The United States has produced cotton since the beginning of the 20th century. Currently, it is among the leading producers and exporters of cotton in the world. For example, the country’s export of cotton accounted for 41% of the world’s total exportation of the crop in 2003. The government of the US has spent a lot of money in subsidizing the cotton sector to protect farmers against perceived possible losses. The subsidy program has seen the cotton sector of the country emerge as a leading power in exportation of the crop. However, the subsidy program faces a number of challenges.

According to Woodward (2007), step 2 of the program is not economically reasonable and beneficial. It provides funding to millers and exporters to buy the expensive US grown cotton instead of buying cheaper cotton from outside the country, and such cotton is then exported at prices with the potential of lowering the international cotton prices. In addition, not all cotton farmers in the country are eligible to receive the subsidy, which raises concerns regarding to bias in the program (Woodward). As shown in the pie chart below, the leading ten percent cotton producers receive 73% of the subsidies. The program, therefore, disadvantages the poor, small-scale farmers, both within and without the country.

US cotton farmers and producers eligible for the subsidies are the main beneficiaries of the subsidy program. The program benefits them in a number of ways. For example, they receive direct payments not in any way related to the price fluctuations of cotton and their levels of production. Such payments depend on the historical production levels. Eligible cotton producers also receive countercyclical payments and emergency assistance to protect them against declines in the international prices of cotton. Just like the direct payments, the countercyclical payments and emergency assistance depend on the historical production levels of farmers (Woodward). The program also provides cotton producers with crop insurance through private insurers to protect them against losses occurring from natural disasters. It pays more than 50% premiums for cotton producers, and also caters for the administration costs of insurers, in addition to paying for the losses over the premiums. The program also provides cotton farmers and producers with export credit guarantees to encourage them to export their cotton to foreign nations in case they do not have available sources of funding.

Cotton farmers and producers not eligible for the subsidies within the country are the greatest losers from the cotton program. Cotton farmers and producers from without the country are also adversely affected by the cotton subsidy program of the United States. The program provides funds for the purchase of US grown cotton, which is later exported to other countries at low prices. It therefore has a direct impact of the international prices of cotton, and in most cases, lowers cotton prices. Some of the poorest countries in West Africa have traditionally been cotton exporters. The US cotton subsidy program has lowered the international market price of cotton such that it ranges from 35 cents to 45 cents per pound, which is what West African cotton farmers and farmers from other poor countries receive. Meanwhile, cotton growers in the United States received 70 cents or more per pound from the subsidies plus the market price.

Economists estimate that cutting or reducing the amounts of cotton subsidies would lower the cotton exports by the US substantially. However, they estimate that the international prices of cotton would be between ten and fifteen percentage points higher if the subsidies were cut or reduced. Reducing subsidies would, therefore, be of great benefit to farmers from poor countries, as well as to the US taxpayers, as they would spend less on subsidies.

The current cotton subsidy program needs to be replaced to avoid payment of subsidies to lazy farmers and to create a competitive international market for cotton. There is need to replace the existing forms of subsidies with new forms. For example, the federal government should create a federal insurance scheme for cotton farmers to protect them against natural disasters. The government should also set minimum cotton prices, also referred to as price floors, to insure farmers against very low market prices. The price floors should be set by taking the cost of cotton production into account, and should be such that prices never fall below the cost of production, which will en courage farmers to produce more cotton. The current program limits the number of farmers who can access the subsidies, thereby disadvantaging some farmers. The new program should ensure that all farmers and producers have fair access to the subsidies. It should avoid direct payment to farmers as much as possible, and should ensure that subsidies are not pegged on the traditional production levels of farmers. Instead, the new program should peg subsidies on current levels of production, such as on acreage under cotton, as opposed to the traditional system.

It is normal for people to fear for the economic changes that would accrue from the reform of the cotton subsidy program. History, however, shows that many industries have been reformed in recent decades with positive results, including the airline, telecommunications, and energy industries. If cotton subsidies are reformed as recommended, the US cotton industry will be forced to work more innovatively and efficiently in order to survive. Additionally, it is interesting that producers of majority of U.S. agricultural commodities do not receive subsidies from the federal government. In fact, commodities that receive federal subsidies account for only 36 percent of U.S. farm production, while commodities that do not rely on subsidies, such as meat, poultry, fruits, and vegetables, make up 64 percent of farm production in the country (Edwards and DeHaven). It is also important to consider that US farmers have diversified to other commercial activities, and are better able to deal with the day to day market price changes. In fact, figures by USDA reveal that the number of people who consider farming their primary occupation is only 38 percent of farm households.

New Zealand is a perfect example of countries that have survived after reforming their subsidy programs. The nation stopped subsidizing its farmers in 1984 (England), which was a risky move given the fact that the country’s economy is almost entirely agriculture-dependent. According to the Organization for Economic Cooperation and Development (OECD), only one percent of the value of New Zealand’s farm products is subsidized, while the same figure is 11% for the United States (OECD).