The U.S. agricultural sector faces the difficult task of developing new policies that will meet the necessary budget constraints. Furthermore, the U.S. cotton industry also must devise policy that will resolve the World Trade Organization (WTO) dispute with Brazil. To achieve that objective, two years ago, cotton industry leaders proposed a voluntary, shallow loss crop insurance product known as the Stacked Income Protection Plan (STAX). The product, when considered by the House and Senate agriculture committees during the 2012 debate, was slightly modified. However, the underlying structure remains: a shallow loss area-wide revenue insurance product that serves as a replacement to upland cotton's direct and counter-cyclical program (DCP) because the target price provisions of the program were found objectionable by a WTO panel.
The U.S. cotton industry first defended STAX from some U.S. commodity and farm organizations which opposed shallow loss revenue insurance products, in part, arguing that shallow loss plans distorted plantings and encouraged risky behavior. Subsequent analysis has not substantiated either of these concerns. The National Cotton Council offered STAX as a replacement for current upland cotton policy only. In keeping with longstanding tradition, the Council made no recommendations regarding policies for other crops.
Since 2010, under the provisions of the Framework Agreement, the governments of Brazil and the United States have held consultative meetings on the GSM-102 export credit program and cotton portions of the WTO dispute. These discussions intensified as Congress began to consider multi-year farm legislation.
Brazilian officials have consistently and publicly stated that target price or reference price provisions are the most objectionable of all policy options. In order to provide an equitable option for cotton in the absence of a target price, it is essential that the STAX crop insurance product include an 80 percent premium subsidy, the harvest price option and the protection factor. Each of these options has a successful track record in existing insurance products. The cotton industry's proposal was designed to be as consistent as possible with existing products. Further, STAX should be made available to cotton growers independent of any underlying coverage. Given cotton's unique situation, it should have some policy differentiation if prices were to weaken and other row crops have an option for target price protection.