It is possible for both the LDP and Step 2 programs to be in effect simultaneously. The world
price may be low enough to trigger LDP payments in the U.S., but the U.S. price may still be more than
high enough above the world price to trigger the Step 2 payments. This was, in fact, the case for much of
1999 through 2001 and persists into 2002. Panel (d) demonstrates how prices are determined when both
programs are in effect. Because the LDP tends to diminish the price benefits of the CRPP-induced
demand shift and the Step 2 tends to enhance this effect, it is not possible to determine a priori whether
the net interactive effects of the programs are positive or negative. It is an empirical issue.
3. Data
Monthly data for the period January 1986 through December 2000 were used to estimate
domestic mill demand and export demand for domestic cotton. The quantity of domestic cotton
consumed by domestic mills and the quantity exported were obtained from various issues of the USDA’s
Cotton and Wool Outlook. The prices used in the model were the price of cotton at the U.S. mill level,
the A Index (foreign cotton price), and the prices of rayon and polyester. These prices were all obtained
from the National Cotton Council (2001) web site. The mill price was adjusted for government subsidies
by subtracting the average user certificate subsidy value for each month from the reported price. Data on
the monthly value of this subsidy for the use of domestic cotton were obtained from Cotton Incorporated
(CI). All prices obtained from the National Cotton Council were converted into raw fiber equivalent
form.15 CI also provided monthly data on CRPP expenditures for advertising, nonagricultural research,
and agricultural research expenditures for the period 1986 through 2000.
The domestic demand model is estimated using per capita quantities. To calculate these
quantities and convert other variables to per capita terms, we collected monthly population data for the
U.S. from the U.S. Census Bureau (2001). We obtained the wage in the domestic textile industry and a
monthly index of energy costs from the U.S. Bureau of Labor Statistics (BLS, 2001). For the domestic
15More waste is associated with cotton fiber than with polyester or rayon. From the mills’ perspective, the relevant price
is the price per unit of useable fiber. This is taken into account by adjusting prices so that the price per unit of
useable fiber is being compared instead of the price of fiber (cotton price is divided by 0.9, while polyester and rayon
prices are divided by 0.96).
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