Organization and Performance of Cotton Sectors in Africa ... - infoDev

Box 2.2 Cotton SubsidiesCotton subsidies in the United States have a long history dating from thecommodity programs of the Great Depression. The specific provisions ofthese programs, including the one for cotton, change with each farm billpassed by the Congress (farm bills are introduced approximately every fourto five years), but their chief objective has remained largely unchanged: totransfer income from taxpayers (and to some extent consumers) to producers.The main channels of support to U.S. cotton producers are the following:(a) price-based payments (also known as loan rate payments) are designed tocompensate cotton growers for the difference between the market price andthe target price when the latter exceeds the former; (b) decoupled payments(renamed direct payments in the 2002 farm bill) are predetermined annualpayments calculated on the basis of area historically used for cotton production(direct payments were introduced with the 1996 farm bill to compensateproducers for “losses” following the elimination of deficiency payments);(c) crop insurance is a subsidy to provide protection against weather-relatedcrop failures; and (d) countercyclical payments were introduced in 1998 (as“emergency payments”) to compensate producers for income “lost” becauseof low commodity prices. The countercyclical payments were made permanentunder the 2002 farm bill. In addition to these transfers, there are otherpublicly funded programs—among them research and extension services andsubsidized irrigation. The U.S. cotton program, which was subject to reviewby the U.S. General Accounting Office twice (1990 and 1995), was, and still is,very complex and expensive.The European Union (EU) also supports its cotton producers. Between1997 and 2007, the budgetary expenditure on the cotton sector rangedbetween $0.7 and $1.0 billion, implying that, on average, EU cotton producersreceived more than twice the world price of cotton. EU cotton producersreceived support even in periods of high prices—because the budgetary allocationto the cotton sector must be disbursed. For example, producersreceived approximately the same level of support in 1995 and 2002, althoughcotton prices in 1995 were twice the level of 2002. A major restructuring ofthe EU cotton program was undertaken under the Luxembourg Council’sdecision of April 22, 2004, which was based on the September 2003 proposal.Under the new program that went into effect in 2006, an estimated €700 million(almost US$1 billion) funds two support measures, with 65 percent of thesupport taking the form of a single decoupled payment and the remaining 35percent taking the form of an area payment (European Commission 2003). Aminor change took place in 2008 regarding the eligible base area, but this doesnot affect the amount of total support.20 BAFFES AND ESTUR