World Fiber Model

1. World Fiber Model Cotton Economics Research Institute Texas Tech University HTTP://WWW.CERI.TTU.EDU/POLICY

2. Who we are • Cotton Economics Research Institute, Texas Tech University • Our Collaborator: Agricultural and Food Policy Center (AFPC), Texas A & M University • Work very closely with: Food and Agricultural Policy Research Institute (FAPRI) • Joint institute of University of Missouri and Iowa State University • Working together with colleagues at Arizona State and University of Arkansas

3. Project Information • The project started in September 2001 with approximately $150,000 funding. • Total funding so far: $675,000. • People Involved in the Project: • Faculty: Sam Mohanty • Don Ethridge, Jaime Malaga and David Willis • Research Staffs: Suwen Pan and M. Fadiga • Current Graduate Students: Maria Mutuc, Jagada Chaudhary and Sidh Bajpai

4. Objectives • To prepare medium-term outlook for the U.S. and world cotton market. • To analyze the effects of alternative policies and external factors on production, utilization, farm and retail prices, farm income, trade, and government costs. • To brief staff members of the U.S. Senate and House Agriculture Committees on projections for U.S. and world cotton markets.

5. Country Coverage Africa: Egypt, other Africa Asia & Oceania: India, China, Taiwan, Japan, Pakistan, S. Korea, Australia, and other Asia Europe: EU-15, Eastern & Central Europe, Other Europe North America: USA, Canada, and Mexico Latin America: Brazil, Argentina, Other Latin America FSU: Russia, Uzbekistan, other FSU Middle East: Turkey, other ME Rest-of-the-world

6. Representative Country Model Structure World Cellulosic Price World Synthetics Price Cellulosic Price Synthetics Price Domestic Cotton Price Cellulosic Utilization Competing fiber prices enter the consumption equations with cross prices weighted by consumption to create a cross price index. Cellulosic Capacity Cellulosic Production Finished Products Trade Finished Products Consumption Finished Products Production A-Index Cotton Imports Domestic Cotton Price Cotton Begin. Stocks Cotton Production Cotton Consumption Cotton End. Stocks A-Index Cotton Exports Yield Cotton Area Harvested Cotton Mill Use Synthetic Utilization Manmade Fiber Mill Use Wool Mill Use Synthetic Capacity Manmade Fiber Trade Synthetic Production Man-made Fiber Production

7. Deterministic vs Stochastic Baselines (February 2004)

8. 2004/05 Outlook Million Bales Cents/lb • 2004/05 production is estimated to be around 100 million bales because of combination of area expansion and yield recovery. • Some build up of ending stock. • Cotton A-index price is projected to decline by 7 cents.

9. World Fiber Prices Cents per lb • Cotton prices are projected to decline by 7 cents per pound next year and remain in the lower 60s for a few more years. • Slow recovery after 2007/08.

10. CDF of U.S. Farm Price for 2004/05 • Draws five hundred alternative yield projections from historical distributions. • Solves the model 500 times to obtain price projections for each of the draw. 53 61 Price

11. Policy Analysis Conducted in 2003/04 and in Progress • Analysis of Brazilian WTO Petitions • Impacts of U.S. Cotton Programs on World Market. • Impacts of U.S. Cotton Programs on West African Export Earnings • Future Potential of Brazilian Cotton Response: Implications for U.S. Cotton Exports • China Analysis • Impacts of MFA on Chinese and World Fiber Markets • Impacts of Chinese Currency Appreciation on the World Fiber Markets. • Impacts of Chinese Tariff-Rate-Quota on Cotton Imports on World Fiber Market. • India Analysis • Assessing Competitiveness of Indian Cotton Production.

12. Brazilian WTO Petition • Brazil filed a petition with WTO settlement body in September 2003. • U.S. cotton subsidies such as marketing loans, export credits, commodity certificates, direct payments and counter cyclical payments are depressing world prices and are injurious to Brazilian farmers. • The petition was supported by Australia and West and Central African (WCA) countries

13. Highlights of WTO Study • Overall, considerable smaller impacts than claimed by Brazil and WCA. • However, weaker price projections in the baseline would have increased the policy impacts to some extent. • Southwest cotton production is likely to have the maximum effects. • Higher supply response by the rest-of-the-world, particularly competing exporters, brings down the cotton prices close to the baseline level in a few years after program elimination.

14. Impacts on A-Index Price Cents/lb

15. While Brazil’s hired gun Dr. Sumner asserted that elimination of the U.S. cotton program would reduce U.S. cotton exports by 40 percent and increase world prices by 12%, a study recently released by agricultural economists at Texas Tech University “directly contradicts Brazil’s assertions.” The Texas Tech study indicated that program elimination might reduce U.S. exports by 4 to 5 percent and that the program does not impact world cotton prices by any more than 2% .

16. Recent Statements on WTP Panel Report • Neugebauer Statement on Official WTO Panel Report on Brazil Cotton Case (September 8, 2004) • “As the Texas Tech University economic study shows, elimination of our domestic cotton programs would, at most, result in just slightly more than a 2 percent world price increase, and these minimal effects do not represent ‘serious prejudice’,” Neugebauer said.  “Brazil, not the United States, has been significantly increasing its cotton production over the last several years, while our cotton production and world market share has remained relatively stable.” • National Cotton Council Statement on WTO Panel Report: (September 16, 2004) • “The panel’s finding of ‘serious prejudice’ seems contrary to 33 years of stability in the share of the world market held by United States cotton and, indeed, a loss of market share in 2002. The decision also runs counter to recent findings by an independent Texas Tech study that showed estimated price impacts from the U.S. cotton program ranging from less than 0.5 percent to just over 2 percent. • Mark Lange, the council’s chief executive officer, contrasts the independent Texas Tech analysis to that conducted by Prof. Dan Sumner for Brazil. • “Although we strongly disagree with the panel’s final decision, we do note that the panel dismissed the outlandish economic model results offered by Brazil’s economic expert. With good reason: the soundness of Brazil’s evidence has been severely undermined by the Texas Tech study and a recent study conducted by the Food and Agriculture Organization, which also found minimal price impacts from the U.S. cotton program. In fact, the FAO study also explicitly questioned and rejected many of the assumptions used by Brazil’s economic expert.

17. Annual Activities • November and January Baseline with FAPRI • World Cotton Baseline Presentation at FAPRI Annual Baseline Review Meeting in Washington. • Briefing to Congressional staffs (House and Senate), Economic Research Service, Commodity Groups and Media in March. • Organizer of Annual Agricultural Outlook Conference in Lubbock. • World Cotton Market Outlook Presentation at World Outlook Conference.

18. 2004 Agricultural Outlook Conference • Tim Snyder (National Sorghum Producers) • Pat Westoff (Food and Agricultural Policy Research Institute, University of Missouri) • Joe Outlaw (AFAC, Texas A & M University) • Abner Womack (Food and Agricultural Policy Research Institute, University of Missouri) • Stephanie Mercier (Chief Economist, Senate Agriculture Committee) • Marvin Cepica (Texas Tech University) • Sam Mohanty (Texas Tech University)

19. Selected Local Presentations • Briefed Lubbock Chamber of Commerce on the impacts of 2002 Farm Bill on South Plain Economy • Short-term and Medium-term Market Outlook Presentation at the Annual Flow Meeting of the Texas Cotton Association since 2001. • Discussed the usefulness of the policy model to the extension agents at the 4th annual cotton symposium.

20. Publications • 15 Journal articles: • American Journal of Agricultural Economics • Journal of Agricultural and Applied Economics • Journal of Cotton Science • Journal of International Law and Trade Policy • Southwestern Journal of Economics • Others • 5 papers under review. • 6 Beltwide cotton conference Proceedings • 5 abstracts in Journal of Agricultural and Applied Economics • 5 proceedings in AgEcon Search (http://agecon.lib.umn.edu). • Technical reports

21. Professional Presentations • Presentations at various professional meetings • Southern Agricultural Economics Association. • Organized Principal Paper session on Policy Modeling at 2004 SAEA Meeting. • Beltwide Cotton Conferences. • American Agricultural Economics Association. • Southwestern Economic Association.

22. Graduate Student Involvements (Aug. 2001 to Present) • Seven students have been graduated. • Impacts of MFA Eliminations on Chinese Fiber Markets. • Supply Response of Brazilian Cotton. • Future of Mexican Cotton Imports. (2004 Best Masters thesis award by the Western Agricultural Economics Association) • Estimation of U.S. Cotton Supply Response. • Estimation of the European Union Cotton Demand • Estimation of Cotton Supply Response of India, Pakistan and Australia. • Three students are currently in the program.

23. External Funding Generated • National Research Initiative Competitive Grant of $79,000 to analyze the future of Indian Agricultural Trade. • Economic Research Service funded $8,000 to examine the relationship between Exchange Rate and Agricultural Commodity Prices in Asian and Western Hemisphere Countries • FORECASTING AND BUSINESS ANALYTICS, LLC funded $27,500 to estimate the economic benefits of cotton check-off program • Negotiating with Cotton Inc. for a multi-year contract to analyze various domestic and international policy issues as it arises.

24. Future Plans • Further Model Improvements. • We are in the processing of adding four West African countries in the model. • Policy Analysis • Getting ready to analyze the effects of recently agreed WTO framework to eliminate export subsidies and reduce domestic support on the world fiber market.

25. HTTP://WWW.CERI.TTU.EDU/POLICY