The U.S. cotton industry doesn't begrudge the tax credit incentives and tariff protection Congress has afforded renewable fuel providers in recent years, National Cotton Council leaders say.
But they say they can't help but wonder how much better the U.S. textile-manufacturing sector might be faring if it had been given the same level of tax breaks and protection from textile imports.
Currently, USDA is forecasting domestic mill consumption of cotton at 5 million bales for 2006-07, says John Pucheu, NCC chairman and a producer from Tranquillity, Calif. That would be 900,000 bales or 15 percent below the level of a year earlier and the lowest U.S. mill consumption since 1931-32.
“In recent months, it has been stated and re-stated that the United States needs a robust and viable renewable fuels production base protected by a tariff and tax credit, Pucheu told a Senate Agriculture Committee farm bill hearing. “We support that policy because it clearly benefits farmers and is in the interest of U.S. security.”
But downstream users of cotton — who once purchased 10 million to 11 million bales of U.S. cotton per year — are not being given the same level of protection and assistance, Pucheu noted.
“Their primary protection was traded away during the Uruguay Round of trade negotiations and may be further eroded in the Doha Round,” said Pucheu. “As a result, we need to provide assistance to our domestic customers — this country's textile production base.”
He said the Cotton Council is asking Congress to provide competitiveness assistance to U.S. textile mills for every pound of cotton they consume. “This modest program would have very low costs and could be offset by minor modifications to other aspects of the cotton program.”
That was one of a number of recommendations Pucheu gave the Senate ag committee at an April 25 hearing on “Challenges and Opportunities Facing American Agricultural Producers”. He also asked the committee to avoid pitting commodity against commodity in the upcoming farm bill debate.
“Government programs must provide equitable levels of support across commodities,” Pucheu notes. (Other commodity groups have criticized the cotton program as being more “equitable” than others, and soybean and wheat farmers have asked the committees to raise the target prices for their crops.)
While a number of measures can be used to compare levels of support, the Cotton Council believes the most appropriate is to look at support rates for the costs of production for each crop, he said.
Using USDA Economic Research Service cost estimates, the cotton loan rate, currently set at 81 percent of the total cost of production, and the target price, 113 percent of the cost of production, compares with corn (82 and 110 percent), soybeans (89 and 104 percent) and rice (70 and 113 percent).
“We believe the comparisons demonstrate that cotton's level of support is in line with other commodities,” Pucheu said.
The cotton industry has made no secret of its preference for keeping the structure of the 2002 farm bill in the new law. But NCC leaders are rethinking their commitment to seeking an extension of the current legislation.
“The basic structure of the current farm programs provides an effective safety net,” says Pucheu, “but cotton markets are changing, so adjustments to the administration of the cotton marketing assistance loan will be necessary.”
The cotton industry has been working with USDA to address the challenges of a changing market, including allowing the relocation of stored cotton, capping of monthly storage rates and requiring warehouses to report shipping performance on a weekly basis. It has also asked USDA to assist a Cotton Council working group that is reviewing loan premiums and discounts.
“The working group will also develop recommendations to add more flexibility in the way loans are redeemed so cotton can move to market more efficiently and competitively,” Pucheu said. “We believe we can develop recommendations for adjustments that can be made to the statute administratively and which protect CCC's collateral and provide an effective safety net for producers.”
The NCC's reaching out to the administration on loan problems doesn't extend to supporting its farm bill proposals, including its recommendation to increase the direct payment for cotton producers.
“We understand the proposal to significantly increase the direct payment is designed to compensate cotton producers for the lower loan in a WTO compliant manner — but it doesn't do an adequate job,” Pucheu said.
“Replacing an important component of our policy that is available on actual production with a decoupled payment based on ancient history doesn't offer adequate compensation — especially to growers in the Southeast and to new growers in places like Kansas and northern Texas.”
The NCC is also opposed to the administration proposal to terminate the three-entity rule that allows farmers to participate in more than one farming operation and thus receive multiple payments. The rule has been in place since 1989, when it was viewed as a significant compromise.
“If we could be assured that the termination of the three-entity rule and implementation of direct attribution would be paired with the new limits by the administration — though they still disproportionately impact high value crops produced in high cost, highly productive areas — it might be worth considering as a means to simplify compliance and administrative burden,” he said.
“However, the clear danger is that the three-entity rule will be terminated and limits will remain at current levels. We also ask for careful consideration of how husband and wife eligibility is to be determined, continuation of the landowner exemption, and an extension of current rules to determine if an individual is actively engaged in farming.”
The Cotton Council is “strongly opposed” to the administration's proposal to modify the existing adjusted gross income test by dropping the level to $200,000 and eliminating the exclusion for those who earn 75 percent or more of their income from farming, ranching or forestry.
Congress added a $2.5 million AGI test to the last farm bill in response to media criticism that high-income individuals — namely Scotty Pippin and Ted Turner — were receiving farm program payments. This was to ensure that individuals who depend on farming, ranching or forestry for their livelihood were not penalized.
“The administration contends that less than 2 percent of Americans who file tax returns have an AGI greater than $200,000,” said Pucheu. “The administration also contends 4.2 percent of recipients of farm program payments who filed a Schedule F in 2004 have an AGI above $200,000 and that only 4.7 percent of all payments received by farm proprietors went to those with an AGI over $200,000.
“That is catchy spin, but dangerously misleading. The real question is what percent of U.S. commodity production will be affected. For cotton, we believe it will be very significant.”
Pucheu said NCC leaders are concerned the new AGI test could subject growers and their lenders to the ping-pong effect of “in one year and out the next” which is directly at odds with the secretary's call for “predictable” farm policy.
The NCC is also questioning a provision in the administration's fiscal year 2008 budget proposal to eliminate cotton storage credits when prices are low. Generally, cotton must be stored in an approved warehouse to be loan eligible, and USDA has covered storage to ensure cotton was available at competitive prices.
“If the administration's budget proposal is accepted, the practice of covering storage when prices are low would be terminated effective Oct. 1, 2007, just as 2006 crop loans are maturing,” says Pucheu. “This would effectively change the terms of the loan after they were made and result in significant market disruption and income losses to farmers.”