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WTO compliance may outweigh negatives...
By Lana Robinson
Field Editor
Several studies, including one by the U.S. Department of Agriculture, suggest that the elimination of the Step 2 cotton program, proposed by the Bush administration, would have very little impact on cotton prices and exports.
"USDA's chief economist estimates that eliminating Step 2 could cause cotton exports to drop by 200,000 to 250,000 bales out of 15 million bales exported each year," said Megan Provost, trade economist for the American Farm Bureau Federation. "In addition, cotton prices would fall by 2 to 3 cents per pound, or about 5 percent."
The administration wants to scrap the program in an effort to comply with a World Trade Organization (WTO) ruling earlier this year that U.S. payments to cotton producers exceed subsidy limits outlined in trade agreements. The Step 2 program pays exporters and millers to use U.S. cotton instead of imported cotton when the lowest U.S. cotton price exceeds the northern Europe cotton price by more than 1.25 cents per pound for four consecutive weeks. It takes congressional legislation to eliminate the program.
While no producer wants to see prices or export quantities fall, Provost said the benefits of complying with the WTO decision probably outweigh any negatives.
AFBF supports making changes in the Step 2 program. The National Cotton Council opposes the proposal, which would change the terms and conditions after the season's marketing was already underway.
Brazil, which initiated the WTO complaint against the United States, has asked the WTO for permission to impose up to $3 billion in retaliatory sanctions on U.S. exports to Brazil. Negotiations on the level of sanctions are now suspended while the U.S. considers its options, including a proposal to comply with the WTO ruling. Brazil is appeased, temporarily, but some African countries don't think the changes go far enough.
The ruling also found the U.S. export credit guarantee program to be "prohibited" subsidies, and gave the U.S. a July 1, 2005 deadline to withdraw them. In response, USDA has also proposed eliminating a 1 percent cap on the fees that are charged for borrowing through the GSM-102 program, and termination of the GSM-103 program that provides longer repayment periods.
AFBF has said that if Congress approves the administration's proposal, the resulting farm program spending reductions should be included in the budget reconciliation that Congress is working on. Under a budget reconciliation measure approved this spring, the House and Senate Agriculture committees must cut USDA program spending by $3 billion over five years. According to AFBF, the Agriculture committees' report is due out in mid-September.
In July, Dr. Samarendu Mohanty, associate professor with Texas Tech University's (TTU) Department of Agricultural and Applied Economics, announced that the TTU Cotton Economics Research Institute (CERI) had prepared, and made available online (http://www.ceri.ttu.edu/policy), a new briefing paper on the potential impact from elimination of the Step 2 program. The University's study, like USDA's, concluded that dropping Step 2 would not dramatically affect exports or cotton prices.
"In the U.S., Step 2 elimination will result in the loss of a price incentive for the exporters and mill users of U.S. cotton," the report said. "The elimination of these payments represents an effective increase in the procurement price of raw U.S. cotton for both domestic mill users and exporters, which will likely decrease consumption of U.S. cotton domestically and lower the cotton farm price. However, this price decrease does not result in a substantial decrease in U.S. cotton plantings or production because of other producer price supporting mechanisms of current U.S. farm policy that remain. The cotton price received by U.S. producers is supported by such program benefits as marketing loans and countercyclical payments. These are unaffected by Step 2 elimination. A lower U.S. cotton farm price would result in a program payment to producers which would offset any negative price impacts of Step 2 elimination at the farm level. Only if the average farm price were above the target price would the loss of Step 2 payments have an impact on prices received by farmers.
"In cotton mill use, it appears that the elimination of Step 2 payments will not impact the continued decline in use in a substantial way. U.S. mill use is expected to decline by over 16 percent from current levels by 2010 with or without Step 2. The loss of Step 2 will effectively decrease the U.S. cotton price relative to the world market and, as expected, decrease exports by about 1 percent. With virtually unchanged production, slightly lower mill use, and decreased exports, the most dramatic impact of Step 2 elimination appears in the accumulating buildup of ending stocks.
"In the world market, fewer exports from the U.S. will result in a very small increase in the cotton A-index. World cotton production is estimated to remain unchanged as well as world trade. It appears that a slight increase in exports is likely from Australia and Brazil which will help offset lower exports from the U.S.
"Overall, this model projects that the effects of eliminating Step 2 payments, as a single action, are minimal except for the impacts on U.S. stocks. U.S. producers are protected by other program benefits and increases in the A-index price and exports by other major producers are less than 1 percent. It appears that the elimination of Step 2 will not dramatically impact the world cotton market."
