Seed Cotton as a Farm Program Crop: In Brief
Randy Schnepf
Specialist in Agricultural Policy
July 25, 2018
Congressional Research Service
7-5700
www.crs.gov
R45143
Seed Cotton as a Farm Program Crop: In Brief
Summary
The Bipartisan Budget Act of 2018 (P.L. 115-123; BBA), signed into law on February 9, 2018,
included a provision—Section 60101(a)—which amended the 2014 farm bill (P.L. 113-79) to add
seed cotton as a “covered commodity,” thus making cotton eligible for the Price Loss Coverage
(PLC) and Agricultural Risk Coverage (ARC) farm revenue support programs.
The 2014 farm bill provides authority for farm programs for the 2014 through 2018 crop years.
Under the 2014 farm bill—signed into law in February 2014—neither cotton nor its co-product,
cottonseed, were eligible to participate in the newly created ARC and PLC programs. During the
first three years of the 2014 farm bill (crop years 2014 through 2016), nearly $20 billion in
support payments have been made to eligible program crops under ARC and PLC.
Upland cotton had been eligible for U.S. Department of Agriculture (USDA) farm support
programs since their origin in the 1930s. However, in a significant departure from past U.S. farm
policy, and in response to a trade dispute with Brazil, the 2014 farm bill permanently removed
upland cotton from eligibility for the ARC and PLC programs. Instead, the remaining cotton-
specific support programs were supplemented by offering the U.S. cotton sector new transitional
payments and, in 2015, a new shallow-loss revenue insurance product: the Stacked Income
Protection Program (STAX).
Since early 2014, U.S. cotton producers have been largely unsatisfied with their economic
situation due to falling cotton prices, and they have expressed additional concern regarding the
perceived lack of revenue support offered under STAX. In early 2015, the U.S. cotton sector
began advocating to be made eligible for payments under the ARC and PLC programs. Several
Members of the House Agriculture Committee (including both its chairman and ranking member)
were supportive of this effort and actively sought a legislative opportunity to reintegrate either
cottonseed or seed cotton—the harvested but un-ginned cotton boll that includes both lint and
cottonseed—back into the revenue support programs in the 2014 farm bill.
After several legislative attempts, this effort was successful when Congress passed the BBA with
a provision that amended the 2014 farm bill to add seed cotton as a “covered commodity,” thus
making it eligible for either ARC or PLC beginning with the 2018 crop. However, to participate,
cotton producers must first make three decisions specified in the new statute: what portion of
their farm program generic base acres will be designated as cotton-specific base, whether to
update historical cotton program yields (needed to determine the per-acre payment rate), and
which program to participate in—ARC or PLC.
The Congressional Budget Office (CBO) projects the cost of adding seed cotton as a covered
commodity at nearly $3 billion over 10 years. However, accompanying budget offsets are
projected to lower the net cost to $61 million. Offsets include reallocating farm payments made to
other program crops planted on former cotton program acres (known as “generic base”) back to
cotton and repealing eligibility for STAX from cotton producers that participate in ARC or PLC.
The policy change for cotton has potential implications for both domestic and international
commodity markets. However, perhaps the most critical aspect of the new seed cotton policy is
that, as part of current law, it becomes part of CBO’s budget baseline used to write the next farm
bill. As a result, it avoids the potential policy debate surrounding a search for budgetary offsets
that would otherwise be needed to pay for the costs associated with adding a new farm program.
This result could facilitate reaching an agreement among congressional negotiators working on
the farm support programs in Title I of a new farm bill.
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Contents
Background ..................................................................................................................................... 1
The WTO Brazil-U.S. Cotton Trade Dispute ............................................................................ 1
Cotton in the 2014 Farm Bill .................................................................................................... 1
Cotton Excluded from New Revenue Programs ................................................................. 2
Historical Cotton Program Acres Renamed as Generic Base ............................................. 2
Cotton-Specific Programs Remaining in the 2014 Farm Bill ............................................. 3
Industry Push for Cotton Reintegration into ARC/PLC Programs ............................................ 4
Seed Cotton as Program Crop: Legislative Evolution ..................................................................... 6
FY2017 Appropriations Bill (115th Congress) .......................................................................... 6
Senate FY2018 Appropriations Bill (S. 1603, 115th Congress) ................................................. 8
Emergency Supplemental Bill (H.R. 4667, 115th Congress) ..................................................... 8
Bipartisan Budget Act of 2018 (P.L. 115-123; BBA) ................................................................ 8
Seed Cotton: Program Design ......................................................................................................... 9
Allocation of Generic Base Acres ............................................................................................. 9
Payment Yield Choice ............................................................................................................... 9
Program Choice ......................................................................................................................... 9
Payment Parameters ................................................................................................................ 10
CBO Cost Projections ............................................................................................................. 10
Potential Issues .............................................................................................................................. 10
WTO U.S.-Brazil Cotton Dispute ............................................................................................ 11
Potential Revival of WTO U.S.-Brazil Cotton Dispute ..................................................... 11
Potential Mitigating Factors .............................................................................................. 12
Potential Budget Cost of Seed Cotton as a Program Crop ...................................................... 13
Base Acres Reduction ............................................................................................................. 14
Figures
Figure 1. Alternative Outlay Scenarios for Seed Cotton Under PLC ............................................ 13
Figure 2. Upland Cotton: Generic Base versus Planted Acres ...................................................... 14
Tables
Table 1. Generic Base: Planted Acres and Payments, by ARC-PLC Program ................................ 7
Contacts
Author Contact Information .......................................................................................................... 14
Congressional Research Service
Seed Cotton as a Farm Program Crop: In Brief
Background
This report briefly describes cotton’s special treatment, relative to other traditional farm program
crops, in the 2014 farm bill. It also reviews the legislative attempts—which culminated with the
Bipartisan Budget Act of 2018 (P.L. 115-123; BBA)—to reintegrate cotton as a program crop
eligible for major farm revenue support programs. Then, it reviews the specifics of the new seed
cotton program and discusses three potential issues related to the establishment of seed cotton as
a program crop.
The WTO Brazil-U.S. Cotton Trade Dispute
As a member of the World Trade Organization (WTO), the United States has committed to abide
by WTO rules and disciplines.1 WTO rules covering agricultural trade and domestic support
programs for agriculture have played a large role in shaping current U.S. cotton policy.2 In
particular, in 2002, Brazil—a major cotton export competitor—initiated a long-running WTO
dispute settlement case against U.S. cotton support programs. Brazil charged that these programs
were depressing international cotton prices and thus artificially and unfairly reducing the quantity
and value of Brazil’s cotton exports, causing economic harm to its cotton sector. In 2004, a WTO
panel ruled against the United States in the cotton case. As a result of the ruling and the potential
for WTO-sanctioned retaliation, the United States made several policy changes—including both
legislative action and administrative adjustments—in an attempt to bring the related cotton
support programs into WTO compliance. Despite these efforts, Brazil successfully argued that the
United States had failed to fully comply with the WTO panel’s ruling. As a result, in 2009 the
WTO granted Brazil authority to retaliate against U.S. goods and services, including copyright
and trademark protections.3
With trade retaliation in the offing, the United States removed upland cotton from eligibility for
the PLC and ARC revenue support programs in the 2014 farm bill. Then, in October 2014, the
two countries signed a Memorandum of Understanding (MOU) that finalized a mutual resolution
to the case based on U.S. cotton policy as enacted in the 2014 farm bill.4 By agreeing to a mutual
MOU, the two countries avoided trade retaliation. In particular, according to Section VI of the
MOU—the Peace Clause—Brazil would refrain from retaliation prior to September 30, 2018,
providing that the United States limits cotton payments to those programs specifically authorized
by the 2014 farm bill such as STAX and MAL.
Cotton in the 2014 Farm Bill
Among traditional program crops, cotton was singled out for special treatment by the 2014 farm
bill. Unlike other crops, upland cotton was made ineligible for new revenue support programs
available to traditional program crops—referred to as covered commodities5—and was given a
1 See CRS In Focus IF10192, WTO Disciplines of Domestic Support for Agriculture, by Randy Schnepf.
2 For more information, see CRS In Focus IF10193, The WTO Brazil-U.S. Cotton Case, by Randy Schnepf, and CRS
Report R43336, The WTO Brazil-U.S. Cotton Case, by Randy Schnepf.
3 CRS Report R43336, The WTO Brazil-U.S. Cotton Case, by Randy Schnepf.
4 WTO, “United States—Subsidies on Upland Cotton,” notification of a mutually agreed solution (WT/DS267/46),
October 23, 2014, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds267_e.htm (hereafter WTO Cotton Dispute
MOU).
5 Covered commodities refer to those crops eligible to participate in either the PLC or ARC programs. Under the
(continued...)
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Seed Cotton as a Farm Program Crop: In Brief
reduced marketing loan rate.6 Instead, upland cotton producers were eligible for new temporary
transition payments and a stand-alone, county-based revenue insurance policy called the Stacked
Income Protection Plan (STAX).7 Cotton producers also remained eligible for several smaller (in
terms of payments) support programs that were unaffected by the WTO case.
Cotton Excluded from New Revenue Programs
The 2014 farm bill repealed the direct payment (DP), the Average Crop Revenue Election, and
the counter-cyclical payment (CCP) programs from the 2008 farm bill (P.L. 110-246).8 In their
place, two new support programs—the Agriculture Risk Coverage (ARC) and Price Loss
Coverage (PLC) programs—were established.9 The new revenue programs provide support to
U.S. agricultural producers of covered commodities through either statutory reference prices
under PLC or historical revenue guarantees based on a five-year moving average of crop prices
and yields under ARC. As with the DP and CCP programs, payments under ARC and PLC are
decoupled from current plantings, meaning they are not based on current production. The
decoupled payment feature was added in earlier farm bills to comply with WTO rules governing
domestic support programs. Instead, payments are made on historical program acres (known as
base acres10) for a select list of program crops (referred to as covered commodities). Cotton was
explicitly removed from the list of covered crops, thus making cotton base acres (estimated at
17.6 million acres) ineligible for participation in the ARC and PLC programs.
Historical Cotton Program Acres Renamed as Generic Base
To avoid having cotton producers completely lose access to farm program benefits on their
historic cotton base acres, those acres were renamed “generic base”11 and retained in a producer’s
total acreage base. As such, they were eligible for program payments under ARC and PLC but
only if a covered crop (excluding upland cotton) was planted on the generic base.12 Thus, ARC
and PLC payments made on generic base were coupled to actual plantings of program crops.13
The “coupling of payments to specific crops” provided strong incentives to plant other eligible
covered crops on generic base acres in lieu of upland cotton.
(...continued)
provisions of the 2014 farm bill, 7 U.S.C. 9011(6), the term covered commodity means wheat, oats, and barley
(including wheat, oats, and barley used for haying and grazing), corn, grain sorghum, long grain rice, medium grain
rice, pulse crops, soybeans, other oilseeds, and peanuts.
6 For details on the marketing assistance loan program, see CRS In Focus IF10714, Farm Bill Primer: The Marketing
Assistance Loan Program, by Randy Schnepf.
7 For details on these programs, see CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-
79), coordinated by Randy Schnepf.
8 CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79), coordinated by Randy
Schnepf.
9 For details, see CRS In Focus IF10711, Farm Bill Primer: ARC and PLC Support Programs, by Randy Schnepf.
10 Base acres are the historical acres planted to USDA program crops as identified and recorded by USDA’s Farm
Service Agency (FSA).
11 7 U.S.C. 9011(9).
12 7 U.S.C. 9011(4)(B).
13 This distinction is important for another reason: the program outlays made on generic base represent a potential
offset when considering how to establish a new cotton program with baseline funding, as discussed later in this report.
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Seed Cotton as a Farm Program Crop: In Brief
Cotton-Specific Programs Remaining in the 2014 Farm Bill
Producers of upland cotton remain eligible for support under several other farm programs under
the 2014 farm bill including benefits under the marketing assistance loan (MAL) program,
temporary Cotton Transition Assistance Payments (CTAP), and a new revenue insurance program
called STAX.14 In addition, the domestic cotton market receives support from provisions that
provide economic adjustment assistance to domestic users of upland cotton (P.L. 113-79, Section
1207(c)) and cotton storage cost reimbursements (Section 1204(g)). An additional payment
program—the Cotton Ginning Cost Share (CGCS) program—was added in 2016 outside of the
farm bill. CGCS was initially intended as a one-time payment in response to deteriorating market
conditions. However, it was repeated again in 2018 (see CGCS below).
MAL Program for Cotton Producers. The MAL program provides both a floor
price and interim financing for so-called loan commodities. A participating
producer may put a harvested “loan” crop under a nine-month, nonrecourse loan
valued at a statutory commodity loan rate. The loan uses the crop as collateral,
and the loan rate, in effect, establishes a price guarantee. Special benefits are
available if the adjusted world price—announced weekly by USDA—falls below
the cotton loan rate. The 2014 farm bill changed the loan rate for upland cotton
from $0.52 per pound to the simple average of the adjusted prevailing world
price for the immediately preceding two market years but not less than $0.45 per
pound or more than $0.52 per pound.15 During the first two years of the 2014
farm bill, cotton producers received $700 million in payments under the MAL
program—$372 million in 2014 and $328 million in 2015. More recent data are
not yet available.
CTAP. The 2014 farm bill also established CTAP as an offset for the loss of ARC
and PLC program eligibility. Upland cotton producers were eligible for CTAP
payments on a percentage of former cotton base acres for crop years 2014 and
2015—60% of base received payments in 2014, 36.5% of base in 2015. CTAP
outlays were a combined $484 million during 2014 and 2015. Transition
payments ended after the 2015 crop.
CGCS. In 2016, USDA used its administrative authority under the Commodity
Credit Corporation (CCC) Charter Act to offer U.S. upland cotton producers
CGCS payments valued at $328 million. The CGCS program provided cost-share
payments for cotton producers’ cotton ginning costs based on their 2015 cotton
plantings multiplied by 40% of average regional ginning costs.16 The CGCS
program was offered again in 2018 with similar payment terms but at a reduced
20% share of average regional ginning costs based on their 2016 cotton
14 CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79), coordinated by Randy
Schnepf.
15 For details on the MAL, see CRS In Focus IF10714, Farm Bill Primer: The Marketing Assistance Loan Program, by
Randy Schnepf.
16 USDA, Farm Service Agency (FSA), “Cotton Ginning Cost-Share (CGCS) Program Fact Sheet,” June 2016,
https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/archived-fact-sheets/
CGCS_Program_Fact_Sheet.pdf.
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Seed Cotton as a Farm Program Crop: In Brief
plantings.17 This second round is projected to result in $227 million in CGCS
payments in 2018.18
Economic Adjustment Assistance for Domestic Users (EAAU) Program.
EAAU payments are made to domestic users for all documented use of upland
cotton on a monthly basis regardless of the origin of the upland cotton. The
payment rate is $0.03 per pound and results in CCC outlays of about $49 million
per year. Although the payments are made to cotton users, at least a portion of the
payment is likely returned to producers in the form of higher prices associated
with the increased demand from domestic users.
STAX. STAX was offered as a shallow-loss, area-wide revenue insurance
product that could indemnify losses in county revenue of greater than 10% of
expected revenue depending on the coverage level selected by a producer.19 To
encourage participation, USDA pays 80% of the policy premium for STAX. In
contrast to the revenue guarantees available under ARC and PLC, which have a
statutorily fixed lower price bound (equal to the PLC reference price), the
revenue guarantee under STAX is recalculated each year and has decreased
significantly following several years of cotton market declines since 2014. As a
result, participation in STAX has been low and has declined each year that it has
been available (29.3% in 2015, 25.3% in 2016, and 23.3% in 2017).
Industry Push for Cotton Reintegration into ARC/PLC Programs
Economic conditions in the U.S. farm economy steadily declined from mid-2014 into 2018,
including both lower farm commodity prices and income.20 Under these conditions, the new ARC
and PLC programs, which function in a counter-cyclical manner relative to market conditions,
have triggered substantial payments to agricultural producers to help offset their economic losses.
During the first three years of the 2014 farm bill, ARC and PLC paid out nearly $20 billion to
eligible program crops ($5.3 billion in 2014, $7.8 billion in 2015, and $6.9 billion in 2016).21
Cotton producers could only indirectly benefit via coupled ARC and PLC payments made to other
program crops planted on generic base acres. Meanwhile, net indemnity payments (indemnities
minus producer-paid premium) under the new cotton revenue insurance program, STAX, were
relatively small at $20.2 million in 2015 and $37.3 million in 2016, and negative net indemnities
(i.e., premiums paid exceeded indemnities received) of -$26.1 million in 2017.22
In 2014, following the downturn in the U.S. cotton market, the National Cotton Council (NCC)
claimed that lower per-acre cotton revenues coincided with elevated costs of production and that
additional economic relief was needed.23 The U.S. cotton sector was also concerned about having
17 FSA, “Cotton Ginning Cost-Share Fact Sheet,” March 2018, https://www.fsa.usda.gov/Assets/USDA-FSA-Public/
usdafiles/FactSheets/2018/cgcs_program_fact_sheet_march_2018.pdf.
18 CBO, April 2018 baseline projections for USDA mandatory spending.
19 For details, see CRS Report R43494, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 113-79), coordinated by
Randy Schnepf.
20 See CRS Report R45117, U.S. Farm Income Outlook for 2018, by Randy Schnepf.
21 FSA, ARC/PLC Program website, data accessed on February 21, 2018, https://www.fsa.usda.gov/programs-and-
services/arcplc_program/index.
22 A negative net indemnity occurs when the producer-paid premiums exceed indemnity payments. USDA, Risk
Management Agency (RMA), Summary of Business website, data accessed on July 12, 2018,
https://prodwebnlb.rma.usda.gov/apps/SummaryOfBusiness.
23 NCC, “NCC Thanks Lawmakers for Cottonseed Designation Push,” press release, December 15, 2015,
(continued...)
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Seed Cotton as a Farm Program Crop: In Brief
resources redirected to other program crops planted on generic base. In response to its exclusion
from PLC program eligibility, the U.S. cotton sector actively sought to regain cotton’s former
status as a “covered commodity” but on the basis of cottonseed rather than cotton lint.
In September 2015, the NCC proposed that the Secretary of Agriculture treat cotton lint and
cottonseed separately for purposes of the ARC and PLC programs. Instead of focusing on lint as
done by past farm policy, the Secretary of Agriculture could use his apparent authority granted
under the 2014 farm bill to designate cottonseed as an “other oilseed.” Then cottonseed would be
eligible for support as a minor oilseed with a PLC reference price of $20.15 per hundredweight
(cwt.) and a MAL loan rate of $10.09 per cwt.24
Cotton Co-Products: Lint and Cottonseed
The successful cultivation of cotton results in two products, fiber (or lint) and cottonseed, which are separated from
the un-ginned cotton bol by ginning the harvested cotton. In 2017, the United States produced 9.8 bil ion pounds of
lint25 from upland cotton valued at $6.7 bil ion and 13.5 bil ion pounds of cottonseed26 valued at $1 bil ion.27 About
78% of U.S. upland cotton lint production is exported while the balance is used domestically. According to the NCC,
more than half of U.S. upland cotton lint production (57%) goes into apparel, 36% into home furnishings, and 7% into
industrial products.28 In contrast, cottonseed goes almost entirely to domestic users—about two-thirds is fed whole
to livestock (primarily dairy cows), while the remaining seed is crushed, producing a high-grade salad oil and a high
protein meal for livestock, dairy, and poultry feed.
Under Section 1111 of the 2014 farm bill, the term other oilseed is defined as a crop of sunflower
seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe, sesame seed, or any oilseed
designated by the Secretary. The NCC contended that this definition provided the Secretary with
sufficient authority to designate cottonseed as an “other oilseed” and thus to extend eligibility for
PLC or ARC to upland cotton producers.
This proposal had the potential to increase federal outlays because the price of cottonseed is
historically well below the “other oilseed” reference price, and PLC payments for cottonseed
could approach $1 billion per year if made on generic base acres.29 Several members of the House
Agriculture Committee agreed with the NCC proposal. In December 2015 several Members of
Congress urged then-Secretary of Agriculture Tom Vilsack to use his authority under the farm bill
to designate cottonseed as a covered oilseed, thus allowing cottonseed to be a “covered
commodity” eligible for the ARC and PLC programs immediately and without further action by
Congress.30
(...continued)
http://www.cotton.org/news/releases/2015/cotseeddesig.cfm.
24 NCC, “Developing a Cottonseed Support Program within the 2014 Farm Bill,” September 21, 2015,
https://www.ibat.org/files/PDFs/Cottonseed-Proposal-fact-sheet%20-10-15.pdf.
25 Alternately, 20.570 million bales of upland cotton lint at 480 pounds per bale.
26 Alternately, 6.725 million short tons of cottonseed at 2,000 pounds per short ton.
27 National Agricultural Statistics Service, USDA, https://quickstats.nass.usda.gov/.
28 NCC, “Cotton: From Field to Fabric,” https://www.cotton.org/pubs/cottoncounts/fieldtofabric/upload/Cotton-From-
Field-to-Fabric-129k-PDF.pdf.
29 C. Zulauf et al., “Cottonseed and U.S. Oilseed Farm Program Issues,” farmdoc daily, vol. 6, no.18 (January 28,
2016).
30 See CRS Insight IN10451, Cottonseed as a Potential Farm Program Crop: What Are the Issues?, February 25, 2016,
by Randy Schnepf (available from the author). Furthermore, a specific provision, “Cottonseed as an Oilseed,” was
added in report language (CRPT 114-531) by the House appropriations subcommittee on agriculture to accompany its
FY2017 appropriations bill (H.R. 5054) in April 2016.
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Seed Cotton as a Farm Program Crop: In Brief
In response, Vilsack contended that he did not have such authority because Congress had
explicitly removed cotton from the list of eligible “covered commodities” and given it two special
programs—STAX and CTAP, although CTAP expired in 2015. Furthermore, Vilsack argued that
Congress could amend the farm bill to explicitly allow upland cotton producers to participate in
ARC or PLC, or, alternatively, it could remove a provision that has appeared since FY2012 in
annual appropriations acts (e.g., §715 of P.L. 115-31, the FY2017 agriculture appropriation) that
effectively prohibits USDA from providing emergency assistance through the CCC.
Seed Cotton as Program Crop: Legislative Evolution
Since USDA said that it lacked the authority to designate cottonseed as an “other oilseed,”
cotton’s proponents determined the path forward would be through an act of Congress.31
Furthermore, such an act of Congress would have budgetary implications. The general view of
the agricultural community was that, if a new cotton program were to be incorporated into the
next farm bill, it would likely have a budgetary cost, thus requiring possibly difficult budgetary
offsets.
PAYGO Budgetary Restrictions on Changes to the Farm Bill
Title I farm programs, in general, receive mandatory funding. Under mandatory funding, the authorizing legislation (i.e.,
the farm bil ) defines both who is eligible to participate and how a program payment is triggered. The farm bil does
not impose any spending limit on mandatory funding. Instead, program outlays are determined by producer
participation, weather, and market forces. In contrast, for discretionary spending the farm bil sets program
parameters and specifies funding levels. Discretionary funding levels are determined by the appropriating committees
through the annual federal budget process. Thus, budget enforcement of discretionary spending is through future
appropriations and budget resolutions.
Outlays for mandatory programs under a new farm bil are evaluated by the Congressional Budget Office (CBO) using
multiyear “baseline” projections and are enforced through “PAYGO” budget rules.32 CBO baseline projections
involve five- and 10-year budget estimates calculated under the assumption that current law is extended for the life of
the projection period. CBO’s five- and 10-year cost estimates establish a program’s baseline funding.33 The baseline is
the benchmark against which proposed changes from current law that would affect mandatory spending are
measured. The baseline cost impact of a proposed program change is referred to as its budget score. Any proposed
program change from current law that increases outlays from CBO’s baseline (such as the designation of cottonseed
as an “other oilseed”) that is determined to have a positive score and under PAYGO must be offset by reductions in
outlays under other current-law programs to preserve baseline neutrality.
FY2017 Appropriations Bill (115th Congress)
Proponents of reintegrating cotton into the ARC and PLC programs, including House Agriculture
Committee Chairman Mike Conaway, began pursuing a legislative track that sought to use the
annual appropriations process as the legislative vehicle to contain their proposal. The idea was to
31 J. Coppess et al., “The Cottonseed Conundrum,” farmdoc daily, vol. 7, no. 77 (April 27, 2017),
http://farmdocdaily.illinois.edu/2017/04/the-cottonseed-conundrum.html.
32 PAYGO is a budgetary enforcement mechanism generally requiring that any direct spending and revenue legislation
enacted into law may not increase the deficit. See CRS Report R41157, The Statutory Pay-As-You-Go Act of 2010:
Summary and Legislative History, by Bill Heniff Jr., and CRS Report 97-865, Points of Order in the Congressional
Budget Process, by James V. Saturno.
33 See, CRS In Focus IF10783, Farm Bill Primer: Budget Issues, by Jim Monke.
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link to page 10 link to page 10 Seed Cotton as a Farm Program Crop: In Brief
include an amendment to the FY2017 appropriations bill that would build off the 2015 NCC
cottonseed proposal.34
During the debate preceding the final agreement for the FY2017 consolidated appropriations bill
in spring 2017, a proposal emerged for including cottonseed as a covered commodity with its own
policy parameters—a MAL loan rate of $8.00 per cwt. and a PLC reference price of $15.88 per
cwt. Because the cottonseed PLC reference price of $15.88 per cwt. is below the “other oilseed”
reference price of $20.15, it was thought that the cost (i.e., the positive baseline score) for the
inclusion of cottonseed would be more manageable. House negotiators identified two potential
budget offsets for the cottonseed proposal: (1) declaring producers who participate in the
cottonseed ARC or PLC program ineligible for STAX and (2) reallocating generic acres back to
cottonseed base and away from other program crops. In the first three years of the 2014 farm bill,
over $1 billion in ARC and PLC payments had been made to crops planted on generic base
(Table 1).
To facilitate the inclusion of the cottonseed proposal, it would not be authorized to begin, or
receive any funding, until FY2018. Thus it would have imposed no budget cost on the FY2017
appropriations bill under consideration. However, the cottonseed proposal became linked to
proposed changes to the new dairy program, the Margin Protection Program (MPP). Similar to
the cotton sector, dairy producers considered their 2014 farm bill program—MPP—as inadequate
in responding to the dairy sector’s economic difficulties. Senate allies of the dairy industry sought
additional baseline funding to make adjustments to the MPP program in response to the dairy
industry’s concerns but were unable to reach a budget compromise.35
Table 1. Generic Base: Planted Acres and Payments, by ARC-PLC Program
Total
Generic Base with Payments
Payments on Generic Base
Generic
(1,000 Acres)
($ Mil ion)
Basea
Crop Year
(1,000 Acres)
ARC
PLC
Total
ARC
PLC
Total
2014
17,583
1,372
858
2,230
$47.7
$101.2
$148.9
2015
17,583
4,871
4,833
9,704
$187.8
$256.0
$443.8
2016
17,583
4,250
4,413
8,663
$163.3
$341.7
$505.0
Total
$398.0
$695.8 $1,097.7
Source: FSA, ARC/PLC Program, https://www.fsa.usda.gov/programs-and-services/arcplc_program/index.
Payment data for 2014 is as of September 30, 2016; 2015 data, February 2, 2017; and 2016 data, April 5, 2018.
Notes:
a. When base acres are aggregated by county by crop year, they add to 19.1 mil ion acres in each of 2014 and
2015 as a result of double-cropping on generic base acres. FSA, “ARC/PLC Election Data,” as of May 29,
2015, https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/arc-plc/excel/arc_plc_election_data.xlsx.
Ultimately, the FY2017 appropriations bill that became law (Consolidated Appropriations Act of
2017, P.L. 115-31; May 5, 2017) included neither the cottonseed nor MPP proposal. Instead, the
34 NCC, “Developing a Cottonseed Support Program within the 2014 Farm Bill,” September 21, 2015,
https://www.ibat.org/files/PDFs/Cottonseed-Proposal-fact-sheet%20-10-15.pdf.
35 The Senate dairy allies had offered a four-part dairy proposal that was estimated to provide $800 million in
assistance over 10 years to milk producers. Agripulse, “Cotton-Dairy Failure Leaves a Big Budget Hole, Farm Bill
Bitterness,” vol. 13, no. 18 (May 3, 2017).
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Seed Cotton as a Farm Program Crop: In Brief
explanatory statement36 accompanying P.L. 115-31 directed USDA to prepare a report within 60
days on the needs of cotton growers and to consider providing immediate assistance to dairy
producers through the CCC.
Senate FY2018 Appropriations Bill (S. 1603, 115th Congress)
The cottonseed proposal was revised with a lower PLC reference price of $15.00 per cwt. but the
same MAL loan rate of $8.00 per cwt. and was included two months later in the Senate
committee-reported Agriculture appropriations bill for FY2018 (S. 1603, §728, 115th Congress,
July 20, 2017).37 The new proposal was more specific in terms of how cottonseed producers
would be allowed to designate generic base acres as cottonseed base acres and about the formula
to be used to determine a producer’s cottonseed program yields—both of which are needed to
calculate PLC payments. In addition, the Senate bill included dairy program changes alongside
the cottonseed proposal. The joint provisions would have authority for $1 billion in new baseline
spending over 10 years but required no budget offsets, because they would not start until after
FY2018. However, Congress was unable to reach agreement on an FY2018 appropriations bill for
reasons unrelated to agricultural policy, and the cotton issue remained unresolved into fall 2017.
Emergency Supplemental Bill (H.R. 4667, 115th Congress)
Stakeholders in the agricultural sector were becoming increasingly concerned that leaving cotton
and dairy policy fixes for the next farm bill would require new baseline spending that could lead
to difficult debate over which programs—farm or domestic food programs—should make budget
sacrifices to free up money for cotton and dairy. In December 2017, agricultural policy
proponents in the House were able to include cotton and dairy proposals into an emergency
appropriations bill (H.R. 4667) that was intended to provide assistance for victims of hurricanes
and wildfires that had occurred during 2017.38 The cotton proposal was reshaped as a “seed
cotton” program that uses a weighted average of both lint and cottonseed (described below). The
House-passed supplemental appropriations bill, H.R. 4667, was not considered in the Senate.
Bipartisan Budget Act of 2018 (P.L. 115-123; BBA)
In February 2018, Congress agreed on a two-year budget deal that included the emergency
supplemental bill provisions along with both the seed cotton and dairy program changes. On
February 9, 2018, Congress passed the BBA (P.L. 115-123). Among its provisions, the BBA
authorized supplemental appropriations for crop and livestock losses from the 2017 hurricane
season and wildfires in the West.39 The BBA also included the seed cotton and dairy provisions
that were in the House-passed supplemental appropriations bill (H.R. 4667). Both of these farm
program changes have long-term policy implications because they change the 2014 farm bill
statutes. In particular, Section 60101(a) of the BBA amends the 2014 farm bill to add seed cotton
as a “covered commodity,” making cotton eligible for the PLC and ARC programs.
36 “Division A, Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations
Act, 2017, Congressional Directives” for P.L. 115-31, Congressional Record, May 3, 2017.
37 For a discussion of the proposed cottonseed policy parameters in the FY2018 appropriations bill, see the shaded box
“Cottonseed as a Hypothetical Program Crop” and accompanying data tables in CRS Report R44914, Farm Safety-Net
Payments Under the 2014 Farm Bill: Comparison by Program Crop, by Randy Schnepf.
38 CRS Insight IN10843, Supplemental Appropriations Proposed for Agriculture, by Jim Monke et al.
39 CRS In Focus IF10829, Agriculture Funding in the Bipartisan Budget Act of 2018, by Jim Monke and Megan
Stubbs.
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Seed Cotton as a Farm Program Crop: In Brief
Seed Cotton: Program Design
The BBA provision, Section 60101(a), includes seed cotton as a covered commodity, thus making
it eligible for participation in PLC and ARC beginning with crop year 2018. Participating
producers must make three decisions by late July 201840 (for the final year of the 2014 farm bill
period): how to allocate their generic base acres, whether to update cotton program yields, and
whether to participate in ARC or PLC.
Allocation of Generic Base Acres
Before producers make any decision regarding ARC or PLC, they must decide how to reallocate
their generic base to either seed cotton or to other program crops by the following formula:
No recent history of planting covered commodities: If the owner of a farm has not planted any
covered commodities (including seed cotton) during the 2009 through 2016 crop years, then the
generic base acres shall be allocated to “unassigned crop base” and no longer be eligible for ARC
or PLC payments.
Recent history of planting covered commodities: The owner of a farm with a history of
planting covered commodities during the 2009 through 2016 crop years shall allocate generic
base acres between seed cotton and other program crops as follows:
1. To seed cotton base acres in a quantity equal to the greater of 80% of their
generic base or the average upland cotton plantings (or prevented from being
planted) during the 2009 to 2012 crop years (not to exceed the total generic base
acres on the farm) or
2. To base acres for covered commodities (including seed cotton) in proportion to
each crop’s share of planted (or prevented from being planted) acreage during
2009 to 2012.41
Any residual or unassigned generic base acres (defined as any positive difference between generic
base and the seed cotton base acres allocated under the first choice) are no longer eligible for
program payments for any covered crop.
Payment Yield Choice
The seed cotton program yield is set at 2.4 times the historical upland cotton program yield
(established by the 2008 farm bill [P.L. 110-246]). Producers may retain their farms’ current
upland cotton payment yield or opt for a one-time opportunity to update their yield based on 90%
of the average yield on planted acres for the 2008 through 2012 crop years.
Program Choice
For the 2018 crop year, producers have a one-time opportunity to elect ARC or PLC for seed
cotton. If no election is made, PLC becomes the automatic choice.
40 USDA, “USDA to Help Producers Prepare for Addition of Seed Cotton to Two Key Safety Net Programs,” press
release, June 25, 2018.
41 In accordance with the reallocation formula for base acres under the 2014 farm bill and specified in code at (B),(D),
(E), and (F) of 7 U.S.C. 9012(a)(3).
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Seed Cotton as a Farm Program Crop: In Brief
Payment Parameters
Seed cotton uses the same payment determinations for ARC and PLC as the other program crops
but subject to its own statutorily fixed reference price and market loan rate. The seed cotton PLC
reference price is set at 36.7 cents per pound. Seed cotton payments are to be made on 85% of the
seed cotton base. Because seed cotton has never been a covered commodity, no price series exists
and, thus, must be defined.42 The calculated seed cotton price (referred to as the “effective” price)
is defined as the weighted annual price for upland cotton lint and cottonseed weighted by their
share of combined production (lint plus cottonseed) measured in pounds. It is an artificial price
that is computed only for purposes of operating the PLC and ARC programs.43 If the effective
price is less than the reference price of 36.7 cents per pound, payments are triggered under the
PLC program. A producer’s payment equals the product of the payment rate (i.e., the difference
between the PLC reference price and the effective price) times the seed cotton program yield
times 85% of the seed cotton base.
Upland cotton production remains eligible for the MAL program under the original 2014 farm bill
with a loan rate that floats between 45 and 52 cents per pound of harvested cotton lint based on
the simple average of the adjusted prevailing world price for the immediately preceding two
market years. The new seed cotton provisions do not establish a nonrecourse MAL for seed
cotton. However, for purposes of calculating the maximum potential seed cotton payment rate,
seed cotton is deemed to have a MAL rate of 25 cents per pound. Finally, any farm that enrolls
seed cotton base acres in either ARC or PLC is ineligible for STAX.
CBO Cost Projections
In February 2018, as part of the BBA score, CBO estimated the cost of seed cotton payments
under the ARC and PLC programs at $1.270 billion over five years (2018-2022) and $2.961
billion over 10 years (2018-2027).44 However, according to CBO, the net costs of the seed cotton
provision in the BBA would be reduced to $61 million over 10 years by associated budget
offsets—including the reallocation of generic base and the removal of residual generic base from
ARC and PLC program eligibility (-$2.188 billion over 10 years) and by repealing the eligibility
for the STAX program for cotton producers that enroll their seed cotton base in either ARC or
PLC (-$711 million over 10 years).
In April 2018 CBO released new baseline projections of USDA’s mandatory farm program
outlays including seed cotton as a covered commodity. Under slightly different market price
expectations, CBO estimated the cost of seed cotton payments under the ARC and PLC programs
to be up 59% from the February 2018 score at $2.015 billion over five years (2018-2022).
Potential Issues
Three issues that could figure into future policy debate as a result of this program change include
considerations surrounding the potential for re-opening of the WTO U.S.-Brazil cotton dispute,
42 J. Coppess et al., “Reviewing the Latest Cotton Proposal,” farmdoc daily, vol. 8, no. 5 (January 11, 2018).
43 In general, economists and policy analysts following this issue contend that a significant majority of cotton base
owners are likely to select the PLC program (perhaps similar to the 97% or higher participation levels of canola, rice,
and peanuts) based on the current outlook for potential payments under PLC. As a result, no published long-run
projections of seed cotton payments under ARC have been undertaken and made public.
44 CBO score for BBA, Section 60101(a), “Treatment of Seed Cotton,” February 8, 2018.
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Seed Cotton as a Farm Program Crop: In Brief
the potential for large budget costs if commodity markets weaken further, and the realignment of
program payment acres.
WTO U.S.-Brazil Cotton Dispute
Under the October 2014 MOU—signed by Brazil and the United States to avoid trade retaliation
by Brazil—the United States agreed to limit domestic cotton support payments to those programs
specifically authorized by the 2014 farm bill. However, two new U.S. cotton support programs
have been implemented since the October 2014 MOU—the CGCS program and seed cotton as a
covered commodity eligible for ARC and PLC payments.
CGCS Program
The CGCS program was established in 2016, under CCC authority, as a one-time payment to
cotton producers in response to deteriorating market conditions. CGCS payments are coupled
with the previous year’s plantings of upland cotton. Through the CGCS program, eligible
producers could receive a one-time cost share payment (to offset their 2016 cotton ginning costs
and assist with the marketing of cotton), based on a producer’s share of 2015 cotton planted acres
multiplied by a payment rate equal to 40% of the average ginning cost for each production region.
USDA made an estimated $326.5 million of CGCS 2016 payments.45 CGCS payments were
intended to serve as a temporary bridge to the re-inclusion of cotton—either as cottonseed or seed
cotton—as a covered crop. However, in 2018 USDA announced a second round of CGCS
payments based on 2016 cotton planted acres and using a reduced 20% share of average regional
ginning costs. This second round of CGCS payments is projected to result in $227 million in
outlays in 2018.46
Seed Cotton as a Covered Commodity
Seed cotton (the un-ginned cotton boll that includes both lint and cottonseed) was made eligible
for the PLC and ARC programs by a provision of the Bipartisan Budget Act (P.L. 115-123,
§60101; BBA) that was signed into law on February 9, 2018. PLC and ARC payments are
decoupled from producer behavior. The first potential payments to seed cotton under PLC or
ARC would be after October 1, 2019.
Potential Revival of WTO U.S.-Brazil Cotton Dispute
According to Section VI of the MOU—the Peace Clause—Brazil would refrain from retaliation
prior to September 30, 2018, provided that the United States limits cotton payments to those
programs specifically authorized by the 2014 farm bill. There is some ambiguity about how
Brazil might respond under WTO rules, if at all, to the addition of the two new U.S. cotton
programs. For example, Brazil might choose to ignore them, or it might find these new U.S.
cotton support programs to be in violation of the MOU. Under the Peace Clause of the MOU,47
Brazil must inform the United States and provide a reasonable opportunity for informal bilateral
45 ERS, Farm Income and Wealth Statistics, February 7, 2018.
46 CBO, April 2018 baseline projections for USDA mandatory spending.
47 WTO Cotton Dispute MOU, §VI.2.
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Seed Cotton as a Farm Program Crop: In Brief
consultations before Brazil requests official dispute settlement consultations on any current
domestic support program or policy. 48
Alternatively, since the two new cotton support programs were implemented after the MOU was
signed, there may be a legal question as to whether these programs would qualify as “current
domestic support” under the MOU. Brazil might argue that these new cotton programs fall
outside the MOU and that Brazil would have no obligation to inform and informally consult with
the United States before requesting official consultations as part of formal dispute settlement
procedures. Or Brazil could choose to operate outside of the WTO framework and impose
retaliatory tariffs (or a similar trade action) on selected U.S. agricultural products.49
Finally, Brazil could avoid the issue of whether the MOU has been violated by simply awaiting
the MOU’s expiration on September 30, 2018. There is some ambiguity about how Brazil may
proceed with charges against U.S. cotton programs after the MOU’s expiration—whether Brazil
could use the existing dispute settlement case and extend its retaliation authority or would have to
start a new WTO dispute settlement case.50
Potential Mitigating Factors
It is not clear to what extent Brazil would have to show evidence (to either a WTO panel or the
United States) that the United States is in violation of the MOU. A potential counterargument
would be that, under the seed cotton related provisions of the BBA, Congress has replaced
coupled payments linked to crops planted on generic base acres with decoupled payments under
the new seed cotton program, thus making U.S. farm programs more WTO-compliant, not less. It
is also unclear how to interpret the CGCS repeat payments, which, although linked to the
previous year’s plantings, were separated by a year (2017) of non-payments. Thus, CGCS
payments are not decoupled from producer behavior (potentially leading to distortive incentives),
but they do not occur on a continuous basis such that cotton producers may not necessarily factor
CGCS payments into their production behavior.
Several economists have also raised more general concerns about linking cotton program
payments to cotton market prices, particularly when the seed cotton reference price—which
represents a composite of upland cotton and cottonseed market prices—is not intuitive and
appears high relative to historical and projected market conditions.51 Still other economists
contend that large government payments tend to mute market signals, and any incentive to
produce more cotton than the market can support at current prices has potentially negative
impacts on developing countries.52 However, these policy concerns may not, of themselves, be
sufficient to justify a claim that the MOU has been violated or that these new programs are out of
compliance with WTO rules.
Furthermore, if Brazil were compelled to show harm before a WTO panel would accept Brazil’s
claim that the United States had violated the MOU, this would likely delay any evidence-based
48 WTO Cotton Dispute MOU, §VI.1. (b).
49 See CRS Insight IN10880, China’s Retaliatory Tariffs on Selected U.S. Agricultural Products, by Jenny Hopkinson,
for an example of how China responded to U.S. Section 232 tariff actions on certain imports of steel and aluminum
products.
50 This report does not address any of this legal ambiguity.
51 For example, see J. Coppess et al., “Reviewing the Latest Cotton Proposal,” farmdoc daily, vol. 8, no. 5 (January 11,
2018); and J. Coppess et al., “The Cottonseed Conundrum,” farmdoc daily, vol. 7, no. 77 (April 27, 2017).
52 Joseph W. Glauber, “Unraveling Reforms? Cotton in the 2018 Farm Bill,” American Enterprise Institute, January
2018.
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Seed Cotton as a Farm Program Crop: In Brief
determination until late 2020. This is because the seed cotton program will first be implemented
for the 2018 crop. If any PLC seed cotton payments are triggered, they would not be paid out
until after October 1, 2019, and would not be reported by USDA until December 2019 or January
2020 at the earliest.
Potential Budget Cost of Seed Cotton as a Program Crop
Projections for PLC payments on seed cotton base are sensitive to changes in market conditions.
Figure 1 compares CBO projected payments reported in February 2018 (using a 2017 baseline)
with CBO baseline market projections made in April 2018 for upland cotton and cottonseed
prices, area, and yields. The differences illustrate how slight changes in projected farm prices
could result in substantial changes in program payments for seed cotton.
Figure 1. Alternative Outlay Scenarios for Seed Cotton Under PLC
Source: The PLC reference price for seed cotton of 36.7 cents per pound and the formula for calculating the
seed cotton effective price is from the Bipartisan Budget Act of 2018 (P.L. 115-123, Section 60101(a)(2), BBA).
The annual effective price for seed cotton is calculated according to the statutory provision using price
projections for upland cotton and cottonseed, weighted by share of combined production in pounds.
Notes: The PLC payment equals the PLC payment rate times the seed cotton program yield (estimated at 1,384
pounds per acre) times seed cotton base acres (estimated at 80% of generic base or 14.1 mil ion acres) times
85%. PLC payments for a particular crop year are not made until after October 1 of the fol owing year. Thus,
there is a nearly two-year delay in payments associated with a crop.
*The annual effective price for seed cotton is the average of the annual farm prices for upland cotton and
cottonseed weighted by their share of total production measured in pounds.
**The projected PLC payment rate equals the difference between the PLC reference price and the effective
annual seed cotton price. PLC payments for the 2018 crop year wil not be paid out until after October 1, 2019
(i.e., FY2020).
*** The CBO score for the BBA, Section 60101(a), “Treatment of Seed Cotton,” February 8, 2018
**** CBO Baseline Projections, “USDA’s Mandatory Farm Programs,” April 2018.
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Seed Cotton as a Farm Program Crop: In Brief
Base Acres Reduction
The reallocation of generic base to seed cotton or other covered commodities, combined with the
elimination of payments to residual base (unallocated generic base), suggests that a significant
portion of historical upland cotton base acres could become ineligible for revenue support
payments. The likelihood of PLC payments to seed cotton base, as suggested in the previous
section, could provide an incentive for reallocating generic base to seed cotton rather than to other
program crops. Upland cotton producers planted an average of 10.8 million acres during the
2009-2015 period compared with 17.6 million acres of generic base (Figure 2). To obtain the
highest seed cotton base possible, most cotton producers might opt to reallocate 80% of generic
base to seed cotton per the statutory reallocation formula for farms with a recent history of
covered crops. If so, national seed cotton base would be approximately 14.1 million acres. This,
in turn, would imply that as much as 20% of generic base (or 3.56 million acres) would be
residual generic base and thus be disqualified from receiving farm revenue support payments.
This contributes to the size of the budgetary offset in the CBO score for the BBA.
Figure 2. Upland Cotton: Generic Base versus Planted Acres
(Under the Provisions of the Bipartisan Budget Act of 2018, P.L. 115-123, Section 160101(a))
Source: Historical data for 2002-2018 are from NASS; projected data for 2019-2027 are from CBO April 2018
baseline projections.
Notes: Mac = mil ion acres.
Author Contact Information
Randy Schnepf
Specialist in Agricultural Policy
rschnepf@crs.loc.gov, 7-4277
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