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TWN Info Service on WTO and Trade Issues (Feb15/01)
9 February 2015
Third World Network
 

US 2014 Farm Bill and developing country cotton producers
Published in SUNS #7955 dated 5 February 2015
 
Geneva, 4 Feb (Kanaga Raja) -- Incentives to produce cotton in the United States will be weaker under the provisions of the 2014 Farm Bill and competing cotton-exporting developing and least-developed countries will have greater opportunities than they would have had if the 2014 bill had continued to provide support as before, a report by the United Nations Conference on Trade and Development (UNCTAD) has suggested.
 
Nevertheless, US cotton production is likely to exceed domestic consumption during the lifetime of the present farm bill, and most of the production will be exported. The exports will remain in the range of 2.2 to 2.7 million tons a year, UNCTAD said. US cotton exports have averaged an annual 2.2 million tons over the last 25 years.
 
[This implies that though domestic incentives may be less, US cotton exports will remain on average the same as before.
 
[Meanwhile, according to a news report in the Indian publication Livemint, US cotton farmers are likely to cut their acreage to the smallest since 2009 on account of prices falling to a five-year low in January. Plantings will drop to 9.73 million acres in the season beginning 1 August, from 11.04 million a year earlier, as farmers switch to other crops, said the news report, which cited a Bloomberg News survey of traders and analysts.
 
[The Livemint report cited the International Cotton Advisory Committee as saying on 2 February that US farmers will join farmers in India and China in cutting their acreage, thus reducing the next global harvest by more than 6% to 24.6 million tonnes, the lowest in six years. - SUNS]
 
In a report titled "The 2014 US Farm Bill and its Implications for Cotton Producers in Low-Income Developing Countries", UNCTAD said that the Farm Bill of 2014 (the United States Agricultural Act of 2014) will provide substantially less support to the cotton sector in the United States than has been provided under previous farm bills.
 
The report was commissioned by UNCTAD's Special Unit on Commodities, and was written by Dr. Terry Townsend, an independent consultant and a former Executive Director of the International Cotton Advisory Committee (ICAC).
 
Given that the United States Government is mandating the use of biofuels in the country's fuel supply, prices for corn and soybeans will probably remain higher, on average, than they were in the past, said the report.
 
Accordingly, said UNCTAD, domestic cotton production is likely to trend downwards toward 3 million tons of lint per year over the next five years as harvested area in regions where cotton competes with corn and soybeans moves towards the production of biofuel crops.
 
"The increases in prices of corn and soybeans will also affect planting decisions in other major cotton-producing countries. Accordingly, there is likely to be a reduced supply of cotton from competing exporting countries, especially the United States, in the future."
 
With competitive pressures from other exporters weakening over the next five years, and the quantity of cotton being used in the textile industry rising as prices gradually decline, there will be opportunities for increased production and exports of cotton from Africa, the report underlined.
 
"Starting from a small base, there will also be opportunities for expanding textile industry activity in Africa."
 
UNCTAD said that the aim of the report is to provide an analysis of the US 2014 Farm Bill, focusing on its potential implications for cotton prices worldwide and especially its impacts on cotton producers in low-income developing countries and least developed countries (LDCs).
 
"It does not attempt to determine whether the cotton provisions of this Act are compliant with WTO rules or explain the findings of the Brazil cotton case; rather, it seeks to examine whether the subsidies paid to United States cotton growers are likely to lead to increased or decreased United States cotton production by 2018," it added.
 
The report noted that cotton is produced on a commercial scale by about 45 million households in about 80 countries, and provides annual incomes to an estimated 250 million people.
 
From the invention of the cotton gin in the 1790s to the present, the United States has always played a leading role in the world cotton industry because of trade relations with the United Kingdom, the major textile producer from the 1700s to the 1950s, and favourable agronomic conditions.
 
The most recent farm bill, passed by the US Congress and signed into law by President Barack Obama in February 2014, will affect the basic structure of agricultural programmes in the United States until 2018.
 
The bill authorises $956 billion in spending over the 2014 to 2023 period, including $756 billion on food and nutrition programmes, $89.8 billion on crop insurance, $56 billion on conservation programmes, $44.4 billion on commodity programmes, including for cotton, and $9.8 billion on other miscellaneous provisions.
 
US COTTON PRODUCTION AND EXPORTS
 
The UNCTAD report noted that over the past 25 years, the United States has produced an annual average of 3.8 million tons of cotton. It has always ranked among the top five producers globally, and has been the largest exporter each season.
 
Its cotton production rose in an impressively strong trend, from 2.4 million tons in 1980/81 to a record 5.2 million tons in 2005/06, but declined steadily thereafter, to 3.8 million tons in 2012/13 and 2.9 million tons in 2013/14.
 
According to UNCTAD, this was partly due to competition from grains and soybeans as a result of mandates to grow crops for biofuel production. With competition from biofuels boosting grain prices, and with cotton yields rising slowly, United States cotton production may continue its downward trend until about 2020.
 
The cotton harvested area in the United States fell relative to the harvested area for corn and soybeans between 2005/06 and 2012/13. Between 1990 and 2013, the total area devoted to cotton, corn and soybeans together increased from 55 million hectares to 70 million, but the area under cotton fell during that period.
 
During the 1990s, the share of cotton in the total area devoted to cotton, corn and soybeans ranged between 8 per cent and 10 per cent in most years, and was still only 8.6 per cent in 2005/06. However, between 2005/06 and 2013/14, that share fell by almost half, to 4.5 per cent.
 
The report said that the data on harvested area indicate that, from farmers' perspectives, cotton is becoming less attractive than corn and soybeans. However, a major factor causing a sustained increase in prices of corn and soybeans relative to prices of cotton in the United States and on world markets is the increasing use of ethanol for biofuel.
 
In 2006, ethanol accounted for less than 4 per cent (by volume) of motor vehicle gasoline supplies in the country, but it grew to 10.6 per cent in 2011. It is estimated that 43 per cent of United States corn in 2013/2014 was used in ethanol production.
 
Therefore, said the report, the increase in demand for feed grains resulting from increased biofuel production in the United States is not resulting in a proportionate increase in demand for cotton.
 
"As long as the United States Government mandates that ethanol be blended into domestic liquid fuel supply, this situation is not likely to change. Consequently, the shift in the relative competitiveness of cotton versus corn and soybeans for land in the United States is likely to persist."
 
The report further noted that the US mill use (consumption of cotton lint by textile mills) rose slightly to 784,000 tons in 2013/14, and there could be further moderate increases towards 800,000 tons over the next few years.
 
Nevertheless, cotton production is likely to exceed domestic consumption during the life of the 2014 Farm Bill, and consequently, most of United States cotton production will be exported.
 
For the past 25 years, the United States has exported, on average, 2.2 million tons of cotton per year, maintaining its role as the largest exporter of this commodity. Cotton exports were 1.5 million tons per year from 1990/91 to 1999/00, 2.8 million tons per year from 2000/01 to 2009/10 and 2.9 million tons from 2010/11 to 2012/13.
 
While changes in stock levels can affect export volumes in any given year, over several years United States cotton exports will equal production minus domestic mill use. If mill use is assumed to be 800,000 tons per year, and production is between 3 million tons and 3.5 million tons, United States exports will probably be between 2.2 and 2.7 million tons per year.
 
Thus, said UNCTAD, United States cotton exports during the second half of this decade will likely be about one-fifth lower than they were during the first half of the decade.
 
PROGRAMMES UNDER THE US 2014 FARM BILL
 
The report explained that under previous farm acts going back to the 1970s, 1980s and 1990s, cotton farmers and farmers of other "covered commodities" (wheat, feed grains, rice, oilseeds, peanuts and pulses) received three kinds of support from the US Department of Agriculture (USDA): (i) marketing loans, (ii) countercyclical payments, and (iii) direct payments.
 
Of these, the countercyclical payments and the direct payments are being eliminated under the new act, but the marketing loan programme will continue.
 
"Across all the covered commodities, growers are facing significant programme changes, but in a unique development, cotton is being treated differently. This is most probably in response to the successful challenge of Brazil at the WTO to the treatment of cotton under the previous United States farm acts," the report suggested.
 
The innovative portion of the new Farm Bill is its increased emphasis on revenue insurance through the Stacked Income Protection Plan (STAX), which will provide revenue insurance to producers of upland cotton. Because of the administrative complexity of the new provisions, and because the bill was enacted after the deadline for implementation of the new provisions for 2014, STAX will not be available until 2015.
 
To provide support in the meantime, upland cotton producers will receive transition payments for crop year 2014 and also for crop year 2015 in any areas where STAX protection is not yet available. STAX can supplement insurance coverage available through the Federal Crop Insurance programme, or be purchased as stand-alone protection. Federal Government subsidies will cover 80 per cent of producers' premiums. STAX, like traditional crop insurance, is not subject to payment limitations or to adjusted gross income eligibility limits.
 
UNCTAD underlined that under STAX, if revenue in a county falls below 90 per cent of the estimated revenue at planting time, upland cotton farmers in that county who had paid the premiums to buy STAX insurance will receive indemnity payments equal to the difference but no more than 20 per cent of expected revenue. STAX will be available for purchase on all acres planted with upland cotton.
 
In addition to STAX, there are numerous other provisions of the 2014 farm bill that will affect cotton production, said the report, noting that the Risk Management Agency (RMA) of USDA provides a number of crop insurance products that United States farmers may choose, and these insurance programmes will continue under the 2014 Farm Bill.
 
Apart from the continued use of marketing loans, the report said that another programme that will continue under the new Act, but with modifications, is the Short-Term Export Credit Guarantee Program (GSM-102).
 
Under GSM-102, the United States Government does not provide loans, but it guarantees payments by non- United States banks on loans extended by United States exporters (more commonly United States banks) for the financing of domestic agricultural commodity exports to selected destinations.
 
The duration, or maximum term of the credit guarantees has been reduced from 36 to 24 months, and the new Farm Bill continues the requirement that the fees cover the Program's operating costs and losses over the long term. Federal budget estimates indicate that this requirement is being met.
 
The GSM-102 Program is limited to $5.5 billion per year for all commodities. During the four most recent complete fiscal years, 2010-2013, the USDA guaranteed loans for imports of cotton amounting to an average of $275 million per year in exported value, or 7.5 per cent of total GSM-102 activity.
 
At average prices, the GSM-102 guarantees would have covered exports of between 100,000 and 200,000 tons of cotton per year, or about 5 per cent of total United States cotton exports.
 
During the cotton seasons 2010/11 to 2012/13, China was the biggest market for United States cotton exports, averaging 1.2 million tons per season, Turkey was a distant second, averaging 373,000 tons, and Mexico was the third at 231,000 tons per year on average.
 
The UNCTAD report said that the new Farm Bill also maintains the Economic Adjustment Assistance Program for textile mills in the United States using upland cotton. This is a subsidy of 3 cents/lb to those mills on each pound of upland cotton they consume. Assuming annual cotton consumption by textile mills in the United States of 800,000 tons, the annual cost to the Government will be around $50 million.
 
According to the USDA, STAX is designed to meet United States obligations under the WTO Brazil cotton case. The United States Government argues that STAX will reflect market conditions more rapidly than both previous cotton programmes and the programmes for other United States commodities under the new Farm Bill, because insurance indemnities will be based on current market prices at planting time, instead of a fixed target price of 71 cents/lb as existed under previous farm acts.
 
In addition to STAX, producers of all covered commodities, including upland cotton, will have a second revenue insurance option, the Supplemental Coverage Option (SCO). SCO will supplement traditional crop insurance and will provide coverage based on county average yields or revenue. The United States Government will subsidise 65 per cent of the premiums.
 
According to UNCTAD, the impacts of STAX on cotton production in the United States can be anticipated, but they are hard for economists to quantify, because the programme is a drastic change from previous programmes and because STAX will not even be operational until 2015, so that there is no set of historical data to study.
 
Nevertheless, even with the 80-percent subsidy of the premiums offered under STAX, government outlays for upland cotton, as estimated by the Congressional Budget Office (CBO), will be lower than levels under the repealed Direct Payments and Counter-cyclical Payments (DCPs).
 
"This suggests that the incentives to produce cotton in the United States will be weaker than they were during previous decades. Accordingly, competing cotton-exporting countries, including developing countries and LDCs, will have greater opportunities, other things being equal, than they would have had if the 2014 Farm Bill had continued providing support as before," the report claims.
 
It also said that during the eight fiscal years from end-September 2003 through September 2008, corresponding to the 2002 Farm Bill, average expenditures on direct and counter-cyclical payments to upland cotton were $2.8 billion per year. During the six fiscal years from end-September 2009 through September 2014, corresponding to the provisions of the 2008 farm bill, expenditures on upland cotton are estimated to have averaged $1.1 billion per year.
 
Based on USDA estimates of average farm prices and production during the life of the 2014 Farm Bill, the Congressional Budget Office estimates that outlays under STAX for upland cotton will average about $360 million per year.
 
"Thus, expenditures under STAX are estimated at about one eighth of the cotton subsidies paid under the 2002 Farm Bill and about one third of the subsidies paid under the 2008 Farm Bill. However, STAX subsidies will be of the same magnitude as subsidies paid in the early 1990s."
 
According to UNCTAD, the "baseline" of United States cotton production estimated by the USDA that was used by the Congressional Budget Office for the projections above, assumes a harvested area of 3.4 million hectares per year and production of 3.1 million tons per year.
 
Accordingly, the premium subsidies under STAX in the 2014 Farm Bill will amount to about $100 per hectare, or about 5 cents/lb of production. To put this in perspective, a farmer could achieve the same degree of price protection (but not yield protection) by purchasing a put on the December cotton contract at a strike price 10 per cent out of the money.
 
In mid-April 2014 (many farmers plant in April), the December futures contract was trading at about 82 cents, and a 74-cent put (the right to sell at 74 cents) cost a little less than 2 cents/lb.
 
In comparison, United States Government outlays for upland cotton averaged $525 per hectare or 28 cents/lb. of production during fiscal years 2001-2008, and outlays are estimated to be an average of $325 per hectare and 16 cents/lb of production between fiscal years 2009 and 2014.
 
"Therefore, upland cotton will be receiving much less under the 2014 Farm Bill than was received under the two previous farm bills. This suggests that United States cotton production is more likely to remain constant or decline in the years ahead, rather than increase, and therefore its share of world cotton exports is likely to follow a downward trend as well."
 
The report however said that while the 2014 Farm Bill provides less support to cotton than did previous farm bills, it nevertheless still provides support.
 
In years of very low market prices, such as those in which the A Index is below 57 cents/lb., United States farmers will still produce cotton as if the A Index were 57 cents.
 
However, since the counter-cyclical payments that were contained in previous farm bills have been eliminated in the 2014 Farm Bill, domestic cotton production would likely fall sharply at these price levels, since costs of production for most farmers are substantially higher.
 
TRENDS IN THE WORLD COTTON MARKET
 
Despite prices well above the long-term average, world cotton production fell during both 2012/13 and 2013/14, and production in 2013/14 at 25.7 million tons is no higher than it was eight seasons earlier.
 
According to the report, the world cotton industry is going through an era of stagnation in production, similar to the situation that prevailed from the mid-1980s to the end of the 1990s. As was the case from the mid-1980s to about 1999/00, and as has been occurring again since 2007/08, world cotton yields are not rising because no new fundamental breakthroughs in production technology have been commercialised since biotechnology-induced improvements in 1996.
 
World cotton production essentially quadrupled from 7 million tons in 1950/51 to 27 million tons in 2004/05, and then amidst much price volatility, it climbed to a record high of 28 million tons in 2011/12. The average annual rate of growth in world production over the last six decades has been 2.5 per cent, or about 290,000 tons.
 
However, during 2012/13 and 2013/14, world production declined because of lower cotton prices, both in absolute terms and relative to the prices of competing crops. The world cotton-growing area fell from 36 million hectares in 2011/12 to 33.8 million in 2012/13, and then to 33.1 million in 2013/14.
 
According to the report, yields are estimated to have declined to about 780 kilograms per hectare in 2013/14, the sixth consecutive year in which world cotton yields have not risen.
 
With yields flat, at least for the rest of this decade, and with the world area for cotton under growing pressure from competition with grains and oilseeds, world cotton production is not likely to rise substantially from its current level of between 25 and 30 million tons per year.
 
As a consequence, almost all the gain in world fibre use is accruing to polyester, not cotton. Consequently, even though fibre use is rising, world cotton use has fallen every season since its peak of 27 million tons in 2007/08.
 
World trade in cotton is estimated at 8 million tons in 2014/15, compared with 8.6 million tons in 2013/14 and 9.7 million in 2012/13.
 
OPPORTUNITIES FOR AFRICAN COTTON PRODUCERS
 
UNCTAD said that over the 40 years between 1973/74 and 2012/13, the Cotlook A Index averaged 73 cents/lb. The average Index during the current season will be about 92 cents/lb, and any realistic appraisal of market opportunities must acknowledge that the current level of cotton prices cannot be maintained.
 
China supported prices in the world cotton market during 2011/12 through 2013/14 through purchases for the State Reserve, and these purchases are likely to be reduced. The Government of China will probably pursue a slow and managed liquidation of the Reserve over many years, allowing prices to gradually move lower towards the long-run average of the Cotlook A Index of 73 cents/lb.
 
As the State Reserve in China is gradually reduced over the next several years, there is a strong likelihood that international cotton prices will decline. Nevertheless, prices lower than the current above-average levels can still be remunerative if the costs of production are below the level of prices received, said the report.
 
The costs of production per kilogram of lint in many African countries are below the world average, and they are below average costs in the United States and China. This indicates that even if the Cotlook A Index declines towards the long-run average over the next several years, African producers will still earn positive margins from cotton production.
 
In addition, biofuel mandates in developed countries, combined with world income and population growth and the resulting pressures on food prices, will probably keep prices of grains and oilseeds above the average levels that prevailed prior to the mid-2000s.
 
Consequently, the area devoted to cotton in Brazil, China, Turkey, the United States and other countries is more likely to fall rather than rise during the remainder of this decade.
 
Accordingly, there will be competitive space in the world cotton market for expanded production and exports from developing countries and LDCs, said the report, adding that because sub-Saharan Africa accounts for just 6 per cent of world cotton production, expanded production in Africa will not exert significant downward pressure on world cotton prices to levels lower than they would be anyway.
 
Further, agricultural technology is in a phase of consolidation so that no major breakthrough is likely during the rest of this decade. This will give African producers an opportunity to close the gap between the world and African yields.
 
"Meanwhile, across Africa, incomes are rising, better governance is apparent, and countries are welcoming private sector initiatives. To take advantage of these opportunities to increase cotton production African governments need to design and implement reforms in two key areas: increasing supplies of and access to inputs, and improving regulation of the sector."
 
The report noted that the biggest constraint on increased cotton production is the failure to provide inputs to farmers. Accordingly, in order to take advantage of the market opportunities available in the next five years, African governments need to improve systems of input delivery to farmers.
 
It said that a lesson of the past two decades, which even the most ardent advocate of deregulation would have to acknowledge, is that a highly regulated cotton sector in which input supply to farmers is linked with seed cotton procurement results in better outcomes than an unregulated sector.
 
It cited Cameroon as an example, in that in producing an average of more than 500 kilograms per hectare, it has the highest national yield in sub-Saharan Africa, other than South Africa (which has produced only 10,000 tons of cotton in recent years).
 
Accordingly, in order to take advantage of the competitive opportunities that will be available to producers in developing countries over the next five years, it is recommended that African governments establish and enforce the regulatory frameworks used in countries with the highest yields, namely Cameroon and Uganda, it concluded. +

 


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