Although Brazil is struggling with various concepts of the STAX plan, which could be a key component for cotton in a future farm bill, they are showing a willingness to work with it to resolve subsidy disputes, according to Darci Vetter, USDA deputy undersecretary for Farm and Foreign Agricultural Services.

Speaking at the National Cotton Council’s mid-year board of directors meeting in Memphis, Vetter said, “We in this room would probably agree that U.S. cotton subsidies, particularly as they have not been paying out in past years, are probably not the cause of a lot of the production and pricing problems that are faced by producers around the world.

“But that narrative and that belief by some of our trading partners has been difficult to dispel. We continue to try and put a spotlight on the fact that export bans in India, and very flexible tariff policies in China, have a greater impact on global cotton prices and volatility in the market than our U.S. programs do.”

The STAX plan, or Stacked Income Protection Plan, is designed to address revenue losses on an area-wide basis, with a county being the designated area of coverage. The ‘stacked’ feature of the program implies that the coverage would sit on top of the producer’s individual crop insurance product. While designed to complement an individual’s buy-up coverage, a producer would not be required to purchase an individual buy-up policy in order to be eligible to purchase a STAX policy.

Vetter said when Brazil “first saw the STAX proposal, they listed a number of criticisms they did not like. If you look at their critiques of it over time, you will now see that they are willing to work with it to find a solution. They understand that what is on the table is STAX. They need to work with STAX and find a way forward based on that.”

Vetter believes that part of Brazil’s opposition to STAX “comes from the fact that they don’t completely understand it, and that they are particularly unfamiliar with area-wide crop insurance programs.

“One of the things that they’re very concerned about is the potential for STAX to make very large payments at a time of high prices because it’s based on the difference between the futures price at the time of planting and your harvest price. It’s difficult for their producers and some of their government officials who see that as a sort of hedging mechanism rather than a loss protection program. They have also expressed concerns about the level of producer subsidy.”

Vetter says Brazil “has some similar questions and misunderstandings about our GSM-102 (Export Credit Guarantee Program), particularly about all the things we have done to bring fees for this program better in line with the risk conditions.

Talks continue

 “We have invited the Brazilians and their technical experts to come to Washington to have a technical discussion about how area-wide crop insurance programs work, and to talk about some of the changes that we have been making and are proposing to our GSM program.”

Vetter says Brazil “has been very receptive. We believe that finding a mutually agreed solution to this cotton dispute in the context of this farm bill is in everyone’s best interest. What we want to avoid is the scenario where we are unable to find a solution in this farm bill, and where under the threat of retaliation and trade sanctions, cotton is asked to review its program separately and out of cycle with the farm bill.

“The worst outcome for everyone would be two bites out of the apple — where you have taken a genuine effort at making critical reforms, and then you are asked to do that again before another farm bill cycle comes up. We’re doing everything we can to make sure that this is put to bed in this farm bill cycle.”

Even though a farm bill in hand before Sept. 30 is unlikely, Vetter says Brazilians have said they would not retaliate in the event that there is a short-term extension of the farm bill, as long as Congress “continues to do its work.”

“We have been very frank with the Brazilians that no farm bill ever seems to get done on time. An extension of the farm bill is not a rare occurrence.”

Vetter said her agency and others within the U.S. government continue to pressure countries where significant defaults have occurred on cotton exported from the United States. “We understand that this has been a significant burden and created real uncertainty in the market at a time when certainty would be more welcome. We also understand the deleterious effects this has throughout the value chain.”

In many cases, defaults that resulted in an award for the exporter have not been fulfilled. “We have made the point that contract sanctity is the basis of a functioning international trade system and we urge them for their support to help resolve these matters,” Vetter said.

Some estimates place the defaults at over $850 million.

Defaults send chilling signal to cotton shippers

Vetter noted that the United States is exploring an opportunity for a more integrated economic relationship with the European Union “which has been a complicated trade relationship in large part because of regulatory barriers. But we’re looking at creative ways to try and join our economies. That working group will release its report in December of this year to see what might be possible in an agreement.”

An agreement “will send a very positive signal to Brazil, India, Russia and others that have been less cooperative in Geneva (headquarters of the World Trade Organization) to say if we can’t move together, we will move without you.”

Vetter said free trade agreements with Panama should be fully implemented in October. “Earlier this year, free trade agreements with South Korea and Colombia entered into force. We are already starting to see the impact of those agreements and increased trade with those countries. We are also actively engaged in the Trans-Pacific Partnership agreement. We hope it will become the flagship economic and trade agreement in Asia.”

Vetter noted that as tariffs have gone down globally, sanitary and phytosanitary barriers have increased, “and have replaced that challenge at the border that the tariffs once created. By harmonizing our regulatory approaches, we’re trying to prevent those barriers before they become barriers.”