New US farm bill can hurt Brazil's cotton trade

The new Farm Bill passed by the US Senate last week and awaiting presidential enactment may be even more harmful to Brazilian cotton, experts say.

The new bill reduces direct federal payments to farmers, an unfair practice according to the World Trade Organization (WTO). Conversely, it introduces a crop insurance program called Stacked Income Protection Plan (the Stax) designed to cover 70% to 90% of farmers' losses – plus government subsidies of up to 80% of the premium amount.

In addition to hurting competitiveness of Brazilian exports, concerns are that the new subsidies could result in widespread cotton supply increases and price falls.

Foreign trade expert Renata Amaral anticipates that the insurance will be “much more trade-distorting” than other subsidies that have previously prompted Brazil to initiate WTO dispute settlement cases. “In a worst-case scenario, [the insurance] could cover up to 90% [of farmers' losses]. [What this basically means is,] they will be insured even if they lose a year's worth of crops,” she said.

Since the new draft has not completely removed the subsidy programs in place under the former Farm Bill, Amaral noted that Brazil can still complain to the WTO. “[Brazil] is now entitled to decide whether or not it finds the new law consistent with WTO rules. [In case it does, it would file] a new case in connection with the previous one,” she said.

Diego Bonomo, Foreign Trade Manager at the National Industry Confederation (CNI), agrees that the insurance introduced by the new farm bill can prove harmful to Brazilian cotton farmers. However, the actual impact of the insurance program cannot be measured, nor acted upon, until the bill is in full effect. “We'll have to wait until it is in action to see how it goes. The outcomes also depend on the market conditions. In order to prove it a violation, [we] would have to provide evidence that it slashes prices and impacts Brazil's exports,” he said.

Bonomo sees both a positive and a negative side to the subsidy reductions. He noted that while the United States repealed direct payment programs for cotton production and reformed those for marketing, it has maintained, though to a lesser impact, the subsidies programs for exports – which lies at the core of the concerns around Brazil's competitiveness. “Under the new farm bill, Congress confers the US Agriculture Secretary with powers to negotiate with Brazil towards further reforms in this regard. Instead of settling the disputes as would be expected, it has added one more step. As it stands, it remains inconsistent with WTO rules, and [the outcomes] will depend on Brazil and bilateral dealings.”

In addition to deciding its approach to the continued export subsidies, Brazil's government must choose whether it is going to retaliate against the US over the cessation of payments to the Brazilian Cotton Institute (IBA) since October last year. In 2009, the WTO gave Brazil the right to retaliate against the US by imposing import tariffs of up to $829 million in US goods. The US responded by proposing an agreement instead, whereby it agreed to make annual payments of $147.3 million to IBA. Last year, however, it ceased making the payments claiming that it could not afford the payments because of the government's automatic budget cuts.

The Foreign Trade Chamber (CAMEX) housed under the Ministry of Development, Industry and Foreign Trade has set up a work group to reconsider its retaliation position with a decision expected by March. The board has also launched a public consultation to welcome proposals on how this retaliation could be implemented. The consultation closes on February 28.

Translated by Mayra Borges