This preference was particularly important for the Eastern member states as they had less efficient bureaucracies and more generally struggled to find the administrative capacity necessary to implement the CAP. The Eastern Europe bloc therefore focused most of its political capital on pushing for a system that would redistribute direct payments while opposing a hard upper limit on those payments . The issue of limits on direct income payments was particularly contentious. This time, the new member states were involved, offering potential allies to both sides of the battle. The agricultural ministers of the Czech Republic, Romania, and Slovakia joined Germany, Italy, and the UK in signing a position paper that pledged to reject any agreement that included a cap on direct income payments . The paper argued that a cap on income payments contradicted CAP rules by discriminating against a set of farmers, in this case large farmers. It further argued that this policy would lead farms to split up or fail to merge. Preventing merges and compelling farms to split apart would reduce efficiency and result in more money being spent “administering the collateral costs of capping” income payments rather than supporting agriculture and advancing environmental goals . Though they were not signatories to the position paper, the Netherlands and Sweden also opposed capping. There were also new member states on the other side of the table. The main member states in favor of capping were Bulgaria, Poland, Austria, and the Baltic states. Bulgaria predicted that, unless capping was implemented, 4% of its farmers would receive 80% of the country’s direct payments. The situation in Poland was not as skewed,30l plant pots but there were still some farmers who received far more than others. Poland supported the plan because it viewed it as a way through which the vast disparities in payment levels between the member states could be addressed.

The Baltic states received among the lowest amount of direct payment per hectare, and thus also supported a payment limit. As very few Austrian farmers would be affected by capping, it was not costly for Austria to support the initiative. Finally, the French tacitly supported a payment cap , but did not wish to expend political capital on this soft preference against the far more vociferous “contra capping coalition” . One point of unity among all key actors was opposition to greening proposals36. COPACOGECA37 , the EU-wide farmer lobby, was particularly critical of the greening component that required farmers to set aside 7% of their land for ecological purposes. COPACOGECA warned that “it would imperil food security, require farmers to find ways of increasing production on remaining land, and damage the ability of farmers to respond to market signals”. Within the Council of Ministers, the general consensus was that the proposals were complex enough to lead to more red tape and bureaucracy and yet insufficient to actually meet the major environmental challenges at hand. The member states as a whole also expressed concern to the Commission that the proposals were too rigid and needed to be made more flexible, so they could be adapted to the circumstances and needs of each member state . Some also argued that the proportion of Pillar I committed to greening was too high at 30%. Here though, there was less consensus, and some thought that environmental matters should be left to Pillar 2, which concerns rural development, while Pillar 1 retained its focus on production and incomes. With respect to greening, the member states shared three goals or preferences: to increase flexibility in order to allow member states to tailor the policies to their own circumstances; to minimize the extent to which the measures would increase bureaucratic and administrative requirements; and to ensure that the greening measures not conflict with or impede production objectives . A first hurdle to tackle in reaching a final agreement was the greening proposals, all of which were widely condemned by the member states.

Beyond their overall negative reactions to the greening proposals, member states were concerned about how to make these policies work in their particular national contexts. As a result, the Commission relented and gave extensive concessions and exemptions in order to forge an agreement. The mandatory Ecological Focus Area was reduced from 7% to 5% of land. This reduction was made even though it was generally believed that most farmers already met EFA standards for 3.5% of their land. Thus they would only need to bring another 1.5% of their land into compliance to meet the new requirement. In addition, changes to rules on compliance and exceptions for certain groups of farmers resulted in 48% of arable land and 88% of arable goods farmers being exempted from the EFA requirement . For those roughly 12% of farmers who would be subjected to the EFA requirement, there was a long list of possible ways to meet this requirement38, some of which permitted the continued use of land and even fertilizers, essentially entirely undermining the idea behind requiring farmers to maintain ecological focus areas in the first place. Similar exemptions were achieved for permanent grassland measures. Concerning crop diversity, the initial proposal stipulated that farmers with more than 3 hectares of arable crops would be required to maintain three or more different crops simultaneously, with the largest crop not to exceed 70% of land and the smallest to represent at least 5% of the land. The proposal was revised, such that the rules applied only to farms over 10 hectares instead of 3 hectares. These farms are required to grow two crops, while those over 30 hectares must grow three, with the main crop not exceeding 75% of land . While this change to the minimum threshold for the holding size may seem like a minor change, it actually served to drastically reduce the number of farmers who were required to comply with this policy. As of 2013, two-thirds of farms in the EU consisted of 5 or less hectares of eligible land and one-fifth of member states reported an average holding size of under 10 hectares . Another point of contention in the proposal was the method and process for achieving both internal and external convergence. The Western member states were amenable to external convergence, as they admitted that an unequal CAP would be politically unsustainable in the long term. Despite this admission, there remained divisions between the old and new member states about how convergence should take place.

The new Eastern and Central European member states preferred rapid convergence while the older and predominately Western European member states preferred that the transition take place gradually. A compromise was reached between the old and new member states with the former accepting eventual convergence and the latter a gradual transition period that would not be complete until after 2020, projected to be in 2028. The Commission was able to forge an agreement, with both camps agreeing to some changes in how the policy would operate. While the new member states agreed to less redistribution at a slower rate than originally proposed, the older member states agreed to transition away from the payment schemes,30 litre pots available only to older member states, that were the source of the growing inequality. In addition, the older member states were afforded “hardship payments” to help farmers adjust to the changes in their income. Under the design of the external convergence program, only €738 million out of a total direct payment budget of €42.8 billion would be redistributed over the period 2014-2020 . As a point of comparison, €4.5 billion would have been needed if the plan had been to bring current payment levels up to parity immediately. The overall period of adjustment for external convergence would be gradual, beginning in 2014. Initially, farmers who previously received their payments based on a historical calculation would receive 50% of the new payment under that calculation while the other 50% would come via the new fixed payment per hectare system . Member states will have some discretion in how this shift takes place, with the expectation that the shift be gradual, and the requirement that by 2019, 100% of the payment be awarded according to the new model . Due to broad member state concerns about the effects of internal convergence, the Commission again relented, resulting in a process that would be slower and less abrupt for farmers. Under this compromise, the target for internal convergence was set at 60% for the “minimum level of average regional payment given to the individual beneficiary” . In addition, in a concession to France, member states were permitted to top up these payments in a sort of reverse degressivity. This position was defended on the grounds that, if production levels were to be maintained, as was the intention, then income supports should not be redirected from more productive to less productive farmers. Capping, in the form of a hard upper limit, once again went nowhere.

The central problem was that the Commission was the only major actor in favor of the proposal. Among the member states, there was a coalition that was staunchly opposed, with the rest of the member states not having a stake in the matter and thus deciding to stay out of the conflict rather than antagonize other member states for whom the issue mattered a great deal. In order to move the negotiations forward, the Commission completely dropped its proposal to place a cap on direct income payments. Degressivity, the other of the Commission’s main proposals seeking to manage payment thresholds, was included in the final agreement by way of a strategic concession by the Commission. Specifically, a final agreement on the issue of degressivity was facilitated by Germany’s acceptance of degressivity of 5% on all payments over €150,000. In exchange for this concession, the Commission allowed member states an additional way to meet the degressivity requirement. Member states were permitted to choose between 5% degressivity for all payments above €150,000, after employee and related costs were subtracted, or to apply a redistributive payment, accounting for at least 5% of the national envelope . Essentially, instead of subjecting individual farmers who earned over €150,000 to this 5% reduction, member states could choose to take 5% of their total national allotment of direct payments and redistribute it amongst their farming community. The final agreement ultimately watered down every element of the Commission’s proposal. For some proposals like external and internal convergence, the process was delayed. Others, like greening, involved the lowering of standards or weakening of requirements. Still others, like a cap on total payments, were defeated outright. The following table presents the initial proposal and final agreement side by side, and summarizes the main points of difference.Of the three central issue areas, nothing from the Commission’s initial proposal remained intact. The greening initiatives and the plan for achieving external convergence were both heavily revised.Regarding direct income payments, while the proposal to transition member states to a single formula for calculating direct payments survived, the plan for addressing the payment disparity between old and new member states was implemented more gradually, with a likely completion date of 2029 instead of 2020. The amount of degressivity was reduced to 5% for any farmer earning over €150,000 instead of a graduated system that would have seen up to 70% garnishment of payments for the largest earners. The overall package of reform for the direct payment system is the only element of the reform that had a clear link to disruptive politics: enlargement. The disruptive politics of enlargement created an opening for the Commission to implement actual change in how this system operated. As with past reforms, lessons from welfare state retrenchment can help explain this outcome. Specifically, the reform of this system serves as a good example of engaging in “vice into virtue” style retrenchment. Reformers were able to achieve policy retrenchment, particularly in area of payments to the largest, richest farmers, by working to correct an existing program that was functioning both unequally. Rather than attempting to adopt an entirely new program that directly attacked the most generous of direct payments, reformers instead focused on fixing an existing program. As a result, policymakers were able to achieve some retrenchment in the realm of direct payments.

The United States maintains binding tariff-rate quotas with high in-quota tariffs for imports of most major dairy products. These trade barriers have insulated U.S. dairy product markets from world market forces, with domestic prices for major agricultural products typically significantly higher than world prices. California’s dairy industry, which produces nearly half of the nation’s non-fat dry milk and approximately 20 percent of its cheese, benefits from these border measures. As part of the Uruguay Round Agreement on Agriculture that took effect in 1995, the system of absolute quotas gave way to a system of tariff-rate quotas . However, the second-tier tariffs that limit over-quota imports are prohibitively high; therefore, the effects of the TRQs remain the same as the absolute quotas that were replaced. The Uruguay Round GATT agreement also provided for a gradual increase in the quantity of dairy product imports into the United States under the TRQs. This provision allowed for a gradual increase in import access into the U.S. dairy market until 2000. The North American Free Trade Agreement , which became effective in 1994, eliminated dairy trade barriers with Mexico, but Mexico is a high-cost milk producer and so no new imports have arrived.Imports of some products, notably casein and milk protein concentrates are outside the TRQ regime. The U.S. dairy industry has proposed imposing new trade barriers to limit imports of these products,30 litre pots but such proposed legislation is still pending and would require some accommodation with WTO trading partners. Current trade negotiations, initiated with the Doha Round, might increase that import access further.

Even under the proposal urged by the United States substantial increases in imports would be likely. However, a multilateral deal would also allow more imports into Europe and protected Asian markets and reduce export subsidies from Europe, so world prices would be likely to rise substantially. Dairy trade is a significant issue in the proposed free trade agreement with Australia. Australia is a major non-subsidized dairy product exporter and opening the border with Australia would likely place downward pressure on U.S. and California milk prices, especially through the impact on the price of products that contain milk fat. California shares in the impacts of the import barriers. As noted in Table 2, by raising the domestic price of milk above the world price, the import barriers alone contribute more than 1.15 billion to the dairy PSE in California . Subsidized exports, along with donations to domestic food programs and international food aid, have long been used to dispose of stocks of dairy products acquired under the federal price support program. Subsidized exports have been considered a market for U.S. dairy products that does not disrupt domestic commercial sales. In addition to the disposal of government stocks, the Dairy Export Incentive Program has provided explicit price subsidies for commercial dairy product exports since 1989. The DEIP has been scaled back over the 1995-2000 period as part of the Uruguay Round Agreement. The average 1999-2001 dairy export subsidy had a relatively small impact on the dairy industry with a value of $20 million. The 2002 Farm Act also extended DEIP through FY 2007. DEIP payments in 2002 were higher at about $28 million, of which, under the Uruguay Round WTO agreement most went to exports of NFDM. Federal milk marketing orders in the United States are regional in their implementation. California is the only significant dairy state that is not a part of the federal system of milk marketing orders. Both the California and federal milk marketing orders establish specific minimum prices that must be paid for raw milk according to the class of its end use .

Marketing orders also establish pool pricing for farms such that individual farmers receive weighted average prices of milk sold in the marketing order. Federal milk marketing orders calculate a single, separate pool price for all milk under each of the regional orders . The FAIR Act of 1996 required the USDA to consolidate current federal orders from about 33 to between 10 and 14 within three years. Today, there are 11 federal marketing orders for milk. The California milk marketing order operates with five classes of milk designated by end use. These classes provide separate prices for milk sold for fluid use and for manufactured products such as yogurt, ice cream, cheese, butter or NFDM. The California milk marketing order provides for price discrimination, with different minimum prices set by the state for fluid products with relatively inelastic demands. The California marketing order provides for two producer “pool” prices. Individual farmers in California receive a weighted average of the two prices, with these weights determined by individual ownership of milk quota . The California milk quota program provided that owners of milk quota received benefits from this program by receiving a bonus for quota milk equal to the differences between the average of the high price uses and the average of the low price uses. This difference averaged approximately $1.70 per hundredweight. The total annual flow return to quota ownership has been about $154 million per year. This figure is taken as an estimate of the value of the marketing order in the PSE calculation. The underlying assumption is that the flow benefits to quota owners has represented the approximate flow to the dairy industry from price discrimination that nets out the transfer from those who own less quota to those who own more than the average quota amount. The FSRI Act of 2002 introduced a new direct payment for dairy, the Milk Income Loss Contract . This payment was designed to limit the total payment to individual producers, thus favoring smaller producers.

Research has shown that supply responses to the payments resulted in lower milk prices and that for most California producers, as well as large producers throughout the country, reduced milk revenues due to lower milk prices have outweighed the MILC payment . The direct payments from the MILC payment to California dairy producers totaled approximately $75 million in 2002.Aside from dairy, import barriers also apply for the sugar sector in California. The trade restrictions for sugar have resulted in a U.S. domestic sugar price twice that of sugar traded on world markets. The proliferation of high fructose corn syrup as a sweetener is a by-product of the relatively high prices of sugar in the United States. The sugar import barrier provides California sugar beet producers with over 80 percent of total support. Other trade barriers for California commodities have relatively small effects. A potential exception relates to selected phytosanitary or food safety and sanitary regulations . Most countries restrict imports of commodities that may transmit diseases, pests, or parasites, in order to keep the infection from developing domestically. For example, beef products from countries that have herds with endemic Foot and Mouth Disease infections are generally banned from import into countries free of the disease. These kinds of regulations can be considered protectionist trade barriers when they are not based upon sound scientific principles. The United States has challenged a number of barriers of other countries, and a few U.S. barriers have likewise been challenged on these grounds. For example, the phytosanitary regulations blocking avocado imports from Mexico to the United States were challenged, and the barrier was slightly relaxed in 1993 and again in 1997 and 2002 . Following the practice of OECD and USDA, we have not attempted to judge which technical restrictions are protectionist. Therefore, trade restrictions based on technical considerations have not been included in calculating the Producer Support Estimates. In the 1980s and early 1990s, explicit export subsidy programs were important for selected grains and oil seed products. For wheat and a few other commodities,40l plant pot the United States has operated the Export Enhancement Program since 1985. The Uruguay Round Agreement on Agriculture implied no significant commitments for domestic subsidies in the United States, but it did impose limits on direct export price subsidies . Limits were placed on subsidy outlays and quantities subsidized by commodity. The EEP was continued in the FAIR Act. The FSRI Act of 2002 extended the annual funding through 2007 at the current funding level of $478 million per year. Budget projections suggest that these authorizations will not be used. Export credit guarantees, food aid and export promotion programs were not explicitly included among the export subsidy programs facing restrictions in the WTO. However, some of these programs are being challenged in WTO disputes. In this chapter, we have included foreign market development and credit programs as part of export assistance. The Market Promotion Program , renamed to Market Access Program in the FAIR Act, and the Foreign Market Development programs are market development programs that provide funds for advertising and product promotion in overseas markets.

Under these programs, non-profit trade organizations, state and regional trade groups, private companies and agricultural cooperatives use government money to develop markets mostly for high-value and processed products. The FSRI Act of 2002 increased MAP funding from $90 million to $100 million in 2002 and then to $200 million in 2007. The FSRI Act of 2002 authorized the use of CCC funds to support the FMD program and increased funding to $34 million per year.Until the FAIR Act of 1996, the deficiency payment program was the key government price and income support program for cotton, rice, wheat and feed grains . The FAIR Act eliminated deficiency payment programs and authority for acreage reduction programs. The price support and marketing loan programs were retained and under the direct payments base land may be used for almost any agricultural activity, including fallow, except fruit and vegetable production . Under the FAIR Act, participants were to receive a predetermined payment each year for seven years, based on a declining percentage of past deficiency payments. These payments were to be independent of market prices and allow a large range of “agricultural” uses for program base land . However, agricultural prices fell considerably and remained depressed in the late 1990s through 2001. At the same time federal budget deficits became surpluses and Congress responded with annual ad hoc legislation payments that raised direct payments by 50 percent in 1998 and doubled payments for 1999 through 2001. In addition, the continuing marketing loan programs triggered billions of additional payments. According to the USDA , subsidies jumped from about $4.6 billion in fiscal year 1996 to $19.2 billion in fiscal year 1999 and $32.3 billion in fiscal year 2000. By 2002, subsidies had fallen to $15.6 billion, because market prices had risen. The 2002 FSRI Act reauthorized the marketing loan program at slightly adjusted loan rates. Marketing loan programs are also made available for peanuts, wool, mohair,honey, small chickpeas, lentils, and dry peas. The 2002 Act further replaced the production flexibility contract payments of the FAIR Act with direct payments that are roughly equal to the payments that applied in 2001. These payments are not tied directly to current production of any crop, but are based on historical payments of a specific program crop and continue to forbid planting of wild rice, fruits, tree nuts or vegetables on base land. In addition, farmers were allowed to update the base areas used to determine payments. The third main payment program in the FSRI Act, the counter-cyclical program was designed to replace the ad hoc MLA payments that were made from 1998 to 2001. In 2003 payments under the new CCP program were lower than the magnitude of MLA payments in 2001.The Conservation Reserve Program , and related long-term land idling schemes that focus on water quality and wetlands, cost the U.S. taxpayers about $2 billion per year and idle about 37 million acres in total. Land idled by the CRP has significant effects on grain supply and price. In the spring of 1997, the U.S. Secretary of Agriculture accepted bids for land to enter a smaller reformed CRP for the next 10 years. Of the national total, fewer than 200,000 acres were in California. Due to the relatively small use of CRP in California, and the requirement of the land idling offset the value of the payments received, CRP contracts were not included in our PSE calculations. Under the 2002 FSRI Act, the CRP along with other major conservation programs was reauthorized and extended. The CRP ceiling increased from 36.4 million acres to 39.2 million acres, so that additional land will be removed from crop production for 10-year periods.