SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 8323 words

COMMITTEE: SENATE AGRICULTURE, NUTRITION AND FORESTRY

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: JAMES ECHOLS, CHAIRMAN OF THE

AFFILIATION: NATIONAL COTTON COUNCIL

BODY:
July 17, 2001

Testimony of James Echols Chairman, of the National Cotton Council

before the Committee on Agriculture, Nutrition and Forestry of the U.S. Senate

Introductory Remarks

My name is James Echols, I am President of Hohenberg Bros. Company in Memphis, Tennessee, and currently serve as the Chairman of the National Cotton Council of America. I have been in the cotton merchandizing business for 40 years. My testimony today reflects the consensus view of all seven segments of the U. S. cotton industry, including producers, ginners, seed crushers, warehousemen, shippers, cooperatives and textile manufacturers.

On behalf of the entire cotton industry, I would like to commend you for holding these hearings on the next farm bill and express our sincere appreciation for this opportunity to testify. My testimony this morning will discuss what our industry would like to see in the next farm bill and will focus on the commodity titles. However, until such time as commodity titles are amended we urge Congress to continue to provide relief similar to the emergency assistance provided during the last three marketing years. Specifically, we urge Congress to:

1.Supplement existing AMTA payments with additional marketing loss payments at the highest rates possible,

2.Allow producers to receive supplemental payments on the higher of existing crop bases or an average of recent planting history, provided adequate funds are available,

3.Mitigate the impact of limitations on supplemental payments, enabling producers to qualify for total payments of not less than the amount of AMTA and marketing loss payments received for the 2000 crop, and

4.Reauthorize cottonseed payments when seed prices are low.

Thumbnail Sketch of the U.S. Cotton Industry

Upland cotton is grown primarily in 16 states across the lower part of the United States, and production of ELS cotton is confined to irrigated regions in California, Arizona, New Mexico and Texas. Over the past 10 years, U.S. production of upland cotton has averaged 16.9 million bales, produced on some 14.1 million acres. During the same period, ELS production has averaged 457 thousand bales on 238 thousand acres.

On average, domestic mills account for 60% of U.S. cotton offtake, and export customers for 40%. U.S. exports normally account for about 26% of world cotton trade. Our biggest competitors in the world market are centrally planned economies and/or developing countries, the largest being China, India, Pakistan and Uzbekistan.

U.S. cotton faces intense competition both from foreign-grown cotton and manmade fibers. U.S. cotton accounts for only 14% of world fiber consumption. The U.S. cotton and textile industries are also confronted with intense competition from textile imports. Currently, Council economists estimate that U.S. cotton accounts for only 50% of the cotton content of textile products sold across U.S. retail counters.

The U.S. cotton industry and its suppliers, together with the cotton product manufacturers, account for one job of every thirteen in the U.S. Annual cotton production is valued at more than $5 billion at the farm gate. In addition to the fiber, cottonseed products are used for livestock feed, and cottonseed oil is used for food products ranging from margarine to salad dressing. Cottonseed and cottonseed products tend to account for about 3% of annual revenue generated from U.S. cotton production.

While cotton's farm gate value is significant, a more meaningful measure of cotton's value to the U.S. economy is its retail value. Taken collectively, the business revenue generated by cotton and its products in the U.S. economy is estimated to be in excess of $120 billion annually. Cotton stands above all other crops in its creation of jobs and its contribution to the U.S. economy.

Background

Mr. Chairman and members of the panel, when the bill hailed as Freedom to Farm was initially debated in 1995, National Cotton Council members expressed grave reservations about its ability to provide the support mechanism needed by American agriculture. Our leaders favored policy more analogous to the target price concept that had been effectively providing counter cyclical income protection under 1990 farm legislation.

Some advocates of Freedom to Farm characterized the National Cotton Council's program recommendations as "depression-era farm policies." Council President Jimmy Sanford responded by saying, ". . .We are concerned about international competitiveness in the face of widespread subsidization. We are fighting for downside price protection to help cotton farmers when our prices are unreasonably low."

Thankfully, a number of amendments were eventually approved that made the bill conform more closely to the National Cotton Council's policy recommendations. Chief among those changes were:

Restoration of a marketing loan with the same formulas as used in 1990 legislation, although capped at 51.92 cents per pound;

Retention of the 3-step competitiveness program, but with funding capped at $701 million; and Retention of the 3-entity rule for determination of payment eligibility.

When Freedom to Farm was being debated, we had experienced several years of relatively strong agricultural prices. However, we were not convinced that prices would remain consistently strong over the next seven years. With removal of the target price concept and the imposition of a cap on the marketing loan rate, we had reservations about the FAIR Act's ability to provide an adequate income safety net in periods of low prices.

Our analysis showed that the farm income safety net would be deficient when prices fell even to moderately low levels. In the case of cotton, for example, that low price threshold would be reached when prices on the New York Board of Trade fell below the mid-to-high 60-cent range. Of course New York cotton prices during calendar 1995 were above 80 cents.

The bill finally enacted as the Federal Agriculture Improvement and Reform Act (FAIR) served us well enough for two years, after which the prevailing strong prices gave way to deep and persistent price troughs across virtually all agricultural commodities. These pervasive low prices meant that we could not flex to alternate crops for any appreciable relief.

Low prices for agricultural commodities have proven to be chronic, and the FAIR Act's Achilles' heel has been painfully exposed. During the past three years, many cotton farmers have avoided bankruptcy only because Congress has authorized emergency relief to supplement the FAIR Act's inadequate fixed payments.

Mr. Chairman we are most appreciative of the supplemental assistance provided by Congress during the past three marketing years and for the consideration that is being given for a fourth year. The combination of fixed payments under the FAIR Act and the emergency funding authorized by Congress has not only kept many farmers afloat, but our nation's agricultural infrastructure has been maintained as well. When the cotton industry's current situation is compared to the one confronting us when 1985 farm law was being debated, we are much better off. Throughout the first half of the 1980s, U.S. mill consumption averaged only 5.75 million bales. By 1985, total offtake of U.S. cotton, including domestic mill use and exports, had dropped to a dismally low 8.4 million bales.

In the years leading up to 1985, we saw cotton inventories build to levels exceeding 9 million bales. We were subjected to "PIK" programs that gave farmers back their own forfeited loan cotton to sell in exchange for sharply reduced plantings. These drastic supply adjustments dropped production in some years to 8 or 9 million bales, whipsawing our processing and handling infrastructure and convincing our entire industry that loan floors above market-clearing prices are a poor way to provide price and income support for farmers.

Thanks to the marketing loan introduced in 1985 farm law and the 3-step competitiveness plan added in 1990 law, offtake of U.S. cotton quickly recovered to levels that have been consistently more than twice the 1985 rate. We regained our traditional position of prominence in the world cotton market and costly, market-wrenching loan build-ups have been avoided. Under most market conditions, we have been able to offer U.S. cotton to our domestic and foreign customers at generally competitive prices.

This experience with market-oriented federal farm policy is in sharp contrast to pre-marketing loan policy that put a floor under U.S. cotton prices, allowed our foreign competitors to undercut our prices and resulted in large accumulations of U.S. cotton in the hands of the Commodity Credit Corporation.

NCC Policy Recommendations

Over the past 15 years, our industry's experience with a marketing loan keyed to the world price for cotton has been mostly good. We strongly support its continuation in future cotton titles.

The initial marketing loan concept was not perfect, however. We found that a marketing loan that was intended to allow U.S. cotton to be quoted competitively against a world market price defined as the average of the 5 cheapest growths quoted for delivery in Northern Europe would not ensure a consistently competitive price. There are times when the lowest-priced foreign growth is well below the average of the 5 cheapest growths, and when such low quotes are backed with a substantial exportable supply, the U.S. is relegated to the role of residual supplier.

To help deal with such competitive situations, the cotton industry recommended, and Congress implemented, a 3-step competitiveness plan in 1990 farm law. This addition to U.S. cotton's overall competitiveness plan improved our ability to offer competitively priced cotton more consistently. The 3-step plan has been amended several times since 1991 to make technical corrections. It is an important part of our competitiveness program, and we strongly urge Congress to continue it in new farm law.

We recognize that prevailing WTO agreements are designed to impose disciplines on U.S. farm policy. In general, the WTO provisions tend to favor price and income support measures that are decoupled from acreage, production and prices. Such supports are considered to be non-trade-distorting and are not limited under current WTO rules.

Support measures that are coupled to acreage, production and prices are, with some exceptions, considered to be trade distorting and are subject to disciplines under WTO rules (referred to as "amber box" spending). The United States agreed to a $19.1 billion ceiling on this type of coupled agricultural support for the 2000 and subsequent crop years, which, if exceeded, could subject the U.S. to sanctions.

Generally, the most cost effective support measures are those that are coupled to prices and production, since outlays under such programs are made only when prices and/or returns fall below an established threshold. Fixed, decoupled payments, on the other hand are less cost effective but more WTO friendly. The multiple goals of income support, cost effectiveness and WTO compliance leads the National Cotton Council to propose new farm policy that relies on a combination of coupled and decoupled payments.

Since we like the planting flexibility that goes hand-in-hand with the FAIR Act's decoupled payment provisions, we encourage as much reliance on decoupled, AMTA-like payments as feasible. Additionally, we recommend some type of counter cyclical income support that is as coupled and as commodity-specific as practical given budget considerations and our commitments within the World Trade Organization.

Mr. Chairman, we know that a number of different counter cyclical payment programs have been tentatively discussed among agricultural interests. Among them are:

1.Crop-specific payments, triggered when the price of a covered commodity falls below a specified threshold (the target price concept in 1990 farm law featured such a program);

2.Crop-specific payments, triggered when revenue per acre for a covered commodity falls below a specified threshold (the modified SIP program falls in this category); and

3.A market-basket approach, whereby payments are triggered when gross revenue for a specified number of commodities falls below a threshold level.

Our analysis of these concepts suggests that each has some strengths and weaknesses and I would like to share our views about them.

1. Crop-Specific, Price Deficiency Payment Program

This kind of program has several advantages. It is sensitive to prices for individual crops; payments are coupled to production and can be paid to producers either on the basis of actual plantings or recent planting history; payments are made only when prices are below the specified threshold; and the payment rate has typically been computed on the basis of the national average price received by farmers. Such programs have merit because they tend to do the best job of delivering appropriate, timely assistance while avoiding outlays when they are not needed.

There are also some potential disadvantages, the chief of which is that these programs are often to be considered to be "amber box" under current WTO rules. While planting flexibility could be retained, the relative size of anticipated payments for each crop could influence planting decisions if payments are made on actual production, possibly prompting counterproductive acreage shifts among alternative crops.

2. Crop-Specific, Revenue Deficiency Payment Program

The principal advantage of a program based on crop-specific revenue per acre deficiency as opposed to a price deficiency is that it provides protection against both low prices and low yields on a commodity-by-commodity basis. Such programs are generally coupled to production, and payments are made only when revenue for a covered crop falls below the specified threshold.

Among the disadvantages of such programs is the possibility that they may be subject to WTO disciplines. Also, it is difficult to identify a common historical period that provides an appropriate revenue baseline for all the major commodities. Moreover, problems could occur in years of very low, or no, production. Price and yield experience in any given year could be offsetting, with the result that no payment would be received in a year of high prices and very low production.

3. Market Basket, Gross Revenue Deficiency Payment Program

The main, and perhaps the only, advantage of such a program over a crop-specific revenue deficiency payment program is the possibility that it would be classified as green box spending under WTO rules.

Its WTO classification is uncertain, and there are disadvantages. There would most likely be years when the revenue for an individual commodity would be out-of-sync with the market basket of commodities. Smaller acreage, Sun Belt crops like cotton and rice would be more vulnerable to such outlier revenue years than the larger acreage crops, since (1) the latter would make up such a high percentage of the market basket revenue from year to year and (2) there is a very real possibility of significantly different weather conditions in the primary cotton and rice growing regions as opposed to the grain producing regions. The cotton industry would be supportive of a market basket approach only if it would be classified as green box within the WTO concepts and if appropriate adjustments could be made to accommodate smaller acreage crops, like cotton and rice.

All these counter cyclical programs share the important common advantages of (1) cost effectiveness as compared to fixed payment programs and (2) predictability as compared to the emergency assistance packages Congress has approved during the past three years. Presumably these programs would be authorized as entitlement spending and, as such, would provide producers and their lenders with far greater certainty that production loans could be repaid each season.

Model Programs

Mr. Chairman, our industry favors a cotton program with a nonrecourse marketing loan keyed to world prices and administered in combination with the 3-step competitiveness plan. Our producer members favor a loan rate of not less than 55 cents, while our shipper segment has expressed opposition to raising the loan rate above 55 cents. Our members have serious concerns with any program that eliminates the nonrecourse marketing loan. Our industry unanimously favors some combination of fixed and counter cyclical payments, although we find it difficult to offer a firm recommendation about the specific level of payments that should be authorized for each without knowing how CBO would score the various loan and counter cyclical programs that might be proposed. However, we have appended two model programs illustrating mixes that would offer significant income protection improvements over the FAIR Act's diminished fixed payment scheme.

Both models establish a revenue goal for producers of base grade cotton that is not less than returns received during the '99 marketing year from all sources, including the market price, marketing loan gains, decoupled AMTA payments and emergency assistance payments that were authorized by Congress.

Both models also incorporate the FAIR Act's capped loan rate of 51.92 cents. This loan rate entry should not be construed as Council support for that specific loan rate. This matter remains under consideration by industry leaders. If a different loan rate were to be authorized, there would be corresponding changes in our recommended fixed or counter cyclical payment rates.

The first model contains a counter cyclical price concept preferred by the cotton industry. It includes:

1.A nonrecourse marketing loan with a redemption level keyed to the world market price;

2.Continuation of cotton's 3-step competitiveness plan;

3.Fixed, decoupled commodity payments at the rate of 5.99 - 10 cents per pound;

4.Commodity-specific, counter cyclical payments triggered when the average per-unit revenue received by farmers (including market returns, the fixed, decoupled payment and marketing loan gains) falls below the '99 marketing year per-unit revenue (also including market returns, fixed, decoupled payments, and marketing loan gains);

5.Fixed, decoupled commodity payments and counter cyclical payments made on the basis of frozen yields;

6.Farmers' choice to use either the contract acreage base under the FAIR act or an updated acreage base using a more recent mix of crops on each farm for the calculation of fixed and counter cyclical payments; and

7.Elimination of payment limits.

The second model is the same as the first except the counter cyclical payments are triggered when gross farm revenue for seven major crops falls below the higher of $43.89 billion or the most recent 5-year moving average of gross revenue generated by the seven crops.

The intent of the second model's payment system is to establish payments that are not trade distorting and, therefore, potentially eligible for green box status under WTO rules.

Model # 1

We append two iterations of Model # 1. Both Model 1-A and Model 1- B incorporate CBO's April baseline prices for upland cotton. The loan is shown at the current, capped rate of 51.92 cents per pound.

The first iteration (Model # 1-A), includes a fixed, decoupled payment rate of 10 cents per pound. The operation of the model looks at the combination of farm price, LDP and fixed, decoupled payment and then computes the counter cyclical payment necessary to return 80 cents for base grade cotton. In this iteration, the requisite counter cyclical payment for 2002 turns out to be 8.56 cents per pound. In subsequent years the counter cyclical payment is higher, but there is no cost associated with Loan Deficiency Payments (LDPs) because CBO's baseline commodity prices exceed baseline loan rates. The resulting program cost, according to estimates by NCC economists, would be about $18.7 billion in 2002 and then move progressively lower, declining to $9.0 billion by 2011. Amber box spending (including $6.2 billion calculated as AMS for dairy, sugar and peanuts and not counted as farm program spending) totals about $17.9 billion in 2002 and follows a similar downward trend through 2011. These estimates of program costs and the amount falling into the amber box category assume loans and payment rates for other crops that are commensurate with those noted for cotton.

The last row of numbers in Model # 1-A shows estimated cumulative spending over baseline. For 2002, spending over baseline is estimated at $9.7 billion. This compares with $7.35 billion earmarked for 2002 in the FY '02 Budget Resolution. However, the average annual rate of over-baseline-spending declines each year thereafter, so that the total for the years 2002 - 2011 reaches $72.9 billion. This compares with a 2002 - 2011 authorization of $73.5 billion in the FY '02 Budget Resolution.

The second iteration (Model # 1-B), drops the fixed, decoupled payment rate to 5.99 cents per pound (the FAIR Act's 2001 rate). The residual counter cyclical payment, therefore, rises to 12.56 cents per pound in 2002 and rises in subsequent years, again because LDP's disappear. This mix of fixed and counter cyclical payments results in projected program costs of about $18.6 billion in 2002, but the amber box category rises to almost $20.8 billion - slightly exceeding the $19.1 billion WTO ceiling. However, both total spending and amber box spending decline in subsequent years, and by 2006, amber box spending drops back below the WTO ceiling and continues to decline in each succeeding year through 2011.

The amber box totals in Models # 1 A and 1 B, include the counter cyclical costs shown for each year. However, if a counter cyclical program is put in place and 1) pays on fixed area and yields and 2) on 85% or less of base level of production, and if that program is determined to be "production limiting," it could be exempt from the calculation of aggregate measure of support (AMS). Accordingly, amber box computations may be overstated in both iterations.

In both iterations of Model # 1, fixed, decoupled payments as well as counter cyclical payments have been estimated using modified PFC base acres and frozen yields. Our industry supports provisions in new farm law that would allow growers the choice of using their existing PFC base acres or updating it based on a more recent cropping history. We believe this modified base approach has merit since it does not penalize farmers for having taken advantage of the cropping flexibility allowed under the FAIR Act and it does not add burdensome program cost. This modified base protocol would add about 5% to fixed and counter cyclical payments while facilitating delivery of benefits more in keeping with current cropping practices.

Although our producers' most preferred counter cyclical program would be linked to actual plantings of the specific program crop, cost considerations led us to base the counter cyclical program outlined in Model #1 on a fixed acreage base established at the beginning of the farm bill term.

It is widely understood that the more closely the receipt of benefits is tied to production, the higher the expected cost score for any given level of protection. That is, the necessity to have production in order to qualify for benefits is likely to increase crop production and possibly lead to lower crop prices. Any increase in production and correspondingly lower prices would then combine to further add to expected costs and increased budget authority.

If there is sufficient budget authority, cotton producers would prefer a counter cyclical program to be based on some minimum production or planting requirement.

Model # 2

Model # 2, appended, summarizes our perception of a market basket approach for triggering counter cyclical payments. It incorporates the same market price and loan rate assumptions as model # 1. And, here too, we have the same grower revenue goal for base grade cotton and the same goal of keeping amber box spending below limitations imposed by WTO agreements.

In this model, which relies on CBO's April baseline price estimates for revenue projections, we estimate that counter cyclical payments would be triggered in 2002 because aggregate gross revenue for the seven constituent crops is projected to fall below the '95-'97 gross revenue benchmark for the same seven crops. The estimated revenue shortfall is about $8.5 billion, which would then be the amount of money available for counter cyclical payments in 2002. In our model, we divide the $8.5 billion among seven program crops using the same percentages applicable under the FAIR Act. Cotton would receive 11.63% of the total.

Relying on CBO's April baseline projections for price and production, annual costs would decline after 2002 as they would in Model # 1. Total costs would average less than in Model # 1. However, amber box spending would be substantially less, provided that counter cyclical payments under this calculation/delivery mechanism would not be considered amber box.

The concept of the market basket approach to revenue protection can apply if all crops included in the market basket move in close correlation with each other. The market basket approach can fail to provide the necessary support for a particular crop if that crop's price or output pattern does not closely parallel the pattern of crops that account for a higher percentage of the revenues in the market basket total. Revenues for corn and wheat account for a much larger percentage of the total market basket than does upland cotton.

In the CBO April baseline the prices and outputs of U.S. corn and wheat increase substantially faster than those of upland cotton over the next ten years (page 2 of Model #2 attachment). The result is that the revenue protection provided cotton producers is insufficient as shown in the Model #2 attachment. If market outcomes over the course of the next 10 years closely approximate the CBO baseline, U.S. cotton producers will suffer from this critical shortcoming of the market basket approach. Expected total returns to upland cotton growers would fall from 78.42 cents in 2002 to 70.06 cents per pound by 2011.

The National Cotton Council would prefer the concepts outlined in Model #1 and supports having the fixed payment as high as economically feasible in order to retain as much cropping flexibility as possible and to have more expenditures classified as WTO "green box" spending. Given the potential shortcomings of the market basket approach (Model #2), serious consideration must be given to addressing the economic well being of producers of crops whose revenue pattern differs from that of larger revenue crops.

Mr. Chairman, the costs assigned to all these model programs, as well as the benefits derived, assume that no benefits would be denied because of payment limitations. If benefits are reduced because payment limits are imposed, both the benefits and the costs will be reduced accordingly.

Since scoring farm program provisions requires numerous judgement calls about economic and market interactions that may be seen differently among economists, I cannot tell you that the spending levels assigned to each model program, or the spending estimates categorized as amber box, will precisely match CBO's scores or our government's determinations about how costs should be categorized under WTO. However, National Cotton Council economists have proven adept at estimating the actual cost of past program provisions, and I believe their estimates should closely approximate scores assigned by CBO.

Mr. Chairman, our objective in presenting these model farm programs is to summarize policy concepts our members could support and note any special considerations of policy components. We would prefer that our presentation be understood as supportable concepts rather than final recommendations with respect to loan rates and the mix of fixed and counter-cyclical payments.

I should also tell the panel that neither our program provisions nor our estimate of costs includes any program changes for soybeans or other commodities that do not currently receive AMTA payments. Limiting participants in these models to the seven program crops covered under the FAIR Act is not a suggestion on our part that other crops should not be included. However, it is clear that the "payment pie" would need to be enlarged if other commodities are included and if the objective is to bring participants' support up to the price or gross revenue levels established as goals in these model programs.

Commodity titles patterned after these models should not prompt appreciable acreage shifts from one commodity to another, since payments for all commodities would be increased by the same percentage. Neither should there be an increase in total acreage, since prices received by farmers, including government payments, would not be appreciably different than those received during the past three marketing years and payments would be based on historical bases and yields, not production.

Exchange Rate Provisions

Mr. Chairman, currency exchange rates have a well-documented effect on international trade. The U.S. cotton industry is especially vulnerable to the effects of an appreciating dollar because of its impact on imports of cotton textile and apparel products. The strong appreciation of the dollar since the mid- 1990s - especially in comparison to Asian currencies -- has significantly lowered the price of foreign-produced textiles and apparel in the U.S. market, increasing the competitive advantage of foreign firms at the expense of U.S. based enterprises. For example, at current prices and exchange rates the FOB price of Pakistani yarn in U.S. dollars is approximately 87.5 cents/lb. In 1995, this same Pakistani yarn would have cost about $1.42/lb. Appreciation of the dollar relative to the Pakistani Rupee has lowered the effective price of Pakistani yarn in the U.S. market by over 60%. Not surprisingly, imports of cotton products from Pakistan had almost doubled by 2000 to about 1.24 million bale equivalents.

Likewise, imports of cotton textile and apparel products from all sources have soared over the past few years. In 1997, the United States was importing 10.5 million bales of cotton textiles and apparel; by 2000, imports had grown to 15.9 million bales. This surge in imported cotton products has decimated U.S. textile mills - the best customer of the U.S. cotton producers. In 1997 U.S. mill use of cotton was 11.4 million bales; by 2000 it had declined to only 9.5 million bales. Currently the annual rate of U.S. mill consumption is just over 8 million bales.

This drop in mill consumption, as significant as it is, does not fully reflect the exchange rate damage that is being incurred by our industry. During the first half of 2001 alone, 45 plants have closed and almost 15,000 jobs have been lost as a direct result. These are plants and jobs that were involved in spinning, weaving, knitting and fabric finishing only. This does not include plants and farms involved in fiber production, nor does it include apparel cut-and-sew operations. Some of the biggest names in the textile industry are in various phases of bankruptcy and almost every company has shut down plants or substantially reduced operating times.

Cotton industry leaders have done some preliminary thinking about ways the adverse consequences of a strong dollar can be offset in new farm policy. One adjustment that comes immediately to mind is elimination of the 1.25-cent threshold currently used in the calculation of Step 2 payment rates. This adjustment would reduce the cost of raw cotton to domestic textile manufacturers and would enable shippers to price U.S. cotton more aggressively for export.

Elimination of the 1.25-cent threshold would not provide nearly enough adjustment to fully offset the adverse effects of a strong dollar. However, it would be a move in the right direction and one that our industry fully supports. Beyond this, we are continuing to explore other options that could help avert the devastating exchange rate impact on our industry.

Cottonseed Program

Cottonseed is a critical component of total farm revenue generated from cotton production. From 1994 to 1998, cottonseed accounted for approximately 13% of the total value of cotton production, averaging over $58 per acre. Unfortunately, cottonseed prices weakened significantly in 1999 as a result of weak crushing demand as well as low oilseed prices. Cottonseed values remain well below those of previous years. The special cottonseed payments authorized by Congress for the 1999 and 2000 marketing years were vitally important in boosting producer income and helping to maintain the industry's ginning infrastructure.

The two primary markets for cottonseed are: 1) oil mills for crushing to produce oil, meal, hulls and linters; and 2) dairies, where whole cottonseed is used in feed rations. The crushing industry is undergoing rapid consolidation in response to severe financial pressures. Prices for cottonseed meal and oil have collapsed while EPA and OSHA regulatory initiatives have significantly increased processing costs. As a result, a number of cottonseed crushing facilities have either closed or merged. In 1995 there were 25 cottonseed oil mills in operation; by 1999 the number of operating oil mills had declined to 18. The struggles of the cottonseed crushing industry have forced more cottonseed into the whole seed market, with a predictable price- depressing effect.

Crushing demand remains weak while soybean prices remain mired well below $5/bushel. Soybeans are the dominant oilseed and, as such, effectively dictate the market values of both raw cottonseed and its end-use products, as is the case with other oilseeds. The correlation between soybean and cottonseed prices since 1950 is approximately 0.88. A simple regression shows that changes in soybean prices account for approximately 76% of the total variation in cottonseed prices over this period. In animal diets, factors such as protein components, digestibility, energy, and lysine and methionine content make cottonseed meal easily replaceable by soymeal. An analogous situation exists with respect to oil products. Hence, the prices of cottonseed end-use products are inexorably linked to those of soyoil and soymeal.

Without a significant recovery in soybean prices, prices for cottonseed will remain under pressure, further exacerbating the financial stress faced by cotton producers and ginners.

Cottonseed assistance needs to be continued. We urge Congress to consider making statutory provisions for counter cyclical cottonseed payments to be triggered when prices fall below an established threshold.

Payment Limits

The National Cotton Council remains opposed to payment limits in any form. They are both counterproductive and discriminatory. Limiting farm program benefits on the basis of size tends to disadvantage the larger, more efficient farming units, causing them to be broken up into smaller units that are less efficient and less capable of surviving in a global market when, and if, subsidies are discontinued. Moreover, crops such as cotton, with a relatively high cost of production compared with other crops, are especially disadvantaged by payment limits since the imposition of payment limits results in a smaller percentage of a cotton farmer's output being eligible for benefits.

Accordingly, Mr. Chairman we encourage Congress to discontinue all forms of payment limits and benefit targeting. If this is not done, we strongly urge (a) establishment of separate and reasonable payment ceilings for each type of program benefit, (b) retention of provisions for CCC loan redemptions with marketing certificates and (c) retention of the 3-entity rule.

NCC Recommendations for ELS Cotton Policy

I would like to summarize our recommendations for Extra Long Staple (ELS) cotton policy. Extra long staple cotton differs from upland cotton in that its staple length is "extra long" and can be spun and knitted to produce a finer material than regular upland cotton. ELS cotton can be grown successfully only in arid- type climates. The major production areas of this or similar cotton are California and Arizona in the United States, Peru and Egypt. U.S. produced ELS cotton is also known as "American Pima."

Over the last six marketing years the price of American Pima on the U.S. spot market has fluctuated by more than 100%, from a low of 77.5 cents to 166.5 cents. Producers of American Pima very badly need reinstatement of a program that will provide them a measure of downside price protection. ELS cotton had a program very similar to that for upland prior to the 1996 farm bill. However, several aspects of the ELS program were gutted in 1996, leaving ELS producers only with a non-recourse loan without any marketing loan component. The loan rate for ELS is currently capped at 79.65 cents per pound. The Council supports continuation of the loan with the loan rate frozen at 79.65 cents per pound.

We also support continuation of the competitiveness provisions that were authorized in the FY 2000 Agricultural Appropriations Bill, but with funding capped at $10 million. Mr. Chairman, we would like to see this provision authorized as an entitlement in new farm law to ensure that funds are available when needed to keep American Pima price competitive.

Finally, we support establishment of some form of counter- cyclical payments commensurate with those that may be established for upland cotton. We believe a price objective for American Pima cotton, in the neighborhood of $1.00/pound, including returns from the market plus counter cyclical payments, would be commensurate with an 80 cent price objective for upland.

While cost estimates for the proposed ELS program have not yet been completed, NCC economists believe it would not add appreciably to total farm program costs but would help to maintain equity among alternative crops in the western cotton producing region.

Conservation

Mr. Chairman, the Council supports the continuation and enhancement, subject to adequate funding, of the existing conservation programs such as EQIP, the Conservation Reserve and the Wetlands Reserve Programs. These programs and the technical assistance delivered by NRCS are vitally important in assisting farmers in meeting new and existing air and water quality regulations. And, these programs have enabled farmers to better manage soil erosion, protect and improve water quality and preserve wetlands and wildlife habitat.

The Council also supports incentive-based programs that encourage conservation and environmental enhancements to agricultural land. We have reviewed the proposed "Conservation Security Act" and find agreement with many of its provisions. We are encouraged that it benefits are focused on land in production and offer flexibility by being tiered in value depending upon the level of participation. We are also encouraged that it is not tied to farm program eligibility. We do not support linking additional conservation or environmental requirements to farm program benefits eligibility.

We have some concerns. First, we are concerned that the current spending authority Congress has provided for developing a new farm bill may be inadequate to provide the necessary level of support for commodity programs and a new conservation program. As much as we support an incentive-based conservation program, our first priority must be to have a farm bill with commodity provisions that are adequately funded. Secondly, we are concerned with the payment limits that are contained in the bill. We oppose payment limits for any program and believe they will restrict commercial-sized operations from fully participating in programs such as the Conservation Security Act. Mr. Chairman, we would urge that this committee work for adequate funding for both a viable farm program and a conservation/environmental benefits bill, without payment limits that will work for U.S. farmers, consumers and rural communities.

Trade

About 40% of the approximately 17 million bale crop of cotton is exported each year. In addition, the equivalent of 5 million bales of cotton in the form of textile and apparel products was exported in 2000.

Our industry is facing the stiffest international and domestic competition I can remember. Five countries, China, the United States, India, Pakistan and the former Soviet Republics produce about 70 percent of the world's cotton. China, India, Pakistan and many developing countries are unalterably committed to textile production and are, through one mechanism or another, subsidizing either their production or manufacturing industries - or both. This competition is reflected in some fairly stunning forecasts for 2001.

Domestic mill use of cotton is expected to fall over 3 million bales below its 1997 level - a drop of more than 25 percent. The anticipated U.S. crop of cotton is expected to be similar to the past two years or larger - meaning we will have to find a home in foreign markets for at least an additional 2 to 3 million bales of cotton - or see our carryover levels soar.

One of the most significant influences on the U.S. cotton market is cotton textile imports. Over half of the 21 million bale U.S. market is sourced by imported textiles made from foreign cotton. Competition will continue to intensify as textile quotas are phased out.

Further, compared to other agricultural products, cotton is uniquely vulnerable to the effects of an appreciating dollar through its impact on imports of cotton textile and apparel products.

In order to meet these challenges, Congress has worked to forge a partnership between government and the private sector to enhance our competitiveness and help secure markets against sometimes unfair competition. There are signs this partnership is unraveling.

The Foreign Market Development program has seen its funding fail to keep pace with inflation, and then decline;

The Market Access Program has had no increases in funding, despite its clear positive impact and its categorization as a green box trade activity in the World Trade Organization. In nominal terms, support under MAP has fallen by 55 percent since 1992. In real terms, it has fallen even more;

The most cost-effective export program of all, the export credit guarantee program, has been offered up by our trade negotiators in return for no significant concessions by any of our competitors;

The U.S. insistence on real cuts in tariff levels - cuts that begin from applied tariffs - has been ridiculed within the World Trade Organization;

The export enhancement program, in which cotton has never participated, has been left dormant in the face of increasing competition in international and domestic wheat markets; and The Administration has chosen to classify supplemental market loss assistance payments -- an obviously green box domestic agricultural program -- as subject to WTO limits. This amounts to leading with our chin and further hampers our efforts to secure meaningful, effective long term domestic agricultural policy.

The upcoming farm bill provides this Committee the opportunity to reassert itself and fill an ever widening void being created as the U.S. government appears to retreat in the face of international competition and the self-serving demands of our competitors.

The National Cotton Council urges this Committee to define an aggressive trade policy agenda that can help live up to the promise of free trade that has been marketed so profoundly the past ten years.

We urge the Committee to improve existing export assistance programs and ensure these programs are utilized.

Over $5.5 billion in agricultural exports have benefited from the export credit guarantee program the past 2 years alone. Yet, the latest proposal being considered in the Organization for Economic Cooperation and Development contains fee increases, shortened loan terms and repayment requirements that would make the program ineffective for U.S. exports of cotton. We have estimated these changes could reduce annual U.S. cotton exports around 500,000 bales and have as much as a 3 cent per pound impact on prices.

The OECD proposal undermines GSM-102 while providing no corresponding reductions in export subsidy programs operated by our competitors.

Instead of moving to cripple this important program, we should be attempting to improve its effectiveness. The cotton industry supports changes to this program that can begin to address differences in currency valuations, that will allow repayment in local currencies, and that will include freight and other shipping charges in the total amount guaranteed.

We recommend that the Department carry out a pilot program under which the repayment of credit is guaranteed based upon documentation other than letters of credit, and we suggest that the amount of loan guaranteed under the supplier credit program be increased to 85% of the credit made available.

Concern over the OECD negotiations is discouraging new crop sales. Therefore, we urge the Department to announce the terms of the 2002 program right away. We need every competitive edge possible to export cotton for 2002.

We encourage the Committee to provide funding for the Foreign Market Development program of $43.25 million per year and to restore annual support for the Market Access Program to its 1992 level of $200 million.

Given the decision of the United States to back harmful changes to the export credit guarantee program, increased support for FMD and MAP is crucial.

Cotton's marketing loan and three-step competitiveness provisions continue to form the cornerstone of an effective U.S. cotton program. Maintaining all aspects of cotton's competitiveness program is central to the long-term competitiveness of our industry. Without cotton's Step 2 program to partially offset the impact of a strong dollar, U.S. raw cotton exports would likely have experienced a far larger decline than was the case in 2000. Elimination of the 1.25 cent threshold contained in Step 2 will help offset the negative impact of the strong dollar. We also support farm law provisions to compensate for the strong U.S. dollar.

The cotton industry supports the efforts of our government to further liberalize market access and trading rules within the WTO and has outlined a set of priorities for the ongoing negotiations, including improving market access for cotton and textiles and improving rules restricting the use of downstream export subsidies. It is very important that our competitors agree to tariff reductions beginning from their applied rates.

We need to meet our competition aggressively. We look forward to working with this committee to improve our export programs and to enhance our competitiveness.

Summary

In summary, for upland cotton, our industry supports continuation of a nonrecourse marketing loan, with redemption provisions keyed to the world market price. We urge you to continue the 3-step competitiveness program for cotton with elimination of the 1.25 cent threshold for step 2 and the continuation of the issuance of marketing certificates. We favor augmenting these programs with a combination of fixed and counter cyclical payments, which, together with returns from the market, will provide producers a return equivalent to what they have received in recent years from all sources, including emergency assistance. We encourage you to retain as much cropping flexibility as possible. We support base acreage provisions that will offers farmers the choice of keeping their current payment base or opting for an updated payment base. We support the retention of frozen yields. Weak oilseed markets necessitate establishment of a permanent program for cottonseed, and other adjustments in program provisions should be made to offset the double impact on cotton of a strong dollar. Importantly, we urge you to eliminate payment limits or, at a minimum, retain the 3-entity rule and provide for separate and reasonable limits for each category of benefits.

Our recommendations for ELS cotton would retain the current non- recourse loan without change, establish the competitiveness program as an entitlement and implement a counter cyclical payment to help ensure returns of approximately $1.00 per pound.

We support a re-invigoration of our export assistance programs, including changes to the export credit guarantee program and increased support for FMD and MAP. The Council supports the continuation of the existing conservation programs such as EQIP, the Conservation Reserve and the Wetlands Reserve Programs assuming adequate funding is available. There is also support for incentive-based programs that encourage conservation and environmental enhancements to agricultural land, but commodity programs remain the funding priority and there are concerns about restrictive payment limitations.

The farm policy concepts we recommend are full-production programs that provide a reasonable level of support for farmers and ranchers while indirectly underpinning our processing and handling infrastructure. Projected costs are generally in line with outlays over the past several years, including special emergency appropriations.

Mr. Chairman, that concludes our farm policy recommendations for upland and ELS cotton. I would be pleased to respond to any questions the panel might have.



LOAD-DATE: July 17, 2001