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Cotton Production and Support in the United States

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Publication Date: June 2004

Publisher(s): Library of Congress. Congressional Research Service

Series: RL32442

Topic: Agriculture, forestry and fishing (Fiber industry)

Abstract:

While cotton, along with other major crops, has been subsidized by the U.S. federal government since the 1930s, cotton subsidies are now in the focus of an international spotlight. The nature and extent of these subsidies have become a roadblock in negotiating multilateral and bilateral trade agreements. Sharp criticism came from the West and Central African countries during various Doha Round meetings. Also, efforts to create a Free Trade Area of the Americas (FAA) foundered at least partially over U.S. cotton subsidies. Now, Congress is watching to see if the United States will be required by the World Trade Organization (WTO) to revise its cotton subsidies in response to a dispute lodged by Brazil.

One reason the international spotlight is on U.S. cotton subsidies, in contrast to other subsidizing nations, is the sheer size of U.S. cotton production and exports. The United States is the second-largest producer of cotton in the world, and the largest exporter. Therefore, U.S. cotton subsidies have global repercussions. Domestically, what happens to cotton subsidies is important to a broad group of interests because grains, oilseeds, and peanuts receive similar support.

U.S. cotton production and export subsidies provide comprehensive support for producers. Farmers with a history of cotton production are eligible for direct and counter-cyclical payments. On their actual production, farmers may utilize the marketing loans and loan deficiency payments. Protection against low yields is
available through subsidized crop insurance, and in some years Congress has approved additional disaster payments. When U.S. market prices rise, and there is
a risk that competitors might capture more of the world export market and even deliver to U.S. yarn and fabric mills, so-called Step 2 user payments are made to U.S. exporters and mills if they purchase U.S. cotton.

From 1991 through 2003 farm subsidies for cotton production have cost $1.76 billion per year, on average. This is the annual equivalent of $0.21/lb. of U.S.
production. While the United States is not alone in subsidizing cotton, this level of support is nearly the highest in the world, according to the International Cotton Advisory Committee.

When the $0.21/lb. average crop year farm subsidy is added to the $0.57/lb. average market price, it has given producers an average revenue of $0.78/lb. from 1991 through 2003. This level of revenue is more than enough to cover average variable cash costs of $0.50/lb., and just enough to cover average total economic costs of $0.78/lb. According to the International Cotton Advisory Committee, variable cash costs of some of the competing cotton exporting nations are about half those of the United States.

This report will not be updated.