off their MA loans at the AWP rather than at the loan rate. The LDP option allows the producer to
receive the benefits of the marketing loan program without having to take out and subsequently repay a
commodity loan.
To mitigate potential negative impacts of the price support programs on cotton exports and the
domestic textile industry, a complicated three-step competitiveness process was also put in place by the
FAIR Act. Step 1 allows the Secretary of Agriculture to further reduce loan repayment rates if the AWP
falls below 115 percent of the loan rate and the lowest U.S. Northern Europe6 price exceeds the Northern
Europe7 price (known as the A Index). Step 2 provides for payments to U.S. mills, marketers, and
exporters when the U.S. price exceeds the A Index by more than 1.25 cents per pound for 4 consecutive
weeks and the AWP does not exceed 134 percent of the U.S. loan rate. These payments are equal to the
difference between the U.S. price and the A Index minus 1.25 cents per pound. The 1996 FAIR Act
capped total expenditures for Step 2 during FY 1996-2002 at $701 million. However, the cap was
reached less than halfway through this period, in mid-December 1999 and payments could no longer be
made. The program was reinstated in October 1999 when the 2000 Appropriations Act removed the
program’s expenditure cap. Step 3 protects domestic cotton users by increasing cotton import quotas
when the U.S. price (adjusted for Step 2 payments) exceeds the A Index by more than 1.25 cents per
pound for 4 consecutive weeks.
2. Conceptual Model
2.1 Model of the U.S. Cotton Market
To assess the changes in supply and demand resulting from the CRPP, a structural model of the
domestic cotton industry is developed. The linkages between the relevant market levels must be included
to ensure that all of the CRPP impacts are considered. The framework for such a market linkage model is
5From this base loan rate, a premium or discount is applied, depending on the region and cotton quality.
6The U.S. Northern Europe price is the weekly (Friday-Thursday) average price quotation for the lowest priced U.S.
upland cotton, as quoted for Middling (M) quality 1 3/32 inch fiber length cotton, delivered c.i.f. (cost, insurance,
freight) to Northern Europe.
7The Northern Europe price is the weekly average of world price quotes for the five lowest priced growths of upland (M
1 3/32 inch) cotton delivered c.i.f. Northern Europe.