The National Cotton Council continues to work with Congress, the Administration and the crop insurance industry to turn the organization’s STAX proposal into a 2012 farm law reality.
Is the NCC promoting STAX?
The NCC-approved farm policy proposal for cotton includes a modified marketing loan and the Stacked Income Protection Plan (STAX). Already having gained Congress’ respect, STAX is a program we want considered favorably during the 2012 farm bill reauthorization. Regarding budget constraints, we have demonstrated to lawmakers that STAX can be operated with a 30 percent reduction in the Congres-sional Budget Office baseline for upland cotton. STAX also will provide meaningful risk management and address the commodity’s unique policy challenge, the World Trade Organization (WTO) Brazil case.
How would STAX work?
STAX, as designed, is not a disaster program but reinforces the importance of individual crop insurance coverage for deep losses. Knowing that crop insurance products are extre-mely flexible and give producers the opportunity to mat-ch the effective risk tools and coverage to their financial situation, we consulted with crop insurance industry representatives and USDA’s Risk Management Agency leaders.
As developed, STAX is an extension of current area-wide revenue-based crop insurance products and allows for reasonably priced loss coverage that is not currently available. It should not be viewed as a replacement for current individual insurance purchases. STAX complements existing products and gives producers the opportunity for obtaining shallow loss coverage tailored to their operation and willingness to pay. Individual buy-up is not required. Producers would be able to buy revenue loss coverage ranging between 10-30 percent in five percent increments. It includes the ability to adjust protection if cotton prices increase during the growing season. This contrasts sharply with Farm Service Agency delivered products that essentially are one-size-fits-all, without any ability to customize participation. Because STAX is an area-wide product and not based on individual performance, producers can elect higher levels of coverage with a reduced chance of moral hazard. In addition, insurance indemnities are not subject to limits or means tests.
What about the criticism of STAX and other farm program options?
There seems to be a tremendous amount of shooting from the hip on criticisms of the multiple program options offered by cotton and other commodities. Claims about locking in high prices with STAX are nonsense. Unlike programs that rely on five-year averages, STAX looks only at the current year’s futures market for price information. Also, aggregate cotton acreage largely will be determined by relative market prices.
Claims of WTO concerns is another common criticism. The use of averages in income and revenue programs does not by itself confer any particular status in a WTO context. The U.S. cotton industry has demonstrated that it has programs with annual average estimated costs between $400-450 million, and those will be fairly stable over time. STAX would eliminate the counter-cyclical payment, which can run costs up to $1.2 billion in years of low prices.
Mark Lange is president and chief executive officer for the National Cotton Council of America. He and other NCC leaders contribute columns on this Cotton Farming page.