Chennai: Even as it continues its global preaching to abolish subsidies directly and through various arms in which it has high stakes, the American government has cleared the Farm Bill to stimulate agriculture sector through subsidies. US President George W Bush signed the Bill to give a boost to the countrys agriculture sector that is going under low commodity prices.

Higher subsidies, the first in several years (in a plan estimated to cost $190 billion over 10 years if programmes are renewed after six), could stem consolidation in some markets, with small farmers reaping most of the benefits, says Standard & Poors (S&P) credit analyst Jayne Ross.

But the Bill changes little for the largest players and could strain international trade relations in the short-term, she adds. The Farm Bills goal was to correct problems that arose after the 1996 Farm Bills passage, which was done in a period of high commodity prices.

Since then, commodity prices have declined, due in part to the Asian financial crisis, record crops, and the contraction in export markets. About 40 per cent of the US commodities are sold internationally, so its a key point to be competitively positioned, Ross says.

Giant diversified agribusiness competitors Cargill Inc (A+/Negative/A-1) and Archer Daniels Midland Company (ADM A+/Stable/A-1) trade and process corn and soybeans. The Bill should be a neutral to a slight positive for these companies, she adds.

There is no major changes in the marketing loan rates, other than the decline in soybeans to $5 per bushel from $5.26, she explains. There should be a movement for greater corn acreage being planted, which will be a plus for some of the rated companies and cooperatives, because when you plant corn, you need more nitrogen fertiliser, and you need more crop inputs than you do for soybeans.

Ross remarks that farmers in the sugar industry also did well under the programme, which eliminates a 1-cent per pound loan forfeiture penalty. The new Bill marks the first time the US dairy industry receives direct payment from the government. The plan favours smaller farmers, Ross emphasises, and could slow the industrys consolidation into fewer and larger dairy farms.

Besides the milk cheque the farmer receives from the cooperative, they also will receive a cheque from the federal government. The government payments are flowing to the farmer, not to the cooperative, Ross says.

But peanut farmers in the Mid-Atlantic and Southeast are upset with the Bill because it phases out the quota system and replaces it with a lower price support programme as tariffs protections decline under both NAFTA and GATT. These farmers feel it may help peanut farmers across the whole US, but the growers in the south, who have been the producers of higher-priced, premium peanuts, will likely be hurt, adds Ross.

According to her the subsidy-size increase, often described at 70 per cent, is misleading. That does not include emergency payments every year. Theyre not comparing apples to apples when you calculate it that way. There was approximately $30.5 billion in supplemental payments to farmers from 1998 to the present.

With the increased spending, which some believe represents an about-face from the free-market policies set forth in its 1996 Farm Bill, the US is nearing a $19 billion annual limit for subsidies spending set by the WTO.

Also, critics in and outside the US are concerned that the US has taken a major step backward, and that this politically motivated Bill, geared to earn votes from key states in the midterm elections, will hurt trading relations, she says. Australia, Canada, Mexico, the European Union and Brazil are all upset by the new US farm programme.

If commodity prices stay at their current level or go lower, the question is whether the US farmer will continue to produce, because they now have the protection or safety net of federal payments resulting in an oversupply situation, asks Ross. This could then put continued downward pressure on the world commodity markets. This is what many of the international players are concerned about-how they will effectively compete in the various agricultural markets given the change in US farm policy.