How can the U.S. cotton program be damaging Brazilian farmers when the latter have just finished harvesting their largest crop ever?
That's a question National Cotton Council leaders and legal representatives were asking at a joint meeting of the American Cotton Producers, the Council's producer arm, and the Cotton Foundation in St. Louis.
According to USDA's latest forecast, Brazilian growers harvested 7 million bales in 2006-2007 or 38 percent more cotton than in 2005-2006. (The seasons are reversed.) U.S. growers, meanwhile, reduced their plantings by 28 percent last spring.
“Brazil's harvest that they just completed appears to be their largest on record,” said Gary Adams, the National Cotton Council's director of economics and policy. “Right now, USDA has it plugged in at about 7 million bales. So we are seeing expanded production in Brazil.
“Brazil's internal prices have risen and the country will probably be a larger exporter of cotton in the next several months,” Adams told attendees at the joint meeting of the two groups.
The increase in Brazil's production is occurring while Brazil has been complaining to anyone who would listen that the U.S. cotton program continues to suppress world cotton prices and damage foreign growers in countries like Brazil.
Not only has Brazil increased its cotton plantings in recent months, NCC representatives said, but its government has also been acting to force the internal price of cotton down by selling government-held cotton stocks on the Brazilian market.
“The actions of Brazil's own government in April and May, when it sold nearly two-thirds of its government held cotton stocks, are clearly incompatible with Brazil's contemporaneous arguments that the United States was suppressing world cotton prices,” said Bill Gillon, an attorney who represents the Council on trade issues.
“The Brazilian government was arguing (and the WTO Panel apparently agreed) that the U.S. cotton program was causing price suppression in the world market, even though the Brazilian government was taking action to drive down domestic cotton prices. Brazil's words to the WTO were blatantly inconsistent with Brazil's own actions at the time.”
(Gillon was referring to press reports that the WTO panel ruled in favor of Brazil after the latter brought a complaint that the United States was not moving fast enough in response to a 2005 WTO panel decision that the U.S. cotton program had caused “serious prejudice” to Brazil's farmers.)
Even in the absence of Brazil's efforts to “break” the market internally, the facts do not bear out Brazil's claims before the WTO review panel in Geneva earlier this spring that U.S. subsidies are resulting in lower world prices, NCC leaders said.
“The current world market situation flies in the face of Brazil's claims,” said NCC Chairman John Pucheu. “During the 2006 marketing year, India was undercutting world prices by as much as 5 cents per pound; Brazil was selling government stocks to dampen domestic cotton prices; and China was using its variable levy system to increase internal prices and stimulate production.
“It cannot be credibly argued that the U.S. cotton program is causing any country serious prejudice in 2007 — the first year the cotton program has operated without Step 2.”
Since the United States eliminated its step 2 program, U.S. cotton exports declined significantly, U.S. acreage dropped 28 percent and production is expected to decline by 20 percent or more for 2007, NCC leaders said.
India, for example, has significantly increased its production although its yield still remains substantially below the world average, according to Adams.
“We would expect as we go into 2007-2008, based on the information we're seeing and if yields continue to improve, we're likely to see a production number of out India in the neighborhood of 23 million bales.” (India's crop totaled 13 million bales four years ago.)
The U.S. Congress eliminated Step 2 at the beginning of the 2006-2007 marketing year last Aug. 1. Since then, U.S. exports have plummeted while shipments from India to China and other countries have increased significantly. While the United States did not alter other aspects of its cotton program after the first panel decision, Gillon said, “the measure of this type of proceeding is not whether the U.S. changed all of its programs, but whether the changes it did make were enough to ensure the program was not causing significant price suppression in world markets.
“Clearly, with U.S. production down and the rest of the world producing at a record pace, the U.S. program is not causing anyone injury.” Noting the WTO panel's report is supposed to remain confidential until it is translated in all the organization's official languages, Gillon said that when the compliance panel report is made public, he hoped it would explain the discrepancy between the apparent decision and the current world cotton market.
“In order for the U.S. to be able to take rational policy steps to adjust to WTO decisions, it must have a clear description of what it is doing wrong,” he said.
“So far, while maintaining that the United States is causing significant price suppression, no WTO Panel has told us what ‘significant’ means.”
Gillon said the current panel had strong evidence before it tending to show that the U.S. program (even before parts of it were eliminated) could have had no more than a 2 percent or 3 percent impact on world prices.
“If the panel did not discredit that evidence, we may have a decision by the WTO that a 2 percent or 3 percent movement in prices is ‘significant,’ which seems to fly in the face of common sense.”
U.S. producers have often heard claims that Brazil's farmers operate without subsidies. Gillon said that's not exactly true.
“The PEPRO program operated by Brazil essentially ensures that domestic guaranteed prices for cotton in Brazil will not unduly harm the competitiveness of Brazilian cotton, either in domestic or international markets,” he said.
China's variable levy system restricting imports into that country also acts as a price support program for its cotton producers — a system that has been equivalent to at least $5.7 billion in subsidized support for 2005 and 2006.
“That program continues to provide support to Chinese cotton producers in 2007,” he added.
Citing the recent announcement of 1 million tons of previously unreported stocks of cotton in China, Gillon stated, “the overall lack of transparency in the Chinese cotton system results in millions of pounds of stocks suddenly appearing within China — undercutting worldwide demand and adding tremendous uncertainty to the world market.”