Relaxing Fruit and Vegetable Planting Restrictions
A recent WTO ruling may
result in the elimination of planting restrictions
on certain crops, a long-time feature of U.S. commodity
programs.
Edwin
Young, Demcey
Johnson, Barry
Krissoff, and Gary
Lucier
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A
recent WTO challenge to U.S. commodity
programs has created pressure to eliminate
fruit and vegetable planting restrictions
on farms that operate on base acres. |
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If
planting restrictions were relaxed,
overall market effects would likely
be limited, with the greatest effects
in California, the Southeast, and the
Upper Midwest. |
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Some
producers with base acreage could benefit
while others without base acres may
find that production of fruit and vegetables
becomes less profitable. |
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This
article is drawn from . . . |
Eliminating
Fruit and Vegetable Planting Restrictions:
How Would Markets Be Affected? by
Demcey Johnson, Barry Krissoff, Edwin Young,
Linwood Hoffman, Gary Lucier, and Vince Breneman,
ERR-30, USDA, Economic Research Service, November
2006.
Fruit
and Vegetable Backgrounder, by Gary
Lucier, Susan Pollack, Mir Ali, and Agnes
Perez, VGS-31301, USDA, Economic Research
Service, April 2006. |
You
may also be interested in . . . |
ERS
Briefing Rooms on:
Farm and Commodity Policy.
Fruit
and Tree Nuts.
Vegetables
and Melons. |
Fruit and vegetables have never
been a major focus of U.S. farm programs, but a
recent ruling by the World Trade Organization (WTO)
places them at the center of policy discussions.
At issue are the planting restrictions that apply
to “base acres,” and whether billions
of dollars of direct payments to U.S. farmers can
remain exempt from internationally agreed-upon spending
limits.
Under current U.S. farm legislation,
recipients of direct and counter-cyclical payments
can plant whatever they like on their base acres,
including lentils, mung beans, and dry peas—except
for fruit, vegetables, and wild rice. Payments tied
to base acres are partially or fully forfeited when
fruit and vegetables are harvested. Planting restrictions,
in various forms, have been a feature of U.S. commodity
programs for many years, but are now a source of
controversy because of a successful Brazilian challenge
to U.S. cotton programs. In March 2005, a WTO appellate
body ruled that, because of planting restrictions,
U.S. fixed, direct payments to cotton farmers could
not be considered “minimally trade distorting”
under terms of the Uruguay Round Agreement on Agriculture.
This legal ruling draws into question whether the
United States can continue to claim that direct
payments are ”green box,” that is, exempt
from WTO obligations on trade-distorting support,
without eliminating the restrictions. (See Glossary
of Farm Policy Terms and Base
Acreage and Planting Restrictions for more information
about farm programs.)
In principle, elimination of the
planting restrictions could expand the supply of
fruit and vegetables, thereby reducing grower prices.
Industry groups are divided on the issue. Growers
are naturally concerned about the price-depressing
effects of potential shifts in production, given
the magnitude of base acreage (about 266 million
acres nationally) and the small amount of acreage
(over 12 million acres) currently harvested for
restricted fruit and vegetables. On the other hand,
vegetable processors tend to regard planting restrictions
as a competitive obstacle—one that limits
available acreage, raises procurement costs, and
can accentuate risks of localized crop problems,
such as diseases that render fields unsuitable for
production. This argument carries special force
in the Midwest and other areas where vegetables
were traditionally grown, but where base acreage
expanded under the 2002 Farm Act as a result of
base acreage updating and the addition of historical
soybean acreage. Some current fruit and vegetable
producers argue that it would not be fair to allow
new fruit and vegetable producers to continue to
receive Federal subsidies.
ERS analysis suggests that if
current planting restrictions were relaxed, acreage
would most likely shift in regions where the land
and climate are suitable for fruit and vegetable
production, but nonbase acres are in limited supply.
California and Florida account for a major share
of fruit and vegetable production. Florida has a
small number of base acres, which limits the potential
impact on supply. Eliminating planting restrictions
would most likely enable some producers to switch
from producing program crops to producing fruit
and vegetables in California, the Upper Midwest,
and the coastal plain in the Southeastern States.
However, these regions would not
necessarily experience large acreage shifts because
current restrictions are not always binding for
producers. For example, some producers circumvent
the restrictions by leasing nonbase land, planting
fruit or vegetables on owned (base) acres, and reconstituting
the farm entity to preserve government payments.
In other cases, the difficulty of securing sufficient
labor for harvesting, the difficulty in establishing
a pre-harvest marketing contract with buyers, and
other agronomic or economic factors would deter
many producers from growing fruit or vegetables.
In still other cases, the loss of payments under
the current program is simply too small to deter
growers from switching into these crops.
Base Acreage Constraints
Greatest in California, Upper Midwest, and Southeast
According to the 2002 Census of
Agriculture, about 434 million acres of cropland
were available, of which about 12.5 million acres
were used to produce fruit and vegetables. Data
from USDA’s Farm Service Agency (FSA) show
that 266 million acres of cropland were designated
as base acreage in 2003, and 35 million acres of
cropland were enrolled in the Conservation Reserve
Program and not available for annual crop production.
These data suggest that sufficient land is available
to increase production of fruit and vegetables.
However, a different story emerges when the data
are disaggregated by region: base acreage constraints
are not uniform across the country, and planting
restrictions under current law might be significant
only in certain regions.
Base acreage constitutes a particularly
large share of cropland in the Corn Belt, Northern
Plains, Mississippi Delta, and parts of the Southeastern
States. Base acreage is significant in California,
the top U.S. fruit- and vegetable-producing State,
but accounts for a much smaller share of available
cropland than in other regions. Florida, the second
leading U.S. fruit- and vegetable-producing State,
has very little cropland designated as base acreage.
Base acreage constraints may be
limiting fruit and vegetable production in eastern
North Dakota, a region where dry beans and potatoes
are grown. Land constraints may also limit acreage
shifts or expansion in southern Minnesota, central
Wisconsin, northern Illinois, western Michigan,
and western New York, where a variety of processing
fruit and vegetables are grown. In California and
Florida, fruit and vegetables already account for
a large share of cropland. While fruit and vegetable
acreage is high in the eastern coastal plain, southern
Idaho, and central Washington, many counties in
these regions have more than 100,000 acres of additional
nonbase land available for crop production.
Disaggregating the data helps
identify areas where planting restrictions may limit
fruit and vegetable production but does not identify
the specific commodities likely to be affected by
relaxed planting restrictions. Based on the share
of cropland that is base acreage in States producing
selected fruit and vegetables, planting restrictions
have the greatest effect on production of dry beans,
processing vegetables, and potatoes. The average
share of base acreage in total cropland is about
20 percent in States producing citrus, and 70 percent
in States producing dry beans.
Many Farms Produce Both Program Crops and Fruit
and Vegetables
Many regions produce both program
crops and fruit and vegetables. The same can be
said about many producers. With their experience
growing these crops, these producers would be prime
candidates for expanding production of fruit and
vegetables if the acreage constraints were eliminated.
Many farms currently produce or have a history of
producing fruit and vegetables on base acreage.
Farmers who participate in the direct and counter-cyclical
payment programs must annually report or “certify”
the use of land on their farms with FSA. A close
look at such data helps gauge the overlap between
production of program crops and production of fruit
and vegetables.
Based on State-level summaries
of acreage reports and program enrollment data for
2003, farms that certified acreage planted about
2 percent of their cropland, or over 6.5 million
acres, to fruit and vegetables. Thus, farms that
certify acreage with FSA account for about half
of land devoted to fruit and vegetables. These farms
contain about 80 percent of land planted to vegetables,
dry beans, and potatoes. Farms with certified acreage
account for less than a quarter of the land devoted
to production of fruit, nuts, and berries. Farmers
may be less likely to plant fruit trees and vines
on base acreage than they are to plant vegetables
and melons because trees and vines require several
years to mature, thus delaying harvest.
Some Producers Find It
Profitable To Forgo Direct and Counter-cyclical
Payments . . .
As noted earlier, 80 percent of
potatoes, dry beans, and other vegetables are grown
on farms with program acreage. Many of these farmers,
with a history of producing fruit and vegetables
on their farms, have assessed the benefits and costs
of planting these crops on base acreage and have
elected to forgo program payments. In 2003, producers
gave up $13.5 million in direct and counter-cyclical
payments on about 620,000 acres to plant fruit and
vegetables.
This type of planting decision
is evident in California, where land devoted to
almond groves has increased sharply over the last
decade, partly at the expense of cotton base acreage,
which brings the highest per acre value of payments.
The U.S. has been the world’s leading almond
producer since 1977, contributing half of total
output. Nearly all the U.S. crop is produced in
California’s San Joaquin and Sacramento Valleys.
Both domestic and export demand have been rising,
with export value exceeding $1.6 billion in fiscal
year 2006. With recent high prices, the prospective
returns for almonds—a crop that takes years
to bear fruit—are such that some cotton farmers
have been willing to give up their direct and counter-cyclical
payments. In other words, the value of expected
net revenue from almond production exceeds the expected
revenue plus government payments for cotton. While
base acreage constraints could impede land-use shifts
into almond production, they do not appear to be
preventing the switch.
Generally, the per acre value
of producing fruit and vegetables exceeds the per
acre value, including government payments, of producing
competing program crops. Corn direct payments of
less than $25 per acre are small relative to expected
revenue per acre from sweet corn production. Similarly,
a farmer considering a switch from wheat production
to dry beans might not consider program payments
to be a significant barrier to switching. As a result,
in 2003, many producers with a history of producing
fruit and vegetables concluded that giving up payments
that averaged $22 per acre to plant fruit and vegetables
on base acreage made economic sense. This suggests
that producers with base acres who make money from
fruit and vegetable production have already expanded
their production of fruit and vegetables; removing
planting restrictions may, therefore, not have much
additional effect.
. . . but Agronomic and
Economic Barriers May Limit Expansion of Fruit and
Vegetable Production
A producer who is considering
a shift or move into producing fruit and vegetables
also needs to consider the potential demand (or
revenue) and cost factors, particularly the specialized
costs for the selected commodity. For new growers,
demand and cost factors can be prohibitive.
Producers who are expanding fruit
and vegetable production need to consider potential
product demand, the need to locate, develop, and
secure markets, and the prevalence of contracting
in the sector. Market competition is intense for
many fruit and vegetable growers. Most vegetables
destined for processing are grown under contractual
arrangements between growers and processors, and
longrun demand is stagnant or declining, offering
little chance for industry acreage expansion. Contracting
is especially prevalent in the production of processing
vegetables (tomatoes, sweet corn, green beans, and
green peas), as processors require assurances of
a crop’s volume, and specific characteristics,
such as variety, size, color, and timing of delivery
to the factory.
While returns per acre can be
substantial, the costs and financial risks of producing
many fruit and vegetables (especially fresh-market
crops) are high, creating significant barriers to
switching land from program crops to fruit and vegetables.
A number of products are labor intensive or require
specialized harvesting equipment. Irrigation needs,
high herbicide and pesticide costs, and specialized
production and marketing expertise also impede the
switch to those crops. Fruit production has its
own limitations. It takes several years following
planting for trees and vines to produce commercially
marketable crops. During these nonproductive years,
growers who plant on base acreage incur costs associated
with maintaining the new crops as well as forgoing
direct and counter-cyclical payments.
What Can We Conclude About
the Market Effects of Relaxing Planting Restrictions?
Market effects of eliminating
planting restrictions are likely to be limited and
confined to specific regions and commodities. Supply
shifts would be more likely in regions where the
land and climate are suitable for vegetable production
and nonbase acreage is in limited supply. Acreage
in these regions would not necessarily shift significantly
because current restrictions are not always binding
for producers. Because some fruit and vegetables
are expensive to produce, program crop farmers are
more likely to switch to less capital-intensive
crops, such as dry beans, or to processing vegetables,
than to fresh fruit or vegetables. However, analysis
of market effects is complicated because of a lack
of comprehensive and consistent data, a large number
of commodities, and limited estimates of relevant
economic parameters. ERS research reflects these
limitations.
While overall market impacts are
likely to be small, impacts could be significant
for individual producers, commodities, and regions.
Producers with base acreage are the most likely
to benefit because they may be able to realize additional
revenue from harvesting fruit and vegetables. Under
current program rules, these producers could expand
production by forgoing direct and counter-cyclical
payments for the current year, if expected net returns
to producing the fruit and vegetables exceed expected
net returns from producing the program crop, including
program payments. If planting restrictions were
eliminated, these producers would continue to receive
direct and counter-cyclical payments. However, before
switching any acreage into fruit and vegetables,
farmers will need to carefully consider the startup
costs and potential markets for their output.
Glossary of
Farm Policy Terms |
Base acreage—A
farm’s crop-specific acreage of wheat,
feed grains, upland cotton, rice, oilseeds,
or peanuts eligible to participate in commodity
programs under the 2002 Farm Act.
Counter-cyclical
payment— Payments that vary
inversely with market prices and are available
for eligible commodities under the 2002
Farm Act whenever the effective commodity
price is less than the target price. The
payment amount for a farmer equals the product
of the payment rate, the payment acres,
and the payment yield. Payments are tied
to historical base acres and program yields.
Direct payment—Annual
payments based on payment rates specified
in the 2002 Farm Act and a producer’s
historical program payment acres and yields.
Green box policies—Domestic
or trade policies that are deemed to be
minimally trade distorting and excluded
from domestic support reduction commitments
in the Uruguay Round Agreement on Agriculture.
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Base Acreage
and Planting Restrictions |
To be eligible to receive
direct and counter-cyclical payments, farmers
are restricted from planting fruit and vegetables
for harvest. The following criteria apply:
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If a farm has a “history”
of planting fruit and vegetables on
base acres, the farm is allowed to plant
fruit and vegetables on up to all of
its base acres, but it must give up
the payments for those acres.
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If the farmer has a
“history” of planting fruit
and vegetables on a different farm, the
farmer can plant the specific crop for
which there is a history, but the farmer
is limited to the (average) number of
historical acres for which he or she has
a history. The farmer must give up the
payments for those acres.
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In regions that have
a history of double-cropping, farms are
permitted to double-crop fruit and vegetables,
with no acreage limits.
Farmers who violate these
conditions must forfeit up to all of their
direct and counter-cyclical payments for
that year.
In 2003 and 2004, about
14,400-15,000 program farms planted fruit
and vegetables on just over 600,000 base
acres. About 99 percent of these farms had
a history of planting fruit and vegetables
on base acreage, so they lost payments (an
average of $22 per acre) associated with
only the affected acreage. California accounted
for about a third of the acreage for which
payments were forfeited, and North Dakota
and Minnesota combined accounted for about
a fifth.
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