The cotton policy regime in the European Union (EU), along with tobacco, olive oil and hops, was one of those not affected by either the 1992 Common Agricultural Policy (CAP) reform or by the Agenda 2000. Since last year however there has been an ongoing discussion for reforming these Common Market Organizations (CMO) and it has been agreed that the proposed changes will be applied by 2005. For cotton in particular the orientation is towards a policy scheme including a mix of coupled and decoupled measures. That is, a mix of non trade-distorting (green box) and less trade-distorting (blue box) forms of farm support has been proposed. This includes a fully decoupled single farm payment (income aid) and an area payment (production aid).
For evaluating the proposed policy regime, at least three aspects should be considered relative to the present policy scheme. First, the extent of the Producer Support Estimate (PSE), which is an estimate of the monetary value of transfers from consumers and taxpayers to producers resulting from government intervention to support farmers. In the context of the proposed policy regime, PSE consists of the change in producers' surplus which results from the area payment measure plus the income from the single farm payment. Second, the extent of Transfer Efficiency of Support (TES), which is the difference between what consumers and taxpayers pay and what the intended beneficiaries (i.e., farmers) receive. Third, the rate of decoupling that will be achieved by the proposed policy regime.
The concept of decoupling has become one of the key issues in agricultural policy design. Several definitions have been put forward, all of them apt to the extent of the production effects of farm support. In particular, a policy scheme is defined as fully decoupled if it does not influence production decisions of farmers receiving payments and that it permits free market determination of prices (Cahill, 1997; OECD, 2001a). This is the more restrictive form of decoupling requiring that (a) demand and supply functions remain unchanged when the policy scheme is introduced, (b) there is no change in equilibrium price and quantities, and (c) there is no difference in the response of the market to any exogenous shock arising on the demand or the supply side. On the other hand, a policy scheme is defined as effective fully decoupling if it results in production that does not exceed the level hat would exist without it. That is, production decisions by farmers could be affected by the policy scheme but in a way that does not result in larger production, although supply responses to external shock would be different with and without the policy regime (Cahill, 1997; OECD, 2001a). Finally, a policy scheme is defined as partial decoupling if it results in production that exceeds the level that would exist without it but does not exceed that which would exist if the scheme was fully coupled to production (Cahill, 1997). From the above it is clear that the proposed policy regime for cotton fits in the latter definition.
There are now several theoretical and empirical studies (e.g., Cahill, 1997; Hennessy, 1998; Moro and Sckokai, 1999; Young and Westcott, 2000; Rude, 2000; Adams et al., 2001; Dewbre, Anton and Thompson, 2001; OECD, 2001b, 2003a,b, 2004; Baffes and deGorter, 20003; Frandsen, Gersfelt and Jensen, 2003) dealing with decoupling aspects of recent agricultural policy reforms. Among their findings, the most relevant to the present study is that area payments, even when implemented with a requirement to plant, were both efficient in transferring income to farm households and less production (and trade) distorting than market price support and payments based on output or input use. Thus they have the greater impact on farm income. On the other hand, payments based on variable input use were found to be the least efficient in transferring income to farm households and the most production distorting of any form of farm support.
The aim of the present study is to evaluate the proposed EU cotton policy regime in welfare terms. In particular, the proposed and the present policy regimes are compared and contrasted in terms of their impact on farm income, PSE and TES. Moreover, after estimating the production effects of the proposed policy regime, its rate of decoupling is calculated. The analysis is developed in a partial equilibrium framework and is based on simulation results for the two main EU cotton producing Member States (i.e., Greece and Spain) over the reference period (2000-2003) that has been used to design the proposed policy regime.
The rest of this report is organized as follows. In the next section, the main features of the EU cotton market are presented. The third section is devoted to the analysis of the present policy regime. The proposed policy regime is analyzed in the fourth section, where the simulation results are also discussed. Concluding remarks follow in the last section.