Cotton’s Three-Step Competitiveness Plan

The cotton program has provisions designed to make U.S. cotton competitive, both for domestic textile mills and for export. These provisions are referred to as the 3-step competitiveness plan for cotton, and they have worked very well. The three steps work together to help keep U.S. cotton price competitive.

Step 1 helps make the cotton marketing loan program more effective in keeping U.S. prices at world levels. It provides authority for the Secretary of Agriculture to reduce the Adjusted World Price (AWP) when the US price for Northern Europe delivery (USNE) exceeds the Northern Europe Price (NE) and the AWP is less than 115% of the loan rate. The maximum reduction is the difference between the USNE and the NE. The Secretary has not taken action under Step 1 since 1992.

Step 2 uses the issuance of marketing certificates (or cash payments) to help bridge part of the gap between the price of U.S. and foreign growths of cotton. It mandates the issuance of marketing certificates (or cash payments) to domestic users and exporters of cotton when the USNE exceeds the NE by more than 1.25 cents/pound for 4 consecutive weeks (provided the prevailing world price does not exceed 134% of the loan rate). The step 2 rate is determined by a statutory formula based on the difference between the USNE and the NE. A 1.25 cent gap is built into the calculation, requiring the United States Northern European price of U.S. cotton to exceed the average world price by more than 1.25 cents per pound before the program is triggered. With the rise in value of the U.S. dollar, this 1.25 cent gap is hindering the overall effectiveness of the program. Step 2 certificates are issued to domestic mills when the bale is opened and to exporters on the date of shipment.

• Step 3 allows raw cotton imports to act to lower U.S. cotton prices and bring U.S. prices more in line with world prices. Step 3 mandates the opening of a special import quota if the USNE (adjusted for certificate value) exceeds the NE by more than 1.25 cents for 4 consecutive weeks. The amount of the quota is equal to 1 week’s consumption by domestic mills at the seasonally adjusted annual rate for the 3 most recent months for which data are available. During any month that the U.S. stocks-to-use ratio for upland cotton falls below 16%, the value of step 2 payments will not be considered in the determination of whether U.S. cotton prices are competitive.

• During any marketing year, actual imports of upland cotton under the Step 3 special raw cotton import quota are limited to 5 weeks of U.S. mill consumption of upland cotton (approximately 1 million bales). The Secretary is instructed to estimate and report monthly the season-ending U.S. upland cotton stocks-to-use ratio, excluding projected raw cotton imports, but including landed raw cotton imports.

The 3-step competitiveness program has been a part of the U.S. cotton program since enactment of the 1990 Farm Bill. It has been amended several times.