The U.S. cotton industry's Step 2 market competitiveness program has become to the USDA and the Bush administration like the mongrel dog the family cannot bear to take to the pound, so they haul it to the country and dump it, only for the dog to beat the family station wagon back home.

USDA still wants the dog gone, but this time they have put down a bone in hopes that the animal will stay gone forever.

The bone is called a “compensatory buyout” by American Cotton Shippers Association executive vice president Neal Gillen. Craig Brown of the National Cotton Council calls it “early termination compensation.” Regardless of what it's called, no one knows how much meat is on the bone for now.

Gillen knew nothing of what the compensatory buyout would offer when he spoke at the 22nd annual Western Cotton Conference in Fresno, Calif., recently. The reason is neither he nor Western Cotton Shippers Association president and Fresno, Calif., cotton merchant Bruce Allbright knows exactly what USDA will offer. USDA says only the offer is coming.

Allbright is on an American Cotton Shippers Association committee that will examine what USDA has to offer. It may be a tough sell.

“Step 2 has allowed us to remain competitive as we are,” Allbright said. Without it, the result likely will be a “bearish market that will slow down the whole process. What happens as we move forward without Step 2” and how that impacts growers and shippers is a key question for USDA to answer when and if it unveils its buyout plan.

All Gillen and Allbright know now is that it is an attempt by USDA and the Bush administration to make Step 2 go away to comply with the WTO ruling against the United States on a successful complaint of unfair trade by Brazil.

Buyout less costly

This compensatory buyout deal has been compared to the USDA tobacco buyout program, although it will likely be far less expensive and not as far reaching. For one thing, the government does not have extra money with the cost of the war in Iraq and the two Gulf Coast hurricanes putting a heavy strain on the U.S. Treasury.

“There are tons of questions to be answered on the authority to do a buyout and whether it can be legislative or administrative,” said Brown, who said the council will call in growers and others to examine the deal when it is laid out.

Brazil won its unfair trade case within WTO, charging the federal cotton program — specifically Step 2 — distorted world prices. The United States agreed to end Step 2, but since it is part of the federal farm program, congressional approval is required to stop it.

Step 2 was supposed to end Dec. 31 this year under the WTO ruling. It looks like it may not end until at least the end of the current cotton marketing year, July 31, 2006.

Allbright points out that U.S. cotton sales are on the books in anticipation of Step 2 for this marketing year and beyond to make U.S. cotton competitive in world markets. When the 2002 farm bill was passed, said Allbright, the federal government struck a deal with the U.S. cotton industry for Step 2. And, Allbright says, a deal should be a deal, regardless of WTO.

“Step 2 has meant two to six cents (per pound), and for farmers that can be the difference in this market between making money and not making money, especially in a year like this when yields are expected to be down in California significantly,” said Allbright.

“It is unfortunate. The industry tried to be compliant with WTO in 2002,” said Allbright. Caving into the WTO ruling against the United States has been called “bait and switch” and “changing the rules in the middle of the game.”

Allbright wants USDA and the Bush administration to maintain Step 2 until the end of the 2002 farm bill, as promised. “At the end of the current farm bill, if Step 2 comes off the table, we will deal with it then,” said Allbright.

View at Calcot

Bob Norris, Calcot's president, acknowledged at the cooperative's annual meeting that Step 2 “will probably be eliminated, even though the WTO had no problem with it for the past 15 years.

“It has been an important part of keeping U.S. cotton price-competitive in the world market,” he added.

Unfortunately, it has not had strong U.S. grower support, he added.

“I think there's a perception among many that it's something that has benefited mainly merchant exporters and domestic textile mills. That just isn't the case,” he said.

Step 2 money Calcot collects goes directly to producers, but overall it has “helped support prices for all growers,” added Norris. Nevertheless, Allbright, Gillen and Norris all agree Step 2 is living on borrowed time.

NCC wants to borrow as much time as possible, said Brown. “The council's position is to try and hold Step 2 as long as we can — at least through the ‘05 crop marketing year,” said Brown.

The cotton industry is getting support in Congress for that position. Gillen says Congress is generally anti-free trade and views the WTO ruling as unwanted interference in U.S. farm policy, especially when the 2002 farm bill was passed with great pains taken to make the federal farm program compliant with WTO rules.

President Bush and USDA want Step 2 gone before the Doha round of WTO negotiations begins.

Safety nets remain

“The United States will get agreements from the Doha round because President Bush wants them,” he said. However, he does not expect it to be Draconian with a phaseout of farm subsidies stretched over the next five to nine years. Gillen believes safety nets for U.S agriculture will remain.

Gillen said the perennial attempt by Sen. Charles Grassley (R-Iowa) to impose stricter farm program limitations is on track to fail once again this year.

“I think Sen. Grassley will come up short again,” said Gillen. The failure, he said, will be due to the strong influence of Sen. Thad Cochran (R-Miss.) and the Washington ag coalition of 120 farm and agribusiness groups.

Gillen had high praise for the California cotton ginners and growers associations for their influence on the California congressional delegation.

“One out of 12 people in Congress is from California. That is astounding, making the support for the cotton industry from California cotton ginners and growers very important,” said Gillen.

Gillen said Agriculture Secretary Mike Johanns is hearing, “Don't change the farm bill,” at his listening sessions. He also said the WTO Doha round will have in impact on the new farm bill. “I do not expect any action from Congress on the farm bill until the Doha round is completed.”


e-mail; hcline@primediabusiness.com