Contrary to the recent farm policy criticisms by Brazil, the National Cotton Council's (NCC) Stacked Income Protection Plan (STAX) represents a positive step forward in efforts to resolve the longstanding trade dispute between the two countries.
In 2005, a World Trade Organization (WTO) panel concluded that the combination of the marketing loan, target price and former Step 2 provision of the marketing loan combined to cause significant price suppression and serious prejudice to Brazil's cotton industry. The upland cotton marketing loan's Step 2 provision was eliminated in 2006. In the current farm program's context, the only remaining provisions relevant to the Brazil dispute are the marketing loan and the target price. By calling into question any program other than the marketing loan or the target price, Brazil has attempted to extend the trade dispute's scope to programs that are not part of the case's current retaliation phase.
In an effort to meet current budget pressures and address the WTO case, the NCC proposes to eliminate the target price for upland cotton and introduce a formula that would lower the marketing loan in times of low prices. Also, after assuming a 30 percent reduction in available support, the NCC proposal redirects remaining baseline funding for the target price-based countercyclical payment program and direct payment into an area-wide insurance program. Moving upland cotton's support into an insurance program is entirely consistent with the WTO panel's findings regarding trade and market distortions. Brazil challenged all crop insurance programs for upland cotton as part of the original dispute, but ultimately, the WTO panel did not assign any economic damages to Brazil based on the presence of insurance programs.
Brazil offers no economic analysis supporting their claim that the NCC's STAX proposal is more trade-distorting than current programs. The 2010 Framework Agreement negotiated between Brazil and the United States calls for trade-distorting domestic support provided to upland cotton to be significantly lower than the level provided in the period 1999-05. The NCC's proposal accomplishes that very goal. Under the NCC's proposed changes, total trade-distorting support to upland cotton -- coupled with past program eliminations -- would have declined by 60 percent over 1999-05, the period on which the Panel's findings are based. The NCC believes the combination of STAX and a modified marketing loan "significantly" reduce the support level that the Panel found to have economic impacts on Brazil.
Brazil offers no analysis to support their assertion that STAX could result in "billions of dollars in subsidies." In the WTO notifications, the subsidy associated with crop insurance is reflected in the premium portion paid by the government, not the indemnities paid to growers. Congressional Budget Office independent analysis suggests that expected government support under STAX likely is no more than $400-500 million per year. By its very construction, the program is incapable of providing "billions of dollars" of premium subsidies.
Brazil's assertion that U.S. cotton farmers would be able to "lock-in" currently high farm revenues reflects a lack of program understanding. Revenue guarantees under STAX or any insurance program are directly related to the futures markets' current level. Fortunately, cotton prices have increased over the last two years -- resulting in higher price elections under crop insurance. However, when the market moves lower, support under STAX and insurance programs also will move lower. STAX does not "lock-in' high revenues through any artificial means such as moving averages of prices or limits on annual movements. STAX simply looks to the market and enables growers to buy a coverage level based on market signals. Furthermore, the higher coverage levels are not based on individual experience but rather on area-wide triggers. There is no guarantee for the producer's individual income.
STAX does not insulate growers from market signals. Economic analyses continue to show that U.S. growers respond to market signals. U.S. cotton acreage continues to move in lock-step with relative prices. This was true under past farm programs and will be true under STAX. Any contrary assertion is blatantly false and not supported by the data.
While the United States is seeking lower overall support, it is unfortunate that Brazil seeks to criticize the progress of writing new U.S. farm policy while Brazil simultaneously maintains a minimum support price for cotton higher than current U.S. support levels.