Direct U.S. agricultural commodity payments are projected to remain near the $20 billion per year level over the next fiveyears. Domestic subsidies have been under intense scrutiny worldwide. In particular, U.S. cotton subsidies have been widelycriticized, culminating in a 2003 formal challenge to U.S. cotton policy under the World Trade Organization. Critics claimthat U.S. commodity payments have caused overproduction which has caused domestic prices to plummet. Given the UnitedStates’ role as a price leader, farmers worldwide have been hurt by low world prices. Critics further claim that eliminatingU.S. direct payments would cause planted acreage to decline and would result in rising U.S. and world prices. This paper addressesthese claims. Results of a simulation using the POLYSYS model of the U.S. agriculture sector are presented showingthat eliminating all U.S. agricultural subsidies results in minor changes in aggregate crop acreages and prices in the U.S. by2011. There may be more significant acreage adjustments for individual crops, in particular cotton and rice, but a policy ofsubsidy elimination would not result in appreciable or timely production responses in the aggregate, which is the appropriatelevel for evaluating such policy alternatives. These results are supported by a simulation conducted by IFPRI using theIMPACT model to estimate the worldwide impacts of removing all direct subsidies and protectionist measures in all developedcountries. Results indicate that crop price increases by 2020 would be less than three percent under the subsidy eliminationscenario. Of particular importance in evaluating policy alternatives is an explicit recognition of the nature and behaviorof agricultural markets and the consideration of aggregate policy impacts.
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