Houston, Jack E.

Nzaku, Kilungu

Vining, Matt

English

Research Papers in Economics

U.S. Cotton Subsidies: Are Brazil’s Accusations True? 
 
 
  
 
 
 
 
Kilungu Nzaku, Matt Vining, and Jack E. Houston 
 
 
 
 
Kilungu Nzaku, Graduate Assistant 
Department of Agricultural and Applied Economics 
205 Conner Hall, 
The University of Georgia 
Athens, Georgia 30602-7509. 
Email: nzaku@uga.edu
 
Matt Vining, Undergraduate Student 
Department of Agricultural and Applied Economics 
301 Conner Hall, 
The University of Georgia 
Athens, Georgia 30602-7509. 
Email: mvining@uga.edu
 
Jack E. Houston, Professor 
Department of Agricultural and Applied Economics 
312 Conner Hall, 
The University of Georgia 
Athens, Georgia 30602-7509. 
Email: jhouston@agecon.uga.edu
 
 
 
 
 
Selected paper prepared for presentation at the Southern Agricultural Economics 
Association Annual Meeting, Dallas, TX, February 2-6, 2008 
 
 
 
Copyright 2008 by Nzaku, Vining, and Houston. All rights reserved. Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided 
that this copyright notice appears on all such copies.  Introduction 
The U.S. cotton subsidies have attracted a lot of debate among foreign producers 
mainly because cotton is the most traded agricultural commodity in the world market. In 
2002, Brazil launched a complaint to World Trade Organization that the U.S. government 
was subsidizing cotton farming in excess of the set WTO commitment of $2 billion per 
year and constituted a violation of the WTO free trade policy (CRS 2007). Brazil claimed 
that the cotton support program was making it hard for Brazilian cotton growers to 
compete internationally as they distorted and lowered world cotton prices. The U.S. 
insisted that the programs were within the WTO exempted incentives to farmers and were 
not illegal neither were they distorting the world prices (WTO, 2007).  Later in 2004 the 
Dispute Settlement panel of the trade organization ruled in favor of Brazil and not even 
an appeal could change their resolve. The ruling of the case was based on evaluating and 
quantifying the U.S. subsidies but little was done to study the impacts. However, Brazil is 
not the only foreign country that has made U.S. cotton support programs an issue. West 
African French speaking countries led by Mali have also been claiming that their export 
earnings from cotton have been seriously impaired by U.S. cotton subsidies. 
To determine the validity of arguments by these nations, this paper estimates the 
effects of the U.S. cotton subsidies on cotton export earnings by Brazil and Mali from 
1965 to 2004. This in essence is an attempt to find out whether the subsidies interfere 
with export from poor countries by flooding the world market and resulting to a reduction 
of cotton prices in the world market. First the paper determines the impacts of the 
subsidies on export earnings by the U.S. itself to determine the extent to which the 
subsidy program boosts U.S. cotton exports. The Cotton Subsidy Debate 
The role of agricultural subsidies in the distortion of world market prices has 
gained considerable attention in the World Trade Organization’s trade negotiations since 
the failure of the 2003 trade talks in Cancun. Trade creates wealth, but while developed 
countries have to a large extent, been able to enjoy the benefits of agricultural trade, the 
same cannot be said for developing countries. Although developing countries may have a 
comparative advantage in agriculture, trade barriers hinder their ability to reap benefits 
from trade (Masagazi, 2005). Subsidies are a barrier to trade and a need for action to 
reduce their disastrous effects has gain substantial support over the past few years.  
The U.S. cotton policies, being the second-largest cotton producer and by far the 
largest exporter, are extremely important in cotton world trade. U.S. cotton subsidies 
have a long history and compose part of commodity programs introduced in the early 
1930s. The cotton support programs are quite enormous in the U.S. In 1997 from the 
1996 Farm Bill, U.S. cotton growers received $878 million. Approximately $700 million 
of the money came in the form of decoupled payments. The rest was as insurance subsidy 
payments. In 1998 government payments were $1.2 billion (Baffes, 2004). Even though 
spending for export subsidies was limited to US$201 million for the 1996–2002 period, it 
was exceeded by the end of 1998. In 1999 the U.S. Agricultural Appropriations Bill was 
passed by the Congress providing an additional US$200 million in 2000 and US$430 
million through 2002 for export subsidies (Gillson, et al.,2004, Blasco, et al, 2006).  
As a result of the massive U.S. cotton subsidies and their strong impact on world 
markets, a number of reactionary steps were taken by other countries. Two of which have 
significant policy implications. On the policy front, a WTO dispute settlement was brought by Brazil in 2003, asserting losses to its cotton exports due to subsidies by the 
United States (WTO, 2002, Blasco, et al, 2006). During this dispute resolution, it was 
found that the United States actually paid $ 3.2 billion in annual cotton subsidies and $1.6 
billion in export credits. In March, 2005 the WTO panel concluded that U.S. policies 
were adversely impacting world trade in cotton, which was so prejudicial for Brazil and 
other exporters such as West African countries, and, consequently these policies should 
be eliminated. Accordingly, this case, which constitutes the first formal challenge to the 
massive agricultural subsidies provided by rich nations to their farmers, ended with the 
victory to Brazil (WTO, 2004). Finally, U.S. cotton export subsidies are calculated to be 
US$3 (Malik, 2005, Blasco, et al, 2006).  Despite this reduction in the subsidy ceiling, 
the discontent with the support programs still persists. 
The Food and Agriculture Organization reports that in the year 2000, West 
African cotton made 50 percent of the total exports and that Western African farmers 
were three times more cost-efficient than U.S. cotton growers yet they were not getting 
much benefits from cotton than the American counterparts because of the U.S. subsidy 
program. 
Cotton Trade Trends 
A trend analysis of cotton exports since 1961 show that U.S. Cotton exports have 
been relatively steady of the period between 1961 and 2004. Cotton exports have slightly 
increased over the period but there is a sharp increase since the year 2000 perhaps due to 
recent change in the U.S. farm policy that has put more efforts in cotton export 
promotion.   
  
 
Figure 1: U.S. Cotton Exports trend from 1961-2003 in tons. 
0
1000000
2000000
3000000
year
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
 
Brazilian Cotton exports trend on the other hand were above 200,000 tonnes  and 
climbed up way over 0.4 million tones in 1970 before falling below 200,000 tonnes 
thereafter. The lowest cotton exports were observed between 1991 and 2000. This also 
makes a period of major policy changes in Brazil such as allocating more agricultural 
land to sugar cane production for ethanol. 
 
 
 
 
 Figure 2: Brazil Cotton Exports Trend from 1961-2003 in tonnes 
0
100000
200000
300000
400000
500000
year
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
 
Mali cotton exports have been small in quantities compared to the U.S. and Brazil 
have grown steadily over the period. At the beginning, cotton exports were virtually zero 
by 1994, they had grown to over 100,000 tonnes. In 1998, cotton exports were 
approximately 150,000 tonnes and almost .3 million tonnes by 2003. 
Figure 3: Mali Cotton Exports Trend from 1961-2003 in tons. 
0
100000
200000
300000
year
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
  
Figure 4: U.S. Cotton Loan Rate trend from 1961-2004 as percentage of cotton 
prices. 
0. 2
0. 3
0. 4
0. 5
0. 6
0. 7
0. 8
0. 9
year
1961 19641967 19701973 1976 19791982 19851988 1991 19941997 2000 2003
 
In the late1960s and early 1970s, the U.S. cotton loan rates were below 50 percent of the 
market price of cotton. This drastically changed in 1976 after which the loan rate was 
increased tremendously to above 80 percent in 1982. Although the subsidies few in the 
subsequent years, they have remain way above 50 percent as shown in Figure 4. 
 
Data Sources and Methods 
A model expressing excess supply of cotton (exports) as a function of world 
cotton prices, U.S. programs, cotton harvests, lagged world prices of cotton and cotton 
producer is formulated to determine the effects of the explanatory variables on exports. It 
is postulated that U.S. Cotton subsidies distort world market prices for cotton and therefore negatively impact on exports from Brazil and Mali. This could be captured by a 
linear relationship model as follows. 
 
12 3 4 ** * * P r Brz o Brz EXP WP USprgm BrzCtnP Brz od e β ββ β β =+ + + + +  …(1) 
12 3 4 ** * * P r Mli o Mli EXP MliWP USprgm MliCtnP Mli od e β ββ β β =+ + + + + …(2) 
 where  Brazil’s Cotton exports,  Brz EXP = MliWP =World price of Brazil’s cotton, 
U.S. cotton farmers loan rate,  USprgm = BrzCtnP =Brazil’s local prices for cotton, 
Brazil’s cotton production,  BrzProd = Mli EXP =Mali’s cotton export, MliCtnP =Mali’s 
local cotton price, MliProd =Mali’s cotton production, MliWP =World price of Mali’s 
Cotton,  s β =associated coefficients,   and  Brz e Mli e  are disturbances for Brazil and Mali 
respectively. 
To establish whether the U.S. subsidies influence U.S. cotton exports which could 
in turn flood the world market with cotton resulting in lower prices, we use the following 
model. 
  12 3 4 ** * * P r US o US EXP USWP USprgm USCtnP US od e β ββ β β =+ + + + +…(3) 
where  US’s Cotton exports, US US EXP = WP =World price of U.S. cotton,   
US’s local prices for cotton, US USCtnP = Prod =US’s cotton production, and   is a 
disturbance for U.S. 
US e
Variables on cotton production, exports, local prices, and acreage 1965 to 2004 
for U.S., Brazil and Mali are used to contact our analysis and obtained from FAOSTAT 
database of the Food and Agriculture Organization of the United Nations (http://faostat.fao.org/site/497/default.aspx ). World prices of cotton from each country 
are generated using the export values and export quantities. 
 
Results 
Findings of the study are shown below. The data used for the analysis is time 
series data and this poses autocorrelation changes as indicated by the DW statistic. The 
R-squared is generally good for all the equations as well. Surprisingly, results show that 
cotton exports are generally indifferent to world prices of cotton, US subsidies and local 
prices of cotton. U.S subsidies are not only insignificant on exports not only for Brazil 
and Mali, but also for the United States itself.  
 
131240 - 410812  40.66183   -  80.10971  0.12442*** Pr Brz EXP USprgm WP BrzCtnP Brz od =+ +
    (757110)      (725350)         (114.0976)            ( 231.63764)               (0.02381)     
 R
2    = 0.9029     Adj R
2 = 0.8253        DW Statistic = 1.376 
 
 119186 + 119.4375*** 118538  0.01974  0.23954*** Pr Mli EXP MliWP USprgm MliCtnP Mli od =− + +
                 (119338)     (36.8973)         (186780)            (0.05472)        (  0.08060) 
 R
2    =  0.8435    Adj R
2  =  0.7182   DW Statistic  =   2.318 
 
 1924913  -2595.35120*** - 4424612* 2402.28774***   0.28450*** Pr US EXP USWP USprgm USCtnP US od =+ +
             ( 1580644)   (851.9043)       (2484584)           (846.12154)                (0.11601)   
R
2    =  0.7470    Adj R
2  = 0.5446    DW Statistic  =       2.640 
 
Results from the Brazilian equation show that Brazil exports are not affected by 
US cotton subsidies although they have the expected negative sign. An increment of the US. Cotton loan rate by one percent results to 410812 tons reduction in cotton exports in 
brazil but this is statistically insignificant. The world prices of  Brazil cotton surprisingly 
has no effect on cotton exports neither does the local prices of cotton.  World prices of 
Brazilian cotton has a positive sign as expected but it is insignificant implying that cotton 
exports are not responsive of world prices. Local price of cotton in Brazil negatively 
impacts on cotton exports. An increase of local prices of cotton by one unit results to a 
reduction of cotton exports by 80 tons. However this is again insignificant.  
Cotton production as expected is significantly affects Brazil cotton exports. If 
production increases by one ton, cotton exports increase by 0.12 tons. This finding 
implies that cotton exports are insensitive to prices and US subsidies and depend much on 
production as farmers fail to show flexibility in cotton production. 
Results from Mali equation indicate that the world price of Mali cotton and cotton 
production significantly determine cotton exports. An increase of world prices of Mali 
cotton of one dollar per ton leads to 119.4 tons increment in cotton exports. On the other 
hand if cotton production increase by one ton, there is a 0.24 increase in exports. 
However, the US subsidy program despite having the expected negative sign does not 
significantly affect exports. The local price of cotton variable has positive sign against 
research expectation but it is insignificant. 
The performance of the US Export equation was poor. The R-square was 
relatively low for time series data. Results of the model show that like the other two 
countries, production significantly impacts on cotton exports. Increasing production by 
one metric ton results to  0.28 tons increase in US cotton exports. The local cotton prices 
like in Mali positively impacts on cotton exports against our expectations.  Like in the other two countries, US cotton subsidies have not effect on cotton 
exports. However the US cotton subsidies/loan rate has an unexpected negative sign. The 
world price of US cotton as well is found to have a ridiculous negative relation with 
cotton exports. 
In general despite the poor performance of the US Export equation and data 
limitations, it is quite clear that the US cotton farm policies have not effect on its exports 
of cotton and those of Brazil and Mali. Any such claim may only be supported by the 
amount of support offered to farmers based on whether in exceeds the WTO limits but 
not econometric methods. 
Conclusions 
The US cotton farm support programs especially subsidies to cotton growers has 
drawn a lot of debate and resistance from other cotton producing countries especially 
developing countries. These countries consistently argue that the subsidies are offer US 
cotton growers an unfair advantage over cotton growers in poor countries that can not 
afford such support programs. Mali and Brazil are some the countries that have always 
disputed these subsidies and this saw WTO ruling against U.S. in favor of Brazil in 2004. 
This paper establishes that these arguments are not necessarily true using a simple 
linear model that determines the effect of the U.S. cotton loans on cotton exports of Mali, 
Brazil and the U.S. It is shown that the most significant factor that affects exports from 
all these countries and perhaps most of countries is production and world prices for 
poorer countries like Mali. This implies that the compensation judgment rendered by 
WTO in favor of Brazil was unwarranted. Data availability limited the ability of this study to address all the important issues 
that possibly affect cotton exports such as foreign exchange, other major producers of 
cotton such as China, Egypt, and Turkey. Opportunities for future research include 
studying the relationships and linkages between cotton exporting countries. 
  
 References 
Baffes, J. 2004. “Cotton: Marketing Setting, Policies, Issues, and Facts.” In Aksoy and Beghin 
eds. 2004.  
CRS (Catholic Relief Services) 2007. Brazil’s WTO Case against  U.S. cotton program. 
Available in http://cnie.org/NLE/CRSreports/07Oct/RL32571.pdf  
FAO (Food and Agriculture Organization) Statistical Data Base. Available in 
http://faostat.fao.org/site/395/default.aspx  
FAO (Food and Agriculture Organization) 2005. “Cotton subsidies in rich countries mean 
lower prices worldwide” Available in 
http://www.fao.org/newsroom/en/focus/2005/89746/article_89759en.html  
Gillson et al 2004. “Understanding the Impact of Cotton Subsidies on Developing Countries”. 
Working Paper, May 2004 
Masagazi, Sophia (2005) Elimination of cotton subsidies at the WTO: Justice not charity for 
least developed countries. LL.M. dissertation, Queen's University at Kingston (Canada), 
Canada. Retrieved January 10, 2008, from ProQuest Digital Dissertations database. 
(Publication No. AAT MR13205). 
Turner, Pamela Rae (1992) An economic analysis of United States cotton exports. Ph.D. 
dissertation, University of Maryland College Park, United States -- Maryland. Retrieved 
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World Trade Organization, 2002. Request for Consultations by Brazil, WT/DS267/1, 
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World Trade Organization, 2004. United States – Subsidies on Upland Cotton 
(WT/DS267/R).Geneva . World Trade Organization. 2007. Meeting shows need for result in cotton talks and more 
coherence on aid. 15-16 March 2007 
 
 

An economic analysis of United States cotton exports.

Cotton: Marketing Setting, Policies, Issues, and Facts.”

Masagazi, Sophia

Relief Services

Request for Consultations by Brazil,

United States – Subsidies on Upland Cotton (WT/DS267/R).Geneva . World Trade Organization.

U.S. Cotton Subsidies: Are Brazil's Accusations True?

U.S. Cotton Subsidies: Are Brazil's Accusations True?

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