Harry de Gorter Charles H. Dyson School of Applied Economics and Management Cornell University

Transcription

1 Cotton Subsidies in the US: A look at the upcoming Farm Bill Harry de Gorter Charles H. Dyson School of Applied Economics and Management Cornell University

2 STAX vs Farm Bill What is STAX? Stacked Income Protection Plan? A new revenue insurance program to supplement the crop insurance program STAX pays for 70 to 90 percent of losses with a taxpayer subsidy of 80 percent Reform of 2008 Farm Bill: Eliminate direct and countercyclical payments Marketing loan program maintained, but loan rate to decline if market prices fall below it (max 10%)

3 Why STAX, why now? 1. Outstanding cotton dispute with Brazil 2. Budgetary pressures in the United States 3. High crop prices since 2006/07 means: a. Direct payments politically embarrassing b. Target prices/loan rates are not effective & political desire to transfer $ to farmers in high/volatile price era

4 4.00 Price Indices (Jan 2005 = 1) Soybeans Corn Rice Wheat Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 4

5 One result of new high price era Crop insurance subsidies in recent years has become biggest spending category (~ $7 bil. total US crops) Although not part of the original US-Brazil cotton WTO dispute, crop insurance now accounts for 47% of total cotton subsidies (averaged 9% up to 2009) Cotton share dropped from 12.% to 7.1%

6 Because of high commodity prices, crop insurance subsidies have increased substantially in recent years

7 One key feature in House Bill not in Senate Bill: Minimum Price House version has a minimum price for STAX of $ per pound (the current loan rate is $0.52 per pound) This minimum price has no impact in the high price era but can increase substantially if return to low historical market prices for cotton The minimum price in the STAX acts like a loan deficiency program embedded in the crop insurance programs Recommend no minimum price be used in the STAX (already have loan rate)

8 CBO Cotton Subsidy Projections $ mil. ( annual average) Status Quo Total cotton subsidies 1,205.7 CIP subsidies Farm Bill Proposals STAX Senate (no price min) low price scenario House (with price min) low price scenario STAX Savings with Senate Bill 62.7 low price scenario Crop Insurance Program (CIP) low price scenario Savings in low price scenario STAX savings no min price in Senate Bill lower CIP subsidies

9 What are possible outcomes for 2012 Farm Bill Proposals Worst case scenario is House with minimum price STAX $613.2 mil. CIP $434.2 mil Total $1,047 (versus $1,205.7 CBO status quo projection) But in low price scenario, best case scenario is Senate with no minimum price STAX $292.7 mil. CIP $127.9 mil Total $420.6 CIP subsidies will likely decline $306.1 mil. with low price scenario for both House and Senate versions

10 STAX subsidies go up in low price scenario with House minimum price But CIP subsidies decline to offset 1,400,000 House Low Price House Low Price reduced CIP Senate Low Price Senate Low Price reduced CIP 1,200,000 1,000,000 Thousand USA $ 800, , , ,

11 Actual Cotton Subsidies in the Past $ mil. Total (annual average) , , ,171 Crop Insurance total ( ) 3, , ,668

12 US$ ('000s) CBO (2013) Status Quo CBO (2012) House CBO (2012) Senate Low Price House * Low Price Senate *

13 US$ ('000s) CBO (2013) Status Quo CBO (2012) House CBO (2012) Senate Low Price House* Low Price Senate *

14 Cotton has always done relatively well in the past. But is US cotton industry in decline?

15 High oil prices means: (1) pressure on food grain/oilseed prices b/c of biofuels; (b) cotton input cost increase

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18 CBO (2013) project cotton acres to decline 11.2% compared to CBO (2012) projection Why? Project lower cotton prices Higher prices of other crops due to biofuels Mid-West drought

19 Bottom line No minimum price in STAX saves $320.5 mil. in low price scenario plus have CIP subsidies declining by $250 mil. No countercyclical payments saves untold millions of $ No direct payments saves untold millions of $ No ACRE payments saves untold millions of potential $ An endogenous loan rate that can fall to as low as $0.47 per pound saves $5.8 bil cuts loan deficiency payments in half Costs of STAX inflated because use CBO (2012) projections but planted acres would be lower in counterfactual of no old program Projected CBO (2013) total cotton subsidies are $1.2 bil. on average which would get much higher under a low price scenario Provides a commitment mechanism whereby Congress will be restrained from legislating additional interventions should a downturn in prices occur in the future