621 Under the Agricultural Risk Protection Act, new insurance products must be developed by the private sector and approved by the Board of Directors of the Federal Crop Insurance Corporation. The US Department of Agriculture is expressly prohibited from conducting research and development on new products. Thus, the variety and availability of insurance products reflects the fact that private companies, not the US Government, have developed and offered these products.
622 Brazil’s Rebuttal Submission, para. 55.
623 Upland cotton producers can insure their crops under the following types of policies: Actual Production History, Group Risk Plan, Income Protection, Crop Revenue Coverage, and Revenue Assurance. Other crops that are eligible for the policies include:
for Actual Production History – Alfalfa seed, all other grapefruit, almonds, apples, avocados, barley, blueberries, cabbage, canola, cigar binder tobacco, cigar filler tobacco, cigar wrapper tobacco, corn, cotton, ELS cotton, crambe, cranberries, cultivated wild rice, dry beans, dry peas, early and midseason oranges, figs, flax, forage production, fresh apricots, fresh freestone peaches, fresh market tomatoes, fresh nectarines, grain sorghum, grapefruit, grapes, green peas, late oranges, lemons, macadamia nuts, mandarins, Maryland tobacco, millet, Minneola tangelos, mint, mustard, navel oranges, oats, onions, Orlando tangelos, peaches, peanuts, pears, plums, popcorn, potatoes, processing apricots, processing beans, processing cling peaches, processing freestone, prunes, rice, Rio Red and Star Ruby grapefruit, Ruby Red grapefruit, rye, safflower, soybeans, sugar beets, sugarcane, sunflowers, sweet corn, sweet oranges, sweet potatoes, table grapes, tomatoes, Valencia oranges, walnuts, wheat;
for Group Risk – corn, cotton, forage production, grain sorghum, rangeland, soybeans, wheat;
for Income Protection – barley, corn, cotton, grain sorghum, soybeans, wheat; and
624 Brazil’s Rebuttal Submission, para. 55.
625 Brazil’s Rebuttal Submission, para. 57.
626 Brazil’s Rebuttal Submission, para. 58.
627 The provisions of the Standard Reinsurance Agreement are available on the Risk Management Agency website at: http://www.rma.usda.gov/pubs/ra/98SRA.pdf.
628 Brazil’s Rebuttal Submission, para. 59.
629 More information on Adjusted Gross Revenue Insurance can be found on the Risk Management Agency website at: http://www.rma.usda.gov/pubs/2003/PAN 1667 06rev.pdf.
630 Brazil’s Rebuttal Submission, paras. 60-67.
631 The US Department of Agriculture, Economic Research Service, studies cited by Brazil only examine the effects of crop insurance subsidies on acreage. They do not consider effects on crop yields.
632 Recent studies by Smith and Goodwin (1996), Babcock and Hennessy (1996) and Goodwin and Smith (2003) suggest that farms with more insurance tend to use less inputs like fertilizer and pesticides and vice versa. This demonstrates a potential moral hazard problem with crop insurance that suggests that crop insurance participation may have a negative effect on yields. See Babcock, B. and D. Hennessy. “Input Demand Under Yield and Revenue Insurance” American Journal of Agricultural Economics 78(1996):416-27; Goodwin, B. and V. Smith. “An Ex Post Evaluation of the Conservation Reserve, Federal Crop Insurance, and other Government Programmes: Programme Participation and Soil Erosion.” Journal of Agriculture and Resource Economics 28(2003):201-216; Smith, V. and B. Goodwin. “Crop Insurance, Moral Hazard and Agricultural Chemical Use.” American Journal of Agricultural Economics 78(1996):428-38.
633 The United States also notes that the Panel’s communication of 19 August 2003 had not indicated that the parties would have an opportunity to comment on each other’s requests to comment. Had there been such an opportunity, the United States would have been happy to comment on Brazil’s request of 23 August 2003. Perhaps Brazil could reconsider whether it has a basis to assert a right to decide that it may unilaterally provide comments to the Panel while denying the United States the same procedural rights. Under Brazil’s approach, it would not have needed to request permission from the Panel to file comments on Wednesday, August 27, but could have simply provided those comments, unsolicited, while denying equal access for the United States. The United States is grateful that the Panel’s extremely prompt reply to the US request obviated any need to respond to Brazil’s unauthorized and out of order comments on that request.
634 See Brazil’s 23 August 2003 letter to the Panel.
635 Brazil uses the phrase “marketing loan programme” or “marketing loan payment” to encompass marketing loan gains, loan deficiency payment (or “LDP’s”) and certificate exchange gains. See US 11 August Answer to Question 67, para. 133.
636 The United States qualified “other payments” as product-specific support to upland cotton. See US 11 August Answer to Question 67, para. 130-133.
637 The amount of payments reflects the amount presented by Brazil in its 22 August Rebuttal Submission, para. 173. The value of the US upland cotton production has been taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p.5). The value of the US production in MY 2002 has been calculated by multiplying the amount of US production as reported in Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p.4) (16.73 million bales * 480 pounds per bale) with the average price received by US farmers of 40.50 cents per pound (see Exhibit Bra-202 (Agricultural Outlook Tables, USDA, August 2003, Table 5). Differences between the sum of individual rates of subsidization and the total rate of subsidization are due to rounding effects.
638 Studies indicate that the boll weevil eradication program has lowered the costs of producing cotton and has made cotton a more attractive cropping alternative. US producers have also rapidly expanded plantings of biotech cotton, rising from 25 per cent of plantings during the 1997 crop year, to an estimated 73 per cent of plantings in 2003. Studies suggest that biotech cotton has increased yields and net returns while decreasing pesticide use.
639 The United States also considers that this proposed standard has not been met by Brazil. First, as explained above, Brazil has not established a prima facie case of present serious prejudice, and therefore one cannot presume that there is a threat such prejudice will continue. Second, the Appellate Body report in United States – FSC cited by Brazil involved export subsidies under the Agriculture Agreement and a completely separate standard. Under the serious prejudice provision of the Subsidies Agreement, the question is the much more complicated issue of what is the clearly foreseen and imminent effect of measures on a Member’s interests, which may depend on future market conditions, world prices, and other factors. Third, Brazil has not demonstrated that the challenged measures are mandatory in the sense that they must be given if an application is made. Even though the Department of Agriculture has the obligation to make such payments available, the obligation only attaches when certain market conditions prevail. Thus, to show that the threat of serious prejudice is (in Brazil’s words) “real, clear, and imminent,” Brazil would have to show predicted prices over the future period complained of (marketing years 2003 07) and the likelihood of that occurring.
640 A similar concern is addressed for purposes of threat of material injury in countervailing duty investigations by Subsidies Agreement Article 15.7; under this article, “[t]he change in circumstances which would create a situation in which the subsidy would cause injury must be clearly foreseen and imminent.” We note the relationship between threat of serious prejudice and threat of material injury, both of which make up part of adverse effects under Article 5.
641 Instead of continued low prices, the A Index average for September 2003 has risen to 64.06 cents per pound. New York Cotton Exchange futures prices demonstrate that market participants expect cotton prices to climb even further through the 2003 marketing year, strengthening beyond their 20 year average of 67.86 cents per pound (1983 2002) within the current 2003 marketing year. In fact, if cotton prices reach the levels (over 70 cents per pound) indicated by the futures market, prices would be very close to what Brazil calculates as the A index average (74 cents per pound) for the period before Brazil alleges serious prejudice.
642 Brazil misapplies the cohort specific accounting methodology, however, to erroneously argue that “when [the] total lifetime reestimates for all cohorts of guarantees disbursed since 1992 are netted against the total original subsidy estimates adopted each budget year during the period 1992 2002, the resulting loss is nearly $1.75 billion”. To arrive at this fanciful figure Brazil begins not with the estimates based on the “actual” level of guarantees issued, but rather with the original subsidy estimate in the budget year, well before virtually any activity in the programmes has occurred in that fiscal year. The “actual” figure is simply a reflection of the actual level of guarantees issued in the particular fiscal year. The original subsidy estimate, in contrast, begins with what is an historically overly optimistic projection of actual use of the programme and then is required to use the government wide estimation rules without regard to the actual experience specific to the CCC export credit guarantee programmes.
Actual guarantee issuance can first be reflected only in the budget two fiscal years after the original subsidy estimate. Once the actual use of the program is determined all subsequent reestimates are based on that figure, not on the original subsidy estimate. Other than with respect to interest (because of independent market forces), a downward reestimate never occurs based on the original subsidy estimate. It only occurs subsequent to establishment of the actual program use. Consequently, it is wholly inappropriate to calculate net reestimates based on the original subsidy estimate for a particular cohort, as Brazil has done. For these reasons, the United States’ calculation indicating increasing profitability within the program is accurate, and the Brazilian calculation is not.
643 The US subsidies the consistency of which is being challenged include both the domestic support measures and the prohibited subsidies and export credit guarantee programme cited at paragraph 7 of Brazil's Further Submission to the Panel of 9 September 2003.
644 Within the meaning footnote 13 of the SCM Agreement.
645 Exhibit Bra-200 (Congressional Record 107th Congress, Senate) S3990; Brazil's Further Submission,9 September 2003, Section 4.9.
646 The USDA estimates the average production cost in the USA at about US$0.73 per pound. Nevertheless, one third of its production has higher production costs. On the other hand, the average production cost in Burkina Faso, for instance, is US$0.21 per pound (Data from International Cotton Advisory Committee, "Survey of the Cost of Production of Raw Cotton", 2001).
647 About 20 per cent lower than in Brazil or China, for instance.
648 Since 1997/98, cultivated acreage has in fact shrunk by 76 per cent, with 174,000 hectares planted to cotton, and production by 63 per cent, with an estimated 73,000 tons of fibre produced. Argentina: Economic Injury to the Cotton Sector as a Result of Low Prices, Working Group on Government Measures of the International Cotton Advisory Committee, 2002.
649 Held in Cairo, Egypt, from 20 to 25 October 2002.
650 As Brazil demonstrates in Section 3.2 of its Further Submissionof 9 September 2003.
651 On the basis of information in the USDA's Fact Sheet: Upland Cotton, January 2003, Exhibit Bra-4, Brazil points out that the total amount of US cotton subsidies was nearly US$13 billion, with an average subsidization rate of 95 per cent. Brazil's Further Submission,9 September 2003, Section 188.8.131.52.
652 Brazil's Further Submission,9 September 2003, Section 184.108.40.206.
653 Argentina agrees with Brazil (Section 220.127.116.11.7) that without the additional income provided by the subsidies granted by the US to its cotton farmers, acreage devoted to cotton would have been, and would be, much smaller, since US cotton production costs are among the highest in the world. (See Third-Party Submission by Argentina, 15 July 2003, para. 17.)
654 In addition, the average values of national standards for the technical characteristics of Argentine cotton fibre show that the length, strength and micronaire value of the fibre are considered in the median range at international level.
655 Brazil's Further Submission,9 September 2003, Section 18.104.22.168.
656 Brazil's Further Submission,9 September 2003, Section 22.214.171.124; Exhibit Bra-I, para.22.
657 Características del Mercado Mundial de Algodón (Features of the World Cotton Market), ANEA, 15 February 2002.
658 Third-Party Submission by Argentina,15 July 2003, para. 28.
659 Brazil's Further Submission,9 September 2003, Section 126.96.36.199.1.
660 Brazil's Further Submission,9 September 2003, Section 3.3.5.
661 See Exhibits Bra-6, Bra-76, Bra-4, Bra-57, Bra-55, Bra-47, and footnotes 301 and 321. The budgetary outlays for US cotton export credits and credit guarantees have not been taken into account.
662 Cotton: World Markets and Trade, USDA, March 2003, Table 1 (http://www.fas.usda.gov/export-sales/esrd1.html).
663 Brazil's Further Submission,9 September 2003, Section 4.2.
664 USDA Release: USDA ISSUES FINAL 2002-CROP UPLAND COTTON, RICE AND PEANUT COUNTER-CYCLICAL PAYMENTS.
665 Monitoring and Evaluation 2003, OECD.
666 Brazil's Further Submission,9 September 2003, Section 4.5.
667 See Exhibits Bra-7 (ERS Data: Commodity Costs and Returns); Bra-257 (Cost of Farm Production Up in 2003, USDA, 6 May 2003) and Bra-82 (USDA Agricultural Baseline Projections until 2012, USDA, February 2003, p.48).
1 As a threshold matter, upland cotton from Benin and Chad is clearly “like” US upland cotton within the meaning of Article 6.3. Benin and Chad agree with the analysis set out by Brazil in Part 3.3.2 of its Further Submission. Applying the tests set out in previous GATT and WTO cases, the Panel should have little difficulty in concluding that these are “like products”.
2 Further Submission of Brazil, paragraph 98.
3 Human Development Report 2003, United Nations Development Programme, http://undp.org/hdr2003.
4 Chad at a Glance, World Bank Group, 20 August 2003.
5 According to the World Bank, there are roughly 400,000 farm households in the cotton-producing areas of Chad, of which about 60 per cent grow cotton. An average farm household has 5 to 6 people. World Bank, Chad Cotton Sector Reform: A Case Study on Poverty and Social Impact Analysis. Document available at http://poverty.worldbank.org/files/13138_chadcottonreform.pdf
6 P. Fortucci, The Contributions of Cotton to Economy and Food Security in Developing Countries. Food and Agriculture Organization of the United Nations. July 2002.
7 World Bank Report on Poverty and Social Impact Analysis – Chad Cotton Sector Reform – Ex-Ante Qualitative Analysis – First Phase. Document available at http://poverty.worldbank.org/files.
9 Benin and Chad also welcome, and endorse, the arguments set out in Part 7 of Brazil’s Further Submission, “Serious Prejudice to the Interests of African Countries by Reason of the US Subsidies on Upland Cotton.”
10 Cultivating Poverty: The Impact of US Cotton Subsidies on Africa. Oxfam Briefing Paper 30. 27 September 2002. Brazil has filed the full Oxfam report as exhibit Bra-15.
11 Id., pages 8-9.
12 Id., page 17-18.
13 Id., page 17-18.
14 Id., page 32.
15 Id., pages 17 and 32.
16 Nicholas Minot and Lisa Daniels, Effect of Falling Cotton Prices on Rural Poverty in Benin. Exhibit BEN-CHA 1, paragraphs 36 and 38.
17 Id., paragraph 13.
18 Id., paragraph 23.
19 Cotton Sector Strategies in West and Central Africa. World Bank Policy Research Paper 2867, July 2002, page 9. Brazil has filed this Working Paper as exhibit Bra-265.
20 The report’s analysis was: “the findings … suggest that privatisation and liberalization will not automatically lead to price competition nor will they automatically solve some of the structural problems that plague the current cotton system in Chad”.
21 World Bank Report on Poverty and Social Impact Analysis – Chad Cotton Sector Reform – Ex-Ante Qualitative Analysis – First Phase. Op cit., page 35.
22 Cotton Sector Strategies in West and Central Africa. World Bank Policy Research Paper 2867, July 2002.
24 Poverty Reduction: Sectoral Initiative in Favour of Cotton. WT/MIN(03)/W/2.
25 WTO News: Address by President Blaise Compaoré to the Trade Negotiations Committee, 10 June 2003. www.wto.org.
26 WTO News: Address by Dr. Kipkorir Aly Azad Rana, Deputy Director-General to the Second East African Business Summit, “The Multilateral Trading System: Why East Africa Must Remain Engaged.” 18-21 September 2003. www.wto.org.
27 These prices are based on the A-Index cotton price, calculated as the average of the five lowest prices for US cotton in Northern European markets based on a grade of middling 1-3/32 inch fibre length.
28 The 1996 Farm Bill introduced production flexibility contract (PFC) payments, which were related to historical (not current) production and would decline over time as part of an effort to phase out farm subsidies. PFC payments to cotton farmers fell steadily from US$ 700 million in 1996 to US$ 474 million in 2002. Loan deficiency payments and marketing loan gains are, on the other hand, tied to current output and market prices. Low commodity prices over the last 3-4 years have sharply increased the cost of these programs. Payments to cotton growers were negligible in 1997, but rose to US$ 1.5 billion in 1999 and almost US$ 2.5 billion in 2002. In addition, Congress has authorized ad hoc market loss assistance (MLA) payments almost annually. MLA payments to cotton farmers were US$ 600 million in 1999 and US$ 650 million in 2002. Cotton exporters and US mills also receive roughly US$ 200 million per year in “Step 2” payments, designed to keep US cotton exports competitive (USDA, 2002b and Oxfam, 2002).
29 The 2002 Farm Bill introduces two new commodity programs: direct fixed payments and counter-cyclical payments. In the case of upland cotton, the fixed direct payment is set at 6.7 cents/pound and is paid on the basis of 85 per cent of the “base acreage”. The counter-cyclical payments involve payments of up to 13 cents/pound on 85 per cent of the base acreage depending on the gap between the market price (or the loan rate, whichever is higher) and the target price. These programs replace the production flexibility contract system and (supposedly) eliminate the need for the market loss assistance. The marketing loan and loan deficiency payments continue under the new Farm Bill with the same loan rate: 52 cents/pound for upland cotton. In addition, farmers are allowed to update their base acreage, providing them incentive to maintain or increase acreage in the event future opportunities to update acreage (USDA, 2002c).
30 Re-exports of manufactured goods to Nigeria and other countries accounts for a large share of total exports.
31 The 16 sections are household characteristics, housing characteristics, land, agricultural production, labour use, input use, changes regarding input use, credit, crop marketing, storage, sources of information, food and non-food consumption, allocation of time, asset ownership, sources of income, and perceptions of farmers.
32 Since this study was carried out, an administrative reorganization has resulted in an increase in the number of departments from 6 to 12. The analysis in this report retains the old definitions of departments because this was the basis for the sampling design of the survey.
33 As mentioned above, we use per capita expenditure as a proxy for per capita income