Elimination of Cotton’s Step 2 Threshold

The 1.25 cents per pound threshold imposed under Step 2 of cotton’s 3-step competitiveness provisions is impeding the international competitiveness of U.S. cotton and cotton textile products.

Published: February 27, 2002
Updated: March 30, 2017

The 1.25 cents per pound threshold imposed under Step 2 of cotton’s 3-step competitiveness provisions should be immediately eliminated. The threshold is impeding the international competitiveness of U.S. cotton and cotton textile products. The objective of the Step 2 program is to keep U.S. cotton competitively priced to both domestic and international customers while supporting cash prices received by U.S. growers. Because of the hyper-aggressive export behavior of our international competitors in the markets for raw cotton and cotton textile products, expectations for both U.S. mill use and exports have weakened significantly over the past year. Elimination of the Step 2 threshold, originally adopted solely to limit government expenditures in a time of austere budgets, is crucial to meeting the challenge posed by our competitors and reversing the economic fortunes of the U.S. cotton industry.

Step 2 of the 3-step competitiveness program provides for payments to U.S. exporters of raw cotton and U.S. mills if the spread between the five-day average of the lowest quote for U.S. cotton delivered to northern Europe and the Cotlook "A" Index exceeds 1.25 cents per pound. The Step 2 payment rate is equal to the spread minus the 1.25-cent threshold. Therefore, if the spread is 4 cents, the applicable Step 2 payment rate is 2.75 cents per pound.

Threshold Reduces Competitive Position of U.S. Cotton Industry

The existence of the 1.25 cent per pound Step 2 threshold means the best any U.S. exporter can achieve is to get within 1.25 cents per pound of the average price of competitors. The Cotlook "A" Index is an average of the five lowest priced growths of cotton quoted for delivery in the northern Europe market. It is often the case that the lowest priced foreign offer for raw cotton in the northern Europe market is several cents per pound below the Cotlook "A" Index. When combined with the threshold value of 1.25 cents the lowest U.S. quote is then commonly 3 to 5 cents out of the competitive range of quotes.

The threshold also reduces the competitive position of U.S. textile mills. The U.S. textile industry is under siege from a flood of discounted imported textile and apparel products as the strength of the dollar reduces the costs of imported products. From 1993 to 1996, net imports of cotton textiles and apparel averaged the equivalent of 5.6 million bales; by 2000, net foreign imports had grown to 10.6 million bale equivalents, fully 50% of U.S. retail consumption of cotton textile and apparel products.

This is not a buggy whip or outmoded technology issue. Investment in yarn spinning machinery and technology has made the U.S. textile industry the most efficient in the world. Although the number of active spinning positions has fallen by more than one-half in the past 20 years, the pounds of cotton used per position have increased seven-fold, from 200 pounds in 1980 to an estimated 1,400 pounds by 2000. Unfortunately, these astonishing productivity advances have proven inadequate in the face of hyper-aggressive Asian export behavior and rapid appreciation of the U.S. dollar. The unrelenting surge in imports has exacted a severe toll on U.S. textile manufacturers. In 1997, U.S. mill use of cotton was 11.4 million bales; by 2000, it had declined to only 9.5 million bales. U.S. mill use has continued to plummet with recent Department of Commerce estimates of cotton mill use falling below 8.0 million bales.

U.S. raw cotton exports face similar difficulties. USDA’s initial projection of raw cotton exports for the 2000-01 crop year was 8.0 million bales. The forecast went through continual downward revisions, and exports ultimately stood at only 6.8 million bales. As a result, the expected U.S. share of the export market for 2000-01 was reduced from almost 29% to less than 25%. For the 2001-02 crop year, USDA has already acknowledged that its export projection is overly optimistic and could likely follow a trajectory similar to that of 2000-01 with month-to-month reductions.

Recent Reductions in Total Offtake of U.S. Cotton Must Be Reversed

Over the past 4 years, total offtake of U.S. cotton has been reduced by almost 4 million bales. This growing weakness in both domestic and international demand for U.S. cotton is impacting prices to U.S. cotton growers. U.S. futures market values have fallen steeply and U.S. cotton growers are facing prices well below USDA’s estimated cost of production. In early September 2001, the futures price of cotton is less than 40 cents per pound, less than one-half of the value at the time the 1995 farm law was passed. The presence of the threshold inhibits effective competitive response by both U.S. textile mills and exporters and is severely detrimental under the current market circumstances facing the U.S. cotton industry. Elimination of the 1.25 cents per pound threshold for Step 2 is a vital first step towards restoring the international competitiveness of U.S. cotton and the economic health of the entire U.S. cotton industry.