Obama says end subsidy to large U.S. farms

U.S. crop and dairy subsidies are estimated to be $7.5 billion in 2009, two-thirds of it from direct payments. An Agriculture Department spokesman declined immediate comment on Obama's proposal.

"From our standpoint, I think this would be a welcome change in farm policy," said Jim Lyons of Oxfam America, which says excessive U.S. subsidies mean lower prices for growers overseas. Cuts in U.S. spending on larger farmers would level the playing field for small farmers everywhere, Lyons said.

Negotiations for a new world trade agreement have foundered partly due to an impasse on agriculture. Developing nations want the industrial world to cut its farm supports. The United States says developing nations must remove barriers to farm imports.

Eleven farm groups wrote Agriculture Secretary Tom Vilsack last week to argue against any cuts in farm supports and particularly direct payments. They said direct payments "are the only component of the farm safety net currently helping every farmer" deal with rising costs of production and a slump in crop prices since record highs last year.

Direct payments were an area of dispute when Congress wrote the 2008 farm law. The Bush administration wanted to expand them and de-emphasize other supports. But groups like the National Farmers Union said direct payments were indefensible in good times and insufficient aid when markets slump.

Because they are "decoupled" from farm output, direct payments are viewed as the least susceptible among U.S. farm supports to a world trade challenge. But price supports and counter-cyclical payments are more popular among farm groups.

Adam Sarhan, analyst at Globalmacroresearch.com, said he doubted reforms in direct payments would directly affect commodity markets. "What will help commodity markets will be his pledge to restore confidence in markets," said Sarhan.

Vilsack has reopened a review of farm payment rules that were written by the Bush administration to implement the 2008 farm law. That law has the first-ever bar on payments to the wealthiest Americans and it eliminated some farm subsidy loopholes.

(Reporting by Charles Abbott; Editing by Chris Wilson and Tim Dobbyn)