Précis:

Grey, Clark, Shih and Associates Ltd. (GCS) has been analyzing U.S. farm subsidy programs for
Dairy Farmers of Canada since 1990. This report is the latest update, which focuses on changes
introduced by the 2008 Farm Bill.1 We have updated and expanded on our earlier studies and
commented on their implications.

GCS does not criticize the benefit and support which the U.S. provides to their farmers and
ranchers. However, this support clearly has production and trade effects. The GCS report will
help farm operators in Canada and other countries to identify support and risk management tools
which might benefit them if their government offered similar programs. This is particularly
important when comparing risk management programs.

This analysis also provides information to governments on what they should be doing to ensure
farmers and ranchers are able to continue providing arguably the most important of basic human
needs; indeed, meeting one of the basic human rights of their citizens.

The U.S. continues to provide massive (sometimes underreported to the WTO) support at the
federal, state and local government level to U.S. agriculture. U.S. dairy producers are among the
principal beneficiaries of this support through a complex web of direct support and indirect
programs and measures.

Indirect support to U.S. dairy production comes through infrastructure (such as irrigation),
services, and general program benefits including export credits, nutrition, food aid and loan and
granted loan programs. In addition, there are very substantial pass through benefits from feed
grain production to livestock that benefit dairy cattle and dairy production.

                                                            
1
The Food, Conservation, and Energy Act of 2008

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In total, the value of U.S. Department of Agriculture programs to the U.S. agriculture industry at
US$180.8 billion in 2009. Based on dairy’s roughly 10.7%2 share of U.S. agricultural sales,
results in benefits of some US$19.3 billion to U.S. dairy farmers.

We estimate that the total direct and indirect benefit to U.S. dairy production through U.S.
federal, state and local programs in fiscal year 2009 was US$12.00 per hundred weight (cwt) of
milk produced or C$31.11 per hectolitre. That includes aggregate of the U.S. Department of
Agriculture Program Levels, irrigation infrastructure support and undeclared below market
price/cost water and power for irrigation systems as well as the ever expanding biomass energy
incentive.

Converting this support into metric, we estimate that this support represents C$31.11 in 2009.
Our study after the previous Farm Bill (2002) estimated support on this basis was C$25.90/hl for
FY 2003.

Below is a chart which illustrates the levels of support:

Summary of U.S. Subsidies to Dairy

(2009)

Per cwt Per hl

US$ C$ US$ C$

Federal 10.56 12.06 23.97 27.37

State/Local 1.44 1.65 3.27 3.74

Total 12.00 13.70 27.24 31.11

The estimated US$12.00/cwt support to U.S. dairy production in 2009 was equivalent to 53% of
U.S. cost of production of milk or 94% of the market returns for milk as reported by USDA.

                                                            
2
All U.S. agricultural commodities in 2009 were valued at US$290.5 billion at the farm gate, while the total value
of cash receipts from the sale of all U.S. dairy production in 2009 was US$31.5 billion.

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The subsidies to U.S. dairy producers are essentially equivalent to revenue from the market
place. This generous support enables U.S. producers to sell below their fully absorbed cost of
production, by insulating them from the need to earn a profit from the market. The support also
permits insulation from international price pressures.

Through the Dairy Export Incentive Program (DEIP) benefits – which were reintroduced and
enriched in 2009 – the U.S. has also helped increase U.S. dairy exports. USDA reports that
shipments of U.S. dairy products to Canada soared by 527% from US$71.3 million in 1995 to
US$375 million in 2008. Globally, U.S. exports of dairy products have increased from US$778
million in 1995 to US$3.752 billion in 2008. Exports in 2009 fell 16% in volume and 40% in
value. There has been a sharp increase in 2010 – 72% to the end of September as compared to
the same period of 2009.

The subsidies also helped American dairy producers to survive from the devastating market
conditions of recent very difficult years – including the disastrous experience of 2009. The
Department of Commerce, U.S. Census Bureau, Foreign Trade Statistics, said that in 2009, there
was a decline in the value of milk production of 13% from 2008.

The U.S. dairy situation appears to have improved in 2010 – but recently the optimum has been
reduced, by a combination of weaker than expected improvements in market returns to dairy
farmers and rising feed costs.

Overall, USDA provides the support to U.S. agriculture which is production and trade distorting.
This study looks at how programs operate and assesses them in the context of U.S. WTO
obligations and reporting. But similar benefits are available to much of U.S. agriculture and it
has traditionally been very generous support.

The 2008 Farm Bill is like earlier Farm Bills. The bill was developed in an economic
environment featuring two consecutive years of record high farm incomes and very high market
prices, by historical standards. This was especially the case for grains, oilseeds and dairy. It
provides additional avenues and more scope for support and risk elimination for U.S. farmers.

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But the complex new bill adds to existing layers of U.S. farm support by increasing the range of
crops receiving substantial support. The Farm Bill raised the target prices for countercyclical
payments (CCPs), raised marketing loan rates for loan deficiency payments; created new
countercyclical and market loan programs for pulses, oilseeds and chickpeas and revised and
enriched dairy support measures. U.S. farmers may also participate in revenue assurance
payments (the Average Crop Revenue Election program); providing greater potential support for
dairy farmers when prices for milk drop or when prices for feed rise.

U.S. agriculture also benefitted from stimulus spending under the American Recovery and
Reinvestment Act of 2009 which injected US$29 billion which created US$52 billion in
additional spending. It is important to understand that the Congress disguises support so actual
budgeted dollars have a multiple effect on spending. One example is marketing loans which are
made and repaid within the fiscal year. These do not show as expenditures because they are
repaid in the period.

State and Local Subsidies are Significant

State and local expenditures on agriculture in 2009 were estimated to be US$3.2 billion. U.S.
state and local government support in 2009 to dairy production amounted to US$2.7 billion or
about US$1.44/cwt. In addition, state and local governments provide very extensive and
important support through irrigation subsidies in the form of below-market and below-cost price
water and electrical power provided for agricultural use although it appears to be at less than
10% of commercial rates, to operate the irrigation systems.

The subsidy exists in the form of water for irrigation provided to producers at prices below the
prevailing market price. The value of the subsidy is the difference between price charged to
agricultural producers and the price charged to other users such as industrial or residential
consumers.

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The total value of irrigation subsidies provided by state and local government has been estimated
at between US$10 billion and US$33 billion. Since our last study in FY 2003, it appears that
water use has increased 12%. In addition, we have uncovered evidence that water districts
received heavily subsidized electricity to pump the water through the irrigation systems. We did
not increase our estimates of irrigation subsidies to reflect this increased usage or the subsidized
power component.

The provision of low-cost water to producers by state and local governments also constitutes a
subsidy for purposes of the WTO Agreement on Subsidies and Countervailing Measures and the
WTO Agreement on Agriculture and must be included in the U.S. AMS.

In dollar terms, the total value of support provided to agriculture by state and local governments
in 2009 is estimated to be US$3.2 billion while the total value of direct state and local
government support to dairy production and indirect support allocated to dairy production is
US$419 million.

Support provided through irrigation subsidies is direct but non-dairy-specific support which is
also allocated on the basis of dairy’s share of the total value of state agricultural production for
those states which are the principal beneficiaries of the irrigation programs. In 2009, the
estimated total value of irrigation subsidies provided to agriculture by state and local
governments was US$21.5 billion. On this basis, the total amount of irrigation subsidies
allocated to dairy production in 2009 is US$2.3 billion.

Therefore, the total value of support to dairy production provided by state and local governments
is US$2.7 billion. Based on total U.S. milk production in 2009 of 189 billion lbs, total state and
local government support per cwt was approximately US$1.44.

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The Politics of Farm Subsidies

Farm Bill subsidies, particularly those to feed grain aid to biofuels – which can have very
distortive market effects – have long been recognized. So has the way that these benefits stretch,
bend and break international trade rules.

Former Deputy U.S. Secretary of Agriculture, Charles Connor, noted:

“I think more fundamentally even, this Farm Bill just heads in the wrong direction in
terms of our international obligations. It’s no secret our current farm programs under
current law have come under enormous fire for their adverse impact on developing
regions of the world and their ability to increase their agricultural production because
they can’t compete against the farm subsidies of the developed world. . .”

Former U.S. Agriculture Secretary, Dan Glickman, put it more bluntly, telling the New York
Times that farming has “become largely an income transfer program,” with the government
underwriting rural businesses and requiring very little in return.

But there is a political reality. Farmers vote.

The New York Times noted:

“… one thing that the people who grow the food and the people who write the checks
agree on is that if the government were to suddenly disengage itself from its monumental
entanglement with rural America, upwards of half of the 1.6 million farmers in the United
States who now receive some form of federal assistance would go out of business.”

The stimulus package under the American Recovery and Reinvestment Act of 2009 (ARRA) for
Agriculture is also very attractive. Some US$28 billion (3.5%) of the stimulus package was
appropriated to the USDA. The Act provides US$19.7 billion to increase the monthly amount of
nutrition assistance to 31.8 million people. Dairy is a significant beneficiary from nutrition
programs.

This study raises important questions about why other WTO members should need to restructure
and rationalize their farm sectors because of the effects of disruptive and devastating U.S.
subsidies, competitive currency devaluations or its non-tariff protection like U.S. Mandatory

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Country of Origin Labelling (M-COOL). The real need is to discipline the “beggar thy
neighbor” policies which lead to massive disruptive U.S. (and E.U.) farm subsidies which drive
prices down in world markets.

World Trade Organization rules have not been effectively enforced. Nor did the WTO take
account of the very fundamental, subsistence nature of agriculture in many developing countries.
Small farmers in these countries are totally vulnerable to cheap import competition. Small
farmers in developing countries cannot be treated the same way as the agribusiness and corporate
farmers which dominate agriculture in the USA and will do so increasingly in Europe.

The level of this trade-distorting farm support will no doubt make it difficult for other countries
to engage in meaningful market access negotiations unless and until the production distorting
programs of the USA (and the E.U.) are brought under control. (This report also addresses
concerns about E.U. support and proposed changes for the post-2013 period. This E.U. report
will offset proposed tariff reductions in the comatose WTO Doha Round and will continue to
frustrate bilaterally negotiated improved access to E.U. markets which now encompass
27 countries.)

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