NCC Chairman's Report

It is a privilege to address this Board as your Chairman and report on Council activities since we last met in Tampa and look ahead to some of the challenges before our industry.

The Council?s efforts in these seven months since Annual Meeting have largely been devoted to addressing the priorities identified by Kenneth Hood in his report to the membership in Tampa.

Kenneth praised the farm bill but warned that it would come under attack and have to be vigorously defended. He also said that while the farm bill would go along way in helping restore profitability, our industry?s economic health is directly linked to that of the U.S. textile industry and a growing list of trade initiatives.

The Council?s initial efforts to defend the farm bill arose during the Senate and House efforts to craft a budget resolution. The Council worked with Cotton Belt members to urge opposition to the inclusion of any provisions that require changes in farm law. We also led an agricultural coalition in urging Budget conferees to maintain spending levels consistent with the 2002 farm bill.

The final budget measure exempted agriculture from the spending cuts. However, Senator Grassley successfully introduced his payment limit amendment in the Senate Budget Committee and has consistently made public statements that he intends to continue to offer his amendment at every opportunity. Fortunately, Chairman Cochran worked to assure that the Grassley amendment did not require a change in law.

Industry leaders have responded well to the Council?s action alerts during the agricultural appropriations process. Prior to consideration on the House floor, and in concert with an action alert email to industry leadership, the Council sent a letter to House cotton belt members from 25 family farmers with the simple yet important message that the current farm law must remain intact. Those efforts paid off and the House bill contained no farm bill amendments. Another action alert was sent prior to the August recess in anticipation of expected action by the Senate, but consideration of the appropriations bill has been delayed until after their return in September. John Maguire will review our Senate strategy later in his Washington report.

The 2002 farm bill created a Payment Limit Commission to study the potential impacts of further payment limitations. Since its inception, the Commission has met several times, solicited public comments earlier this year, and conducted a public workshop in June to receive input from agricultural program experts.

The Council has taken an active role with this process and Mark Lange testified at the public workshop at the invitation of the Commission.

Mark?s presentation focused on the potential for extraordinary damage to U.S. agriculture and the rural economy from arbitrary and unwarranted limits that deny eligibility for farm program benefits.

Part of the Council statement was devoted to the role of generic certificates and the importance of fully maintaining the marketing loan. In addition, a number of cotton industry leaders in attendance at the workshop offered brief statements in support of the Council?s position on payment limits and program eligibility.

John Maguire?s report will provide more detail on the work of this commission and the expected timetable for the release of their report.

An integral part of the Council?s farm bill defense strategy has been an extensive effort with cotton industry leaders to significantly raise the level of CAC funding this year to support the re-election campaigns of cotton?s friends in Congress.

I am encouraged by the fundraising efforts underway in many communities and the excellent industry response. I look forward to CAC Chairman Heiden?s report later today which will provide additional details of this effort.

In addition to our farm bill defense efforts, the Council has focused its attention on a number of important trade issues. Many of our trade concerns were voiced during recent contacts with Washington officials and in trade testimony I presented to both the Senate and House.

The Council?s testimony outlined the cotton industry?s priorities in a Central American Free Trade Agreement, addressed China?s continued refusal to comply with its WTO commitment, supported the implementation of safeguards from surging Chinese imports, and reminded Congress that the 2002 farm bill did not break our country?s WTO commitment.

Council staff is currently assessing the U.S. and European Union compromise proposal to the agricultural negotiating group of the Doha round, which calls for significant reductions in domestic agricultural subsidies and the phasing out of certain export subsidies.

The US/EU agreement calls for a quick phase-out of export subsidies on specific commodities that are of interest to developing countries. While the primary goal of the agreement appears to be the decrease in trade distorting agricultural subsidies, which could benefit all of U.S. agriculture, significant disciplines on domestic support bear careful monitoring.

The Council remains closely involved in a number of activities related to China, including TRQs, China?s quality measurement requirements, and implementation of textile safeguard provisions.

Earlier this month, the Council submitted comments to USTR in response to China?s proposed revisions for the implementation of TRQs. We voiced our concern that despite some reforms by China, these revisions do not appear to address all of the U.S. concerns with TRQ implementation.

The Council also was instrumental in arranging two orientation sessions in the Carolinas to help organize industry follow-up activities on the China safeguard petitions filed by select organizations of the fiber/textile coalition. These meetings were arranged principally for textile executives but included participation by southeast region grower-ginner leadership and vice chairman Woody Anderson who traveled from Texas to attend both meetings.

Of the four China safeguard petitions filed by eligible members of the fiber/textile coalition, U.S. trade officials have accepted three for further consideration. The Council will be filing comments in support of the safeguard petitions and through an action alert to our Interest Organizations, we are urging them to support these efforts as well.

The Council is continuing to work closely with the staff of USTR and USDA on the Brazil WTO case. A dispute panel was named in February and they heard arguments in mid-July on the alleged U.S. violation of the peace clause.

While USTR developed a strong argument on the peace clause and they believe their initial arguments were effective, there have been some troubling developments. The Brazilians have retained the services of a U.S. law firm and hired Dr. Dan Sumner to handle their economic analysis. Dr. Sumner is on the faculty of UC-Davis and a former assistant secretary at USDA. He was appointed by Brazil as an official delegate and he actually addressed the panel during the July meeting.

We have expressed our concerns to California?s cotton industry and the media about someone with Dr. Sumner?s experience, inside information, and access to confidential U.S. information actively trying to dismantle U.S. farm programs. Leaders from the California cotton industry and other agricultural interests recently met with Dr. Sumner to voice their concerns about his role in this case.

During today?s closed session of the Board, we will receive reports from Bill Gillon, Gaylon Booker and John Maguire, who will provide more detail on Council activities to address priority trade concerns, including China TRQs and safeguards, the Brazil WTO complaint, and negotiations on a number of free trade agreements, including Central and South America.

There also are serious concerns about the efforts by several international organizations to skew WTO agricultural negotiations against U.S. agriculture. Using seriously flawed analysis and outright misrepresentation, these groups have set several African countries against the U.S.

Unfortunately, the U.S. cotton industry has become their latest target and we are the subject of a well-orchestrated media campaign that continually re-hashes the same set of inaccurate analysis and data.

The Council is providing a strong response to these media attacks. We developed a fact sheet for use with key Congressmen during the appropriations debate that clearly explains that our nation?s agricultural subsidies are not responsible for declining world prices and that these media claims ignore a number of important facts.

The key points we stressed were:

• the US is the only source of growth in world demand for cotton in the last decade increasing demand by 8.3 million bales,

• the rest of the world reduced cotton consumption some 2.2 million bales,

• the AGOA trade package dramatically increases African access to the U.S. retail market,

• virtually all internationally traded commodities (agricultural and non-agricultural) experienced extraordinarily low prices in 2000 and 2001,

• the world agricultural system is rampant with subsidies and the WTO is the venue to discuss disciplines on all agricultural subsidies, and

• many west African growers realize 8 to 12 cents less per pound than farmers in more open market systems due to their own governments? intervention.

More recently, the Council has employed a media plan in response to the Africa challenge, which was developed after a strategy session with a leading consulting firm. The plan will use to the fullest extent possible cotton industry trade media, wire services, national and regional newspapers, television and the Washington press.

Council staff and West Tennessee producer leader, John Lindamood, have already participated in one television interview and we have been approached by several other media outlets. Most of these are affiliated with public television stations who will be running stories on the cotton industry in Africa and the U.S. prior to the WTO meeting in Cancun. We also have prepared and distributed information for others in the industry who have received requests for interviews.

In a development that occurred just yesterday, the BBC has made us aware that they intend to do stories on the Africa and U.S. cotton industries. The Council has begun working to find a national media outlet to counter what we believe will not be a friendly story.

The Council is continuing to closely monitor the court challenge to the beef checkoff plan, to determine possible implications for the cotton promotion and research program. In a recent decision, the Court of Appeals held the beef program to be unconstitutional.

The last several years have seen a number of challenges to commodity promotion programs. These legal challenges are serious and they are grounded in claims that the plaintiff?s free speech rights are being violated.

Recent court decisions have not been decided using consistent standards and they are leading to more Supreme Court decisions in an attempt to clarify the legal standards.

So far, the promotion programs that have lost in court have been constructed differently from the cotton program and have a different approach to how they expend their research and promotion funds.

At present, each of these cases is being decided on the specific facts of the particular program being challenged. We believe the cotton program could withstand such a challenge.

We have an excellent promotion and research program that has strengthened demand, improved the product we produce and significantly broadened our market.

The Council currently is addressing a number of flow issues, including lightweight bales, outside storage, rack samples, centralized loan processing, and private sector processing of CCC sales ? just to name a few.

As follow-up to the recommendations of the Council?s Joint Lightweight Bale Study Committee, we have initiated an educational program for ginners with the principal aim of reducing incidences of light and heavy-weight bales.

Council staff has developed a bale management educational program, which addresses both bale size and weight, which are being used at this summer?s gin association meetings and will be mailed to U.S. gins.

In another important cotton flow issue, the Council was made aware that USDA received a request from a large California cotton producer to allow outside storage of ELS cotton under CCC loan.

Through a number of communications to USDA, we have explained the Council?s policy against outside storage and the longstanding practices of the Bale Packaging Committee for evaluating the performance of packaging materials.

Obviously, we were very disappointed earlier this week when USDA published an interim rule that permits outside storage of loan eligible ELS cotton under certain conditions.

The rule allows outside storage of ELS cotton pledged for CCC loan collateral if a producer meets the requirements contained in an addendum to the loan agreement. The rule indicates that the cotton does not have to be secured by a warehouse receipt, but must be stored in a county where the 10-year average level of precipitation is 10 inches or less. The rule specifies how the storage site is to be constructed and that the producer is liable for all costs associated with the storage of the cotton while it is stored outside. In addition, the producer is responsible for any deterioration of quality incurred by cotton stored outside.

There is a 30-day comment period and council staff developed an initial set of comments. We will discuss the issue and the Council?s response in more detail in tomorrow morning?s executive session. Bert Farrish of USDA will join us by conference call to answer the Board?s questions on the rule.

The Council has a number of ongoing programs of significant importance I would like to briefly touch on.

Through the efforts of the Council?s Quality Task Force, critical quality concerns are being addressed to help make sure producers receive economic signals consistent with the important factors determining fiber spinning efficiency and over-all lint value. The Task force continues its efforts to address a wide range of issues, from pepper trash research to short fiber measurement to moisture management.

The Quality Task Force will be meeting in early fall and we anticipate a very full agenda that will include a thorough review of the bale moisture studies called for by this Board. Andy Jordan will provide us a summary report of those studies later today as part of his presentation on technical issues.

Through the support of the Council and cotton?s allied industry, the Cotton Foundation continues its strong research and educational programs that are of vital importance to our members. I know Cotton Foundation Chairman Don Cameron?s report will provide highlights of a very active program, including funding support for a number of general and special projects.

Cotton Council International continues to place a high priority on overseas market development. CCI President Bobby Carson will have a very positive story to tell in his report-- of increased industry support which has resulted in substantially higher public funding for this vital program.

I would like to spend a moment discussing another very important Council program with you. The Cotton Leadership Program is one of the most highly respected leadership development programs in U.S. agriculture.

Participants in this program receive a very well-rounded curriculum that includes tours across the cotton belt to observe production, processing and research, and visits with industry leaders. During their trip to Washington, they meet with lawmakers and government agency representatives. There is specialized training in public speaking, media relations and other skills necessary for effective industry leadership and communication.

On a personal note, my participation in the second class of the Leadership Program, in 1984-85, helped me understand the dynamics of a very complex industry and importance of working with others for achieving common goals.

The Council?s Cotton Leadership Development Committee, ably chaired by Jimmy Sanford, plays a tremendously important role in selecting participants and making sure this effort maintains its status as the premier leadership development program.

The program requires a significant commitment and investment in time and other resources for both the participant and the sponsoring company, and I commend those individuals and companies who have supported this program in the past. I also urge your continued support and involvement, so that all industry segments continue their longstanding tradition of offering top applicants for this program.

I would also note that tonight?s dinner will include a very special event, as we will be conducting the graduation ceremonies for the 20^th Cotton Leadership Class.

While the Board will be receiving a comprehensive management report from Mark Lange during our executive session, let me conclude my comments by providing you with my perspective on Council operations.

During the 2002 calendar year, the Council approved a budget that had been reduced by close to a million dollars. For 2003, the budget that was approved is about $2 million below the budget approved for 2001.

These cuts were made in concert with the recommendations of our study committee that worked to ensure that there would not be appreciable reductions in resources devoted to the Council?s priority activities and programs. The members of the committee and management believe that these budget adjustments position the Council to operate on a fiscally sound basis for the next six to eight years, provided the current farm law stays in place.

Having served on the study committee, I have confidence in both the review process and the end result. We have an experienced and talented staff; no important program or activity of the Council has been appreciably affected by the spending cuts, and we have the highest overall membership support in the Council?s 65-year history.

In addition to these significant budget reductions, many Cotton Foundation member firms have answered the call to help defray the expenses associated with a number of important Council activities. These include sponsorships for Cotton?s Week, Ag Day, Cotton E-News, and many events at our Annual Meeting.

In addition, seven allied industry firms have partnered with the Council to support our efforts in the areas of pesticide registrations and availability, and cotton biotechnology product approval and acceptance. I hope each of you will take the time to personally thank our allied industry partners for their generous support.

As I said at the beginning of my remarks, I believe the Council has effectively focused its resources on the priorities established during our Annual Meeting. However, as my report indicates and many of the other reports today will emphasize, there are several serious challenges ahead. It is important for us ?in the days and even months ahead?to maintain the same intensity of CAC giving and Washington activity that have characterized our earlier efforts.