USDA's proposal to eliminate Step 2 payments has re-ignited a debate in Washington and within the cotton industry over whether Congress should retain the provision aimed at keeping U.S. cotton competitive in world export markets.

Faced with a July 1 deadline for its initial response to the WTO ruling in Brazil's case against the U.S. cotton program, Agriculture Secretary Mike Johanns announced on July 5 that USDA was submitting a plan to Congress that called for the immediate end of Step 2.

After lengthy discussions within its executive committee, the National Cotton Council said it would oppose the USDA plan, saying it could change the terms and conditions of the cotton program in the middle of the marketing season.

“Sales of the 2005 crop have already begun in earnest,” said NCC Chairman Woods Eastland. “The approach suggested by the administration would alter a fundamental piece of the sales and marketing structure for cotton in the United States in mid-stream, harming many U.S. cotton merchants and textile manufacturers.”

Eastland, a cotton producer and cooperative executive from Greenwood, Miss., said the council believes Congress should decide the fate of Step 2 in the next farm bill, scheduled to be written in 2006.

Asked about those comments at the USDA Farm Bill Forum in Nashville, Johanns seemed nonplussed by the NCC action.

“I guess I would have been surprised if they had stepped up and said ‘Gee. This is a good idea,’” he said. “They were disappointed by the ruling, and we were, too. We felt very, very strongly we had complied with the WTO. The ruling came down against us, we appealed and it came down against us again.

‘Work through this’

“My message is we're going to work through this with the industry. We're going to sit down with the House and Senate leadership. They've vowed to work with us and we're going to return the favor.”

Other comments made at the Farm Bill Forum, the first of several listening sessions USDA plans in advance of the next farm bill, indicated the depth of some of the divisions within the industry over Step 2.

Step 2 is part of the Three-Step Competitiveness Program that Congress included in the 1990 farm bill to help offset the impact of the fire-sale prices that many countries were offering cotton for in the late 1980s.

Step 1 allows the secretary of agriculture to reduce the adjusted world price for cotton when U.S. prices are significantly higher than world market prices; Step 2 allows USDA to issue marketing certificates to domestic users and exporters of cotton when U.S. prices exceed world benchmark prices; and Step 3 allows raw cotton imports into the United States to help domestic mills offset high U.S. cotton prices.

The National Cotton Council has always insisted that all three steps are required to make U.S. cotton competitive. But not all NCC members share that thinking.

Asked about the Step 2 issue at the Farm Bill Forum, Somerville, Tenn., cotton producer Harris Armour said many growers believe large cotton merchandising firms reap most of the benefits of Step 2.

Whatever the final U.S. response proves to be, Johanns said in Nashville that there's no question that the administration will fail to live up to its promises to the WTO.

“We are absolutely insisting that the world comply with WTO rules,” he said. “We have to lead the way. Yes, we are going to work with the industry on this, but I think the industry understands how important it is that we comply with the WTO.”

e-mail: flaws@primediabusiness.com