Agricultural Trade: Government Support Calculations Under the U.S.-Canada Free Trade Agreement

Published by the Government Accountability Office on 1990-08-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

August   1990
                    AGRICULTUR,AL            ..-
                      Government support

                      Calculations Under the :
                      U.S.-Canada Free
                   ‘. Trade Agreement

GAO; RCED-90-210
GAO                United States
                   General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community,          and
                   Economic Development           Division


                   August 81990

                   The Honorable Kent Conrad
                   United States Senate

                   Dear Senator Conrad:

                   Your letter of October 26, 1989, expressed concerns about the method
                   used to calculate levels of government support in the U.S.-Canada Free
                   Trade Agreement. The agreement uses a formula, which calculates the
                   amount of support governments provide their agricultural sectors, to
                   determine the conditions that are required for Canada to open its mar-
                   kets to U.S. grain and grain products. You raised several questions
                   regarding the accuracy of the 1989 government support calculations for
                   U.S. wheat, which we address in this report. We will address your other
                   question-regarding    the appropriateness of the agreement’s method of
                   comparing government support for agriculture-in     a subsequent report.

                   The 1989 government support totals were generally calculated accu-
Results in Brief   rately, based on our review of 93 percent of the total amount of govem-
                   ment support calculated. However, we noted several opportunities to
                   adjust state budget expenditure data that would show more precisely
                   how much support state governments are providing their agricultural
                   sectors. I

                   State budget expenditures represent a relatively small portion-about  2
                   percent-of government transfers provided to U.S. wheat producers.
                   Consequently, even very large adjustments made to state budget
                   expenditures would result in only a small change in the total govern-
                   ment support percentage. In addition, some adjustments would increase
                   and others would decrease the amount of state budget expenditures.
                   Thus, the magnitude of these changes would probably be even less
                   because these adjustments would tend to offset each other. However,
                   when the two countries’ government support calculations are close, as
                   they were in 1990, these adjustments could affect whether Canada IS
                   required to lift its grain import restrictions.

                   ‘Annex 705.4 of the US-Canada Free Trade Agreement refers to this category as State Budget 1hit-
                   hys. However, the formula measures agricultural expenditures by state governments. Conrqwnt~y.
                   throughout the report, we refer to these data as state budget expenditures.

                   Page 1                                                     GAO/RCED-W210      Agrkulturd    Trade

Background              trading partners-entered    into a Free Trade Agreement. The countries
                        negotiated the agreement, which became effective January 1. 1989, Lvith
                        the goal of eventually eliminating trade barriers to improve market
                        access for each country’s goods and services. As part of the agreement,
                        both countries agreed to eliminate virtually all tariffs between the coun-
                        tries within ten years.

                        The agricultural chapter of the agreement includes a provision on
                        market access for grain and grain products. Canada protects its agricul-
                        tural sector by requiring import permits for some U.S. grain products.
                        Canada uses these permit requirements to protect its domestic pro-
                        ducers from import competition. This provision sets conditions for
                        Canada to eliminate its import permit requirements for wheat, barley,
                        and oats and associated products when the United States’ level of gov-
                        ernment support for these commodities becomes equal to or less than
                        Canada’s Because the level of IJS. government support for oats was
                        lower than Canada’s in 1989, Canada no longer requires import permits
                        for U.S. oats and oat products.

                        To measure the level of government support, the agreement includes a
Calculating the         formula that measures the amount of producer revenue that is derived
Agreement’s Levels of   from government policies. These measures of government support are
Government Support      calculated for each crop year, but for the purposes of determining kvhen
                        import restrictions are eliminated, officials use an average of the two
                        most recent crop years. The U.S.-Canadian Free Trade Agreement repre-
                        sents the first time that such a measure of government support had been
                        used in a trade agreement.

                        The level of government support is expressed as a ratio. The numerator
                        expresses the total of both direct and indirect government support for
                        each commodity (wheat, oats, and barley) in one crop year. Payments to
                        divert land from production are an example of direct government pay-
                        ments to producers. Inspection and research programs, which help
                        farmers, but are not directly paid to them, are examples of indirect sup-
                        port. The denominator expresses the total value of production for each
                        of these commodities, plus direct government payments.

                         For example, the calculations of government support for crop >.tbar1987
                         showed that the U.S. government provided wheat producers $:3 1Z!j bil-
                         lion in direct payments and $2.178 billion in indirect support i 5icbtl;~pp.
                         I.) Added together, the total of $5.307 billion represents go~~t~rnmc~nt

                         Page 2                                        GAO/RCEDS@21O   .Agncultural   Track

                                        transfers to producers, which serves as the measure’s numerator. To
                                        derive the measure’s denominator, known as the adjusted producer
                                        value, analysts added the value of wheat production for 19872 ($5.497
                                        billion) to the amount of direct payments ($3.1‘29 billion) to obtain
                                        $8.626 billion. The ratio of the numerator and the denominator show
                                        that in crop year 1987, U.S. wheat producers derived 61.5 percent of the
                                        value of their production from government support. Equivalent calcula-
                                        tions for the same crop year showed that Canadian wheat producers
                                        derived 46.7 percent of their income from government support.

                                        Table 1 identifies the United States’ and Canada’s level of government
                                        support for wheat (in terms of 2-year averages) since they have been
                                        calculated under the agreement. As a result of both years’ calculations,
                                        U.S. wheat producers are still subject to Canada’s import restrictions.

Table 1: Levels of Government Support
for U.S. and Canadian Wheat                                                                         Level of Government Support
                                        Country                                                              198P                       1 990b
                                        United     States                                                      61.62                    45 80
                                        Canada                                                                 46.28                    44 83

                                        aAverage of levels of government support for crop years 1986 and 1987.
                                        ‘Average    of levels of government support for crop years 1987 and 1988

                                        The U.S. government support calculations for wheat are comprised of 13
                                        categories of direct and indirect support. (See app. II.) In total, these
                                        categories are comprised of 25 elements; the largest element by far is
                                        deficiency payments to producers.” Other significant elements include
                                        Commodity Credit Corporation (CCC)loan forfeiture benefits, Export
                                        Enhancement Program benefits, and CCC commodity loans. The Free
                                        Trade Agreement specifically identifies the sources of data and the for-
                                        mulas used to derive each country’s level of government support.

                                        kakulated by multiplying 57.36 million metric tons of wheat by the average producer pnce 1It
                                        $96.84 per ton.
                                        .%eeappendix II for a listing of each element.

                                        Page 3                                                          GAO/lZCED9@210   Agricultural   Trade

U.S. Level of             tion of the 1989 U.S. government support totals for wheat. We noted,
Government Support        however, several opportunities to adjust state budget expenditure data
for Wheat Generally       that would show more precisely how much state governments are sup-
                          porting their agricultural sectors.
Calculated Correctly
                          State budget expenditures represent a relatively small portion of the
                          government support numerator. In crop year 1987, for example, state
                          budget expenditures totaled $106 million, approximately 2 percent of
                          the $5.3 billion in government transfers provided to U.S. wheat pro-
                          ducers. Consequently, even very large adjustments made to state budget
                          expenditures would result in only a small change in the total govern-
                          ment support percentage. In addition, we identified adjustments that
                          would both increase and decrease the amount of reported state budget
                          expenditures. Thus, the magnitude of the change would probably be
                          even less because these adjustments would tend to offset each other.

                          The agreement’s formula for state budget expenditures measures the
                          amount of agricultural expenditures by state governments, by crop,
                          excluding any federal funds provided for those purposes. The basis for
                          this calculation is the amount of state government agricultural expendi-
                          tures reported by the U.S. Census Bureau. The Census Bureau data for
                          state agriculture expenditures, however, are not collected for the pur-
                          pose of calculating the level of government support. Consequently,
                          Census Bureau officials suggested making certain adjustments to the
                          Bureau’s state budget expenditure data that would provide a more pre-
                          cise total of the amount that states are spending to support their agricul-
                          tural sectors.

                           These adjustments involve the reporting of (1) user charges and check-
                           off fees, (2) interest income, (3) interest expense, (4) state contributions
                           to retirement, and (5) state expenditures for experimental stations and
                           the extension service. Both the Census Bureau and USDA officials
                           agreed that these adjustments were merited. However, they both noted
                           that in some cases determining the magnitude of these adjustments
                           could be difficult and costly.

User Charges and Check-    States collect user charges and check-off fees for various agricult~lral
                           related purposes. For example, state agricultural promotion boards are
Off Fees                   usually funded by check-off fees, which are financed as a tax on the
                           first buyer’s purchase of an agricultural product. User charges U-P often

                           Page 4                                         GAO/WED-9@210   Agricultural   Trade

                  collected by states on the sale of agricultural products. These funds are
                  used for state inspection or grading services.

                  The agreement specifically excludes expenditures based on user contri-
                  butions from being included in the government support calculation
                  because these funds are generated by the agricultural community for
                  the agricultural community. The Census Bureau’s reports, however, only
                  identify a portion of revenues generated from user contributions-those
                  contributions generated primarily by state fairs and shows and the sale
                  of products from agriculture experiment station farms-and do not
                  identify revenues generated from check-off fees. All revenues generated
                  from user contributions need to be identified to make appropriate
                  adjustments to the Census Bureau state budget expenditure totals.
                  USDA and Census Bureau officials agreed that expenditures funded by
                  check-off fees should also be excluded from these totals because, like
                  user charges, these revenues are collected from the agricultural commu-
                  nity for use by the agricultural community.

                  Without adjustments to these figures, the Census Bureau reports would
                  overstate, for the purposes of the Free Trade Agreement, the amount of
                  state budget expenditures. At our recommendation, the Census Bureau
                  provided USDA with adjustments to the 1990 government support calcu-
                  lation that resulted in a reduction of about $550 million in the Bureau’s
                  reported state budget expenditures. These adjustments represented
                  close to 20 percent of the unadjusted totals for state budget expendi-
                  tures and reduced the calculated amount of government support for
                  wheat by $24.3 million in crop year 1988 and $20.8 million in crop year

Interest Income   Agricultural organizations funded by user charges and check-off fees
                  earn interest on some of their funds, primarily because they often
                  receive total funding at the beginning of a fiscal year and earn interest
                  until the money is spent. Just like offsets needed for revenues generated
                  from user charges and check-off fees, revenues generated from interest
                  earned on these funds also need to be offset. Bureau officials told us
                  that the amount of these funds can be identified in most states. Offset-
                  ting state budget expenditures for interest earned on these revenues
                  would decrease the totals for state budget expenditures for agriculture.

                  ‘Wheat represents about 4 percent of the total value of U.S. agricultural production T?wreftIrr I he
                  $660 million ac&stment for all U.S. agricultural production translates into a much smaller dJu>rment
                  for wheat.

                  Page 5                                                      GAO/RCED-B&210      Agricultural   Trade

Interest Expense         States often issue public debt to fund certain projects, some of which
                         may be related to agriculture. The Census Bureau’s reports of state
                         budget expenditures for agriculture do not include the interest on the
                         debt for these expenditures. Census Bureau officials and a i3DA repre-
                         sentative agreed that the portion of interest on this debt that is dedi-
                         cated to agricultural projects should be added to the state budget
                         expenditures. However, reporting this expense would be very difficult
                         because public debt is used for many types of projects, only some
                         related to agriculture. Identifying the agriculture-related portion of this
                         debt to add to state budget expenditures would be technically difficult,
                         they said.

State Contributions to   State agricultural budget expenditures do not report state contributions
                         to retirement, unemployment compensation, and workman’s compensa-
Retirement               tion funds for state agriculture department employees, extension agents.
                         and experimental station employees. These costs equal about 7 to 10
                         percent of these employees’ salaries, according to Census Bureau offi-
                         cials. For Census Bureau reporting purposes, these costs are listed as
                         accruals and recorded as expenses under categories other than agricul-
                         ture when they are realized. Bureau officials said that these costs can be
                         readily identified in most states and would increase total state expendi-
                         tures for agriculture.

Extension Service and    The Census Bureau’s state budget expenditure reports are supposed to
                         include state expenditures for the Extension Service and LSD;\ esperi-
Experimental Stations    mental stations. A small amount of these expenditures, however. are not
                         included in the Census Bureau’s report of state budget expenditures for
                         agriculture. These amounts are generally undercounted because very
                         often colleges and universities in their reports to the Department of
                         Education do not accurately identify their agriculture-related expenses.
                         The Census Bureau, which is aware of the problem, does not expect to
                         solve this data collection problem until it begins collecting the data Itself
                         beginning in fiscal year 1991. Including the accurate total for these state
                         costs would add to the Bureau’s reported total for state agriculr l1r-t’
                         budget expenditures.

                                                                                              -       ~__
                         For the most part, U.S. levels of government support are bemy (.;III II-
Conclusion               lated correctly, although we noted several opportunities to adJu4 -rate
                         budget expenditure data showing how much support state goi t*r-nrr~nts
                         are providing their agricultural sectors. These adjustments to ! t1t8

                         Page 6                                         GAO/RCED!W210   Agnrul~ural    Trade

                      Census Bureau reports-both     adding and subtracting from current
                      totals-would   be needed to provide more precise totals. Calculating
                      some of these adjustments, however, could be costly because doing so
                      would require additional analysis and data collection.

                      Making all of these adjustments also may not be cost beneficial because
                      state budget expenditures represent only about 2 percent of the entire
                      level of government support total; that is, adjustments that affected
                      state budget expenditure totals by even as much as $100 million would
                      only affect the final government support percentage by less than 2 per-
                      centage points. The magnitude of these changes would probably be even
                      less because these adjustments would tend to offset each other. Never-
                      theless, for the 1990 government support calculations-in    which the
                      U.S. and Canada wheat results were different by less than 1 percentage
                      point-an adjustment of that magnitude, if it was in the United States’
                      favor, would have been sufficient to cause Canada to remove its require-
                      ment for wheat import permits.

                      Given the potential importance of even small changes in the U.S. govern-
Recommendationto      ment support calculations to the lifting of Canadian import restrictions
the Secretary of      for grain, USDA and the Cens& Bureau should jointly identify a cost-
                      beneficial method for adjusting the Census Bureau’s report of state
Agriculture and the   budget expenditures for agriculture that would show more precisely
Secretary of          how much state governments are supporting their agricultural sectors.
Commerce                                                                         -.‘h
                      In developing our responses for this report, ye obtained information
                      from the USDA and the Department of Commerce, Bureau of the Census.
                      In agreement with the requester, we limited our analysis to the verifica-
                      tion of 7 of the 25 elements comprising the 1989 U.S. government sup-
                      port calculations for wheat. These elements together account for 93
                      percent of the total amount of support calculated.” Our verification of
                      the U.S. government support calculations for wheat included deter-
                      mining whether (1) the data sources were complete and appropriate. ( 2)
                      the calculations were consistent with the agreement, and (3) the calcula-
                      tions were made correctly. To determine the accuracy of the calcula-
                      tions, we traced all numbers back to original sources. We also performed

                      ‘Payments of the Commodity Credit Corporation, Acreage Reduction Program, CCC Loan Fwt*alt~ire
                      Benefits, Price Enhancing Aspects of Government Programs, CCC Commodity Loans. State HrilWr
                      Outlays, and Farm Credit Programs.

                      Page 7                                                    GAO/RCED9O-210     Agricultural   Trade

     tests on numbers derived from formulas to ensure that these were calcu-
     lated accurately. We did not verify the Canadian government support
     calculations because questions were not raised about their accuracy.

     We discussed our findings with officials from USDA and the Census
     Bureau and incorporated their comments in the report. Our work was
     conducted in accordance with generally accepted government auditing

     As arranged with your office, unless you publicly announce its contents
     earlier, we plan no further distribution of this report until 7 days after
     the date of this letter. At that time we will send copies of this report to
     the Secretary of Agriculture; the Secretary of Commerce; the Director,
     Office of Management and Budget; and other interested parties. Copies
     will be provided to others on request.

     This work was performed under the direction of John W. Harman.
     Director, Food and Agriculture Issues, who may be reached on
     (202) 275-5138. Major contributors to this report are listed in
     appendix III.

     Sincerely yours,

c/   Assistant Comptroller General

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Page 9   GAO/RCED-90210.4gricultrrral   Trade

Appendix I
Calculation of the U.S.
Wheat Level of
Government Support
for Crop Year 1987
Appendix II                                                                                            13
U.S. Government
Support for Wheat,
Crop Years 1986 and
Appendix III                                                                                           14
Major Contributors to
This Report
Table                     Table 1: Levels of Government Support for U.S. and                           3
                              Canadian Wheat


                          ccc       Commodity Credit Corp.

                          Page 10                                   GAO/RCEDW210   AgriculturalTrade

    Page 11   GAO/RCEDBO-210   Agricnltud   Trade
Calculation of the U.S. Wheat Level of
Govemment Support for Crop Year 1987

               Dollars In billions
               Government transfers to producers
               Direct payments                                                     93 129
               Indirect payments                                                     2 178
               Total                                                               $5.307
               Adjusted producer value
               Value of wheat productton                                         $5 497
               Direct payments                                                    3 129
               Total                                                             $8.626
               Level of government support                        (5 30718626) = 61 5°C

                Page 12                            GAO/RCEDW210     Agrirulrural     Tradr
Appendix   II

U.S. Government Support for Wheat, Crop
Years 1986 and 1987

                Dollars in millions (sections III-VII)
                                                                                            1986              1987
                I.       Level of production in million metric ton8                        55.92             57.36
                II.      Producer price-dollars    per ton                                988.61            $95.84
                Ill.     Value of production                                           SW44.35           t&496.83
                IV.      Direct payments                                               $3.750.78         S3,129.09
                V.       AdJurted producer value                                       s&795.13          W625.92
                VI.      Policy transfers to producers
                         A. Direct payments                                             $3,750.78         $3,129 09
                            1. Payments of the CCC                                       3,799.07          3,279x6
                               a. Deficiency payments                                    3d56.84           3,279.06
                               b. Disaster payments                                        126.96               0.00
                               c. Diversion payments                                       215.27               0.00
                            2. CCC storage payments                                        170.33            144.75
                            3. Conservation Reserve Program                                  11.95            102.47
                            4. Acreage Reduction Program                                 -355.46           -479.54
                            5. Cerficate premiums and discounts                             124.89            82.35
                         6. Other support                                                 1,677.37         2,178.27
                            6. CCC loan forfeiture benefits                                 487.37           105.51
                            7. Price enhancement                                            457.80         1,433.Oo
                            8. Advance payments benefits                                       3.78             9.65
                            9. Crop Insurance                                                48.76              164
                            10. Government service programs                                   93.92          103.56
                               i. Federal grain inspection                                     0.62             0.35
                               ii. Research and extension                                     43.03            44.05
                               iii. Irrigation                                                 3.65             4.16
                               iv. Inland waterways freight                                   16.57            1760
                               v. Conservation                                                22.09            27 34
                               vi. Rail freight                                                0.65             0.79
                               vii. Low interest loans for rail                                1.42             162
                               viii. Cooperator export programs                                0.89             1 07
                               ix. Marketing services                                          0.61             0.64
                               x. Plant disease and pest control                               4.26             4.59
                               xi. Targeted export assistance                                  0.13              134
                             11. CCC commodity loans                                        376.48           30847
                             12. State budget outlays                                        106.00           106.00
                             13. Farm credit programs                                        103.27           11043
                 VII.      Total government support                                     $5,42&l 5         s5Jo7.37
                 VIII.     Qovemment support (per-t)                                        61.72              61.53
                           Average for 1936 and 1987 (percent)                                61.62
                 Note: Pursuant to Article 705 and Annex 705.4 of the United States-Canada Free Trade Agreemenr
                 Source: USDA, adapted by GAO.

                 Page la                                                     GAO/WED-BWlO        Agrldtplrl    Trade
Appendix III

Major Contributors to This Report

                        Flora H. Milans, Associate Director
Resources,              Jeffrey E. Heil, Assistant Director
Community, and          Jeffrey Itell, Evaluator-in-Charge
                        Jack M. Pivowar, Evaluator
Development Division,
Washington, D.C.

                         Page 14                              GA0/RCED9%210   Agriirultural   Tradr
[enited States
(kneral   Accounting     Offiw      -~-
Washington,    II.<‘. 2O.‘i-t8

Official   Business
Penalty    for Private   Use $300