, and the several proposals before the negotiators to review and reform existing multilateral trade rules on agriculture, and the several new proposals to further restrict dumping, but says many are not very promising - making a distinction between “trade-distorting” and “non-trade-distorting” subsidies but failing to recognize and address dumping.

The strong US defence of trade remedies, IATP says, should be used to open up a debate on the US’ own contribution to agricultural dumping.

Article VI of the General Agreement on Tariffs and Trade (GATT) 1994 defines dumping as taking place when the export price of a product is below the normal selling price on the domestic market; but where the domestic price is too distorted to provide a reference, it provides ways to judge dumping, namely, when the export price is less than the cost of production in the country of origin plus a reasonable addition for transportation, handling and profit.

Since agricultural production is rarely priced in an open market, the second method based on cost of production should be applied, says IATP.

Focussing on US practices and the ways it has developed and been experimenting with administered prices and support to farmers, IATP notes that half of the US farmers are not eligible for any government programme, but the commodities that dominate US exports are produced in markets that are anything but free. Market presence is distorted by oligopolies, with a few transnational agribusiness corporations dominating all agricultural commodity production, transportation and processing.

Over 80% of US corn is exported by three firms: Cargill, ADM and Zen Noh. The four top beef producers are Tyson, ConAgra, Cargill and Farmland National beef packing company. The four control 81% of the market. Three of these four are also top pork packers, and two of them are the top poultry producers. Cargill ranks among the top three of the four across the sector.

The presence of grain traders and processors as owners of the largest livestock feeding and slaughter operations contributes to the dominance of closed, vertically integrated markets, where the costs of each of the different stages of production, processing to marketing are internalized, and there is no price discovery at different stages of production and there is considerable cross-subsidization.

The IATP report has constructed prices for costs of production using the government subsidies to input costs (met from the public purse, rather than farm operations) and transportation, and has then compared them to export prices. The costs do not include the much larger sums (than the PSE equivalents calculated by the OECD) spent by the US on income support that is not related to production, but an income-standard determined in a political bargaining process, says the IATP report.

The report has also used a variety of sources to estimate the average costs of transportation and handling of commodities from the farmgate to the export port - costs not included in the data available from the OECD or the USDA but representing a significant part of the cost of exporting agricultural commodities.

IATP says the estimates are very conservative, given the lack of accurate data, and the prices have been averaged over several years as an acknowledgement that the numbers are only estimates.

The data used are imperfect, acknowledges IATP, since costs of production are not available on specific crop basis, including the costs of inspection and R&D. Inputting land values is also complicated, distorted heavily as they are by government policies.

However, the distortions are significant enough to warrant serious attention and there is a need to establish more stringent reporting methods to determine production costs and sale prices more accurately, says IATP.

On the argument that though slow, the market will ultimately prevail and force an end to the practice of selling below cost, IATP notes that in the meanwhile there would be structural damage, given that it takes only two or three years for a farmer to go out of business - as demonstrated in sub-Saharan Africa. While in the long run WTO rules may force governments to implement commitments, in the meanwhile people will go hungry as viable agriculture is destroyed.

As for the view that domestic subsidies are the cause and these should be eliminated as soon as possible, the IATP report argues that this implies that subsidies are the cause of excess supply in world markets. However, it notes that while wheat production expanded greatly in the EU, where it is heavily subsidized, it expanded even more in Argentina and Australia, where there is virtually no subsidy, and in Canada, which has very low subsidies. In the US, where subsidies are high, production has actually fallen.

Disciplines against dumping

The globalization of dumping, argues IATP, requires disciplines to ensure orderly marketing.

The effect of the dumped exports on developing countries has to be viewed in the context of the push over the last 20 years to reduce tariffs in the developing world. The tariff cuts have been encouraged and locked into the international trade agreements, and are also pushed by the IMF and World Bank structural adjustment programmes. Combined with the high volatility in the prices, with open borders, farmers in the developing countries can only receive prices equal to or below dumped prices that do not cover their costs.

While the WTO’s anti-dumping rules provide remedies, the technical difficulties of establishing material injury and the cause of the harm, coupled with the political reality of the trading system - making it, for example, much easier for the US to apply anti-dumping measures against Bangladesh than vice versa - make it difficult.

The report says that the WTO’s Agreement on Agriculture (AoA) successfully deflects criticisms on dumped prices onto the EU for its heavy reliance on export subsidies, while managing to mask the extent of domestic support through dividing the expenditures into multiple categories.

However, the US proposals of July 2002 for agricultural reform ignore the extent to which dumping is rife as a result of its own agricultural policies. These proposals merely eliminate what it calls “trade-distorting” domestic support, while leaving in place some $10 billion in general support, 5% of the value of any given commodity for that commodity, the unlimited expenditures on ‘food aid’, decoupled payments and emergency payments.

The theoretical distinctions between “trade-distorting” and “non-trade-distorting” support are of extremely limited value in practice, as the OECD and others have admitted.

The report notes that after years of accepting agricultural dumping, a few countries have begun to respond with investigations. The submission in the WTO agriculture talks of some developing countries on special and differential treatment (for developing countries) is the first sign that the political acceptance of the system is eroding.

Governments have also begun to discuss how to improve rules to provide real disciplines against dumping - for example, the Philippine proposal to enable countries to impose countervailing duties automatically against imports from countries that subsidize their agriculture; and rejecting the distinctions based on the three pillars addressed in the agriculture negotiations, i.e., domestic support, export subsidies and market access, it looks at the effect as a whole.

Firstly, suggests the report, to end these dumping practices, visible export subsidies should be eliminated as quickly as possible. However, it is apparent that the will to reform is lacking in the EU.

Secondly, there must be commitments by countries to keep products priced below the cost of production out of world markets - and importing countries should be enabled to levy countervailing duties to bring dumping prices up to cost-of-production levels.

However, it will be difficult for small nations to impose such duties to protect themselves.

The most effective way would be to work within the US, the EU and other major grain exporters to have laws to ensure that the full costs of production, plus marketing and reasonable profit, are captured in the export prices. In the US, says IATP, this can be done by a meaningful loan rate - and re-establishing a floor price, combined with strict supply management policies.

Third, the OECD could publish each year a full cost-of-production estimate, including producer paid costs, government paid input costs, and cost of marketing with a reasonable profit. The OECD might start by doing this for its member states, where the problem is most aggravated.

Governments could eliminate dumping over five years, through eliminating direct export subsidies and using full cost-of-production prices to ensure fair prices.

However, some developing countries most dependent on food imports will need a more flexible arrangement to adjust to the anti-dumping disciplines while continuing to meet their food-security needs.

The IATP report also suggests some additional measures:

   *  publish accurate and complete cost-of-production numbers for all crops that a country wants to export, including the dollar value of domestic support, with a minimum threshold level where a country would be exempt if it had a very small share of the world market, say 3% or less;

   *  extend the transparency measures required of state trading enterprises to private companies with a similar or greater degree of market power, to increase market transparency;

   *  extend the special safeguards to all developing countries, linking their application to subsidy levels in the country of origin rather than, as now, the historic levels of non-tariff barriers in the importing countries; and

   *  examine the possibility of remedial measures easily accessible for developing countries and ensure that economic damage through unfair competition can be limited.

“It is time,” says IATP, “for governments to get back to trade basics. If market distortions are going to be eliminated, then prohibiting all causes of dumping must head the list of reforms. It is also time to remember development fundamentals. Developing countries need healthy agriculture sectors to eliminate poverty as they develop. They need to generate sustainable rural livelihoods.

“To achieve this,” concludes the report, “agriculture commodities must be priced fairly. Dumping is a gross distortion of commodity markets that undermines the livelihood of the 70% of the world’s poorest people. We have now the means to address agricultural dumping. It is now up to governments to act.” (SUNS5282)

From Third World Economics No. 300 (16-30 March 2003)