63. Could Brazil explain whether or not it considers that whether marketing loan and counter-cyclical payments increase acreage is not relevant to the inquiry of whether these payments cause significant price suppression within the meaning of Article 6.3 (c) of the SCM Agreement? (para. 56 of the Opening Statement of Brazil) Could Brazil comment on the points made by the United States in footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation in the meeting with the Panel?
63. The United States notes that the bulk of Brazil's answer to this question addresses arguments that have never been made by the United States. The United States has never suggested that "Article 6.3 of the SCM Agreement . . . compel[s] a complaining Member to produce evidence that the challenged subsidies result in a steady increase in production or acreage."544 Therefore, it is inexplicable why Brazil devotes nearly four pages of argument in an attempt to rebut such an assertion.
64. Rather, as the Panel's question itself reflects in its reference to footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation in the meeting with the Panel, the United States has taken issue with Brazil's inexplicable arguments in its unsolicited third written submission – BRA-659 – that the Panel should disregard a number of the studies submitted by the United States because they do "not examine whether CCPs are decoupled from production. Rather, [they] examine whether CCPs increase acreage."545
65. The United States appreciates Brazil's acknowledgment now, in response to this question, that its focus on "coupling" in the language cited by the United States was misplaced: "the notion of "coupled" and "decoupled" support in the Agreement on Agriculture . . . is not relevant for the assessment of the effects of subsidies under Articles 5 and 6 of the SCM Agreement."546 Rather, as Brazil now concedes the salient question is whether marketing loan and counter-cyclical payments cause such substantial shifts in planted acreage that oversupply, export, and ultimately "significant" price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement result.547 As discussed in the prior U.S. submissions548 and above in the general comments of the United States regarding Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement, the evidence before the Panel does not support Brazil's arguments that the marketing loan and counter-cyclical payments are causing any such significantly suppressed world market prices.
64. Given that Brazil has criticized the new empirical research cited by the United States because it does not deal specifically with the effects of countercyclical payments on upland cotton production, why does Brazil consider that the McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil, para. 140) is particularly relevant to this case? Could Brazil comment on the arguments of the United States in paragraphs 248-249 of the Rebuttal Submission of the United States? 66. Brazil fails to establish why the McIntosh, Shogren & Dohlam study – a study that does not address upland cotton specifically and that is premised on highly restrictive assumptions about the operation of the counter-cyclical program – is "more applicable to the assessment that the compliance Panel is tasked with"549 than the many studies submitted by the United States.
67. Indeed, it is important to note that – because the McIntosh, Shogren & Dohlman study is not limited to upland cotton production – its results are presumably supposed to be valid even for predicting effects on wheat, corn, and soybean acreage. However, it comes to directly inconsistent conclusions about the effects of counter-cyclical payments on wheat, corn, and soybean acreage than the studies submitted by the United States (for example, the Lin & Dismukes study finding that "[t]he effect of CCPs on producers' planting decisions . . . appears to be very negligible – anincrease in the acreage of major field crops of less than 1% . . . .")550 Although Brazil has argued that the Panel should ignore those other studies because they are not specific to upland cotton, Brazil has never explained why the McIntosh, Shogren & Dohlman study should be viewed as reliable when it comes to such different conclusions about the effects of counter-cyclical payments even with respect to the other crops. Indeed, the divergence in the results for wheat, corn, and soybean acreage simply confirm what the United States has argued and the authors of the McIntosh, Shogren & Dohlman study themselves acknowledge551 – that this study overstates any effects of counter-cyclical payments on acreage.
68. The authors themselves identify some of the reasons why that particular study overstates any effects of counter-cyclical payments on acreage. Namely:
Our design did not address two features of the 2002 Act which could affect the interpretation of our results. First, there are no adjustments made in our bonuses for the fact that direct and counter-cyclical payments are made only on a percentage (85 percent) of base acres. If these adjustments were incorporated, the lump sum bonuses would have been lower, implying our results could overstate the effects of CCPs. Second, we excluded the marketing loan program to focus on the basic CCP structure—target price, market price, and direct rate. Adding the marketing loan program into our design would temper the basic effects of CCPs by providing an additional price support mechanism.552
69. There are other reasons as well that have to do with the kind of laboratory experiments upon which the McIntosh, Shogren & Dohlman study is premised. The use of a laboratory experiment may allow the researchers to focus on a particular set of problems or issues but necessarily abstracts away from other highly relevant factors that also affect a producer's planting decision. Thus, for example, Brazil cites the authors of the McIntosh, Shogren & Dohlman study as noting that "farmers have other risk management tools at their disposal; large and less risk-averse farms tend to dominate production of program crops; and other programs such as marketing loan provisions already offer price protection."553 The McIntosh, Shogren & Dohlman study excludes these factors in assessing the effects of counter-cyclical payments. Yet, as Paul Westcott et. al. explained554, it is precisely these kinds of factors that mitigate and temper any actual effects of counter-cyclical payments.555 To ignore these factors is to improperly attribute to counter-cyclical payments effects that they do not actually have in the real world but only have in some artificial vacuum created for purposes of a laboratory experiment. It says little about whether counter-cyclical payments are actually having the kind of production effects alleged by Brazil and whether those effects are actually lead to the kind of price suppressive effects with which Article 6.3(c) is concerned.
70. What Brazil presents – in short – is a highly abstract study with limited conclusions.556 The laboratory experiment upon which the study is based does not reflect the economic conditions of actual upland cotton producers.557 Rather, the experiment "mimicked" certain stylized scenarios to attempt to isolate and measure the impact risk aversion and uncertainty might have on production decisions.558 In doing so, however, the authors removed from consideration some of the most critical factors that affect the degree to which farmers are, in fact, risk averse, such as the size of the enterprise and the availability of other price hedging mechanisms. Moreover, they exclude important factors other than risk that affect a farmer's planting decisions. When all factors are taken into account – as reflected in the empirical data used by some of the other studies submitted by the United States – a much more realistic picture emerges of the effects of counter-cyclical payments.
71. Brazil also claims that the McIntosh, Shogren & Dohlman study is more relevant because it is not confined to the geographic regions of other studies.559 That is a curious argument given that Brazil at once asserts that geographical factors may have some effect on the effects of counter-cyclical payments and asserts that a study that takes none of these factors into account is somehow the most reliable measure of the effects of counter-cyclical payments. In any event, Brazil's criticism that the Lin & Dismukes and Goodwin & Mishra studies on corn, soybeans, and wheat are less relevant to upland cotton because supply elasticities for these crops are much smaller than for upland cotton is only valid if one ascribes to the inflated supply elasticity used by Brazil in its Sumner II (CATO) model. For the reasons explained in the prior U.S. submissions, it is not appropriate to do so.560
72. Finally, the United States notes that Brazil misstates the U.S. arguments. The United States has not criticized the field of behavioral or experimental economics, nor has the United States suggested that the McIntosh, Shogren & Dohlman is invalid merely because it is based on controlled experiments, as Brazil claims.561 Rather, the United States has identified the numerous factors that limit the utility of the McIntosh, Shogren & Dohlman study in assessing the question at hand, including those expressly acknowledged by its authors. Moreover, the United States has noted the irony in Brazil's criticisms leveled at the studies submitted by the United States (i.e., that they are not unique to upland cotton production), when Brazil itself submits studies that do not even examine the behavior of actual farmers but, rather, the responses of University of Wisconsin economics students to some highly stylized scenarios. To claim that this highly abstract experimental study "analyzes more closely the effects of counter-cyclical payments on the production decisions of U.S. upland cotton farmers than results of empirical studies"562 – as Brazil does – is simply not supported by a review of the study and its conclusions.
65. The United States has cited new empirical research on the production effects of counter-cyclical payments. Could Brazil explain why the fact that these studies do not deal specifically with upland cotton should preclude the Panel from considering the studies as being highly probative?
73. Brazil's answer to this question fundamentally contradicts its answer to Panel question 64. Brazil asserts that the studies submitted by the United States are not probative "due to their failure to address the specific effect of upland cotton counter-cyclical subsidies on upland cotton production."563 Yet, as Brazil admits in Question 64 there are no studies that "address the specific effect of upland cotton counter-cyclical subsidies on upland cotton production."564 and in fact that studies upon which it relies itself – including the McIntosh, Shogren & Dohlman study – do not even do so. Brazil's complaint on this basis is, thus, patently absurd.
74. Equally unavailing are the four bases that Brazil asserts for why the effects of counter-cyclical payments made to a holder of upland cotton base acreage that produces upland cotton should be understood to be fundamentally different from those observed by Lin & Dismukes for counter-cyclical payments made in respect of corn, wheat, and soybeans and Goodwin & Mishra for marketing loss assistance payments in respect of the same crops. For example, Brazil does not explain what its assertions about "maximum per-acre counter-cyclical payments" have to do with effects on production. In fact, if it were true – as Brazil alleges – that the costs of production for upland cotton are higher than for other crops, one would expect rational farmers to produce other crops while still collecting the allegedly very high maximum upland cotton counter-cyclical payment. Thus, Brazil's reasoning actually supports exactly the opposite conclusion than the one it asserts.
75. Brazil's assertions about the "frequency of payment" similarly lack merit. Differences in what Brazil calls the "fill rate" did not preclude Brazil's preferred study – the McIntosh, Shogren & Dohlam study – from presenting one single assessment across all counter-cyclical payments. This supports the conclusion that any alleged differences in the "frequency of payment" do not preclude the Lin & Dismukes and Goodwin & Mishra from being highly probative of the likely effects of counter-cyclical payments made in respect of upland cotton base acres.
76. Brazil's third asserted basis – its allegation that "one would expect low supply elasticities in these regions for these crops"565 – is similarly without merit. As noted in response to Question 64, this appears to be premised on Brazil's own assertions of grossly inflated supply elasticities for upland cotton.
77. Finally, as noted above, there is no basis for Brazil's attempts to invoke certain statements by the NCC carefully selected to give the impression that U.S. upland cotton farmers would simply be "bankrupt" without counter-cyclical payments. As Brazil admits, these statements were not even made with respect to counter-cyclical payments under the FSRI Act of 2002 but rather were made in February 2001 – before the FSRI Act of 2002 even came into effect – about certain emergency relief that had been provided under the FAIR Act of 1996 including production flexibility contract payments, marketing loss assistance payments, and disaster payments. These statements offer no insight regarding the role of counter-cyclical payments in production decisions or about U.S. farmers' costs and revenues today. And they certainly do nothing to detract from the actual data regarding "present" costs and revenue, which flatly contradict Brazil's claims that U.S. upland cotton farmers would be bankrupt without counter-cyclical payments.
78. In sum, Brazil has offered no valid reason why the Panel should not consider the studies submitted by the United States to be highly probative on the question of the effects of the counter-cyclical payments on acreage and production decisions. The United States submits that these studies continue to provide important insight into the effects of those payments and confirm the U.S. arguments that these effects are not the "significant" production and price effects that Brazil has alleged.
66. Can Brazil explain the differences between the figures for the amount of counter-cyclical payments allocated to upland cotton provided by Brazil at the meeting of the Panel with the parties (Opening Statement of Brazil, para. 40 and Exhibit Bra 625) and the figures in Table 5 of Brazil's Rebuttal Submission? 67. Please confirm whether or not the Panel's understanding is correct:
"Table 6" in Brazil's First Written Submission was produced using the so-called "Brazil's method" using USDA data.
"Table 5" in Brazil's Rebuttal Submission was produced using the so-called "cotton-to-cotton" methodology using USDA data.
The figures cited in para. 40 of Brazil's opening statement (i.e. "$868 million and $838 million) are produced with the "Brazil's method" as well as the "cotton to cotton" methodology, using the data provided by the United States in exhibit US 64. 68. Please comment on the following statement by the US:
"The United States understands that Brazil intends the counter-cyclical payment figures shown in 'Table 5' of Brazil's rebuttal submission to supersede the counter-cyclical payment figures shown in 'Table 6' of its first written submission." (US response to question 4 at para. 15)
69. How does Brazil address the argument of the United States that "the only evidence that Brazil has submitted purporting to examine the price effects of marketing loan and counter-cyclical payments specifically are the results of the modelling exercise that it has conducted for purposes of this proceeding"? (Opening Statement of the United States, para. 76) 79. In the cited portion of the U.S. oral presentation, the United States observed that:
regarding the degree of any possible effects on world market prices, the United States notes that the only evidence that Brazil has submitted purporting to examine the price effects of marketing loan and counter-cyclical payments specifically are the results of the modeling exercise that it has conducted for purposes of this proceeding.566
80. Brazil accuses the United States of "ignor[ing] the hundreds of exhibit and the circumstantial evidence presented by Brazil in the original proceeding and in this compliance proceeding,"567 and then expounds for 10 pages about the "abundant and diverse evidence" it has allegedly presented.568 However, not a single piece of the allegedly "abundant and diverse evidence" does what the United States noted – examines the degree of any possible effects on world market prices of the marketing loan and counter-cyclical payment programs. The United States therefore understands Brazil's response to confirm the U.S. observation.
81. As to Brazil's assertion that its allegedly "abundant and diverse evidence" nonetheless supports a finding that "the effect" of marketing loan and counter-cyclical payments is "present" significant price suppression, Brazil is wrong. The United States has addressed each of Brazil's arguments in its prior submissions569, in the general U.S. comment above regarding Brazil's claims under Articles 5(c) and 6.3(c), and in the U.S. comments regarding Brazil's responses to Questions 62-65 and 70. As shown therein, none of the "evidence" asserted by Brazil withstands scrutiny.
70. How does Brazil respond to the United States' rebuttal that Brazil has not even established a temporal correlation between payment of subsidies and significantly suppressed prices during the life of the FSRI, that is from marketing year 2002 to 2005? More specifically, please address the United States' claim of the stability of US plantings, US share of world production, US share of world exports and the world price of cotton during this period. 82. The United States notes that Brazil chooses not to respond to the Panel's question. The Panel asks Brazil to "respond to the United States' rebuttal that Brazil has not even established a temporal correlation between payment of subsidies and significantly suppressed prices during the life of the FSRI, that is from marketing year 2002 to 2005." Instead of responding, however, Brazil attempts to sidestep the issue by attributing to the United States – inexplicably – the "assertion" that "there were not 'coincidences' between (a) increased U.S. production and exports and (b) large U.S. marketing loan and counter-cyclical subsidies" and then proceeding to attempt to rebut that alleged "assertion."570 The United States has never suggested that this is the appropriate analysis, let alone made the kind of "assertions" that Brazil attempts to attribute to the United States. Nor did the original panel conclude that an increase in absolute levels of production and exports would equate to a "temporal coincidence" between allegedly significantly suppressed world market prices and payments under the marketing loan and counter-cyclical payment program.
83. Rather, the original panel considered a number of factors every single one of which the United States examined in its first written submission and its rebuttal submission.571 As the United States showed therein, none of the factors considered by the panel in the original proceeding in reaching its conclusion of a "discernible temporal coincidence" between U.S. subsidies and significant price suppression support such a finding with respect to the marketing loan and counter-cyclical payments now. Brazil has never rebutted the U.S. arguments in this regard; and does not do so now even despite the direct request by the Panel to do so. This confirms that Brazil has not – and cannot – prove any "discernible temporal coincidence" between significantly suppressed world market prices and marketing loan and counter-cyclical payments. Indeed, as discussed below, Brazil has not even proven the factual predicates therefor, including significantly suppressed prices.
84. Rather than offering any proof of "discernible temporal coincidence" between significantly suppressed world market prices and marketing loan and counter-cyclical payments, Brazil relies on reasoning that is entirely untenable. Consider, for example, Brazil assertion that the increase in the absolute level of U.S. production and exports alone over the life of the FSRI Act of 2002 should be understood "in isolation" to "suggest a relationship" between the marketing loan and counter-cyclical subsidies and allegedly suppressed world market prices.572 As evidenced by the fact that U.S. share of world production and exports has remained relatively stable over the course of the entire FSRI Act, however, it is a fact that there is precisely the same "temporal coincidence" between increased foreign production and exports and the U.S. marketing loan and counter-cyclical payments. Does this – "in isolation" – support the same conclusion in respect of foreign production and exports? Should the U.S. marketing loan and counter-cyclical payments be understood to have caused the increase in the absolute level of foreign production and exports? Surely not. Surely any rational analysis would look more closely at how the marketing loan and counter-cyclical payments interact with the production decisions (i.e., the decision on what to plant).
85. When one looks at planted acreage, one finds that the increase of absolute levels of U.S. production is solely attributable to an increase in yields. In fact, in MY 2005, U.S. producers actually planted fewer acres than in either MY 2001 or MY 1999 (13.9 compared to 15.4 and 14.5 million acres, respectively), the years that Brazil has urged the Panel to look at as comparison years before the FSRI Act came into effect. Moreover, had the yields in MY 2005 been what they were in those earlier years, U.S. production in MY 2005 would have been far lower.573 Thus, contrary to Brazil's assertions, the increased production in these years is not evidence of any causal link between the marketing loan and counter-cyclical payments and production. It is evidence of dramatic improvements in yields.
86. In an apparent effort to avoid this flaw in its argument, Brazil then argues that "but for" the U.S. marketing loan and counter-cyclical payments, U.S. planted acreage would have been lower over the life of the FSRI Act.574 As the United States has shown – examining the planting decisions made by U.S. farmers in MY 2006, MY 2005 and, in fact, every year under the FSRI Act of 2002 – the facts do not support Brazil's assertion.575 Thus, Brazil's answer only confirms that, notwithstanding its assertions, Brazil does not – and, in fact, cannot – "reinforce the original panel's finding, at paragraph 7.1351 of its report, of a discernable temporal coincidence of suppressed world market prices and the price-contingent U.S. subsidies."576 87. Nor does Brazil respond fully to the second of the Panel's questions. As the Panel's question reflects, the United States identified a key flaw in Brazil theory at the very start of this proceeding.577 Namely, if, as Brazil alleges, U.S. producers were cut off from market signals, why does U.S. production response mirror foreign production response (see chart below)? Why does one not find U.S. share of world production and exports increasing over the life of the FSRI Act as U.S. producers allegedly ignore the same market signals received by their foreign counterparts?
88. Brazil has never been able to rebut this evidence; its only response has been to assert that the stable share of world production and exports is somehow itself evidence that U.S. producers are insulated from market signals. However, as the United States explained in its first written submission, in making this assertion, Brazil is improperly assuming its own conclusion – i.e., "stable U.S. share of world production and export proves that U.S. support payments cause price suppression because without the price suppression caused by U.S. support payments U.S. share of world production and exports would not be stable."578 Brazil's circular reasoning is not improved by its reassertion in Brazil's response to this question.
89. In its response, Brazil also argues at length about the alleged "United States [sic] claims that the stability of U.S. acreage demonstrates the lack of any 'temporal coincidence' (and hence causation)."579 Brazil's arguments in this regard are baffling because the United States has not "claimed" any such thing. What the United States has noted is (a) the original panel's analysis that "United States production of upland cotton increased from MY 1998 to MY 2001 and, while production dropped in MY 2002, there was still an overall increase in MY 2002 compared to MY 1998;"580 and (b) Brazil's arguments that in its discussion of production and "temporal coincidence" in the panel report, "[t]he [original] Panel simply referred to "production" as shorthand for planting decisions by producers, which even in agricultural economics literature is not uncommon."581 According to Brazil's argument, then, the original panel found an "overall increase" in the U.S. upland cotton planted acreage in MY 1999-2002 and considered this as one factor in its finding of a "discernible temporal coincidence". The United States has shown that there is no similar "overall increase" in the U.S. upland cotton planted acreage over the life of the FSRI Act. To the contrary, planted acreage declined from MY 2002 levels in MY 2003 and MY 2004, picked up slightly in MY 2005 and more so in MY 2006 but is projected to fall dramatically in MY 2007 to levels lower than they have been in almost a decade.582
90. There is similarly no merit to the other arguments made by Brazil regarding U.S. planted acreage.583 Brazil continues to make arguments on the fundamentally flawed assumption that U.S. planted acreage should change year-to-year based on changes in the futures price for upland cotton alone. Thus, for example, Brazil even claims as "one of the most important 'temporal coincidences' in the record" – the fact that U.S. planted acreage increased slightly in MY 2005 even though futures prices for cotton in that year were lower than the year before.584 But Brazil's own assertions about the proper analysis of planted acreage in another year – MY 2007 – demonstrate the fallacy in Brazil's arguments about planted acreage shifts in MY 2005. If U.S. planted acreage must move in synch solely with upland cotton prices, why does Brazil argue that U.S. upland cotton acreage should be decline dramatically in MY 2007585 even though the expected harvest time price for upland cotton in this year (i.e., the average January-March 2007 New York futures price for the December contract) is 59 cents/lb, more than 6 cents/lb higher than for MY 2005 and almost the same level as in MY 2006. The reason why Brazil argues that there should be a decline is because the prices for corn – a competing crop – make that a more attractive option in MY 2007.586 The same kind of considerations of competing crops, weather, pests and other such factors – not some narrow assessment of changes in the futures price for upland cotton price alone – explain the acreage shifts also in MY 2005 (and indeed in each of the other years that the FSRI Act has been in effect).587
91. Finally, the United States notes that although the Panel asks Brazil specifically to respond to the U.S. arguments regarding world market prices, Brazil does not do so. Rather, Brazil simply asserts that prices over the life of the FSRI Act are below those that prevailed in MY 1980-1998.588 As the United States explained in its first written submission, however, Brazil's claim in this proceeding is of significant price suppression, not price depression. A decline in prices does not demonstrate price suppression.589 The question is whether prices are being prevented from rising by something (in this case, the marketing loan and counter-cyclical payment programs). Brazil provides no empirical evidence showing such "suppression" as a result of marketing loan and counter-cyclical payments.
92. Rather, the fact that the A-Index has trended downwards for more than 25 years now – well before the FSRI Act came into effect – and the fact that the A-Index has gone up from the levels that prevailed before the FSRI Act came into effect as of MY 2002 would tend to suggest that, to the extent there is any price suppression, it is not "the effect" of the marketing loan and counter-cyclical payment programs.
Source: USDA, Agriculture Marketing Service Reports590
93. Brazil has never rebutted this evidence nor established that there is a "discernible temporal coincidence" of U.S. marketing loan and counter-cyclical payments and allegedly suppressed world market prices.
71. In the original case, the Panel concluded that the analysis covering "the six-year period from 1997-2002 ... lends itself to an assessment of the medium- to longer-term examination of developments in the United States upland cotton industry" (see para. 7.1354 of the original panel report). Thus, total costs of production were the costs considered appropriate by the Panel. Would total costs of production continue to be relevant should the compliance Panel decide to use only marketing year 2005 as the reference period for analysis? Or would variable costs of upland cotton farming in marketing year 2005 now be the relevant information to consider?
94. The United States offers a number of observations regarding Brazil's answer to this question. First, Brazil asserts that there have been no fundamental changes in the conditions of competition or any other relevant factors that would compel the compliance Panel to reject the findings of the original panel's causation analysis relating to "total cost of production."591 Brazil is incorrect.
95. As the United States explained as early as September 2003, the 1997 ERS/USDA survey data on cost of production used by both Brazil and the United States in the original panel proceeding likely overstated certain costs because of technological and other changes.592 The U.S. arguments were borne out when ERS released new cost of production data based on a 2003 survey. As a result of changes in technology – widespread adoption of biotech cottonseed, and other improvements in production practices, such as boll weevil eradication programs – upland cotton yields have exhibited a structural increase and per unit input costs have fallen.593 This dramatic shift in the cost and yield structure for upland cotton certainly represents a fundamental shift in the conditions of competition, contrary to Brazil's assertions. As the United States explained in earlier submissions, the data show clearly that upland cotton producers covered not only their operating (variable) costs but also a substantial portion of their total costs between 2002-2005.594
96. Second, Brazil continues to assert that total costs of production, including non-cash or economic costs, are determinative of a producer's planting decision, without offering any basis in the economic literature or even in fact to support that assertion. The United States has reviewed this issue thoroughly in its prior submissions and, rather than repeating this here, refers to the Panel to the earlier discussion.595 For the reasons explained by the United States, if the Panel were to examine effects on planting/production in a single year – MY 2005 – the relevant consideration is operating costs, not "total" costs.596
97. Third, while Brazil is correct in its observation that a farmer has two different cost concerns – one a year-to-year planting decision and another long-term decisions about the economic viability of his farm – Brazil analysis of these decisions is flawed. As the United States has explained the "total costs" that Brazil uses is not an appropriate consideration with respect to either decision.597 To the extent a producer has planting options for various crops, based on agronomic conditions, the first decision is an assessment of net returns per crop; that is, what is relative market revenue minus operating costs (net revenue per crop).598 In addition, over time, a producer must also cover all cash costs, including such items as mortgage costs and equipment. The United States agrees with Brazil that "without generating sufficient funds to meet this second set of costs, there would be no facilities or equipment to grow upland cotton in the first place."599 However, as the United States has shown, U.S. farmers assess the economic viability of a farm based on the total costs and revenue for the farm.600 It is on the basis of those considerations – not some artificially segmented crop-by-crop "total cost" analysis – that the farmer makes decisions such as whether to declare bankruptcy.
98. It is a significant flaw in Brazil's analysis, therefore, that Brazil disregards off-farm income and income from other crops, both of which are an important part of the total revenue of a farm. It is similarly incorrect for Brazil to attempt to include in its "total cost" analysis such factors as imputed opportunity costs that have been calculated by USDA to attribute some value to unpaid labor and owned land but that are not necessarily costs that must be paid off in order for farmers to avoid having to "close down [their] business[es]."601 As a result of these flaws, the picture that emerges of the financial viability of U.S. farmers is completely and thoroughly distorted. It results in the attribution to marketing loan and counter-cyclical payment "effects" that they are not in fact having.
99. When one considers instead, the total cash costs that most farmers do in fact have to meet over the long term, the data show that U.S. farmers have in fact generated sufficient funds to cover their total cash costs over the long term. The cost data for the period 2000-2005 show that, instead of the cumulative $663 deficit per acre erroneously asserted by Brazil, the cumulative returns over the same period were a positive return of $161 per acre. Moreover, for MY 2000-2006, instead of the $837 deficit per acre alleged by Brazil, the cumulative net returns were a positive $133 per acre.602 100. The FAPRI baseline projections from July 2006, which Brazil used in an earlier submission, confirm the same facts. Comparing gross market revenue for upland cotton per acre to variable expenses per acre shows that upland cotton revenue would more than cover variable expenses and would cover a large share of other cash expenses. For the period 2004/05-2010/11, cumulative net returns per acre were projected to be $620.34.603 101. It is important to remember that these results look only to total costs and revenue for upland cotton production. When whole-farm costs and revenue from all sources is taken into consideration an even more robust picture of economic viability would likely emerge.
72. Brazil has argued that the adjustment in cotton stocks should not be included in the simulation of a large and permanent reduction in subsidies to cotton. Please respond to the following argument:
If the simulation were a comparative static analysis in which a baseline is compared to a counterfactual outcome in some long-run state, modelling such adjustments would be unnecessary. But such adjustments should be taken into account given that the model is used to simulate the average impact on the world price of cotton (among other variables) on specific periods of time (MY 2002-05 or MY 2006 08) and not in the long run.
102. In its response to this question, Brazil continues to suggest incorrectly that stock responses are incorporated into the demand elasticities used in Brazil's new model. This is simply untrue.
103. Brazil also attempts to minimize the importance of stock adjustments to overall market price movements. However, stock-holding activity is an important component of any storable commodity market. Market participants hold stocks for a variety of reasons to accommodate a number of possible factors. The adjustment of stocks is an important determinant in overall price movement. The United States has shown that by ignoring the importance of stocks in a short-run analysis, Brazil's analysis overstates the price impacts.604
104. The United States agrees that stock adjustments are not necessary to an analysis of long-term demand and price adjustments. However, in a long-term analysis, the elasticities that are used must fully reflect long-term adjustments in supply and demand. Based on such elasticities documented by FAO, the United States demonstrated that – even using Brazil's own econometric model, which suffers from certain fundamental structural flaws that tend to overstate the results – any price impacts due to the removal of U.S. programs are only in the range of 1 to 1.5 percent, not the grossly exaggerated results that Brazil attempts to show.
73. How does Brazil respond to the argument made by the United States in paragraph 79 of its Opening Statement that: "to the extent a counterfactual assessment is undertaken, it is only to assess what the price equilibrium would be at present if marketing loan and counter-cyclical payments had been lower, different or did not exist. Article 6.3(c) does not ask what prices will look like in the short-run adjustment period if the marketing loan and counter-cyclical payments are suddenly eliminated... Brazil's argument that it is necessary to look at the short-run effects of total elimination of the programs cannot be accurate as a textual matter."
More specifically: (a) Why did Brazil not consider it appropriate to include simulations that involve reductions rather than elimination of the subsidy programmes? 105. The United States offers two observations in respect of Brazil's answer. First, Brazil's response to this question appears to make little sense. Brazil asserts that it has not modeled reductions of the U.S. marketing loan and counter-cyclical payment programs because the United States has not made changes to reduce payments under those programs. However, the United States has also not eliminated the marketing loan and counter-cyclical payments. Under its own reasoning, Brazil would have no basis for purporting to model the total elimination of those payments either.
106. Second, the United States notes that Brazil reasserts its arguments about the appropriateness of assessing the "short-run" response of "shocking" the system with elimination of marketing loan and counter-cyclical payments. As the United States has explained, Brazil confuses the question under Articles 5(c) and 6.3(c) of the SCM Agreement. The question under those provisions is what the present effects of the challenged measures are (and whether these effects comprise "significant" price suppression). The question is not what the effects are of eliminating anything. To the extent a counterfactual analysis is conducted to attempt to tease this out, the question is simply where the equilibrium would have been today had the challenged measures not been in existence. The question is not what will happen in the short run if a Member were to eliminate the challenged measures today. Brazil's citation of Korea – Ships confirms this precisely:
price suppression is the situation where prices have been restrained by something, and price depression is the situation where prices have been pushed down by something. So the question to be answered is whether the "something" is subsidization. Looking at a counterfactual situation, i.e., trying to determine what prices would have been in the absence of the subsidy, seems to us the most logical and straightforward way to answer this question.605
107. Indeed, in other disputes, Brazil has confirmed that in assessing trade effects using a counterfactual analysis, "elasticity values should be taken from long-run estimates and not short run estimates."606 Brazil has provided no valid reason for why the analysis is different here.
(b) If simulations of such scenarios are performed, would the current values of the elasticities chosen (particularly the supply elasticities) to simulate the elimination of marketing loan and counter-cyclical programmes continue to be appropriate? Please kindly provide an explanation for the chosen answer.
108. The United States is surprised by Brazil's assertion now that its inflated U.S. supply elasticity is actually appropriate even for assessing a partial reduction of payments under U.S. programs. Brazil itself has argued that different elasticities are necessary for reduction of payments versus "permanent" removal of payments and has attempted to have the Panel dismiss the FAPRI parameters on the basis that they are not applied to "permanent" removal of payments.607 Now – however – the Panel is to believe that the inflated Sumner elasticities are nonetheless appropriate for use in every context. Brazil's assertions about the these elasticities simply lack credibility. The United States has shown that the modeling parameters and assumptions that Brazil uses are grossly exaggerated.608 This is true regardless of whether they put to an analysis of partial or full reduction of payments.
74. Brazil's view is that the data that the Panel must consider for its claim of present serious prejudice should be that covering the latest marketing year for which complete information is available, MY 2005, and where credible, evidence after 31 July 2006. Since in MY 2005, payments under Step 2 continued to be made by the United States (payments which the original Panel found to have contributed to adverse effects) how shall the Panel ascertain that any adverse effects observed in marketing year 2005 are due solely to the two subsidy measures which are the subject of the present serious prejudice claim – marketing loan and counter cyclical payments?
109. The United States offers three observations about Brazil's answer to this question. First, Brazil's response to this question provides an interesting contrast to its response to Question 69 above. In that response, Brazil attempts to excuse its failure to provide empirical evidence regarding the effects of the marketing loan and counter-cyclical payment programs on the basis that "Brazil cannot unilaterally remove the U.S. subsidies to present direct evidence of what would actually happen to U.S. acreage, production, exports, and world prices without those subsidies. Only the United States can do so."609 In its response to this question, however, Brazil argues that where the United States has removed a domestic support program, the Panel should not rely primarily on the "direct evidence of what would actually happen to U.S. acreage, production, exports, and world prices without" payments under that program but rather on Brazil's own "counterfactual" assertions about the effects of the removal of the Step 2 program (which are, in any event, heavily contradicted by the arguments presented by Brazil itself in the original panel proceeding and undermined by the empirical evidence).610 In effect, Brazil suggests that – regardless of what the facts actually are and regardless of whether payments are being made under the challenged programs or not – the Panel must rely on whatever Brazil alleges about the effects of the payments. There is no basis for such a suggestion.
110. Second, the facts relating to the period after the removal of the Step 2 program – which Brazil attempts to have the Panel ignore – show U.S. plantings declining and U.S. exports declining dramatically even as the cost structure of U.S. upland cotton farms improves due to such factors as the use of genetically modified cottonseed. Brazil has not established that, despite these facts, U.S. marketing loan and counter-cyclical payments are somehow "significantly" suppressing world market prices. The decline in exports and the decline in predicted plantings are occurring even though both the marketing loan program and the counter-cyclical payment program remain in place and even though – according to Brazil – these programs are allegedly "designed" to provide consistently high payments to U.S. farmers. These facts are not consistent with the theories that Brazil has put forward purporting to establish the alleged "numbing" of U.S. production response and alleged substantial levels of overproduction and export of U.S. upland cotton.
111. Third, Brazil asserts that the removal of the Step 2 program should be assessed as part of a "non-attribution" analysis and suggests that the original panel's analysis somehow supports this approach. Brazil is wrong. The original panel never assessed the effects of Step 2 payments as part of any "non-attribution" analysis; Step 2 payments were, instead, part of the package of payments whose effects were directly at issue in the "present" serious prejudice analysis under Articles 5(c) and 6.3(c) of the SCM Agreement.
112. Nor does it make sense that removal of the Step 2 program would be part of a "non-attribution" analysis. As the Appellate Body has explained, a "non-attribution" analysis focuses on "ensur[ing] that the effects of other factors on prices are not improperly attributed to the challenged subsidies."611 This requires separating out the effects of other factors suppressing world market prices and ensuring that they are not attributed to marketing loan and counter-cyclical payments. As removal of the Step 2 program is not suppressing any prices, it is not logical to speak of including that factor in any "non-attribution" analysis.