[env-trinity] Cotton Subsidy Example

[Byron]

With most of Trinity's water going to Westlands Water District, and that
District planting 32 percent - down from 38 percent a few years ago - of its
land to cotton, several have asked how cotton subsidies play out.

 

Cotton Subsidies - a hypothetical example - year 2000 figures not including
water and electricity subsidies for South of SF Bay Delta growers...

 

Suppose I have a cotton ranch.                          

 

I plant my cotton crop and harvest it.

 

After harvest I can go to the Farm Service Agency (USDA agency) and get a
short-term loan based upon my harvest and the prevailing government loan
rate.  The loan rate for cotton is 52 cents a pound.  Say my harvest was
1.92 million pounds of cotton, I could get a $1 million loan using my
harvest as the collateral for that loan (i.e. $0.52 x 1.92 million = 1
million).

 

Unfortunately, the world market price for cotton is only 38 cents a pound,
thus even if I sell my entire crop I'm still $270K short of being able to
repay my loan (actually more including interest).

 

Since I know I'm not going to be able to repay my loan by selling my cotton,
I don't sell it.  Instead I forfeit it to the government.   All of my cotton
goes to a government warehouse and I'm even with the government.  In
essence, I've sold to the government for 52 cents a pound, cotton that's
worth 38 cents a pound.

 

Now the government doesn't like paying warehouse rent to keep my cotton, so
if I want to, I can buy my cotton back from the government at the world
market price of 38 cents a pound (using the infamous commodity
certificates).  This is a cool deal because the government is selling to me
for 38 cents what I already sold to them for 52 cents and now my original
$270,000 loan default becomes a $270,000 "market gain" that goes into my
bank account.  

 

Thus, I now have my cotton back plus an extra $270,000 in the bank just for
playing this little game with the government.  Now that I've got my cotton
back (and a fatter wallet), I can sell the cotton or hang on to it waiting
for a better world market price. 

 

Whoa!! Just a minute, my $270,000 loan default can't be turned to gold at a
1:1 ratio because someone with half a brain put a $75,000 cap on the profit
I could make by buying back my cotton from the government.  Thus, in this
case I could only get enough certificates to buy back about a half-million
of my 1.92 million pounds of cotton because at a 14 cents a pound (52 minus
38) profit (subsidy), buying back a half-million pounds would result in
$75,000 (the limit) in my bank account.  Then, someone raised the limit to
$150,000 (which still prevents me from turning my entire $270,000 failure
into a success story).

 

Now someone has decided there shouldn't be any limit!!!  So now the bigger
you fail the bigger you win... without limit!!  I now get to buy my entire
crop back and put the full $270,000 in my bank.  

 

You think that's good?   Well, my neighbor, a larger grower, defaulted on
his government loan big time, coming up millions of dollars short because of
the bad cotton market.  Guess what?  Now he's even richer than me because
instead of all of us having to be happy with a $150,000 scam, the big guys
now can work a multi-million dollar scam and in the process the large grower
is becoming so strong financially that I expect someday soon he'll be buying
me out so that he can fail on an even bigger scale and get even stronger.

 

Oh wait, I don't have a cotton ranch (damn), but if I did it wouldn't be big
enough to fail big enough to compete with my large grower neighbor.  At
least now we know how all the small cotton farmers in Mississippi and
Alabama went extinct... they just couldn't fail enough to survive.  This
says nothing about the rampant and widespread poverty and famine we've
created in Africa by devastating through cotton subsidies and price supports
a major source of income in that area - cotton. 

 

 

Byron Leydecker, 

Chair, Friends of Trinity River

Consultant, California Trout, Inc.

PO Box 2327

Mill Valley, CA 94942-2327

415 383 4810 ph

415 383 9562 fx

bwl3 at comcast.net

bleydecker at stanfordalumni.org (secondary)

http://www.fotr.org

http://caltrout.org

 

 

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