Cotton Program:

The Marketing Loan Has Not Worked

RCED-90-170: Published: Jul 31, 1990. Publicly Released: Aug 10, 1990.

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Pursuant to a congressional request, GAO analyzed the Department of Agriculture's (USDA) cotton marketing loan program and identified options for improving its effectiveness.

GAO found that: (1) since 1985, the marketing loan program has not achieved its objective of keeping U.S. cotton prices competitive in world markets; (2) during the 14-month price divergence period, U.S. producers lacked incentive to redeem their loans and to market their cotton at prices near the world price; (3) import restrictions and 8-month nonrecourse loan extensions are two other factors that make it difficult for the program to be effective; (4) administrative changes to the program primarily affected the calculation of the adjusted world price and the payment of storage and interest costs; and (5) the Secretary of Agriculture has used the acreage reduction program in an attempt to maintain cotton carryover stocks at the 4-million-bale level.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The 1990 farm legislation continued the cotton program with basically the same nonrecourse loan rate configurations. Therefore, this recommendation has been negated by Congress.

    Matter: To increase the effectiveness of the cotton program, Congress should consider lowering the nonrecourse loan rate to a level that represents a fraction of the current U.S. spot price or world price, whichever is lower at the time cotton in placed under loan. Because the nonrecourse loan rate would vary with market conditions, a maximum rate should be established. Lowering the nonrecourse loan rate would: (1) lower producers' price expectations and encourage producers to market their cotton, rather than forfeit it to the government; and (2) reduce producers' tendency to hold cotton under loan for extended periods.

  2. Status: Closed - Not Implemented

    Comments: The 1990 farm legislation continued the cotton program, keeping the 8-month loan extension intact. Therefore, this recommendation has been negated by Congress.

    Matter: To increase the effectiveness of the cotton program, Congress should consider providing the Secretary of Agriculture the authority to make available the 8-month loan extension to the basic 10-month nonrecourse loan only when it is needed to minimize cotton forfeitures to the government. This provision would eliminate the existing situation, where producers are virtually assured availability of the 8-month loan extension, which allows them to keep cotton under loan, whether or not justified by current market conditions.

  3. Status: Closed - Implemented

    Comments: The 1990 farm legislation (P.L. 101-624) provided for USDA to make a preliminary announcement of its acreage reduction program by November 1 each year, and a final announcement by January 1 of the following year. This action is in line with the recommendation. GAO will prepare an accomplishment report.

    Matter: If Congress chooses to maintain a target carryover stock level for cotton, it should consider including provisions in the 1990 farm legislation to revise the acreage reduction program announcement date to at least January to provide the Secretary of Agriculture the time needed to obtain data on the crop year's harvest through December of each year.

 

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