Measuring the Impact of the 2007 U.S. Farm Bill on Future U.S. Acreage (Part 2 of 2)

Sunday, March 15, 2009

The Market vs. Government Policy:
Measuring the Impact of the 2007 U.S. Farm Bill on Future U.S. Acreage

Presentation made at the 2006 FiberMax Cotton Quality Summit, Singapore.

Transcribed by our friends at Cotton Bangladesh.

US Farm Bill
A multi-client study was conducted by Globecot earlier this year. The goals of the study were to estimate the future cotton acreage in the US under various subsidy scenarios, understand the interplay amongst different crops for available acreage, measure the impact of changes to the farm bill on the cotton sector, and analyze the impact of changes in textiles and how those changes will affect cotton. The results from the study were:

a. volume of cotton moving through the U.S. marketing system will be large from 2005-2012;
b. cotton market is likely to be even more export-dependent;
c. prices will be subject to greater volatility;
d. the cotton sector is likely to demand the same or fewer resources over the 2005-2012 period as compared to 2000-2004, but growers will continue to rely heavily upon government payments; and
e. despite the fact that farm support payments are necessary for many growers to continue growing cotton, budgetary and WTO concerns will put pressure on the Bush Administration to slash payments in much of the farm program
• Doha Round has already called for at least a 20% cut in the most trade-distorting programs
• Cotton program falls into that category
• WTO decision relating to Brazil also jeopardizes elements of the program - in particular elimination of the Step 2 program

f. Despite all of this, the 2002 cotton program is flexible enough to accommodate some of these budgetary concerns and reductions required under the WTO and still provide a degree of subsidy for US growers
g. Yet with the way congressional budget negotiations occur, there will likely be little way of spreading the pain of cuts evenly across all commodities
h. Cotton may be singled out as a way of protecting other products

Findings of the study show that
a. the smaller cotton growers are going to be the most affected (during the study, we surveyed dozens of US cotton growers of different sizes and regions)
b. the smaller ones have indicated that if they lose their basic subsidy program they would have to sell their lands for building of shopping malls. That is, they won’t stay into agriculture business if the subsidies are withdrawn, and
c. the larger growers indicated that they might stay in the business, but there would be some degree of movement towards other crops
d. although the farm program is important to smaller growers, cuts to the farm program do not spell the end of cotton production in the U.S.; in fact, far from it.
e. the question needs to be asked if cutting cotton benefits may actually be a good thing

Some of the other issues that we came to realize from the study were
a. What is the best type of fiber to meet the need of the world’s largest consumer of fiber in Asia? What type of spinning machinery is being run? Is longer stable more important?
b. What are the issues of ring spinning versus rotor spinning type operation?
c. Foreign mill requirements versus domestic mill requirements
d. A changing balance as domestic mill consumption declines, while foreign demand increases

The current bill is very complex. 2002 legislation is so complex that changes in one program can affect costs differently in other programs. It has many unwise unforeseen aspects. For example, cuts in some programs can trigger increased spending in other programs that can reduce net savings or actually increase overall program costs. In the modeling in our study, we tried to anticipate the shifts that would occur in the acreage number. It has been quite an exercise to analyze.

I would like to illustrate eight scenarios that can evolve due to the Farm Bill.


Scenario 1: Reduce Payment Base
If the payment base is reduced, there will be a decline in acreage.

Scenario 2: Reduce Target Price
If the target price is reduced, (which is currently about 72 cents) there will be a decline in acreage in the US for cotton.

Scenario 3: Reduce Direct Payment
If direct payments are reduced, actually acreage will go up. It will increase a lot of inefficient producers to get out of business and, in turn, it will create more competition and more demand for acreage.

Scenario 4: Reduce Marketing Loan Gain (MLG)/Loan Deficiency Payment (LDP)
If some of the loan programmes are taken out, there again will also be some increases in acreage.

Scenario 5: Reduce Step 2 Payment
Let’s discuss the Step 2. It talks about issues directly affecting the US spinners. If Step 2 is taken, the acreage will go up. On the other hand, if Step 2 is cut out, it will freeze the current loan preference agreements.

Scenario 6: Reduce Loan Rates
If loan rates are reduced, there will be a decline in the acreage.

Scenario 7: Reduce Payment Limit
If payment limits are reduced, there will be decline in acreage.

Scenario 8: Revamp Export Credit
If change is made in the credit terms, there will basically be no effect. The assumption is that the demand for US cotton will exist because of the overseas industries.

Can the current program handle the requirements of the WTO rulings and also provide subsidy to the US farmers? There is definitely some degree of flexibility to do that. There are many gives and takes in the system and lots of ways of juggling and manipulating it. All the lobbyists in the Washington will be doing that as the bill goes through the legislative process. There is one broad approach that could be considered :
o Reduce the cotton base frame.
o Reduce the target price.
o Raise the direct payment to make the direct payment the primary on-going income enhancer for farmers.
o Lower the cotton loan rate.
o Recast the counter cyclical payments to address market stabilization issues.
o Eliminate Step 2 and bring the export credit program in line with WTO rules.

Most of the above stated scenarios will end up in decline in acreage. But these declines may result in some shift in production. At the same time, quality of cotton will become more significant.

When you are dealing with a complex commoditized supply chain, how do you stand out in that type of an environment? You need a quality product which is easy to understand; a product that stands out and can be marketed throughout the supply chain, rather than to the immediate traditional outlets of the product.

In the future, retailers like China and India, will require quality cotton. This is essential to understand where the business is going. Thus, there is no wonder why the traditional ways of doing business do not apply. For the US farmers, the traditional subsidy will not be in place as they had been previously. Therefore, it will require new innovations and hence some of the traditional players will go out of business. It will also require new partners. On a company by company basis, there are some very interesting partnerships that may occur.

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