1. U.S. Cotton and Rice Policy Compatibility with WTO Commitments And Other Trade Liberalization Efforts Mechel S. Paggi Center for Agricultural Business, California State University, Fresno Silverado Symposium on Agricultural Policy Reform / Napa, California /January 20, 2004

2. Where Were We? Where are We? Where are we Going? Existing Programs vs. 1996 Act Existing Programs vs. 1996 Act Expenditures Under 1996 Act Expenditures Under 1996 Act Potential Exposure in Low Price Scenario Potential Exposure in Low Price Scenario With New Programs With New Programs Projections of Future Expenditures Projections of Future Expenditures Under New Programs Under New Programs Suggestions for Changes Resulting from Doha Round Suggestions for Changes Resulting from Doha Round Potential Exposure of Existing Programs under those changes Potential Exposure of Existing Programs under those changes Suggestions for alternative policies Suggestions for alternative policies Suggestions regarding the potential for change Suggestions regarding the potential for change

3. U.S. Cotton & Rice Program 1996 vs. 2002   Marketing Loans   Direct Payments   Counter Cyclical Payments  Step 2 for Cotton

4. U.S. Cotton & Rice Program 1996 vs. 2002 Marketing Loan 1996 The loan rate for upland cotton was set at the lesser of 85% of the 5-year Olympic average of spot market prices, or 90% of the Northern Europe-based average price, subject to a maximum of $0.5192 per pound and a minimum of $0.50 per pound. Rice was fixed at $6.50 per

5. Spending caps for each crop, except rice, were adjusted for prior-year crop program payments to farmers made in FY 1996 and any 1995 crop repayments owed to the government. The amount allocated for rice was increased by $8.5 million annually for FY 1997-2002. Oilseeds were not eligible for production flexibility contract payments. 1996 FAIR Act PFC Payments 1996 $5.570 1997 $5.385 1998 $5.800 1999 $5.603 2000 $5.130 2001 $4.130 2002 $4.008 PFC Payment Levels Wheat 26.26% Corn 46.22% Sorghum 5.11% Barley 2.16 % Oats 0.15% Cotton 11.63% Rice 8.47% Allocations

6. 1998/9951.928.17316.4604.00 1999/200051.927.88016.4604.00 2000/200151.927.33016.3604.80 2001/200251.925.99016.2605.30 2002/200352.0074.206.67/13.7318.9604.3/638.9 2003/200452.0074.206.67/--18.4603.7/638.4 Current U.S. Cotton Program Price and Income Support Levels (Cents per Lb.) Marketing Loan Rate Target Price Direct Payment Rate (CC Rate) Program Acres Program Yield (CC Update)

7. ______________$/cwt_______________Cwt/acre 98/996.502.9214.248.17 99/20006.502.8204.248.15 2000/016.502.6004.148.15 2001/026.502.1004.148.15 2002/036.5010.502.35/0.004.548.14/51.23 2003/046.5010.502.35/--4.548.12/51.9 Marketing Loan Rate Target Price Direct Payment Rate (CC Rate) Program Acres Program Yield (CC Update) Current U.S. Rice Program Price and Income Support Levels

8. Cotton Step 2 Payments 1997$390$0.65$312.961246166 1998$307$0.60$288.961062431 1999$421$0.45$216.001949074 2000$236$0.50$239.04987282 2001$196$0.30$143.041370246 Million Dollars Season Avg. Price Price Per Bale Equivalents Total expenditures for Step 2 payments were originally limited to $701 million over FY 1996-2002. The 2000 Appropriations Act removed the expenditure cap.

9. CC Payment Rate = to 0.0 or (TP – Effective Price) Effective Price = The Higher of the National Loan Rate + Direct Payment or the Average Farm Price Max Cotton CC Payment Rate Per LB. $0.724 – ($0.52 + $0.0667) = $0.1373 $0.65.73 Max Rice CC Payment Rate Per Cwt. $10.50 – ($6.50 + $2.35) = $1.65 $8.15/cwt

11. For Cotton In 1999 LDP & PFC Payments = 47% Of Gross Revenue Per Acre

12. * * 1999 – 2001 Unofficial Estimates from former CBO work Limit of $19.6 Billion

13. Limit of $9.6 Billion

16. Fiscal Year20022003200420052006200720082009201020112012 (MillionDollars) Corn2,9591,1884,9545,7815,8415,5784,8805,2575,2015,1195,127 Sorghum207137393456453436389408402395385 Barley97101198223218213 210209206 Oats7112535 343332 3132 Wheat1,1901,3082,2902,3822,3232,2272,1172,0771,9811,8811,838 Rice1,0841,2411,3051,2281,1931,1831,1581,1231,0781,029985 Soybeans3,4471,2732,1632,3942,1241,9721,7711,8861,9912,0332,066 Peanuts1291,399394259252259227277290297302 Other Oilseeds873098716667 667273 Upland Cotton3,3072,9962,8992,8592,8282,6282,4992,4022,2672,1682,065 Sugar-130-83111111111 Dairy6142,6781,6381,640703391400 378357341 12,99812,27916,35817,32916,03714,98913,75514,14313,89713,59213,421 FAPRI Baseline Projections Government Payments Note: For feed grains, food grains, oilseeds, cotton, and dairy, figures represent the means of the results of the stochastic analysis based on 500 random draws. Figures do not include effects of the FY 2003 omnibus appropriations bill.

17. Crop Year02/0303/0404/0505/0606/0707/0808/0909/1010/1111/1212/13 (Million Dollars) Direct Payments5,2645,2635,2615,2595,2585,2575,2555,2545,253 Marketing Loans1,8624,7914,7874,5214,1653,8153,6443,6333,4973,4503,480 Counter-cyclical Payments1,7644,5965,0644,8384,6674,3824,2684,0863,9013,8213,637 Total8,89014,65015,11214,61914,09013,45413,16712,97312,65112,52412,370 Selected Direct Government Payments FAPRI Baseline, 2003 Note: Includes direct payments, marketing loans (loan deficiency payments and marketing loan gains) and counter-cyclical payments for feed grains, food grains, oilseeds, and upland cotton. Figures represent the means of the results of the stochastic analysis based on 500 random draws.

18. PS AMS = Dairy, Sugar & Aggregate LDP payments NPS AMS = CCP’s and Crop Insurance PFC Payments = Green Box

19. FAPRI 2003 Baseline Cotton Outlook

21. Suggested Changes in Doha Round Decrease Amber Box AMS by 50% Decrease de minimis NPS Amber Payment Limit by 50% Effective limits fall to $9.8 Billion and $4.8 Billion Could Be a Problem Particularly For NPS that includes CCP’s

22. Apparent Program Options Increase Direct Income Support and Increase Direct Income Support and Drop the CCP Drop the CCP Create Alternative Green Box Income Create Alternative Green Box Income Transfer Programs Transfer Programs Utilize Circuit Breaker Option if Expenditures Exceed Limits Utilize Circuit Breaker Option if Expenditures Exceed Limits Create Some New Box (maybe Pink) Create Some New Box (maybe Pink) With a Justification for Product Specific Supports Tied to Prices With a Justification for Product Specific Supports Tied to Prices Develop Program to Transition Out of Income&Price Supports Develop Program to Transition Out of Income&Price Supports

23. USTR Ominous Warning for Cotton

24. Political Reality May Dampen Rush to Change Election Year 2004 Election Year 2004 Rice and Cotton Production: Texas, California, Arkansas, Louisiana, Mississippi, Missouri, New Mexico, Arizona, Tennessee, Alabama, Georgia, North Carolina, South Carolina, Florida, Virginia, Oklahoma and even Kansas and Nebraska Rice and Cotton Production: Texas, California, Arkansas, Louisiana, Mississippi, Missouri, New Mexico, Arizona, Tennessee, Alabama, Georgia, North Carolina, South Carolina, Florida, Virginia, Oklahoma and even Kansas and Nebraska These Programs Date Back to 1933 These Programs Date Back to 1933 Lack of Enthusiasm for Increased Trade Liberalization Among Farm Organizations at the Expense of Domestic Price and Income Support Lack of Enthusiasm for Increased Trade Liberalization Among Farm Organizations at the Expense of Domestic Price and Income Support