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Paggi tells hedging and options seminar participants: Little farm program changes could have biggest impact

It could be changes in the “nuances” in the current federal cotton program that could have the greatest impact on how and how much the government will support American cotton producers, according to Mechel “Mickey” Paggi, director of the Center for Agriculture Business at California State University, Fresno.

The primary focus in the federal farm program debate so far has been the big items, like payment limitations. However, Paggi, speaking at a hedging with options seminar recently at Harris Ranch, Coalinga, Calif., said it could be changes in or elimination of the seemingly small elements of the federal cotton program like the government's Step 2 export incentive element; the government's loan guarantee for poor nations to buy U.S. cotton, and the current ban on planting of fruits and vegetables on program crop land that could result in significant impacts on Cotton Belt farmers.

Paggi added than even the bedrock of the federal cotton loan program, the minimum quality standard of Strict Low Middling 1 1/16th-inch cotton could face changes as the U.S. cotton industry quickly moves to a predominantly export industry.

Change standard

At the seminar sponsored by Fresno State, the New York Board of Trade, Cotton Incorporated and the University of California, Paggi said he believes the minimum federal cotton loan quality standard must be changed if the U.S. is going to fully capitalize on its new future, exporting the majority of American-grown cotton.

“If people want the Mid-South and Southeast cotton industries to go away,” leave the minimum federal loan cotton standard at the current SLM level, Paggi commented.

California already exports 75-80 percent of its high quality Acala and Pima cottons and is expected to continue to prosper in the new export cotton era, said Paggi. “California knows well how to export cotton and is positioned to serve the export market with what foreign mills want.”

This loan level does not encourage the rest of the U.S. Cotton Belt to produce of minimum export standard 1 1/8-inch cotton.

Sixty percent of the world's cotton supplies are now consumed in three countries, India, Pakistan and China, which is by far the biggest user of cotton, devouring now as much as 35 percent of world supplies now en-route to 40 percent and beyond.

“China is paying a premium for 1 1/18-inch cotton,” said Paggi. There is now no incentive in the federal cotton loan program for the remainder of the U.S. cotton loan program to grow that cotton quality.

The U.S. cotton industry was gearing for the debate on the new 2007 farm bill when two things happened to heat up the debate early. One was the administration's announcement that it wanted to cut farm program payments and, second, the World Trade Organization's ruling against the U.S. on a complaint from Brazil that the U.S. federal support program encourages cotton production to the detriment of world cotton prices.

Program challenge

Those two events have come together to create a formidable challenge to the current federal farm program.

Paggi says the WTO ruling puts three provisions of the current farm program in jeopardy, although he acknowledges that the U.S. could simply ignore the WTO ruling and do nothing.

However, based on the WTO findings, he says the market incentive Step 2 program “will probably go away” as well as any loan guarantee program for export cotton to developing nations.

The third issue and the one that would have the greatest impact on the West is the current farm program provision that fruits and vegetables may not be planted on program crop ground.

If this provision is stricken from the farm bill, Paggi predicts it would produce a “huge movement” from the fruit and vegetable growers not only in California but nationwide to demand “if you are going to do that to us, do right by us” in the federal farm program.

“I am not sure how to handle the fruits and vegetable issue at this point,” said Paggi.

Earlier President Bush signed a bill into law that would channel federal money into the fruit and vegetable industry. It is called Specialty Crop Competitiveness Act. Western Growers of California, representing more than 3,000 specialty crop growers in California and Arizona, lobbied the bill through Congress. It authorizes federal spending of $54 million annually for five years to enhance the competitiveness, both domestically and internationally, of each state's fresh produce crops, mostly through block grants to the state departments of agriculture. However, the bill has not been funded.

Bargaining chip?

O.A. Cleveland, Mississippi State University economist who also spoke at the seminar, said this fruit and vegetable issue could become a bargaining chip for Mid-South farmers who “would be willing to give away fruits and vegetables” for continued levels of federal cotton support. That could result in disunity within the U.S. cotton industry, he noted.

Cleveland said underlying this farm program debate is a desire by the Bush administration to “do away with all subsidies.”

Paggi acknowledged that, adding, however, that politically he does not see that happening soon. “There may be some shifting sideways” in support programs, Paggi predicted. “However, politically I do not see the bottom line changing for agriculture.”

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