With the number of legislative days in 2013 rapidly dwindling for Congress, National Cotton Council’s Gary Adams succinctly summarizes the situation: “We need a farm bill. The further we go toward year’s end, the more potential problems we face for cotton — and agriculture in general.
“We’re now well beyond two years since the passage of the Budget Control Act kicked this farm bill debate into high gear, and we still don’t have a bill,” he said at the annual meeting of the Mississippi Agricultural Economics Association at Mississippi State University.
Adams, NCC’s vice president of economic and policy analysis, says the race against the calendar becomes increasingly critical for cotton. “The later we go into the year, the more difficult it will become to implement programs in the legislation.”
The new farm bill — whether the Senate version or House version, or some combination of the two — “essentially makes crop insurance the delivery mechanism of a safety net for cotton producers, except for the marketing loan. There are no other Title 1 programs.
“This raises issues of implementation. We’re too late in the year now for STAX (Stacked Income Protection Plan) to be ready for 2014. There will also be challenges for the crop insurance industry with program changes, and it will put a tremendous burden on FSA as well when these big changes hit late in the year.”
STAX was developed, Adams says, in keeping with the cotton sector’s goal of policy changes that would address three pressures: spending less money, not relying on the existing farm program structure of direct payments and target prices, and addressing the longstanding trade dispute with Brazil.
“STAX is a shallow loss revenue insurance product designed to be stacked on top of a producer’s individual crop insurance coverage,” he says. “It addresses the level of risk beyond a producer’s crop insurance coverage, and does it as an insurance product that we believe will make it more acceptable from a trade standpoint.
“With direct payments and target prices going away, we believe STAX is a product that will help producers manage this area of risk. “
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STAX is included in both the House and Senate bills, Adams notes. “It’s not as we originally proposed, but it’s very similar. It uses a lot of features of existing crop insurance products and has similarities to existing area-wide products offered by the Risk Management Agency.”
In moving to an insurance-based farm program, there are some differences between the House and Senate bills that will have to be worked out in conference, he says.
“There is a specific implementation process that the Risk Management Agency will go through. The House was concerned that STAX might not be fully operational in 2014, or maybe even in 2015, and they included transition payments in their bill. The Senate bill doesn’t have similar provision.
“There are crop insurance changes that not only apply to cotton, but to other crops as well, that our industry will find very beneficial. Overall, there are a lot of things to like. There are some differences to work out, but from cotton’s standpoint, I don’t think they’re insurmountable.”
Some changes were also made to the marketing loan program, which he says “has been one of the foundations of the farm program for the cotton industry. But it was also one of the programs found to be at fault in the WTO Brazil case. We feel we’ve addressed that problem with a formula where the marketing loan rate can adjust, depending on the moving average of a price.”
Addressing trade pressures
Farm bill passage is also needed in order to address trade pressures, Adams says.
“For the past 11 years, we in the cotton industry have lived with the ramifications of Brazil’s complaint to the World Trade Organization about the U.S. cotton program.
“In 2002, Brazil filed a complaint against all portions of the cotton program, as well as our export credit guarantee program. Generally, the WTO panel found in favor of Brazil on countercyclical payments, marketing loans, and cotton’s Step 2 provision. They also found in favor of Brazil on our export credit guarantees. The only things they didn’t find any direct fault with were direct payments and the crop insurance program.”
A 2010 framework agreement between U.S. and Brazilian governments, Adams says, provided that Brazil would hold off on trade retaliation if the U.S. would make changes to the cotton program as part of the new farm bill, and make administrative changes to the export credit guarantee.
“The U.S. government further agreed to pay Brazil $147 million each year until these policy changes were made as part of the farm bill.”
But, he says, “Secretary of Agriculture Vilsack announced some time ago that as we moved into fiscal 2014, there would be no more payments by the U.S. to Brazil under the WTO framework agreement. With the government shut down, as of October 1, as far as we know, no more money has been paid to Brazil.
“If there are no further payments, we don’t know the reaction and actions of Brazil. We worry about the possibility of trade retaliation — they could impose higher tariffs on products outside agriculture. They could deny intellectual property payments and take action against patent rights, software development, pharmaceuticals, the motion picture industry — many potential impacts because of the cotton case. These aren’t pressures we need or want, not just for the cotton sector, but for the U.S. business community.
“With the year running down, we’re also awaiting a decision on a countervailing duty case with Peruvian government on imports of U.S. cotton into Peru. This is now in the final stages of investigation by the Peruvian government. They could choose to impose countervailing duties.
“Then there’s the December WTO ministerial, where cotton will be a focus. The lack of a new farm bill and associated policy changes continues to keep pressure on U.S. negotiations with the WTO.” (The new WTO director general is a Brazilian, who was the primary attorney who argued the case against U.S. cotton.)
A new farm bill is also needed in order to avoid another extension of the current law, which could jeopardize changes important to the cotton sector, Adams says.
“As popular as the current programs have been in the industry, an extension would be, for cotton, a continuation of policies that were found to be in violation of our trade commitments —and Senate Agriculture Committee Debbie Chairwoman Stabenow (D-Mich.) has indicated she doesn’t favor continuing direct payments for another year.”
Another important consideration, Adams says: “I think we need a new farm bill to take the ongoing uncertainty about this legislation off the table for U.S. farmers — to give them the ability to plan going forward, with some assurance about what farm programs are going to be.
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“Farmers are facing a lot of challenges, a major one is their rising cost of production. For cotton, there’s the challenge on the demand side of competing with polyester and on the supply side competing for acres with corn and soybeans.”
An ongoing undercurrent of worry, he says, is the 45 million bales of cotton being held by China.
“Right now, they’re supporting global cotton prices, but at some point that’s going to change — they can’t keep building stocks and holding them off the market forever — and we’re concerned about the potential impact of that transition on the market.’