Terry Townsend, Former Executive Director of the International Cotton Advisory Committee shares his thoughts on Cotton Diaries World Cotton Day talk about cotton subsidies.

October 25, 2022

The World Cotton Day edition of Cotton Diaries about cotton subsidies with a focus on US subsidies helped to remind us that the Doha Development Agenda (the Doha Round) of trade talks within the World Trade Organization remains unfinished. 

The DDA was began in 2003 with high hopes, but those hopes remain only partially fulfilled two decades later. Consequently, the Doha Round, and indeed the entire WTO process, has largely fallen off the radar screen for most people in the cotton industry. Cotton Diaries provided an opportunity to remind ourselves that significant partial progress in the cotton sector has been made.

The underlying logic of the Cotton-4 (C-4) countries in the WTO was that subsidies paid to US cotton producers led to increased production which depressed prices paid to producers in Africa. Therefore, the point of the work of the Subcommittee on Cotton within the Talks on Agriculture in the WTO was and is prices.

The Cotlook A Index, an indicator of world cotton prices, averaged 60 cents per pound during the decade prior to 2008. Prices spiked following the Great Recession of 2008 and 2009, and never returned to former levels during the decade following. The average Cotlook A Index during the past decade has been 93 cents per pound, more than 50% above the previous level. Cotton prices were the second highest on record during 2021/22 and remain well above average today.

Subsidies paid to US cotton farmers have not caused significant distortions in the world cotton market for approximately a decade. Market prices have been above the trigger levels for US cotton income support operations, called Reference Prices, almost continuously since 2010.

It is particularly encouraging to recall that the Dispute Settlement Mechanism within the WTO worked. Under the Brazil Cotton Case, the Government of Brazil prevailed with its argument that US cotton subsidies caused extreme prejudice to Brazilian cotton exports. The United States paid $860 million in compensation to the cotton industry of Brazil and was forced to eliminate the three-step competitiveness provisions of the cotton program, of which the most distorting was Step 2.

It is an interesting footnote that Brazil solicited the participation of African governments in the cotton case, and African governments refused to join. If they had joined, they would have been eligible for direct and specific compensation from the United States, just as Brazil was. 

In addition to the elimination of Step 2 under the Dispute Settlement Mechanism, the entire U.S. cotton program was revised in the 2014 Farm Bill to base payments on seed cotton rather than lint, to lower effective intervention levels (Reference Prices and Loan Rates), and to move payments from Amber Box to Blue Box under WTO rules. The result has been a shift in payments from income support to crop insurance and the Conservation Reserve Program.

With all that is going on in the world, from a resurgence in inflation, to war in Europe, to what appears to be a looming recession, to floods in Pakistan and drought in Texas, it is important to recall that multilateral institutions still exist and that talks involving governments from around the world still matter. Thank you for using the World Cotton Day edition of Cotton Diaries to shine light on the important matter of the Doha Round.

Sincerely,

Terry Townsend

Former Executive Director of the International Cotton Advisory Committee