California’s record high average yields of 30.75 tons per acre in 1991, the highest in the world, are due largely to sustained research efforts over a long period of time. These efforts, which included variety testing, culture, soil fumigation, disease-free plants, drip irrigation, mulching, and annual replanting, are documented in Alston, Pardey and Carter . California Strawberry Advisory Board grants accounted for 42.5 percent of all state funds for strawberry research during the 15-year period from 1978 to 1992. The distribution of the returns from production research is an issue that has been studied extensively by agricultural economists. Alston, Norton, and Pardey provide an excellent summary of this work. Depending upon the relative price elasticities of demand and supply, consumers may receive half or more of the short-run benefits from production research. Huang and Sexton demonstrated recently that market power can have an important effect on both the level and distribution of benefits. Processors with market power may be able to capture a large share of the benefits at the expense of both consumers and producers. To the extent that the benefits from producer-funded research accrue to consumers and processors, it diminishes the farm sector’s incentive to fund such research.As Table 5 shows, some commodity programs have been effective for a long period while others are of more recent origin. Many programs have been terminated as a result of changing economic and political relationships.
Despite the turnover, the number of government-mandated commodity programs has grown over time,chicken fodder system and the group approach to solving commodity marketing problems remains popular. The periodic renewal votes conducted for most programs reveal their popularity, with positive votes typically above 90 percent. A number of marketing programs have, however, encountered problems. As a group, the programs using quantity controls to practice price discrimination have lost governmental and legislative support, due to perceived adverse impacts on U.S. consumers. The programs with the strongest potential for increasing producer prices, including hops, lemons, Navel oranges, and Valencia oranges, have been terminated by the Secretary of Agriculture. Those orders with quantity controls nowadays use them infrequently.Informed observers agree that it will be very difficult to gain approval for a new marketing order with strong quantity controls. Programs compelling producer and handler support of commodity advertising programs have faced withering legal challenges in recent years based upon the argument that they represent an undue restriction on commercial free speech under the First Amendment to the U.S. Constitution. Two recent rulings on the issue by the U.S. Supreme Court have done little to clarify matters.6 Additional litigation is working its way through the court system. If the courts find ultimately that producers and handlers cannot be compelled to support an industry’s advertising program, it will likely fail due to free-rider problems. If the courts decide in favor of mandatory support, current programs will continue and new programs may emerge. There will, however, be increased monitoring of program costs and benefits to assure program supporters that their funds are being well-spent. Research funding pressures may require commodity groups to increase their support for research programs, if they want research to be done. The mandated programs provide a proven means for commodity-based research support, and they may take on an increased research role, as has been done by the California strawberry industry.This chapter surveys California’s agricultural trade environment and prospects.
We pay particular attention to the impacts of the 2002 United States Farm Bill, the Farm Security and Rural Investment Act on California’s trade in agricultural products and the prospects for California agriculture from further agricultural trade liberalization. We argue that foreign markets are extremely important to California agriculture, and that increased trade liberalization will be beneficial to most California producers since they competitively supply specialty products and continue to face barriers to trade in important markets. We also discuss the benefits of subsidies provided to agriculture in California and agricultural exports in particular. While a quantitative comparison of this support versus the potential benefits of increased trade liberalization is beyond the scope of this chapter, there is suggestive evidence that California agriculture would be better off with reduced subsidies to U.S. agriculture and concomitant increased access to markets abroad. Thus, to the extent that the political fallout from the Farm Bill results in less ambitious World Trade Organization negotiations, the 2002 Farm Bill is costly for the California agricultural sector.The remainder of this chapter is organized as follows: First, the chapter describes the main characteristics of California’s agricultural trade. Second, the international trading environment facing California agriculture is discussed. Third, we review and discuss elements of the Farm Bill that have important implications for California’s agricultural trade. These include the export programs, the highly controversial country-of-origin-labeling guidelines, and environmental programs. Fourth, we discuss how the 2002 Farm Bill affects the U.S.’s ability to meet its current WTO obligations and its potential effect on current liberalization talks from which California has much to gain.California agricultural producers rely on foreign markets for a significant portion of their revenues and export relatively more than producers in other states do. The value of California agricultural exports totaled about $6.5 billion in 2002, or about 20 percent of the value of agricultural commodities produced in California.
While it is not surprising that California’s export earnings exceed those of every other state since its farm cash receipts are the highest in the country, exports are relatively more important to California than to other states. While California accounts for 12 percent of national farm cash receipts , it accounts for an estimated 15 percent of total U.S. agricultural export revenue. To put these figures in an international context, the state of California exports more agricultural products than some leading agricultural countries do, including such countries as Chile and China. The annual value of Mexico’s agricultural exports is only slightly larger than California’s estimated value.As shown in table 1, the top six food product exports from California in 2002 were almonds, cotton, wine, table grapes, dairy, and oranges. The state is not a significant producer or exporter of grain crops such as corn, wheat, or soybeans. In fact, the state is a net importer of feed grains. Figure 1 highlights the diversity of California’s exports. The top five products account for just over one-third of California’s agricultural exports by value. Even when exports are aggregated into commodity groups, as opposed to individual products, the range of products exported by California is striking . According to UC Agricultural Issues Center statistics, fruit exports comprise 25 percent of the state’s agricultural exports, followed by field crops , tree nuts , vegetables , animal products and wine . This diversity of exports reflects California’s production diversity and differentiates the state from other important agricultural states in the U.S., which tend to produce only a few commodities. For instance, the agricultural sector in Iowa and Illinois is concentrated in just three commodities: corn, soybeans and hogs,fodder systems for cattle which account for 70-80 percent of those states’ farm cash receipts. Nebraska’s production of corn and cattle generates over 70 percent of that state’s farm receipts. Texas depends on the cattle sector, which produces 50 percent of its farm cash receipts . Of any other state in the U.S., the profile of Florida’s agriculture is perhaps most similar to California’s. While the value of agricultural production in Florida is about 25 percent of that in California, Florida’s agriculture is quite diversified and the state produces fruits, vegetables, and dairy products. However, Florida is not as dependent on foreign markets as California is; many of the state’s fruits and vegetables are sold domestically.
Not surprisingly, this means that Florida’s growers tend to be more protectionist than growers in California. As we explain a little later, California growers have a great deal to gain from breaking down foreign barriers to trade in fruits and vegetables; this is less true for Florida growers. California’s exports are destined for a diverse group of relatively high income countries, with the exception of the increasingly important Chinese market. The major foreign markets for almonds and wine are in Europe, while significant markets for the other top commodities are in Canada, Mexico, and Asia. Penetration of these desirable markets is all the more impressive because these countries remain quite protectionist with respect to agriculture, as discussed in the next section. It is estimated that about 40 percent of California agricultural exports is destined for Asia, 20 percent to Europe, and 30 percent to North America. California exports nearly twice as much of its agricultural output to the relatively wealthy European Union markets compared to the U.S. as a whole .California agriculture faces a complex international trading environment, characterized by import tariffs, non-tariff trade barriers, new competitors, and relatively little traditional federal assistance compared to other states. In this section, we review the market environment in which California’s agricultural producers compete. Increasing foreign competition and relatively closed markets have created demand within California for both increased government support for agriculture , and further trade liberalization in foreign markets . The internal contradictions between these positions have not been resolved. We argue later that California receives little benefit from the taxpayer dollars spent on foreign marketing; consequently, the California agricultural industry may wish to concentrate on achieving global trade liberalization even if this necessitates funding reductions for foreign marketing activities. In the last decade, the nominal value of total U.S. agricultural exports grew by about 30 percent. Exports of some commodities important to California grew more rapidly and some less rapidly than the national average. Over this time period, U.S. dairy exports increased by 265 percent and fresh vegetable exports increased by 73 percent. Figure 3 shows how the nominal values of some major California exports changed over the period 1995-2002. According to UC AIC and the Foreign Agricultural Service , the fortunes of California’s commodities have been mixed; almonds and wine have fared somewhat better than tomatoes and raisins. While the total nominal value of California’s agricultural exports has declined by about 5 percent since 1995, this figure masks widely divergent trends across commodities, so no general conclusions can be drawn.In the 1990s the most significant import growth in world markets was in high valued and processed food products like those grown in California. The share of high value and processed agricultural products in world agricultural trade has increased from less than 40 percent in the early 1980s to well over 50 percent by the end of the 1990s . At the same time, the share of fruits and vegetables in world agricultural trade remained at about 17 percent from 1990 to 2001, with a dollar value of $69.8 billion in 2001, up from $51 billion in 1990 . The fact that fruit and vegetable trade did not increase any faster than total agricultural trade is very surprising given the growing per capita demand in developed countries for fresh fruits and vegetables. The stagnant share of fruit and vegetable trade no doubt reflects the high level of protectionism around the world for these food categories. For instance, two-tiered tariffs known as tariff-rate quotas are commonly used to restrict imports of fruits and vegetables. Worldwide, there are more than 350 TRQs placed on trade in fruits and vegetables, and more than 25 percent of all agricultural TRQs are concentrated in the fruit and vegetable trade . This phenomenon critically affects California agriculture. As an exporter of high-value food commodities, California must contend with the fact that import tariffs in important markets such as in the EU are generally higher on processed agricultural products than on the primary commodities. This tariff wedge between a processed commodity and its corresponding primary commodity is referred to as tariff escalation, and this is a significant obstacle to California exports. Tariff escalation produces a trade bias against processed agricultural products and value added products. There is general evidence of tariff escalation in OECD countries , especially for fruits, vegetables, and nuts—major California exports. For many countries, bound tariffs tend to be higher for processed food products than for unprocessed products . Furthermore, recent tariff reductions on agricultural products exceeded tarrif reductions on processed food products in Australia, Canada, the European Union and Mexico . Government transfers to the agricultural industry have contributed to the sector’s profitability in California, particularly for those farmers not growing nuts, fruits and vegetables.