WT/DS267/R/Add.2 
Page I-275 
 
 
ANNEX  I-7 
 
 
ANSWERS OF BRAZIL TO QUESTIONS POSED  
BY THE PANEL FOLLOW ING THE SECOND  
SUBSTANTIVE MEETING OF THE PANEL 
 
 
(22 December 2003) 
 
 
 
 
TABLE OF CONTENTS 
 
Page  
 I. Terms of Reference.......................................................................................................... .. 278 
 II. Economic Data .............................................................................................................. ..... 279 
 III. Domestic  Support.......................................................................................................... ..... 291 
 
IV. Export Credit Guarantees................................................................................................. 29 3 
 V. Serious Prejudice ........................................................................................................... .... 303 
 VI. Step 2..................................................................................................................... .............. 339 
 
VII. Re medies .................................................................................................................. ........... 341 
 VIII. Misce llaneous ............................................................................................................ ......... 342 
  WT/DS267/R/Add.2 
Page I-276  
 
Table of Cases 
 
Short Title Full Case and Citation 
Korea – Beef GATT Panel Report, Republic of Korea – Restrictions on Imports of Beef – 
Complaint by the United States , BISD 36S/268, adopted on 7 November 1989. 
Japan – Alcoholic 
Beverages Appellate Body Report, Japan – Taxes on Alcoholic Beverages,  WT/DS8/AB/R, 
adopted 1 November 1996.  
EC – Hormones Appellate Body Report, European Communities - Measures Concerning Meat 
and Meat Products (Hormones),  WT/DS26/AB/R, adopted 13 February 1998. 
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/R, 
adopted 20 August 1999. 
Indonesia – Automobiles Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry,  
WT/DS54/R, adopted 23 July 1998. 
Argentina – Textiles and 
Apparel Appellate Body Report, Argentina – Measures affecting Imports of Footwear, 
Textiles, Apparel and Other Items , WT/DS56/AB/R, adopted 22 April 1998. 
Guatemala –  
Cement (I) Appellate  Body Report, Guatemala – Anti-Dumping Investigation Regarding 
Portland Cement from Mexico,  WT/DS69/AB/R, adopted 25 November 1998. 
Japan – Agricultural 
Products Panel Report, Japan – Measures Affecting Agricultural Products, WT/DS76/R, 
adopted 19 March 1999. 
India – Quantitative 
Restrictions Panel Report, India – Quantitative Restrictions on Imports of Agricultural, 
Textiles and Industrial Products, WT/DS90/R, adopted 22 September 1999. 
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of Milk 
and the Exportation of Dairy Products, WT/DS103/AB/R, adopted 
27 October 1999.  
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign Sales 
Corporation”, WT/DS108/AB/R, adopted 20 March 2000. 
Argentina – Footwear Appellate Body Report, Argentina – Safeguard Measures on Imports of 
Footwear , WT/DS121/AB/R, adopted 12 January 2000. 
Australia – Leather Panel Report, Australia – Subsidies Provided to Producers and Exporters of 
Automotive Leather, WT/DS126/R,  adopted 16 June 1999. 
US – Certain EC 
Products Appellate Body Report , United States –Import  Measures on  Certain Products 
from the European Communities,  WT/DS165/AB/R, adopted 10 January 2001. 
US – Export Restraints Panel Report, United States – Measures Treating Export Restraints as Subsidies , 
WT/DS194/R, adopted 23 August 2001. 
Chile – Agricultural 
Products (Price Band) Appellate  Body Report, Chile- Price Band System and Safeguard Measures 
Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 
23 October 2002. 
Canada – Aircraft II Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft,  
WT/DS222/R, adopted 19 February 2002. 
Argentina – Peach 
Safeguard Panel Report, Argentina – Definitive Safeguard Measure on Imports of 
Preserved Peaches, WT/DS238/R, adopted 15 April 2003. 
Japan – Apples Panel Report, Japan – Measures affecting the Importation of Apples, 
WT/DS245/R, adopted 10 December 2003. 
US – Steel Safeguards Appellate  Body Report, United States – Definitive Safeguard Measures on 
Imports of Certain Steel Products, WT/DS248/AB/R, adopted 
10 December 2003. WT/DS267/R/Add.2 
Page I-277 
 
 
List of Exhibits 
 
Loan Deficiency Payment and Price Support Activity as of 12/3/2003 Exhibit Bra- 373 
 
“Crop Year Statistics MY 2002” – Federal Cr op Insurance Corporation Exhibit Bra- 374 
 
Information Provided by Gerald Estur, ICAC. Exhibit Bra- 375 
 
“About FAPRI,” Center for Agricultural and Rural Development, Iowa State University  Exhibit Bra- 376 
 
“About FAPRI,” Food and Agricultural Policy Research Institute at the 
University of Missouri. 
 Exhibit Bra- 377 
“About FAPRI,” Food and Agricultural Policy Research Institute. Exhibit Bra- 378 
 
CARD Report, 40 Anniversary Commemorative Issue Exhibit Bra- 379 
 
“Food and Agriculture Policy Resea rch Institute Receives USDA’s 
Highest Honor,” CARD Press Release, 9 July 2002.  Exhibit Bra- 380 
Jeffrey D. McDonald and Daniel A. Sumner. “The Influence of 
Commodity Programmes on Acreage Responses to Market Price: With 
and Illustration concerning Rice Policy in the United States.” American Journal of Agricultural Econom ics, (85) 4 November 2003. 
 Exhibit Bra- 381 
Cotton and Wool Outlook, USDA, 12 December 2003. 
 Exhibit Bra- 382 
Brazil and US Export Data on Export Quantities and Values by Country 
 Exhibit Bra- 383 
Import Prices from Various Countries Exhibit Bra- 384 
 
Domestic Prices from Various Countries Exhibit Bra- 385 
 
Brazil and US Export Prices  by Country Exhibit Bra- 386 
 
Brazil Export Prices v A-Index Prices by Country Exhibit Bra- 387 
 
US Export Prices v A-Index Prices by Country Exhibit Bra- 388 
 
Brazilian Domestic Price Data Exhibit Bra- 389 
 
“Glickman Proposes Cottonseed Payment Programme,” USDA News 
Release, 29 February 2000. 
 Exhibit Bra- 390 
Cost of Ginning and Value of Cottonseed per pound of Cotton Lint Exhibit Bra- 391 
 
“William Duvanant Says: Overproduction Thwarts Cotton price Upturn,” Western Farm Press. 
 Exhibit Bra- 392 
Futures Prices as of 19 December 2003 Exhibit Bra- 393 WT/DS267/R/Add.2 
Page I-278  
 
UNITED STATES – SUBSIDIES ON UPLAND COTTON 
 
Questions from the Panel to the parties –
 
second substantive Panel meeting  
 
I. Terms of Reference 
 
192. Regarding the interest subsidies and storage payments listed by the United States in its 
response to the Panel's Question No. 67:   (a) Please provide a copy of the regul ations under which they are currently 
provided and under which they were provided during the marketing years 1996-
2002;   
  (b) Please indicate whether there are any such payments which are not provided to 
implement the repayment rate for upland cotton within the marketing loan 
programme.  USA 
 193. Are interest subsidies and storage payments  already included in the amounts shown in 
your submissions to date for payments under th e marketing loan programme?  Has there been 
any double-counting?  BRA 
 Brazil’s Answer:
 
 
1. The answer to both questions is “no.”  Brazil reported interest subsidies and storage payments 
separately and thus did not double count them.1  To the extent that the United States confirms that 
both of these payments are connected in some way to the storage of bales of cotton involved in the 
marketing loan programme, then they would approp riately be included within the overall marketing 
loan numbers.  In that case, the Panel should in crease the amount of payments attributable to 
marketing loan payments by including interest and storage payments related to bales of cotton in the 
marketing loan programme.    194. Does the United States maintain its position  stated in response to the Panel's Question 
No. 67 that "it would not be appropriate for the Panel to examine payments made after the date 
of panel establishment"?  If so, please explain wh y.  Can Brazil comment on this statement?  
BRA, USA 
 Brazil’s Answer:
 
 
2. Brazil reserves its right to further comment on the US answer provides some initial thoughts.   
 3. Brazil reiterates its arguments that the Panel must examine data relating to payments made 
after the date of establishment.
2  In addition, the Panel is not prevented from examining payment data 
that originates after the date of the Panel’s est ablishment because these payments are identified in 
Brazil’s panel request and, therefore, are within the Panel’s terms of reference.   4. The measures covered by Brazil’s request for th e establishment of the Panel are very broad 
and encompass, inter alia, any type of payment made under the 2002 FSRI Act and the 2000 ARP 
Act.
3  In addition, the panel request covers, inter alia, a time period of a “marketing year” for 2002 for 
                                                      
1 See e.g. Brazil’s 9 September Further Submission, Table 1. 
2 Brazil’s 22 August Rebuttal Submission, paras. 88-96;  Brazil’s 22 July Oral Statement, paras. 40-44.   
3 WT/DS267/7, p. 2. WT/DS267/R/Add.2 
Page I-279 
 
 
upland cotton for the period 1 August 2002 through 31 Ju ly 2003.  The panel request further covers 
2002 FSRI Act and 2000 ARP Act payments to be made during marketing years MY 2003-2007.  In 
addition, the identified measures guarantee the right of  eligible US producers, users and exporters to 
receive future payments.4  Given the comprehensive scope and ti ming coverage of the request for the 
establishment of a Panel and the mandatory nature of the payments,5 the Panel’s terms of reference 
encompass all payments made under the 2002 FSR I Act for the period marketing year 2002. 
 5. As has been firmly established in WTO jurisp rudence, any “measure” identified in the panel 
request pursuant to DSU Article 6.2, is within terms of reference of the panel.
6  As noted above, 
Brazil identified all relevant “measure s” in its request for the establishm ent in the Panel.  Further, in 
the Chile – Agricultural Products (Price Band) case, the Appellate Body held that a panel request 
which includes reference to “amendments” is suffici ent to bring later enacted significant changes to 
legislation within the Panel’s terms of reference.7  While Brazil’s panel request also included 
“amendments,” this case does not even raise the Chile – Agricultural Products (Price Band) issues 
because Brazil’s panel request identified the measures that have not changed or been amended since 
18 March 2003.  Further, to the extent that “p ayments” made since 18 March 2003 are evidence, the 
Appellate Body and panels have repeatedly found that evidence ge nerated after the establishment of 
the panel can be used by panel’s in their obj ective assessment of the facts under DSU Article 11.8   
  
II. Economic Data 
 
195. Does the United States wish to revise it s response to the Panel's Question No. 67 bis, in 
particular, its statement that "the United Stat es ... does not maintain info rmation on the amount 
of expenditures made under the cited programme s to US upland cotton producers"?  Did the 
United States make enquiries of the FSA in the course of preparing its original answer? USA 
 
196. Please provide the latest data for th e 2002 marketing year on payments under the 
marketing loan, direct payments, counter-cyclical payments, user marketing certificate (step 2) programmes and export credit guarantee programmes.  BRA, USA 
 
Brazil’s Answer:
 
 
6. With its letter of 18 December 2003, the Unite d States has finally confirmed – after asserting 
the contrary repeatedly to Brazil and then to the Pa nel – that it has collected complete planted acreage, 
contract base acreage, contract yields, and even pa yment data that would allow it to calculate with 
relative precision the amount of direct and counte r-cyclical payments made to current producers of 
                                                      
4 Brazil’s 9 September Further Submission, para. 423. 
5 US 27 October Answers to Questions, paras. 95-97. 
6 Panel Report, Japan – Agricultural Products , WT/DS76/R, para. 8.4;  Panel Report, Indonesia – 
Automobiles , WT/DS54/R, paras. 14.3-14.4. 
7 Appellate Body Report, Chile – Agricultural Products (Price Band) , WT/DS207/AB/R, para. 135. 
8 Panel Report, India – Quantitative Restrictions , WT/DS90/R, para. 5.161-5.163 (“In this case the 
parties and the IMF have supplied information concerning the evolution of India’s balance of payments and 
reserve situation until June 1998.  To the extent that such information is relevant to our determination of the 
consistency of India’s balance of payments measures wi th GATT rules as of the date of establishment of the 
Panel [18 November 1997], we take it in to account.”);  Appellate Body Report, EC – Hormones , 
WT/DS26/AB/R, paras. 133-4 (“The deliberate disregard of, or refusal to consider, the evidence submitted to a 
panel is incompatible with the panel’s duty to make an objective assessment of the facts. …  A claim that a 
panel disregarded or distorted the evidence submitted to it is, in effect, a claim that the panel, to a greater or 
lesser degree, denied the party submitting the evidence fundamental fairness, or what in many jurisdictions is 
known as due process of law or natural justice.”);  Panel Report, Japan – Apples , WT/DS245/R, para. 8.49;  
GATT Panel Report, Korea – Beef , BISD 36S/268, paras. 122-123. WT/DS267/R/Add.2 
Page I-280  
 
upland cotton in MY 2002.  Therefore, Brazil lo oks forward to the United States answering this 
question in full on 22 December.   7. Unfortunately, Brazil cannot calculate direct  payment and counter-cyclical payment figures 
because the United States refused to  produce on 18 December the info rmation requested by Brazil and 
the Panel.  In particular, the United States refused to provide farm-specific identifying numbers, thus 
rendering any matching of farm-level information on  contract payments with information on farm-
specific plantings impossible.  Only this unique farm number (or a substitute number protecting the alleged confidentiality of farmers)  would allow any matching of plan ting and payment data critical for 
the calculation of the amount of contract payments that constitute support to upland cotton.
9  T h e  
United States asserts newfound “confidentiality” concerns even though it provided identical 
information on rice to a private US citizen ma king a simple FOIA request.  But even these 
confidentiality concerns could not possibly apply to  aggregate matched figures that the United States 
could easily calculate with the data the United St ates admits it has collected.  On 12 January 2004, 
Brazil will provide a more detailed analysis of the US failure to cooperate in this proceeding by 
continuing to refuse to provide Brazil and th e Panel with the requested information.  
 8. In view of the US failure to produce the requested information that would allow Brazil and 
the Panel to calculate easily th e amount of direct and counter-cyclical payments (as well as PFC and 
market loss assistance payments for MY 1999-2001 ), Brazil must present below revised figures using 
its so-called “14/16
th” methodology.10  The figures represent the best information available and are 
corroborated by circumstantial evidence.  Moreover, in view of the US refusal to produce the actual 
information regarding direct payment and counter-c yclical payments, the Panel could reasonably infer 
that the actual amounts are greater than those estimated by Brazil.   
    
                                                     
 
9 Brazil pointed this out more than a month ago when it stated in its 18 November Further Rebuttal 
Submission, that “CCC-509 does indicate the quantity of base acreage fir each programme crop on the farm.  
Since both CCC-509 and FSA-578 require identification of the identical  ‘farm’ by a unique farm serial number, 
the base acreage from CCC-509 can be matched with the planted acreage in FSA-578.  What the United States 
has failed to do is ‘connect the dots,’ i.e., match the information in the two forms.”  (Brazil’s 18 November 
Further Rebuttal Submission, para. 44, emphasis in original, footnotes omitted). 
10 In view of the new information provided by the Un ited States in Exhibit US-95, Brazil has adjusted 
the total amount of contract payments by a ratio of 13.714 million acres of actual upland cotton plantings in MY 
2002 to 18.858 million acres of total upland cotton base. WT/DS267/R/Add.2 
Page I-281 
 
 
 
PROGRAMME PREVIOUS AMOUNT OF 
PAYMENTS11 NEW AMOUNT OF 
PAYMENTS 
MARKETING LOAN 
GAINS AND LDPS $918 MILLION $832.8 MILLION12 
CROP INSURANCE $194.1 MILLION $194.1 MILLION* 
(+ $104.2 MILLION13) 
($298.3 MILLION) 
STEP 2 $217 MILLION $217 MILLION* 
DIRECT PAYMENTS $485.1 MILLION $454.5 MILLION14 
COUNTER-CYCLICAL 
PAYMENTS $998.6 MILLION $935.6 MILLION15 
COTTONSEED 
PAYMENTS $50 MILLION $50 MILLION* 
OTHER PAYMENTS $65 MILLION $65 MILLION* 
TOTAL PAYMENTS $2,927.8 MILLION $2,749 MILLION 
($2,853.2 MILLION) 
* Brazil has no new information on the amount of these payments 
 9. Concerning the export credit guarantee progra mmes, Brazil estimates the amount of payments 
using the “guaranteed loan subsidy” estimate FY 2003 (which largely overlaps with MY 2002) results 
in a subsidy amount of $17 million.
16  In sum, the latest data available to Brazil continues to 
demonstrate that US support to upland cotton in  MY 2002 far exceeds the support decided in MY 
1992.    197. Please provide actual data for 2002/2003 for US exports, US consumption and per cent of world consumption to replace the projected data in Exhibit US-47.  If available, please provide projected data for 2003/2004 to replace the forecast data.  USA  198. Please comment on the respective merits of  the price-gap calculations of MY1992 
deficiency payments in US comments of 27 August, footnote 14 ($867 million), and Brazil's 
response to the Panel's Question No. 67 ($812 million).  BRA, USA 
                                                     
 
11 Taken from Table 1 of Brazil’s 9 September Further Rebuttal Submission. 
12 Exhibit Bra-373 (Loan Deficiency Payment and Price Support Activity as of 12/3/2003). 
13 Brazil notes that the United States also paid $104.2 million in fulfilment of its reinsurance 
obligations towards the insurance companies providing the insurance policies to upland cotton producers.  These 
payments also constitute support to upland cotton, but Brazil had so far not included them in its calculation of the total support to upland cotton.  This amount results from a MY 2002 loss ratio of 1.26, i.e., the 26 per cent of 
the $400,666,618 in indemnity payments were not covered by the Federal Crop Insurance Corporation or 
producer premium payments.  These $104.2 million were paid by the Federal Crop Insurance Corporation ( See 
Exhibit Bra-374 (“Crop Year Statistics MY 2 002” – Federal Crop Insurance Corporation). 
14 This calculation is based on total direct payments for upland cotton base of $625 million (US 27 
August Comments, Table at para. 28 reporting PFC payments for MY 2002 of $452 million and additional 
direct payments of $173 million).  This figure has been adjusted by the ratio of MY 2002 plantings (13.714 
million acres) and MY 2002 di rect payment base acreage  (18.858 million acres) ( See Exhibit US-95). 
15 Brazil has used the direct payment of $454.5 million and adjusted it by the ratio of the direct 
payment rate of 6.67 cent per pound basis and the CCP payment rate for MY 2002 of 13.76 cents per pound.  
16 Brazil refers the Panel to Exhibits Bra-333 (C otton: World Markets and Trade, USDA, October 
2003, Table 3) for the amount of cotton exports that were  covered by export credit gu arantees during the fiscal 
years that overlap with MY 2002 (FY 2002 and FY 2003).  Since the overlap is largel y with fiscal year 2003, 
Brazil has used the share of cotton export credit guarantees ($349.63 million) of the total guarantees made available ($5,953 million) under GSM 102 and GSM 103 in that year to calculated the amount of payments as 
estimated by the FCRA formula.  The original subsidy estimate for FY 2003 (taken from the 2004 budget) is 
$294 million.  The share attributable to cotton export credit guarantees would be $17 million. WT/DS267/R/Add.2 
Page I-282  
 
 Brazil’s Answer:
 
 
10. Brazil has no reason to disagree with the US calculations which appear based on information 
exclusively within the contro l of the United States.   
 
 
199. What is the composition of the A-Index?  We do note footnote 19 and, for example, 
Exhibit BRA-11, but please explain more in detail how this index is calculated. BRA 
 Brazil’s Answer:
 
 
11. Brazil refers the Panel to the statement made by Andrew Macdonald in Annex II of Brazil’s 9 
September Further Submission that provides consid erable detail about the calculation and formation 
of the A-Index.17  Further information is set forth in Exhibit Bra-375.18  The A-Index, along with the 
B-Index, are two important indices that summarize the price developments of the physical market in 
various countries around the world.  Both indices ar e published by Cotlook, Inc., a private company, 
and reflect an average price.19  As an index, it is not a trading or negotiable price, but a composite of 
quotations from the major producing origins around the world, much like a poll.  12.  The A-Index is published weekly by the Cotton Outlook and calculated daily based on daily 
cotton price quotes converted on the basis of delivery to Northern European ports.  The A-Index is 
generated based on Cotlook receiving daily inform ation as regards  quotations for upland cotton 
referring to 16 different origins.  The quotes ar e for an upland cotton described as quality Middling 
Grade with a 1 3/32” staple length.  The 16 quoted pr ices that are eligible for inclusion in the A-Index 
include prices for Brazilian Middling 1 3/32” upland cotton as well as prices for US Memphis and 
California/Arizona Middling 1 3/32” upland cotton.
20  The A-Index value of the day represents the 
average of the five cheapest quotes out of the 16 quot es that are considered for the index calculation.  
The price quotes are derived from a variety of phys ical markets, merchants and trade information, 
which is gathered telephonically and analyzed for consistency and logic.21 
 13. Andrew Macdonald testified that growers, consumers and traders perceive the A- (and B-
Index), along with the New York futures prices as reflecting the “world” market price for cotton.
22 
  
200. Concerning the chart on page 37 of Brazil's further rebuttal submission, why did Brazil 
use a futures price at planting time?  Is this a relevant measure for assessing acreage response?  
BRA  
Brazil’s Answer:
 
 
14. Brazil presented the nearby futures chart in its 18 November Further Rebuttal Submission23 to 
rebut US arguments that US producers allegedly respond to market price signals in making their 
                                                      
17 Brazil’s 9 September Further Submission, Annex II, paras. 22-25. 
18 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC). 
19 Brazil’s 9 September Further Submission, Annex II, paras. 22-25. 
20 The other quotes being Mexican Middling 1 3/32”, Paraguayan Middling 1 3/32”, Izmir/Ant St 
White 1 3/32”, Syrian Middling 1 3/32”, Greek Middling 1 3/32”, Spanish Middling 1 3/32”, Uzbekistan 
Middling 1 3/32”, Pakistan Punjab SG 1503 1 3/32”, Indian H-4/M each-1 1 3/32”, Chinese Type 329, 
Tanzanian AR Type 2, African “Franc Zone”  Middling 1 3/32” and Australian Middling 1 3/32”. 
21 Brazil’s 9 September Further Submission, Annex II, para. 22. 
22 Brazil’s 9 September Further Submission, Annex II, para. 22. 
23 Brazil’s 18 November Further Rebuttal Submission, paras. 81-82. WT/DS267/R/Add.2 
Page I-283 
 
 
planting decisions.24  Because the United States’ 18 Novemb er Further Rebuttal Submission focused 
on the December Futures price in February as th e relevant contract month to gauge producer’s 
revenue expectations,  Brazil presented a similar chart in its 2 December Oral Statement based on average December futures prices in January-March planting period.
25  Using December futures prices 
(like the nearby futures chart) confirms USDA’s economists – and the world’s leading cotton 
trader’s26 – conclusions that US subsidies make cotton producers largely unresponsive to market price 
signals.27  
  
201. Is data available to show the proportion of US upland cotton production sold under 
futures contracts, and the prices under those cont racts, at different times during the marketing 
year?  If so, please provide summarized versions to the Panel.  How does a futures sale impact 
the producer's entitlement to marketin g loan programme payments?  BRA, USA 
 
Brazil’s Answer:
 
 
15.  Brazil has reviewed the questions very carefully and regrets that it does not have a clear 
understanding of the meanings of the terms used.  Therefore, Brazil provides alternative answers 
depending on the possible intent of the questions/terms used.  Brazil regrets if it has misinterpreted the 
terms in the questions and would welcome the op portunity to provide additional comments if the 
Panel should so desire.   
 
16. The first question focuses on data relating to “cotton production sold under futures contracts. ”  
The term “futures contracts” could have several meanings in the context of this dispute.  First, if the phrase “production sold under futures contracts” means the amount of US production sold on a 
forward delivery basis, the answer is that Braz il has no access to any such data.  However, Brazil 
notes that all US upland cotton that is exported is for “future delivery” because it takes time to 
actually ship cotton from the United States, and some c ontracts are more “future” than other contracts.  
Theoretically, it would be possible to take the vo lume of US upland cott on exported each week and 
assume that it was sold at the average A-Index pri ce that week.  However, this would only be an 
estimate and would not necessarily reflect the pri ce received by the US producers, or the prices 
received by the exporter.  Prices received by US producers are tabulated by USDA and are before the 
Panel.
28  Average A-Index prices are also evidence before  the Panel and are found in Exhibit Bra-311.  
If this is the information sought by the Panel, Br azil would be pleased to provide an estimate.   
 17. If the phrase “production sold under futures c ontracts” means contracts for future delivery 
where the contract for sale contains a pricing clau se pegged to the New York futures price at the time 
of delivery, then the answer to the first question is “no,” i.e., there is no data that would provide the 
amount of production sold through such contracts.  The record contains evidence that Brazilian and 
Chad producers and purchasers of upland cotton use such clauses in their contracts.
29  Brazil has no 
access to information concerning the amount of US upland cotton sold through such contracts.   
 18. Finally, if the phrase “cotton production sold  under futures contracts” means the amount of 
US upland cotton that is sold through the New Yo rk cotton futures exchange , the answer is “very 
                                                     
 
24 Brazil’s 7 October Oral Statement, paras. 13-15.  Brazil’s 27 October Answers to Questions, paras. 
35-36. 
25 See e.g.  Brazil’s 2 December Oral Statement, para. 44. 
26 See Brazil’s Answer to Question 247 infra . 
27 Brazil’s 2 December Oral Statement, paras. 39-40. 
28 See e.g.  Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5) and various issues 
of USDA’s Cotton and Wool Outlook, Table 6. 
29 Brazil’s 9 September Further Submission, Annex II, para. 16;  Chad’s 8 October Oral Statement, 
para. 9 (Statement by Ibrahim Malloum). WT/DS267/R/Add.2 
Page I-284  
 
little.”  As Andrew Macdonald has indicated, the pur pose of the futures market is not for the buying 
or selling of physical cotton.
30  Rather, it is used for hedging position for growers and the upland 
cotton industry while the speculators in th e market provide the day-to-day liquidity.31  Physical 
delivery is theoretically possible in order to give reality to the market, i.e., it is always possible to take 
or give delivery of cotton at the expiration of the c ontract.  This ensures that the futures truly reflect 
the market and vice versa.  However, the volume normally delivered is very small compared to the 
total volume traded during the life of a contract.  Th is is because traders with long (or buy) futures 
contracts and traders with short (or sell) futur es contracts “close out” or “settle” the contracts by 
offsetting trades at the end of the contract peri od and, thus, no physical cotton is delivered.32   
 
19. With respect to the final question of whether a “futures sale impacts the producer's 
entitlement to marketing loan programme payments,”  the answer is “no.”  A producer is entitled to 
receive a marketing loan payment independent fro m any futures price or selling price that the 
producer may receive.  A producer receives a marke ting loan benefit if – after having taken out a 
marketing loan – he sells the upland cotton, i.e., loses the beneficial interest to the upland cotton, or 
foregoes the right to a marketing loan in favour of a LDP payment, which is paid upon ginning of the 
raw cotton.33  The process of marketing and selling the upland cotton in the United States or for 
export through forward contracts to supply upland co tton in the future, or contracts which set the price 
based on future New York futures market prices does not impact in any way the amount the US 
producer receives in marketing loan payments.  The amount of marketing loan payment solely 
depends on the difference between the loan rate an d the adjusted world price.  Whether the actual 
selling price is below or above the loan rate, or below or above the adjusted world price, has no 
impact on the amount of the marketing loan benefit.  The fact that producers may sell at prices above 
the adjusted world price means that they genera te a combined revenue from the market and the 
marketing loan programme that exceeds 52 cents per pound.  
 
202. Concerning paragraph 7 of the US oral st atement, are the expect ed cash prices shown 
for February only?  Can the US provide the prices  for January and March of each year as well?  
USA 
 
203. Please provide information concerning th e organization, mandate, credentials and 
standing of FAPRI.  BRA  
Brazil’s Answer:
 
 
20. The Food and Agricultural Policy Research In stitute (FAPRI) was established in 1984 by a 
grant of Congress and continues to be financed la rgely by the US Congress.  FAPRI is a unique dual-
university programme by the Center for Agricultura l and Rural Development (CARD) at Iowa State 
University34 and the Center for National Food and Agricultural Policy at the University of Missouri 
(Columbia),35 with researchers at the University of Mi ssouri focusing mainly on the domestic / US 
side of agriculture and researchers at Iowa St ate University focusing mainly on international 
agricultural issues.  FAPRI uses comprehensive da ta and computer modeling systems to analyze the 
                                                      
30 Brazil’s 9 September Further Submission, Annex II, para. 17. 
31 Brazil’s 9 September Further Submission, Annex II, paras. 14-15. 
32 The information in this paragraph was provided by Andrew Macdonald to counsel for Brazil during 
the week of 12 December. 
33 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 1-2). 
34 Exhibit Bra-376 (“About FAPRI,” Center for Agricultural and Rural Development, Iowa State 
University). 
35 Exhibit Bra-377 (“About FAPRI,” Food and Agricultu ral Policy Research Institute at the University 
of Missouri). WT/DS267/R/Add.2 
Page I-285 
 
 
complex economic interrelationships of the food and agriculture industry.36  FAPRI’s mission is to 
provide objective qualitative and quantitative analyses of  alternative US and international agricultural 
policies.   
 21. FAPRI is considered the leading US agricultu ral policy research institute and ever since the 
1985 farm bill
37 has conducted analyses of alternative po licies that have helped shape US farm 
legislation.  In July 2002, FAPRI received th e USDA Secretary’s Honor Award, the highest award 
bestowed by the US Department of Agriculture, for it s analysis of various farm bill proposals that led 
to the 2002 FSRI Act.38  Professor Bruce Babcock described the award as follows: 
 
This award recognizes the outstanding research effort by FAPRI at [Iowa State 
University] and [the University of] Missouri in analyzing policy proposals during the 2002 farm bill debate.  This group has dedicat ed itself to being the world’s best at 
conducting agricultural policy analysis.
39 
…  
World economic integration makes it increasingly vital that we understand the 
impacts of US policy decisions on US and world markets, producers and consumers.  Increasing numbers of policy proposals and their complexity requires that we continually update our analytical capabilities and our market intelligence.
40 
22. FARPI is the leading research institution that fulfills this task in the United States.  FAPRI 
prepares baseline projections each year for the US  agricultural sector and international commodity 
markets. The multi-year projections are published as FAPRI Outlooks,41 which provide a starting 
point for evaluating and comparing scenarios involving macroeconomic, policy, weather, and technology variables.
42  These projections are intended for use by farmers, government agencies and 
officials, agribusinesses, and others w ho do medium-range and long-term planning.43   
 
23. FAPRI describes its objectives as follows: 
 
• To prepare baseline projections for the US ag ricultural sector and international commodity 
markets. These multi-year projections are available in print and on the Web.  
 
• To examine the major commodity markets and analyze alternative policies and external 
factors for implications on production, utilization,  farm and retail prices, farm income, trade, 
and government costs.  
 
• To help determine effective risk management tools for crop and livestock producers, and to 
analyze how government policy affects risk management strategies.  
 
                                                      
36 Exhibit Bra-378 (“About FAPRI,” Food an d Agricultural Policy Research Institute). 
37 Exhibit Bra-379 (CARD Report, 40th Anniversary Commemorative Issue, Part 2, p. 1-2.)  
38 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest 
Honor,” CARD Press Release, 9 July 2002). 
39 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest 
Honor,” CARD Press Release, 9 July 2002). 
40 Exhibit Bra-380 (“Food and Agriculture Polic y Research Institute Receives USDA’s Highest 
Honor,” CARD Press Release, 9 July 2002). 
41 See http://www.fapri.iastate.edu/outlook2003. 
42 See http://www.fapri.iastate.edu/publications for all of FAPRI’s publications. 
43 Exhibit Bra-378 (“About FAPRI,” Food an d Agricultural Policy Research Institute). WT/DS267/R/Add.2 
Page I-286  
 
• To brief staff members of the US Senate and House Agriculture Committees on projections 
for US and world agricultural markets.  
 
• To disseminate research results through prin ted reports, staff presentations, and on the Web.
44 
 24. In sum, FAPRI is the most influential orga nization in the United States analyzing farm policy 
and its effects on US and world commodity markets, i.e., that has the highest reputation and 
experience in answering the kind of “but for” questions  faced by this Panel.  This is a fact implicitly 
recognized by Dr. Glauber who indicated on 2 Decemb er in responding to the Panel’s oral questions 
that the United States was not contesting FAPRI’s work or analysis but rather took issue with 
Professor’s Sumner’s modifications to and use of the FAPRI baseline.    
 
204. Which support to upland cotton is not captu red in the EWG data ref erred to in Brazil's 
18 November further rebuttal submission?  BRA 
 
Brazil’s Answer:
 
 
25. While Brazil believes that the EWG data is a useful indicator of the amount of support 
provided to producers of upland cotton, the EWG data undercounts the amount of support in several 
basic ways.  First, the database undercounts the amount of marketing loan payments reflected in 
FSA’s “LDP / Loan / Market Gain Activity” Su mmary Report by $572 million for MY 2000 through 
MY 2002.45  The EWG database also undercounts the amount of contract payments by $61 million in 
MY 2000 and MY 2001.46  This means that there are very like ly additional farms and recipients of 
upland cotton contract payments th at also received marketing loan payments, but that are not tracked 
by EWG data.    26. Second, as described more fully in Christopher Campbell’s statement in Exhibit Bra-316, the 
database also undercounts the percentage of cont ract payments to farms growing upland cotton, 
because marketing loan certificates are often purchased by partnerships, with the partnership receiving the payment from USDA.
47  There can be multiple partners in th ese partnerships that eventually get a 
portion of the marketing loan certificate payment.  These partners are not recorded in the EWG data 
as receiving marketing loan payment – thus as upland cotton producers – but they are, in fact, 
producers of upland cotton that will most  likely receive contract payments.   
 27. Third, current producers of upland cotton also  received contract payments from base acreage 
other than upland cotton.  The EWG database does not  readily permit the allocation of these payments 
without the application of a complex methodology requiring a number of assumptions.  Only farm-specific data exclusively controlled by the United St ates, which it continues to refuse to provide to 
Brazil and the Panel, would permit such a calculation. 
 28. The EWG data, however, provides corroborating evidence that Brazil’s “14
th/16th” 
methodology is a reasonable approximation of the am ount of contract payments that are support to 
upland cotton.  In view of the continued refusal of the United States to provide the requested 
information on contract payments and acreage matche d by farm, the Panel should infer that Brazil’s 
methodology of calculating these payments undercounts the actual amount of contract payments that constitute support to upland cotton. 
                                                     
 
44 Exhibit Bra-378 (“About FAPRI,” Food an d Agricultural Policy Research Institute). 
45 See Brazil 9 September Further Submission, Table 1 p. 4 and Exhibit Bra-316 (Statement of 
Christopher Campbell – Environmental Working Group). 
46 Compare  Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2 003, p. 6) with Exhibit Bra-
317 (EWG Database: Tables of Results, Table 2). 
47 Exhibit Bra-316 (Statement of Christopher Campbell, para. 13).   WT/DS267/R/Add.2 
Page I-287 
 
 
  
205. Does the United States accept or agree with the EWG data submitted by Brazil?  If not, 
please explain your reasons.  USA 
 
206. Please explain how the graph in paragraph 40 of the US further rebuttal submission was derived.  In so doing, please clarify whether the figures are on a cents per pound basis or some 
other basis.  What averaging method was used?  Can you prepare individual charts showing average US and Brazilian cotton prices for each  of those third country markets?  USA 
 
207. Please indicate whether any of the measures challenged in this dispute obliges  cotton 
farmers to harvest their crop in order to receive the benefit of the programme (subsidy).  USA 
 208. Please provide data for the marketing years 1992 and 1999-2002 of the "quantity 
of production to receive the applied administered price" ( Agreement on Agriculture , Annex 3, 
paragraph 8) for purposes of a  price-gap calcul ation of support through the marketing loan 
programme. USA   209. It is understood that the data in the graph in paragraph 5 of the US oral statement are 
as at harvest time, while the data in the graph in  paragraph 39 of Brazil's oral statement are as 
at planting time. Please explain why the trend of US acreage increase/decrease differs between 
these two graphs. BRA, USA   
Brazil’s Answer:
 
 
29. The trend between those two gr aphs differs because they provi de a different measure for US 
upland cotton acreage.  The graph at paragraph 5 of the US 2 December Oral Statement shows 
harvested  acreage, while the graph at paragraph 39 of Brazil’s Oral Statement shows planted acreage.  
The figures differ because not all planted US upland cotton is harvested.  The rate of abandonment 
that describes the difference between planted acr es and harvested acres is significant in the United 
States.  During MY 1996-2002 it varied between 3.6 per cent in MY 1997 and 20 per cent in MY 
1998.  The average for the period was 12.2 per cent.48  
 
30. Brazil notes that US upland cotton farmers natura lly reflect their planting decisions in planted 
– not harvested – acreage.  To analyze whether the planting decisions of upland cotton farmers in the 
United Sates are “congruent” to farmers in other pa rts of the world, it would be best to compare 
planted acreage figures.  Harvested acreage figures are a function of weather effects that may cause 
the abandonment of a significant portion of planted acreage.  This is relatively common in the arid 
cotton producing areas of the US Southwest and less common in the irrigated regions of the US West or in the high rainfall regions of the South.  Braz il also refers the Panel to its response to Question 
210.   210. Are worldwide planted acreage figures available?  BRA, USA 
 
Brazil’s Answer:
 
 
31. To the best of Brazil’s knowledge, there are no planted acreage figures available on a 
worldwide basis.  However, the fact that these figures do not or may not exist does not render the US 
harvested acreage graph valid for the purpose of ev aluating the responsiveness of the US farmer to 
world prices.    
                                                     
 
48 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4). WT/DS267/R/Add.2 
Page I-288  
 
32. Nonetheless, variations in harvested acreage could be a reasonable proxy for variations in 
planted acreage for the world outside the United Stat es.  The reason is that the relationship between 
planted acreage and harvested acreage on a worldwid e basis can be assumed to be relatively stable, 
i.e., weather-related problems likely lead to the aba ndonment of about the same percentage of planted 
acreage at the aggregate level each year.  Upland cotton is grown in many regions and worse than 
normal weather conditions in one region will be offset  by better than normal weather in other regions.  
But this is not the case when only an individual coun try such as the United States is analyzed because 
individual countries have more variab le weather.  This is particularly true for the United States with 
the considerable variance in aba ndonment in the Southwest.  Thus , for the United States, planted 
acreage is the appropriate measure of production decisions.  By contrast, on the worldwide level, high 
abandonment in one region would be compensated or balanced out by low abandonment in other 
regions.  On average, these differing trends woul d cancels each other out and worldwide harvested 
acreage would remain relatively stable over from year to year.    33. The following graph shows percentage ch anges in US planted acreage and percentage 
changes in non-US (harvested) acreage:
49   
 
Percent Change in Planted Acres
-20-15-10-5051015
1996 1997 1998 1999 2000 2001 2002
marketing yearpercentUS change
non-US change
 
 
As expected, the graph demonstrates that the decision-making process of US producers is quite 
different than that of non-US producers.  US planted acreage moved in opposite  directions to world 
harvested acreage between MY 1998-2000.  In MY 1996, 1997 and 2001, US planted acreage changes to a far greater extent  than non-US planted acreage.
50  Given those significant differences, for 
any valid statistical analysis, this graph could not  possibly be used to support a claim that planting 
decisions in the US were analogous to those made wo rldwide.  In fact, taken together with the other 
evidence that US producers are not  sensitive to market signals,51 this graph confirms that US 
producers are insulated from market forces and act  independently of competitors’ behavior.   
                                                      
49 The US planted acreage is taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 
2003, p. 4) and Non-US acreage is taken from Exhibit US-63. 
50 The non-US planted acreage is approximated by using non-US harvested acreage.  As discussed 
above, with a stable rate of abandonment, changes in  harvested acreage equal changes in planted acreage. 
51 Brazil’s 18 November Further Rebuttal Submission, Section 3.4 with further references. WT/DS267/R/Add.2 
Page I-289 
 
 
 34. The United States relies on its “harvested acr eage” chart to argue that “US producers have 
increased and decreased acr eage commensurately with producers in the rest of the world” relying on 
data for MY 1996-2002.
52  But even using this inappropriate harvested acreage chart, the same 
disconnect between US producers and other world pr oducers can be seen.  Only in two out of seven 
years is there a similar movement in the harvested acr eage of the US and the rest of the world.  In the 
other five years, the movement either goes in th e opposite direction or the magnitude of the acreage 
movement is much smaller or greater respectively.    35. These distinctly different reactions by US a nd non-US farmers are consistent with the fact 
that non-US farmers must actually deal with ma rket signals.  The significant production declines by 
Mato Grosso producers in MY 2000 and 2001 in the face of record low prices (even though they are among the world’s highest yield and lowest co st producers) illustrate this point well.
53  In addition, the 
fact that US farmers’ planted acreage did not significantly decline in MY 1999-2002 is totally 
inconsistent with the considerable  exchange rate increases of the US dollar during the same period.   
 
36. Finally, even in MY 2002 when US acreage movements were relativel y consistent with the 
rest of the world, the effect of the US subsidi es significantly dampened the decrease in US acreage.  
As Professor has demonstrated, the US planted acreage in MY 2002 would have been 7.5 million 
acres without US subsidies not the 13.7 million acres actually planted.54  Thus, the effect of the US 
subsidies is better estimated by examining the amount  (or level) of US planted acres, rather than 
percentage changes in which the graph moves.  We re it not for the US subsidies, the US downward 
trend in MY 2002 would have been much sharper, as a large number of inefficient cotton producers 
would have chosen not to plant or would have switched crops.   
 
211. Brazil presents a graph in paragraph 59 of its further rebuttal submission indicating the 
increasing cumulative loss incurred by cotton pr oducers.  Please comment on the argument that 
US cotton producers could not continue operati ng without subsidies.  In particular: 
  (a) to what extent does the use of 1997 survey technological coefficients with 
annually updated values affect the results?  
 
 (b) to what extent do producers base pl anting decisions on their ability to cover 
operating costs but not whole farm costs? USA   
 212. Brazil states in paragraph 37 of its oral statement that studies of Westcott and Price found that the effect of the programme on cotton is  to add an additional 1 to 1.5 million acres 
during marketing years 1999-2001 and to suppress US prices by 5 cents per pound. Does the US 
reject these findings? Why or why not? USA    213. What differences, if any, can be observed  in the results of econometric models in the 
literature which use lagged prices and those which use futures prices to analyse the effect of prices on planting decisions?  BRA, USA 
 
                                                     
 
52 US 2 December Oral Statement, para. 5.  This da ta is different from the one  contained in the above 
graph, as it is based on US harvested acr eage data rather then planted acreage. 
53 See Exhibit Bra-283 (Statement by Christopher Ward – 7 October 2003). 
54 Brazil has applied the percentage change as estimated by Professor Sumner in Brazil’s 9 September 
Further Submission, Annex I, Table I.5a.   WT/DS267/R/Add.2 
Page I-290  
 
Brazil’s Answer:
55 
 37. Econometric simulation models of the sort used by Professor Sumner, USDA and other independent economic analysts have not used futur es markets in their projections or counterfactual 
analysis.  Instead, analysts have used either lagge d prices and revenues or some variant of lagged or 
actual realized prices or revenues as the representation of grower expectations.  Thus, there are no 
comparisons that one could make in this regard.    38. As previously noted, “it is impossible to  know what precisely individual farmers expect”
56  
because price expectations of farmer s are “fundamentally unobservable.”57  It is important to note that 
USDA economists Westcott and Price, like Professo r Sumner, have used and relied on the same 
retrospective analysis of the effects of marketi ng loans using so-called “lagged prices” – not futures 
prices.  The United States notes that the use of a fu tures price analysis for MY 2002 is not possible for 
“multi-commodity modeling frameworks for extended time projection.”58  The United States accepts 
that FAPRI, USDA and the US Congressional Budget Office use lagged prices rather than futures 
prices as proxies for price expectations.59  And Dr. Glauber indicated during the second Panel meeting 
on 3 December that the United States accepts the FA PRI modeling system as a valid means to analyze 
the questions faced by this Panel.  39. The statistical estimation literature in agricu ltural economics has used a variety of proxies for 
anticipated prices and revenue for the upcoming seas on.  These include rational expectations in which 
many sources of information available to decision makers are combined and the expectations are 
consistent with the conditional forecasts of the mode l.  Such models have strong theoretical grounding 
but have been impractical in most estimation situations.  40. No systematic survey has been undertaken of  the very large statistical literature estimating 
supply functions to study how estimates differ ba sed on assumed models of the formation of 
expectations.
60  In a recent study for rice, McDonald and Sumner61 found that most published articles 
for rice (another US programme crop with comple x government programmes) used a variant of 
lagged information to project prices and future re venue per acre.  None of the rice estimates used 
futures markets.  
41. Across a wide variety of commodities, no syst ematic differences are noticeable in estimated 
supply or acreage response depending on how expecta tions of prices and other revenue terms are 
represented in the model.  That is, there is no evid ence that the estimated acre response elasticity are 
systematically lower or higher using futures market s to represent the price that then enters the 
projected relative net revenue function used for estimation. 
 
42. Finally, if the United States were right (whi ch it is not) that futures prices are a better 
indicator of farmers’ price expectations, then Professor Sumner’s results are not wrong , but 
                                                     
 
55 The information and analysis in this answer was provided by Professor Sumner. 
56 Brazil’s 9 September Further Submission, Annex I, para. 18. 
57 Exhibit Bra-279 (Statement of Professor Sumner – 7 October 2003, para. 9).   See also  Exhibit Bra-
361 (Cotton Pricing Guide, July 2001) containing guidance for farmers to take planting and marketing decisions. 
58 US 7 October Oral Statement, para. 34.   
59 US 7 October Oral Statement, para. 34.   
60 Exhibit Bra-306 (Lin, William, Paul C. Westcott, R obert Skinner, Scott Sanford, and Daniel G. De 
La Torre Ugarte.  Supply Response Under the 1996 Farm Act and Implications for the US Field Crops Sector , 
TB-1888, US Department of Agriculture, Economic Research Service, July 2000) provides a survey of the 
literature and cites mostly studies that use a variant of  lagged prices.  Lin et al. use both lagged prices and 
futures markets to represent expectations. 
61 Exhibit Bra-381 (Jeffrey D. McDonald and Daniel A. Sumner. “The Influence of Commodity 
Programmes on Acreage Response to Market Price: With an Illustra tion concerning Rice Policy in the 
United States.” American Journal of Agricultural Economics, (85) 4  (November 2003): 857-871).  WT/DS267/R/Add.2 
Page I-291 
 
 
conservative .  This is, because, as a matter of statisti cal theory, the more precise the proxy for 
expected price or revenue, the larger the coeffici ent of supply response.  For example, in regression 
estimations, when an explanatory variable is measur ed with error, the regression coefficient tends to 
be biased toward zero, thus undercounting the significance of the variable.  When there is less error in 
measurement ( i.e., the imperfectly measured proxy variable  becomes more accurate) the regression 
coefficient tends to be larger.62  In the present context, this means that if futures market prices were 
better proxies for farmers’ expectations, the estimated  coefficient of the price or revenue effect on 
acreage (the acreage response elasticity) would be  larger.  It follows th at the estimated acreage 
response elasticity would be too low in the FAPR I model.  US acreage would respond stronger to 
changes in relative cotton revenue than estimated in the FAPRI models.  In the context of the 
Professor Sumner’s simulation analysis, that would m ean larger US supply response to expected price 
and revenue changes, and thus hi gher supply and export response to government programme benefits.  
In sum, Professor Sumner’s results, which are b ased on FAPRI elasticity estimates, would not be 
wrong, but would underestimate the amount of ad ditional acreage, production and exports from US 
policy incentives. 
 
III. Domestic Support 
 
214. Please provide a copy of regulations regar ding the marketing loan programme and loan 
deficiency payments published at 58 Federal Register 15755, dated 24 March 1993.  What does this regulation indicate about the target price?  USA 
 
215. Please expand or comment on the statemen t at paragraph 91 of the US further rebuttal 
submission that the counter-cyclical target pric e ceases to be paid when the farm price rises 
above 65.73 cents per pound.  In this scenario , should the Panel disregard Direct Payments?  
BRA, USA 
 
Brazil’s Answer:
 
 
43. It is correct that the CCP payments cease wh en average US farm prices for the marketing year 
received by US farmers rise above 65.73 cents per pound.  But this has only happened four times 
since the 1930s and the last time was seven years ago in MY 1996.  In MY 2002, the average price 
received by US farmers was 40.50 cents per pound.63  Through November 2003, MY 2003 average 
price received by US farmers was 58.5 cents per pound.64  Indeed, the first CCP payment has been 
made for MY 2003.65   
 44. The impact of the direct payments has b een analyzed and quantified by Professor Sumner 
who found, using the FAPRI November 2002 baselin e, that in MY 2002 direct payments added 
120,000 acres to US upland cotton production.
66   
 45. Even in the highly unlikely even t that expected US farm prices were to exceed the CCP target 
price of 72.4 cents per pound for MY 2004
67 (prices that have occurred only twice in the past 
75 years), direct payments would still be made a nd US producers would still require direct payments 
                                                      
62 See e.g. William H. Green, Econometric Analysis, 5th edition, 2002, Prentice Hall or any standard 
textbook on regression analysis.  
63 Exhibit Bra-202 (Agricultural Outlook Tables, USDA, August 2003, p. 5).  
64 Exhibit Bra-382 (Cotton and Wool Outlook, USDA, 12 December 2003, Table 6) for September to 
November 2003 and Exhibit Bra-328 (Cotton and Wool Outlook, USDA, 14 October 2003, Table 6) for August 2003. 
65 Exhibit Bra-340 (“USDA Announces First Partia l 2003-Crop Counter-Cyclical Payments,” USDA 
Press Release, 17 October 2003). 
66 Brazil’s 9 September Further Submission, Annex I, Table I.5a. 
67 US farm prices have exceeded 72.4 cents per pound  only twice in 75 years – in MY 1995 and in MY 
1980.  Exhibit Bra-4 (“Fact Sheet Upland Cotton,” USDA, January 2003, p. 5).   WT/DS267/R/Add.2 
Page I-292  
 
to cover the total cost of current production.  Th ese payments, like the other payments in the package 
of cotton subsidies, are essential to maintain past , current, and future high levels of US upland cotton 
production.
68  Thus, they must be taken into account in assessing the production-distorting effects they 
caused in MY 2002 as well as today in MY 2003.    
46. Brazil recalls that even if fu tures price were to indicate that US farm prices will be at or 
somewhat above the target price, the programme has a significant impact on planting decisions.  At 
planting time, the producer still is unsure on whethe r or not the target price will be met during the 
following marketing year.  Given the considerable price fluctuations and the low prices in the MY 
1997-2002 period, there is a significant risk that actua l prices will be lower than the futures market 
predicts.  The direct and counter-cyclical payments remove the risks of lower prices.  The evidence of 
a long-term lack of any significant US acreage r esponse to higher or lower prices since MY 1996 
demonstrates that US producers have and will c ontinue to plant upland cotton because they face no 
downside revenue risk.  Professor Sumner outlined this  effect when he responded to a similar question 
by the Panel at the second meeting with the parties.
69  This reinforces the argument that the Panel 
cannot disregard these payments in the scenario described in the question. 
  
216. How many times have upland cotton pro ducers been able to update their base acres 
since 1984?  How do upland cotton producers come to  note the possibility of future updating?  
Please provide examples of relevant material.  BRA, USA 
 
Brazil’s Answer:
 
 
47. Under the deficiency payment programme as  provided by the 1985 and 1990 Farm Acts, 
farmers were offered the option to update the am ount of acreage participating in the programme each 
year.  To do this, they were required to opt out of the programme and receive no payments during the 
period in which they increased the amount of acreage planted to the programme crop.  Relatively few 
upland cotton farmers took advantage of this pr ogramme feature because th e costs of forgoing 
payments in the current year generally outweighed the present value of benefits of higher base acres 
and base yield in the future.    
48. In the 1996 FAIR Act, farmers establis hed their production flexibility base acreage by 
carrying over the would-be deficiency payment base  acreage.  For example, any producers of upland 
cotton during the period MY 1991-1995 were entitled to place such acreage into the PFC programme 
along with any acreage that had been in the con servation programme and was released from that 
programme in MY 1996.
70  Unlike the 1985 and 1990 Farm Acts, the 1996 FAIR Act did not 
authorize any acreage or yield updates by individual farmers during later years.  In the 1996 FAIR 
Act, Congress essentially told farmers they should take advantage of planting flexibility and that 
planting alternative crops would not affect the amo unt of their payments.  However, several years 
after 1996, as commodity prices began to decline, mome ntum for an update in the next farm act began 
to build.  Many upland cotton farmers and others ar gued that their historical acreage and yields no 
longer reflected the reality of their current productio n and that they needed additional payments on 
their increased programme crop acreage.  These upland cotton and other programme crop growers 
                                                      
68 Brazil’s 18 November Further Rebuttal Submission, para. 26 citing, inter alia , the National Cotton 
Council. 
69 Exhibit Bra-371 (Simple Example of the Calcul ations of Marketing Lon Benefits (Probability 
Distribution). 
70 Any such former deficiency payment base being released from the conservation programme could be 
added to the PFC base once the land left the conservation programme. WT/DS267/R/Add.2 
Page I-293 
 
 
including wheat, feed grains, and rice pressure d Congress to include updating of acreage and yield 
bases in the 2002 Farm Bill.71   
 49. The 2002 FSRI Act provided fo r the opportunity for all farmers to update their base acreage 
for purposes of the direct payment programme and to update their base acreage and base yields for 
purposes of the counter-cyclical payment progra mme.  They could do this without having to 
temporarily opt out of the programmes, which they  needed to do under the deficiency payments 
programme.  The 2002 update and the individu al deficiency payment updates during 1985-1995 
established the principle that acreage and yield ba se updates are a part of the farm policy in the 
United States.  Even though no updates are explicit ly provided for during the lifespan of the 2002 
FSRI Act, farmers may reasonably expect future updates,  either as a part of ad hoc legislation or as a 
part of the regularly scheduled new law in 2007.    50. The pressure for updates will come especially fro m farmers who were not in a position to take 
advantage of the 2002 update having switched aw ay from higher per-acre payment crops like upland 
cotton or rice.  For example, farmers who had plan ted less than their full upland cotton base to upland 
cotton in the MY 1998 to 2001 period would likely have found the acreage update unattractive.  But, 
since the yield update was only av ailable to farmers who updated acreage, these farmers also missed 
the opportunities to update yields.  These farmers expressed deep disappointment in 2002 that they 
had used planting flexibility, only to find that th ey were penalized by not being allowed to update 
payment yields.  These farmers saw the update of 2002 by farmers who had stayed in upland cotton 
production during MY 1998-2001 as unfair  and look to have this redressed in the next revision of the 
programmes.  Many of those (non-updating) farmer s are now planting their full upland cotton base (or 
more) and are maintaining high and expanding inputs  to expand their yields in order to be in a 
position to take advantage of an anticipated base upd ate at the next opportunity.  These farmers will 
add to the political pressure to upda te base in 2007, if not before. 
 
217. What is the reason for reducing payments under the PFC and direct payments 
programmes for planting and harvesting fruit, vege tables and wild rice on certain base acreage?  
Please comment on the statements by the Eu ropean Communities that "the reduction in 
payment for fruit and vegetables, if the EC underst ands correctly, is in fact designed to avoid 
unfair competition within the subsidising Member." (EC oral statement at first session, first 
substantive meeting, paragraph 29) and "To find otherwise would not permit a WTO Member 
wishing to introduce decoupled payments to take  account of important elements of internal 
competition (…)" (EC response to Panel third party Question No. 5).  USA  218. Please comment on the testimony of USDA Chief Economist Keith Collins cited in 
paragraph 36 of Brazil's oral statement regar ding the trade-distorting and production-
distorting nature of the marketing loan payments.  USA   
 
IV. Export Credit Guarantees 
 
219. Under the Agreement on Agriculture  the general position is that the use of export 
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e) which 
are not so listed, may only be used within the limits of the product specific reduction commitments specified in Part IV of Members' Schedules.  One might therefore have expected 
that Article 3.3 of the Agreement on Agriculture  would have prohibited the use of both listed and 
non-listed export subsidies in excess of reduction  commitment levels in the case of scheduled 
products and, in the case of non-scheduled prod ucts, would have simply prohibited the use of 
any export subsidy.  Instead, the Article 3.3 pr ohibition is limited in both cases to export 
                                                     
 
71 See e.g. Exhibit Bra-41 (Congressional Hearing, “The Future of Federal Farm Commodity 
Programmes (Cotton),” House of Representatives, 15 February 2001, p. 4, and 24).  WT/DS267/R/Add.2 
Page I-294  
 
subsidies listed in Article  9.1. What significance,  if any, does this contextual aspect have for 
how Article 10.2 might be interpreted having regard, inter alia , to:  
 
(a) the fact that export performance-relat ed tax incentives, which like subsidised 
export credit facilities were considered  as a possible candidate for listing as an 
Article 9.1 export subsidy in the pre-December 1991 Draft Final Act 
negotiations, have been held (for example, in United States – Tax Treatment for 
Foreign Sales Corporations , WT/DS108) to be subject to the anti-circumvention 
provisions of  Article 10.1; and  
 
(b) the treatment of international food aid and non-commercial transactions under 
Article 10?  USA  
 220. What will be the relevance of Articles 9 and 10.1 of the Agreement of Agriculture  to 
export credit guarantees when discipl ines are internationally agreed?  BRA 
 
Brazil’s Answer:
 
 
51. The relevance of Articles 9 and 10.1 of  the Agreement on Agriculture following the 
conclusion of the negotiati ons called for by Article 10.2 of th e Agreement necessarily depends on the 
commitments that are negotiated.  Brazil does not know what the outcome of the negotiations will be, 
or what commitments, if any, parties will unde rtake.  Nor does Brazil know in what way those 
commitments would be brought into the WTO – automatically, via the cross-reference in Article 10.2, 
or instead via amendments to the Agreement on Agricultu re or the SCM Agreement, or yet some 
other means.  The nature of the disciplines negot iated and the way in which those disciplines are 
transposed into the WTO will dictate the effect th ey will have on Articles 9 and 10.1.  With these 
important reservations about the purely hypothetical nature of this exercise, Brazil will explore a 
number of possible outcomes and the impact tho se outcomes would have on Articles 9 and 10.1.  
 52. One possible outcome is that negotiators will reach agreement on other types of export 
credits, but that export credit guarantees will not be in cluded.  In Brazil’s view, this would mean that 
export credit guarantees would con tinue not to be among those per se export subsidies listed in 
Article 9.1, and would continue to be subject to Ar ticle 10.1, to the extent that they constitute export 
subsidies and circumvent (or threaten to circ umvent) a Member’s export subsidy commitments. 
 53. Another possible outcome is an amendment to Article 9.1 that would add export credit 
guarantees (or possibly those export credit guarantees i ssued or programmes maintained on particular 
terms or conditions) to the list of per se  export subsidies.  Article 10.1  would no longer be applicable, 
since export credit guarantees would no longer be “[ e]xport subsidies not listed in paragraph 1 of 
Article 9 … .”  54. Yet another possible outcome is agreement to subject export credit guarantees to the same 
type of notification, consultation and informa tion exchange disciplines agreed in the OECD 
Arrangement on Officially Supported Export Credits for industrial products (“OECD 
Arrangement”).
72  For example, the OECD Arrangement includes provisions regarding:  prior 
notification of derogations, permitted exceptions, matching of derogations, permitted exceptions, non-
conforming non-notified terms, and terms granted by countries that are not parties to the OECD 
Arrangement.  The United States now char acterizes such disciplines as “pedestrian.”73  In Canada – 
Aircraft II , however, the United States characterized these provisions and the disciplines they 
                                                      
72 See OECD Arrangement on Guidelines for Officia lly Supported Export Credits, Chapter IV 
(Sections 1-5) available at http://w ww.oecd.org/dataoecd/52/3/2763846.pdf. 
73 US 3 December Closing Statement, para. 3. WT/DS267/R/Add.2 
Page I-295 
 
 
provided as central to the “entire logic” of the OE CD Arrangement, and as a critical way to prevent “a 
subsidy ‘race to the bottom.’”74 
 55. Under this outcome, export credit guarant ees would continue not to be among those per se 
export subsidies listed in Article 9.1, and would conti nue to be subject to Article 10.1, to the extent 
that they constitute export subsidies and circumvent  (or threaten to circumvent) a Member’s export 
subsidy commitments.  Under WTO jurisprudence, th e provisions regarding notification, consultation 
and information exchange would be read cumulati vely with Article 10.1, since the obligations 
imposed would not be mutually excl usive or mutually inconsistent.
75 
 
56. Another possible outcome would be agreemen t on alternative benchmarks against which to 
determine whether export credit guarantees and e xport credit guarantee programmes would constitute 
export subsidies.  In determining what constitu tes an “export subsidy” within the meaning of 
Article 10.1, the Appellate Body’s decisions in US – FSC76 and Canada – Dairy77 currently direct the 
Panel to refer to contextual gui dance included in Articles 1 and 3 of the SCM Agreement and in item 
(j).78  Were agreement one day reached on alterna tive benchmarks following negotiations pursuant to 
Article 10.2, that agreement might provide relevant context for a pa nel to determine what constitutes 
an “export subsidy” for the purposes of Article 10.1 .  Alternatively, it might serve as “subsequent 
practice,” pursuant to Article 31(3)(b) of th e Vienna Convention on the Law of Treaties,  indicating 
the interpretation of the term “export subsidy”  that the Members intend for the purposes of 
Article 10.1.79 
 
57. Under this outcome, export credit guarant ees would continue not to be among those per se 
export subsidies listed in Article 9.1.  Moreover, they  would continue to be subject to Article 10.1, to 
the extent that they constitute export subsidies, and to  the extent that they circumvent (or threaten to 
circumvent) a Member’s export subsidy commitm ents.  The difference would be that the 
interpretation of the term “export subsidy” might be based, among other things, on the context or 
evidence of “subsequent practice” offered by the newly-negotiated alternative benchmark. 
  
221. In respect of the table in paragraph 161 of the US August 22 rebuttal submission 
(concerning the cohort specific treatment of ex port credit guarantees), the Panel notes the 
subsequent US agreement (footnotes 82 and 96 in  US further submission of 30 September 2003; 
footnote 160 in US 18 November further rebutta l submission) to Brazil's assertion (footnote 67 
in Brazil's 27 August 2003 comments on US rebutta l submission) that the total figure net of re-
estimates should be $230,127,023 instead of the figure which originally appeared ($381,345,059). 
                                                     
 
74 Panel Report, Canada – Aircraft II , WT/DS222/R, Annex C-2, paras. 12-13 (Third Party Submission 
of the United States, 22 June 2001). 
75 See e.g. Appellate Body Report, Guatemala –Cement , WT/DS60/AB/R, paras. 66, 73-74;  Panel 
Report, Indonesia – Automobiles , WT/DS54, para. 14.28.   
76 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 136-140. 
77 Appellate Body Report, Canada – Dairy , WT/DS103/AB/R and WT/DS113/AB/R, para. 87-90. 
78 See Brazil’s 24 June First Submission, paras. 258-261. 
79 The extent to which alternative benchmarks agre ed pursuant to negotiations under Article 10.2 
qualify as relevant context for or as “subsequent practice” regarding the interpretation of the term “export 
subsidy” in Article 10.1 will depend, in part, on the form the agreement ta kes.  If agreement is reached among 
only the 10 WTO Members that participated in OECD di scussions on agricultural export credit disciplines, it 
will be difficult to argue that the agreement serves as re levant context for interpretation of Article 10.1, which is 
applicable to 146 Members.  Nor would such an ag reement constitute evidence of “subsequent practice.”  See 
Appellate Body Report, Chile – Agricultural Products (Price Band) , WT/DS207/AB/R, para. 213 (defining 
“subsequent practice” as “a ‘concordant, common and consis tent’ sequence of acts or pronouncements which is 
sufficient to establish a discernible pattern implying the agreement of the parties [to a treaty] regarding its 
interpretation.”).  See also Appellate Body Report, Japan – Alcoholic Beverages , WT/DS8/AB/R, 
WT/DS10/AB/R, WT/DS11/AB/R, p. 12-17. WT/DS267/R/Add.2 
Page I-296  
 
 
(a) Please submit a corrected table reflect ing all of the necessary information to 
produce this result, to the extent this is possible for the reasons indicated in 
footnote 96 in US further submission of 30 September 2003.  
 
(b) Please clarify whether and how the Panel should treat the figures in Exhibit 
BRA-182 for the net lifetime re-estimates for each respective cohort.   
 (c) The Panel notes that the CCC 2002 financial statement in Exhibit BRA-158 
refers to annual "administrative" expen ses of $4 million, and that the US has 
also referred to this figure in its submissions (e.g. US first written submission, 
paragraph 175).  Please confirm whether the figures in the table in paragraph 161 of the US August 22 rebuttal submis sion (or a corrected version thereof) 
includes "administrative expenses", of approximately $4 million per year over the period 1992-2002, and explain why (or why not) this affects the substantive 
result.  
 
Brazil’s Comment:
 
 
58. With respect to the $4 million of administ rative expenses for the CCC guarantee programmes, 
Brazil draws the Panel’s attention to Congressi onal testimony by the administrator of the 
programmes, General Sales Manager Christopher Goldth wait.  This testimony is included on pages 
20-21 of Exhibit Bra-87.  Mr. Goldthwait’s testimony clarifies that premiums charged by the CCC are sufficient to cover these administrative expenses, but not other costs and losses of the programmes. 
 59. A member of Congress posed the followi ng question to Mr. Goldthwait and August 
Schumacher, USDA’s Under Secretary for Fa rm and Foreign Agricultural Services: 
 
Is [the GSM] programme operated at essentia lly no net costs to the US Government?  
By that what I mean putting to one side the Iraq and the Poland experiences which 
you outlined earlier in your response to questi ons, do we charge fees that reflect the 
cost of administering the programme and the risk that is involved, the default, things 
such as that , or is this a programme which is subsidized at a fairly significant level by 
the Federal Government?  (emphasis added)   
Mr. Goldthwait’s response was as follows: 
 
Yes.  The programme is from the administrative standpoint  at least pretty much self-
financing.  We do collect fees.  The fee structure is relatively modest.  We keep the 
fees low because the legislation has limited us to no more than 1 per cent.  But, nonetheless, we collect several million dollars a year in fees, and that enables us to 
say that effectively the administrative cost  of running the programme are more than 
covered .  Now, that money does not come direc tly to us at the USDA, it goes to the 
general Treasury account, but the amount of the money is more than enough to cover 
the administrative costs of the programme . (emphasis added) 
60. Thus, although the question asked whether f ees covered “the cost of administering the 
programme and the risk that is involved, the default, things such as that,” Mr. Goldthwait, the 
administrator of the CCC guarantee programmes, res ponded that fees “at least pretty much” covered 
only “the administrative cost of running the programme.”  Mr. Goldthwait could not state that the fees 
collected also cover “the risk that is involved, the default, things such as th at,” since, as Brazil has 
established, fees for the CCC guara ntee programmes are not set to (see comment to question 223) and 
in fact do not cover those risks and defaults.    WT/DS267/R/Add.2 
Page I-297 
 
 
(d) Please identify what is considered an "a dministrative expense" for this purpose.   
 (e) The Panel notes the US statement in paragraph 160 of its answers to Panel 
questions following the first meeting that  all cohorts are still open although the 
1994 and 1995 cohorts will close this year.  Is  this still an accurate statement?  If 
not, please indicate whether any cohort s have since "closed" for the period 1992-
2002.   
 (f) The Panel notes the current "high" fi gures for 1997 and 1998 indicated in the 
original US chart.  Pending their confirmation and/or updating by the US, why 
does the US assert that a cohort will necessarily reach a "profitable" result (for 
example, the 1994 cohort, which has almost closed still indicates an outstanding amount)?  Do "re-estimates" reflect also  expectations about a cohort's future 
performance?  
 Brazil’s Comment:
 
 
61. Brazil reserves the right to comment on the US response, but would like to provide a 
preliminary comment on the last part of the Panel’s question.  To a certain extent, reestimates do reflect expectations about a cohort’s future perfo rmance.  Agencies are to  undertake two types of 
reestimates – interest rate and technical reest imates.  The Office of Management and Budget 
(“OMB”) defines these two types of reestimates in the following way: 
  Two different types of reestimates are made:  
• Interest rate reestimates, for differences between interest rate assumptions at the time of 
formulation (the same assumption is used at the time of obligation or commitment) and the 
actual interest rate(s) for the year(s) of disbursement; and 
 
• Technical reestimates, for changes in technical assumptions.
80 
 62. One purpose of technical reestimates is “to ad just the subsidy estimate for . . . new forecasts 
about future economic conditions, an d other events and improvements in the methods used to estimate 
future cash flows.”
81  The OMB also states that one purpose of technical reestimates is to record 
“changes in assumptions about future cash flows.”82 
 
 
(g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its 
examination, as suggested in paragr aph 198 of the US further rebuttal 
submission?  
 (h) Why should the Panel "eliminate", in  addition, the 2000 cohort, as also 
suggested in paragraph 198 of the US further rebuttal submission for which information is presumably more "complete"?   
 
(i) Under the US approach, at what point in time could a Panel ever make an 
assessment of the programme, if it had to wait for each cohort to be completed 
before it could be "properly" assessed?  Wh y is it inappropriate for the Panel to 
                                                     
 
80 Exhibit Bra-116 (OMB Circular A-11, p. 185-15). 
81 Exhibit Bra-116 (OMB Circular A-11, p. 185-16). 
82 Exhibit Bra-163 (“Introduction to Federal Credit Budgeting,” OMB Annual Training, 24 June 2002, 
White House Conference Center, p. 32). WT/DS267/R/Add.2 
Page I-298  
 
include these "most recent years" in its evaluation, as the US suggests in 
paragraph 199 of its 18 November further rebuttal submission?  USA  
 
222. For GSM 102, 103 and SCGP, please provi de year-by-year amounts from 1992 to 2003 
with respect to: (i) cumulative outstanding guar antees; (ii) claims paid; (iii) recoveries made; 
(iv) revenue from premiums; (v) other current revenue, including interest earned; (vi) interest 
charges paid; and (vii) administrative costs of  running the programmes.  Please indicate any 
allocation methodologies used to calculate administrative costs.  USA  223. Are the premium rates applicable to GSM 102, 103 and SCGP subject to regular review 
as to their adequacy in enabling the opera ting costs and losses associated with these 
programmes?  If so, what criteria or benchmarks  are taken into consideration for this purpose? 
Secondly, how do the premium ra tes applied compare with the implicit cost of forfaiting 
transactions and with premiums fo r export credit insurance?  USA 
 Brazil’s Comment:
 
 
63. Brazil reserves the right to comment on the US response, but would like to provide a 
preliminary comment on the first part of the Panel’ s question.  First, Brazil notes that premium rates 
for the three CCC guarantee programmes are not subject to regular review.  In audit reports of the 
CCC’s fiscal year 2000 and 2001 financial statem ents, USDA’s Office of the Inspector General 
confirmed that “the fees CCC charges for its GSM-102 and GSM-103 export credit guarantee 
programmes have not been changed in 7 years and may not be reflecting current costs.”83  T w o  
changes have been made, in the fee schedule for GSM 102, since November 1994:  (i) for a 12-month 
guarantee with semi-annual repayment intervals,  the fee was changed from $0.209 per $100 of 
coverage to $0.229 per $100 of c overage; and (ii) borrowers are now  offered the additional option of 
30- and 60-day guarantees, at the same fee charge d for 90-day and 4-, 6- and 7-month guarantees.84 
 64. Moreover, the US General Accounting Offi ce (“GAO”) analyzed CCC’s failure to charge 
guarantee fees that take account of country risk or  the creditworthiness of individual borrowers.  The 
GAO emphasized that CCC’s failure to do so means th at it lacks the flexibility to cover the costs and 
losses of the programmes: 
 
Although GSM-102 recipient countries vary si gnificantly from one another in terms 
of their risk of defaulting on GSM-102 lo ans, CCC does not adjust the fee that it 
charges for credit guarantees to take account  of country risk.  CCC fees are based 
upon the length of the credit period and the num ber of principal paym ents to be made.  
For example, for a 3-year GSM-102 loan with semiannual principal payments, CCC 
charges a fee of 55.6 cents per $100, or 0.56 per cent of the covered amount.  For 3-year loans with annual principal payments, the fee is 66.3 cents per $100.
[ ]  CCC fees 
that included a risk-based component might not cover all of the country risk, but they could help to offset the cost of loan defaults.
85 
                                                      
83 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT 
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000, 
Audit Report No. 06401-14-FM (June 2001), p. 31).  See also  Exhibit Bra-154 (US Department of Agriculture 
Office of Inspector General Great Plains Region Audit Re port of the Commodity Credit Corporation’s Financial 
Statements for Fiscal Year 2001, Audit Report No. 06401-4-KC (February 2002), p. 49 (“[T]he fees CCC charged for its GSM-102 and GSM-103 export credit guarantee programmes have not been changed for many 
years and may not be reflecting current costs.”). 
84 Brazil’s 11 August Answers to Questi ons, para. 167 (first bullet point). 
85 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member, 
Committee on Agriculture, Nutrition, and Forestry, US Senate, Former Soviet Union:  Creditworthiness of 
Successor States and US Export Credit Guarantees , GAO/GGD-95-60 (February 1995), p. 135-136). WT/DS267/R/Add.2 
Page I-299 
 
 
As noted above, CCC fees for GSM 102 have not ch anged materially since the GAO published its 
report in 1995.86  Moreover, the United States confirmed in  its 11 August Answer to Question 84 (at 
paragraph 180) that US law prohibits CCC from charging fees in excess of one per cent of the 
guaranteed dollar value of the transaction.  
65. With respect to the second part of the Panel’ s question, Brazil has demonstrated that forfaits 
and export credit insurance are not similar financ ial instruments to CCC export credit guarantees, and 
therefore that the terms for forfaits and export cr edit insurance cannot serve as benchmarks against 
which to determine whether CCC export credit guarantees confer “benefits.”
87  Moreover, Brazil has 
demonstrated that in any event, fees for forfa iting instruments are well above fees for CCC export 
credit guarantees.88 
 66. Although government support from the US E xport-Import Bank does not constitute a market 
benchmark for the purposes of determining “benefit, ” Brazil has offered evidence that premiums for 
CCC guarantees are considerably lower that fees for Ex-Im Bank guarantees.
89  This demonstrates 
that the terms for CCC guarantees do not even meet non-market benchmarks.  As noted by the GAO: 
 
The US Export-Import Bank, which provides credit guarantees to promote a variety of US exports, uses risk-based fees to defray the cost of defaults on its portfolio.  
Under its system, each borrower/guarantor is rated in one of eight country risk 
categories.  Exposure fees vary based on bot h the level of assessed risk and the length 
of time provided for repayment.  For example, in the case of repayment over 3 years, 
a country rated in the lowest risk category is charged a fee of 75 cents per $100, whereas a country in the highest risk ca tegory is charged a fee of $5.70 per $100 of 
coverage.  Thus, the bank’s fee structure in cludes a substantial added charge for high 
country risk.  According to the bank, its sy stem is designed to remain as competitive 
as possible with fees charged by official export credit agencies of other countries. 
Under section 211(b)(1)(b) of the 1990 Farm  Bill, CCC is currently restricted from 
charging an origination fee for any GSM-102 credit guarantee in excess of an amount equal to 1 per cent of the amount of  credit extended under the transaction.
[90]  This 
restriction was initially enacted in 1985 fo llowing proposed administration legislation 
to charge a 5-per cent user fee for expor ts backed with credit guarantees.  Some 
Members of Congress were concerned that such a fee would adversely affect the 
competitiveness of GSM-102 exports.  Under the 1-per cent restriction, CCC would be considerably limited in the size of the f ee that it could charge to take account of 
country risk should it decide to do so.  For example, as previously noted, CCC charges 0.56 per cent for a loan payable in 3 years and with principal payments due 
annually.  The most it could increase the f ee would be 0.44 per cent.  In contrast, the 
Export-Import Bank currently charges fees as high as 5.7 per cent for 3-year loans.
91 
 
                                                      
86 Brazil’s 11 August Answer to Question 77 and 84, para. 167, 193-194. 
87 Brazil’s 22 August Rebuttal Submission, para s. 103-105;  Brazil’s 27 August Comments on US 
Rebuttal Submission, paras. 68-70;  Brazil’s 7 October Or al Statement, para. 72;  Brazil’s 18 November Further 
Rebuttal Submission, paras. 23 3-241;  Brazil’s 2 December Oral Statement, para. 79. 
88 Brazil’s 27 August Comments on US Rebuttal Submission, paras. 76-77 and Exhibit Bra-199 (Trade 
and Forfaiting Review, “Argentina Trade Finance to the Rescue,” Volume 6, Issue 9 July/August 2003). 
89 Brazil’s 27 August Comments on US Answers, para. 110. 
90 The United States confirmed in paragraphs 179-180 of its 11 August Answer that this remains the 
case. 
91 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member, 
Committee on Agriculture, Nutrition, and Forestry, US Senate, Former Soviet Union:  Creditworthiness of 
Successor States and US Export Credit Guarantees , GAO/GGD-95-60 (February 1995), p. 135-136).   WT/DS267/R/Add.2 
Page I-300  
 
224. Please indicate how the CCC's cost of borrowing was treated in the 2002 financial 
statement of the CCC, in Exhibit BRA 158.  USA  225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if 
so,  please indicate the accounting regulation or  principle used.  If a "written off" debt is 
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest 
received in relation to the debt during the time it was "written off"?  USA  226. If a debt was "written off" more than te n years ago, does it still create a cost to the 
programme?  If so, how is this reflected in th e 2002 financial statement of the CCC, in Exhibit 
BRA 158 (or any other material)? USA  
 227. The United States has indicated that Braz il continues to "mischar acterize" the amount 
of $411 million in the 2002 financial statement of the CCC, in Exhibit BRA 158, pp. 18 & 19.  Can the United States please indicate how it believes this amount – referred to on p. 19 of the 
Exhibit as "Credit Guarantee Liability-End of Fiscal Year" - should be properly characterized?  
How, if at all, does it represent CCC operating costs or losses? USA 
 
Brazil’s Comment:
 
 
67. On page 4 of the notes to the CCC 2002 financial statements, CCC defines the term “Credit 
Guarantee Liability” as follows: 
 
Credit guarantee liabilities represent the estim ated net cash outflows (loss) of the 
guarantees on a net present value basis.  To  this effect, CCC records a liability and 
charges an expense to the extent, in mana gement’s estimate, CCC will be unable to 
recover claim payments under the post- Credit Reform Export Credit Guarantee 
programmes.92 
Thus, Brazil stands by its characterization of th e $411 million figure as a cumulative running tally of 
the losses for the programmes during the period 1992- 2002, and as one way of demonstrating that the 
CCC guarantee programmes meet the elements of item (j).  
 
228. What accounting principles should the Pane l use in assessing the long-term operating 
costs and losses of these three programmes?  For example, if internal US Government 
regulations require costs to be treated differently to generally accepted accounting principles, is 
it incumbent on the Panel to conduct its analysis in accordance with that treatment?  BRA, USA 
 
Brazil’s Answer:
 
 
68. Item (j), interpreted according to its ordina ry meaning, in its context and according to the 
object and purpose of the SCM and Agriculture Agre ements, does not require that the Panel use any 
particular accounting principles to assess long-term op erating costs and losses.  Similarly, under item 
(j), it is not incumbent  on the Panel to conduct its analys is in accordance with US government 
accounting principles, whether or not those princi ples adhere to GAAP.  (A Panel may, however, 
consider it particularly persuasive that the US  government’ own accounting principles lead to a 
conclusion that premium rates are inadequate to m eet the long-term operating costs and losses of the 
CCC guarantee programmes.)  Nor is it necessary, at this stage of dispute settlement proceedings, for 
                                                      
92 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT 
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit 
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 4)). WT/DS267/R/Add.2 
Page I-301 
 
 
the Panel to arrive at a determination of th e precise amount by which operating costs and losses 
incurred by the CCC guarantee programmes outpace premiums collected.  69. For these reasons, Brazil has offered a number of different methodologies and sets of evidence that the Panel can use to  determine whether premium rates are adequate to meet the long-
term operating costs and losses of the CCC guarantee programmes.  Each of those methodologies or 
sets of evidence demonstrates that premium rates are inadequate to meet the long-term operating costs 
and losses of the CCC guarantee programmes.  70. One methodology is the present value acc ounting endorsed by the US Congress and the 
President in the Federal Credit Reform Act (“F CRA”).  The FCRA has been translated into 
accounting standards for US government loan gua rantees by the Federal Accounting Standards 
Advisory Board (“FASAB”).  Consistent with th e FCRA, the FASAB accounting standards state that 
“[f]or guaranteed loans outstanding, the present valu e of estimated net cash outflows of the loan 
guarantees is recognized as a liability.”
93  The FASAB standards (and the FCRA) state that “[t]he 
amount of the subsidy expense equals the present va lue of estimated cash outflows over the life of the 
loans minus the present value of estim ated cash inflows, discounted at the interest rate of marketable 
Treasury securities with a similar maturity term a pplicable to the period during which the loans are 
disbursed.”94   
 71. As one way to determine whether the long- term operating costs and losses of the programmes 
outpace premiums collected, Brazil has used th e net subsidy expense (including reestimates) 
calculated using the FCRA and FASA B standards over the period 1992-2002.
95  The CCC has itself 
adopted this methodology in its 2002 financial stat ements, when it lists a net subsidy expense of 
$411 million for all post-1991 CCC guarantees.96  Using present value accounting, CCC’s 2002 
financial statements also track enormous unco llectible amounts on pre-1992 and post-1991 guarantees 
that far outpace premiums collected for the programmes – by $2.3 billion on pre-1992 guarantees, and 
by $550 million on post-1991 guarantees.97 
 
                                                      
93 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, “Statement of Federal Financial 
Accounting Standards No. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees” in S
TATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS NO. 2, March 2001, p. 13 (para. 
23)). 
94 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, “Statement of Federal Financial 
Accounting Standards No. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees” in S TATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS NO. 2, March 2001, pgs. 13-14 
(para. 24)). 
95 Exhibit Bra-193. 
96 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT 
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit 
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19).  
97 See Brazil’s 11 August Answers to Questions, para. 167 (third and fourth bullet points); Brazil’s 
18 November Further Rebuttal Submission, para. 250; Notes to Financial Statements contained in Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT Operations, Audit Report, 
Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002, Audit Report No 06401-15-FM 
(December 2002), pg. 14).  Contrary to  the United States’ assertion at para graph 170 of its 22 August Rebuttal 
Submission, for post-1991 CCC guarantees, the amounts in  the “subsidy allowance” column are actually the 
amounts of receivables associated w ith post-1991 CCC guarantees that CCC considers uncollectible.  Under the 
FCRA – and as confirmed above in the quote from page 4 of the CCC 2002 financial statements – the subsidy 
allowance is recorded on a net present value basis, wh ich means that it represents the cost CCC considers it will 
incur on a guarantee cohort at the time that cohort is closed .  The amount listed in the “subsidy allowance” 
column in the receivables table of CCC’s 2002 financial statements for po st-1991 guarantees is therefore as 
uncollectible as the amount listed in the “uncollectible” column of the pre-1992 CCC guarantee receivables 
table. WT/DS267/R/Add.2 
Page I-302  
 
72. The Panel asks whether, if US government regul ations require costs to be treated differently 
than they would be under generally accepted a ccounting principles, the Panel must conduct its 
analysis in accordance with that treatment.  As Brazil has already noted, nothing in item (j) would 
require the Panel to do so.  However,  Brazil notes that in its 2002 financial statements, the CCC, 
which relies on present value accounting, states th at “[t]he accounting principles and standards 
applied in preparing the financial statements a nd described in this note are in accordance with 
Generally Accepted Accounting Princi ples (GAAP) for Federal entities.”
98 
 73. In this dispute, the United States objects to  the use of present value accounting to determine 
the costs of the CCC guarantee programmes, becau se present value accounting entails the use of 
“estimates.”
99  Apart from the fact that the FCRA does not  in fact rely on “estimates” to the extent 
suggested by the United States,100 Brazil also notes that in other contexts, the US government is 
comfortable with this inherent aspect of present value accounting for loan guarantees.  Present value 
accounting has been endorsed by the US Congress and the President in the FCRA, as well as by the 
FASAB, the Office of Management and Budget,101 and the General Accounting Office,102 to name a 
few.  Finally, Brazil notes that the United States is comfortable with the Panel relying on present 
value accounting and some estimated data, as long as the Panel lim its itself to data suggesting that 
CCC guarantees issued in some, carefully-selected years did not lose money.103  This is not an 
appropriate means of determining the performance of  the “programmes,” as is required by item (j). 
 74. Other methodologies and means of accounting for CCC’s long-term operating costs and 
losses confirm the result reached using present valu e accounting.  First, Brazil has constructed a 
methodology using actual data on income, costs and losses, which shows net losses for the CCC 
guarantee programmes of $1.1 billion.
104  Second, defaults of more than $4 billion on CCC guarantees 
for exports to Iraq and Poland alone  similarly demonstrate costs and losses far in excess of total CCC 
premiums collected.105  Third, a methodology adopted by the US General Accounting Office 
concluded that if GSM 102 and GS M 103 continued until 2007, costs w ould reach $7.6 billion, which 
exceeds maximum premiums collect ed by nearly $7.3 billion.106   
 75. In conclusion, item (j) does not require that the Panel use any particular accounting principles in assessing long-term operating costs and losses.  Braz il has offered the Panel a number of different 
methodologies based on a variety of accounting princi ples.  Each methodology confirms that premium 
rates are inadequate to meet the long-term  operating costs and losses of the CCC guarantee 
programmes.  
                                                     
 
98 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT 
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit 
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 1).  
99 US 11 August Answers to Questions, paras. 157-161, 162-163, 169-172, 173; US 22 August 
Rebuttal Submission, para. 162; US 18 November Further Rebuttal Submission, para. 196. 
100 Brazil’s 22 August Rebuttal Submission, para. 11 3;  Brazil’s 11 August Answers to Questions, 
paras. 180-181. 
101 Exhibit Bra-116 (OMB Circular A-11) and Exhibit Bra-163 (Office of Management and Budget 
Annual Training, Introduction to Fede ral Credit Budgeting, 24 June 2002). 
102 Exhibit Bra-120 (GAO, Report to the Director, Office of Management and Budget, “Credit Reform: 
Review of OMB’s Credit Subsidy Model,” GAO/AIMD-97-145, August 1997, p. 3-5). 
103 US 18 November Further Rebuttal Submission, paras. 196-198. 
104 Brazil’s 11 August Answers to Questions, paras. 158-166 (including chart at para. 165).  Brazil’s 
all-inclusive formula can be stated as follows:  (Premiums collected + Recovered principal and interest (Line 
88.40) + Interest revenue (Line 88.25)) – (Administrative expenses (Line 00.09) + Default claims (Line 00.01) + 
Interest expense (Line 00.02)). 
105 See Brazil’s 11 August Answers to Questions, para. 167 (second bullet point and note 226); Brazil’s 
18 November Further Rebuttal Submission, para. 251. 
106 See calculation included at Brazil’s 11 August Answers to Questions, para. 167. WT/DS267/R/Add.2 
Page I-303 
 
 
 
V. Serious Prejudice  
 
229. What is the meaning of the words "may arise in any case where one or several of the 
following apply" (emphasis added) in Article 6.3 of the SCM Agreement ?  Please comment on 
the possibility that these words indicate that on e of the Article 6 subparagraphs may not be 
sufficient to establish serious prejudice and that serious prejudice should be considered an additional or overriding criterion to the fa ctors specified in the subparagraphs.  BRA 
 
Brazil’s Answer:
 
 
76. The phrase “ one or several ” must be interpreted in its ordinary meaning.  This phrase means 
that the conditional clause “may  arise” is satisfied when one of the following applies or when more 
than one  of the following apply.  The phrase “ one or several ” is equivalent to: “ at least one .”  Such a 
trigger is not conditioned on  any other clause.  In fact, this is stressed by the wo rds “in any case” just 
before the phrase where one or several .  Therefore, serious prejudice may be shown in any case where 
at least one  of the subparagraphs of Article 6.3 applies. 
 77. Brazil disagrees with the possibility that the words one or several  indicate that one of the 
Article 6.3 subparagraphs may not be sufficient to  establish serious prejudice.  Had negotiators felt 
that this should be the case, they certainly would ha ve found a way to say so.  This was the case, for 
example, in Articles 3.2 and 3.4 of the Anti-Dumping Agreement, where after the enumeration of 
relevant factors, the text states that no “… one or several of these factors” can “give decisive guidance.”  Identical language is found in  the SCM Agreement itself.  Article 15.4 in fine  reads “… 
nor can one or several of these factors necessarily give decisive guidance.”  In SCM Article 15.7 negotiators were even more explicit, affirming that “[n]o one of these factors by itself can necessarily 
give decisive guidance but the totality of the factors considered must lead to the conclusion that … .” 
 78. The provisions of the Anti-Dumping and SCM Agreement cited above re late to situations 
where a number of factors could lead to a determinat ion of injury.  Article 6.3 of the SCM Agreement 
is meant to address a similar situation: a list of factor s could lead to a determination of serious injury.  
However, in stark contrast with Articles 3.2 and 3.4 of the Anti-Dumping Agreement and 
Articles 15.4 and 15.7 of the SCM Agreement, nego tiators chose not to include reference to the 
possibility that, in Article 6.3, “the words one or several  indicate that one of the Article 6 
subparagraphs may not be sufficient to establish ser ious prejudice.”  To find so, the Panel would need 
to read into Article 6.3 the words found in Artic les 3.2 and 3.4 of the Anti-Dumping Agreement and 
Articles 15.4 and 15.7 of the SCM Agreement.  The A ppellate Body has made clear that panels must 
not read into a text words that are not there. 
 79. The phrase “may arise in any case where one or  several of the following apply” recognizes 
that effects of subsidies constituting serious pr ejudice under one of the identified paragraphs of 
Article 6.3 may also constitute serious prejudice under anothe r of the identified paragraphs of 
Article 6.3.  This case is a good example.  US cotton subsidies have both increased the US world 
market share under Article 6.3(d) as well as suppr essed world market prices and prices in third 
country markets under Article 6.3(c).  But the existe nce of “serious prejudice” in this or other cases 
does not depend upon whether the effects of the subsid ies cause one or four different types of serious 
prejudice.    
80. In its context within Article 6, the phrase “m ay arise in any case where one or several of the 
following apply” is necessary becau se while the facts may demonstrate that the effects of the 
subsidies may create the one, two, three or four enumerated types of serious prejudice, these effects 
may not be actionable.   For example, under Article 6.3(d), there may be an increase in the world 
market share for a commodity product.  But it “m ay” not be actionable because there are specific 
multilaterally agreed rules for that commodity, w ithin the meaning of footnote 17.  Further, WT/DS267/R/Add.2 
Page I-304  
 
Article 6.7 of the SCM Agreement creates exempti ons from serious prejudice findings even if the 
requirements of Article 6.3 would be fulfilled.  Th ese situations include export prohibitions by the 
complaining Member, force majeure , arrangements that limit exports, or the failure to conform to 
standards and regulatory requirements.  Article 6.9 of the SCM Agreement covers another situation in 
which the “may” language would be applicable.  It exempts serious prejudice that exists even where 
the requirements of Article 6.3 are fulfilled because th e subsidies are exempt from action by virtue of 
the peace clause of Article 13 of the Agreement on Agriculture.   
230. Please comment on Brazil's views on Article 6.3 of the SCM Agreement as stated in 
paragraphs 92-94 of its further submission. USA  
 231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM Agreement 
are relevant context for the Panel's interpretation of Article 6.3?  USA  
232. How, if at all, should the Panel take in to account the effects of other factors in its 
analysis of the effects of US subsidies under Arti cle 6.3? If the Panel should compare the effects 
of other factors to establish the relative signific ance of one compared to others, how would this 
be done? What would be relevant “factors” for this purpose? BRA 
 
Brazil’s Answer:
 
 
81. Brazil divides its response to this question into two parts.  First, Brazil will discuss 
Article 6.3(c), and, second, Brazil will discuss Article 6.3(d).  82. Concerning Article 6.3(c), the Panel can and shoul d, to the extent it is relevant to do so, take 
into account the effects of non-subsidy related factors in its analysis of the price-suppressing effects of 
US subsidies.  The only “other factors” identifie d by the United States include demand-related factors 
the United States claims contributed to lower co tton prices in MY 1999-2002 including weak cotton 
demand, flat retail consumption, falling world inco mes, increasing US textile imports, and China’s 
releasing of stocks.
107  The United States further claimed that US production-related factors accounted 
for increased US production including boll weevil eradication, higher yielding GMO cotton, and 
lower prices of alternative crops.108   
 83. Brazil addressed all of these “other” factors in earlier submissions and demonstrated that while some of the so-called other factors no doubt influenced prices, many of them either were 
factually incorrect ( i.e., not “other factors”) or could not have had the effect claimed by the 
United States.
109  Brazil further demonstrated that Professo r Sumner’s analysis took account of all the 
“other” factors identified by the United States.  Professor Sumner stated:   
 
The baseline is calibrated to reproduce th e acreage, production, exports, prices and 
other variables that actually applied be tween the marketing years 1999-2001, the 
period over which data was available at the time the baseline was developed.  By 
calibrating the baseline to actual data for the recent past, the model incorporates all 
the factors that have determined the situatio n of the cotton market during this period.   
The United States has highlighted some of these factors. In their Further Submission 
they discuss developments in the synthetic fiber market, such as prices of polyester; 
Chinese stock releases, exchange rate m ovements, global and US macroeconomic 
                                                      
107 US 30 September Further Submission, paras. 22-44.   
108 US 30 September Further Submission, paras. 45-70.   
109 Brazil’s 7 October Oral Statement, paras. 18-28;  Exhibit Bra-279 (Statement of Professor Sumner – 
7 October 2003, paras. 13-14);  Brazil’s 27October Answers to Question 176, paras. 157-160.  WT/DS267/R/Add.2 
Page I-305 
 
 
conditions, and technical changes in cotton production that reduce costs, such as boll 
weevil eradication and release of genetically modified cotton varieties.  Remember, my model is calibrated to reproduce actual cotton market data for the historical 
period.  Hence, my model incorporates all these historical factors into the baseline 
from which I analyze the impact of removing cotton subsidies .
110    
84. The econometric evidence presented by Brazil – including the studies by USDA economists 
Westcott and Price, Professor Sumner, and Professor Ray of the University of Tennessee, among others – separate out the effects of the US subsid ies from the effects of all other supply and demand 
factors that impact on the upland cotton market.  In effect, these studies are designed precisely to 
answer the question posed by the Panel.  The results  of these studies sift through the “other factors” to 
isolate for the effects of the US subsidies.  Professor Sumner has conservatively estimated that A-
Index prices would on average be 12.6 per cent or 6.5 cents per pound higher without the US 
subsidizing upland cotton production,  use and exports.  The other ec onometric simulation models find 
that cotton prices are suppressed to a significant degree regardless of whether other factors push 
upland cotton prices up or down.   
 
85. It bears repeating that Brazil has not claimed in this dispute that the entire decline in upland 
cotton prices during MY 1999-2002 was due to the effe cts of US subsidies.  Brazil’s argument has 
been all along that but for  the US subsidies upland cotton prices would be higher by a significant 
degree, whether prices rise or fall.  Thus, for exam ple, the fact that Chinese release of stocks may 
have lowered world prices in MY 2000-2001 to a certa in extent is entirely consistent with Brazil’s 
evidence and its proof.  Brazil demonstrated that  actual market prices in MY 1999-2002 would have 
been higher to a significant degree but for the US subsidies.   
 86. Thus, the Panel can and should take “other f actors” into account.  But the record shows that 
there is no legitimate basis to conclude that “other” supply and demand factors collectively (a) 
accounted for all of the declines in prices during the period of  investigation or (b) meant that prices 
went as high as they would have even if no US subsidies had been provided.  87. Brazil’s claim under Article 6.3(d) concerns the development of actual world market share 
data.  This world market share is the result of several key factors including US subsidies, weather effects in many countries, and exchange rate effect s.  However, Brazil has de monstrated that the US 
subsidies were a major contributing factor behind th e increase in the US worl d market share, which 
occurred even when prices were falling and the US dollar increased in value.  Professor Sumner has 
conservatively estimated that without the US subsid ies, US exports would be on average 41.2 per cent 
lower during MY 1999-2002.
111  The US upland cotton farmers’ long-term cost of production gap 
between market revenue and total costs of $872 per acre for over 14.38 million acres during MY 
1997-2002 (or $12.5 billion) fully supports Professor Sumner’s analysis.112    
 88. It follows that the US world market share w ould be much lower absent the US subsidies.  As 
an example, based on Exhibit Bra-302, Brazil has calc ulated out the effects of a 41.2 per cent decline 
in US exports as estimated by Professor Sumner for MY 2002.
113  In this example, US world market 
shares for MY 1999-2001 remain unchanged.114  The results are as follows:   
 
                                                      
110 Exhibit Bra-279 (Statement of Professor Sumner – 7 October 2003, paras. 13-14).   
111 Brazil’s 9 September Further Submission, Annex I, Table I.5a. 
112 Brazil’s 3 December Closing Statement, para. 13.   
113 This calculation assumes that total world trade wo uld not be affected if US subsidies were not 
provided. 
114 Brazil emphasizes that also for these years ther e are strong export-enhanc ing effects of the US 
subsidies, but has assumed for this exercise that they had no effects on US world market share. WT/DS267/R/Add.2 
Page I-306  
 
U.S. World Market Share W/Out Subsidies in MY 2002
051015202530354045
1999 2000 2001 2002
marketing yearpercentU.S. World Market Share
1999-2001 Average
 
 
89. This graph shows that in MY 2002, US expor ts would have fallen and remained below their 
previous three-year average without  the US subsidies for that year.  In other words, but for the 2002 
US subsidies, there would have been a re duction in US world market share, not an increase.115  This 
analysis also demonstrates that while there may have been other factors at work stimulating US 
exports (such as reduced domestic US demand for upland cotton), these factors were not enough to 
cause an increase in US world market share ove r the previous 3 year period as required by 
Article 6.3(d).      
233. In Brazil's view, what is or are the "same market(s)" for the purposes of Article 6.3(c)? 
Does Brazil's view of "world market" imply that regardless of which domestic (or other) 
"market" is examined, price suppr ession will be identifiable? BRA 
 
Brazil’s Answer:
 
 
90. The “same market(s)” for the purposes of Brazil’s price suppression claims under 
Article 6.3(c) are (1) the world market for upland cotton, (2) the Brazilian market, (3) the US market, 
and (4) 40 third country markets116 where Brazil exports its cotton.  US and Brazilian “like” upland 
cotton is found in each of these markets.    
                                                     
 
115 Brazil’s 9 September Further Submission, Annex I, Table I.5a. 
116 Argentina, Belgium, Bangladesh, Bolivia, Cambodia, China, Chile, Colombia, Cuba, Ecuador, 
France, Germany, Greece, Hong Kong, Indonesia, India, Israel, Italy, Japan, South Korea, Malaysia, Morocco, 
Netherlands, Pakistan, Peru, Poland, Portugal, Philippines, Singapore, South Africa, Spain, Switzerland, 
Thailand, Tunisia, Turkey, Taiwan, United Kingdom, Ukraine, Venezuela, Vietnam. WT/DS267/R/Add.2 
Page I-307 
 
 
91. The record establishes that there is a “world  market” for upland cotton and that the prices for 
that market are reflected in the New York  futures prices and in the A-Index prices.117  Brazil 
established that there is a global price discovery m echanism that reflects the “world market price,” 
which is heavily influenced by world market  supply and demand factors, including the US 
subsidies.118  These “world market prices,” in turn, ar e transmitted to the US market, the Brazilian 
market, and to the 40 other markets where both Braz ilian and US subsidized cottons are marketed as 
typical commodities.119  
 92. In response to the Panel’s question whether the world market prices that Brazil claims are 
suppressed are also “identifiable” in the “domestic (or other) ‘market,’” the answer is “yes.”  The 
evidence of the transmission of the global effect s to these other markets includes (1) USDA’s own 
data for the US prices received by US producers,
120 (2) USDA volume and value data for US exports 
to third countries,121 (3) Brazilian Government volume and va lue data for Brazilian exports to 40 
countries,122 (4) Brazilian ESALQ Index data regarding internal Brazilian prices,123 (5) data from 
various third countries reflecting upland cotton import prices,124 and (6) data from several third 
countries reflecting their domes tic prices for upland cotton.125  In addition, Brazil has presented the 
evidence of Andrew Macdonald and Christopher Ward who testified concerning the importance of the 
A-Index.  Brazil further includes the views of Gerald  Estur, the ICAC’s chief statistician, as set out 
below.126 
 93. A-Index world prices are a useful benchmar k by which to judge whether prices for upland 
cotton traded internationally or even within domes tic markets are influenced  by global world market 
forces.
127  While the New York futures prices play a majo r role in influencing markets, the short term 
volatility of the futures market makes comparison with monthly or annual export prices more difficult.  Andrew Macdonald indicated that “the price o scillations of the A and B-Index are much less 
pronounced than the futur es market, but in the longer term they accompany the signs and trends 
coming from the futures market.”
128  Moreover, the US Government uses the A-Index as a key basis 
for Step 2 and marketing loan payments.  Prof essor Sumner’s model adapted from the FAPRI model 
used actual A-Index prices for the period MY 1999-2001 and the “world price” simulation effects are estimated “A-Index” prices.
129   
 94. Organized below is the evidence on pricing da ta supporting the link between A-Index prices 
that reflect the global supply and demand influences (including effects of the US subsidies) and prices 
in “other markets” as posed in the Panel’s question.   Brazil first presents evidence of US and Brazilian 
                                                     
 
117 Brazil’s 2 December Oral Statement, paras. 14-16 ( citing evidence set out in th e record from earlier 
submissions to the Panel).   
118 Brazil’s 2 December Oral Statement, paras. 14-16 ( citing evidence set out in th e record from earlier 
submissions to the Panel).   
119 Brazil’s 2 December Oral Statement, paras. 14-16 ( citing evidence set out in th e record from earlier 
submissions to the Panel).   
120 Brazil’s 9 September Further Submission, para. 113 ( citing Exhibit Bra-4 and Exhibit Bra-202).  
121 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). 
122 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). 
123 Exhibit Bra-207 (Cotton lint: International Prices & Brazilian Prices);  Brazil’s 9 September Further 
Submission, para. 115 note 156.   
124 Exhibit Bra-384 (Import Pri ces from Various Countries). 
125 Exhibit Bra-385 (Domestic Pri ces from Various Countries). 
126 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).  
127 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(“The A-Index is a good proxy for 
prices of cotton traded internationally.”). 
128 Brazil’s 9 September Further Submission, Annex II (Statement of Andrew Macdonald, para. 23.).   
129 Brazil’s 9 September Further Submission, Annex I (Sumner Analysis, para. 70 (“the model uses the 
Cotlook A-Index price to represent the world price . . . [and] the actual A-Index prices were used for the 
database for the model for marketing years 1999-2001.”).   WT/DS267/R/Add.2 
Page I-308  
 
export prices to 40 different countries, based on official published US and Brazilian Government 
sources.  It then provides (based on availability)  information concerning the import prices of all 
imports from certain of the 40 countries where bot h Brazil and US upland cotton was exported during 
MY 1999-2002.  Finally, Brazil presents information of internal domestic pric es in the United States, 
Brazil, and China. 
 
Brazilian and US Export Prices  
 
95. In response to the Panel’s question, Brazil first presents evidence of US and Brazilian export 
prices to 40 different markets where both Brazilian and US upland cotton was exported at some point 
during MY 1999-2002.  The information and evid ence below is based on a compilation from two 
sources.  First, all information on US upland cott on export prices is based on the “US Trade Internet 
System,” a web application run by USDA’s Foreign Agricultural Service (FAS).
130  Second, 
information on Brazilian upland cotton export pr ices is taken from information published and 
maintained the Brazilian Ministry of Agriculture on its public web-site.131  The export “prices” 
represent the declared contract value of the upla nd cotton at the US and Brazilian port of export – 
known as “Free Alongside Ship (FAS)” values.132   
 96. The first way to examine the available data is to view it collectively similar to what the 
United States did in Exhibit US-75.  The first graph below examines the cumulative Brazilian and US export prices in MY 1999-2002 cove ring exports to the 40 markets where Brazil exports its upland 
cotton as well as US exports to Brazil.
133  
 
                                                      
130 See http://www.fas.usda.gov/ustrade/ .  The four upland cotton HS-10 codes used are 5201001010, 
5201001020, 5201001025 and 5201001090.  All data originally in tons and dollars, was converted into pounds 
and cents.   
131 See http://alicewebl.desenvolvimento.gov.br ; www.mdic.gov.br/indicador es/balanca/balanca.html .  
See also Exhibit Bra-383 (Brazil and US Export Data  on Export Quantities and Values by Country).  All 
Brazilian data originally provided in kilograms and dollars was converted into pounds and cents.   
132 The FAS value includes all inla nd freight, insurance and other charges incurred in placing the 
merchandise alongside the carrier at shipping or insurance costs.   
133 Exhibit Bra-386 (Brazil and US Export Prices by Co untry).  The data for all of the graphs in this 
subsection of Brazil’s answer is cont ained in Exhibit Bra-383 (Brazil a nd US Export Data on Quantities and 
Values by Country).  WT/DS267/R/Add.2 
Page I-309 
 
 
 
Export Prices Total
0.0020.0040.0060.0080.00100.00
Aug-99 Oct-99 Dec-99 Feb-00
Apr-00
Jun-00 Aug-00
Oct-00
Dec-00
Feb-01
Apr-01
Jun-01 Aug-01
Oct-01
Dec-01
Feb-02Apr-02 Jun-02
Aug-02
Oct-02 Dec-02
Feb-03
Apr-03
Jun-03cents per pound
U.S. Brazil A-Index 
 
97. The A-Index on the graph is the solid black lin e.  The Panel can see that over the four year 
period, US and Brazilian export prices closely follow th e movements in the A-Index.  In addition, as 
discussed in greater detail in th e answer to Question 235, Brazilian prices are at times equal to, 
slightly greater than US prices or slightly lower than US prices.   
  
98. The Brazilian export data can be used as a prox y for third country market prices in a handful 
of countries where there were extensive Brazilian expor ts.  This is illustrated in the cases of three of 
the larger markets for Brazilian exports – Argentin a, India, and Portugal as set out in the graph 
below:
134 
 
                                                      
134 The Panel will find a complete list of graphs showing A-Index prices plotted against Brazilian 
export prices to all countries to which Brazil exports in Exhibit Bra-387 (Brazil Export Prices v A-Index Prices 
by Country). WT/DS267/R/Add.2 
Page I-310  
 
Brazilian Export Prices to Argentina
0.0020.0040.0060.0080.00100.00
Aug-99Oct-99
Dec-99 Feb-00
Apr-00
Jun-00
Aug-00
Oct-00
Dec-00Feb-01
Apr-01
Jun-01
Aug-01 Oct-01
Dec-01
Feb-02
Apr-02 Jun-02
Aug-02 Oct-02
Dec-02
Feb-03 Apr-03
Jun-03cents per pound
Brazil A-Index  
 
Brazilian Export Prices to India
0.0020.0040.0060.0080.00100.00
Aug-99Oct-99
Dec-99 Feb-00
Apr-00
Jun-00
Aug-00
Oct-00
Dec-00Feb-01
Apr-01
Jun-01
Aug-01 Oct-01
Dec-01
Feb-02
Apr-02 Jun-02
Aug-02 Oct-02
Dec-02
Feb-03 Apr-03
Jun-03cents per pound
Brazil A-Index 
 WT/DS267/R/Add.2 
Page I-311 
 
 
Brazilian Export Prices to Portugal
0.0020.0040.0060.0080.00100.00
Aug-99Oct-99
Dec-99 Feb-00
Apr-00
Jun-00
Aug-00
Oct-00
Dec-00Feb-01
Apr-01
Jun-01
Aug-01 Oct-01
Dec-01
Feb-02
Apr-02 Jun-02
Aug-02 Oct-02
Dec-02
Feb-03 Apr-03
Jun-03cents per pound
Brazil A-Index 
 
99. Because US exports were so much greater th an Brazilian exports, a better way to examine the 
relationship between A-Index prices and prices in the 40 countries is to examine US export prices, 
particularly where there were large volumes of US e xports.  This is illustrated in the graphs below for 
China, Indonesia, South Korea and the Philippin es (as well as other graphs in Exhibit Bra-388):135  
 
US Export Prices to China
0.0020.0040.0060.0080.00100.00
Aug-99 Oct-99 Dec-99
Feb-00
Apr-00
Jun-00
Aug-00
Oct-00
Dec-00
Feb-01
Apr-01
Jun-01
Aug-01
Oct-01
Dec-01
Feb-02
Apr-02 Jun-02
Aug-02
Oct-02 Dec-02 Feb-03
Apr-03
Jun-03cents per pound
United States A-Index 
 
                                                      
135 The Panel will find a complete list of graphs s howing A-Index prices plotted against US export 
prices to all countries to which Brazil exports in Exhibit Bra-388 (US Export Prices v A-Index Prices by 
Country). WT/DS267/R/Add.2 
Page I-312  
 
US Export Prices to Indonesia
0.0020.0040.0060.0080.00100.00
Aug-99 Oct-99 Dec-99 Feb-00
Apr-00
Jun-00 Aug-00
Oct-00
Dec-00
Feb-01
Apr-01
Jun-01 Aug-01
Oct-01
Dec-01
Feb-02Apr-02 Jun-02
Aug-02
Oct-02 Dec-02
Feb-03
Apr-03
Jun-03cents per pound
United States A-Index 
 
Export Prices to South Korea
0.0020.0040.0060.0080.00100.00
Aug-99 Oct-99 Dec-99 Feb-00
Apr-00
Jun-00 Aug-00
Oct-00
Dec-00
Feb-01
Apr-01
Jun-01 Aug-01
Oct-01
Dec-01
Feb-02Apr-02 Jun-02
Aug-02
Oct-02 Dec-02
Feb-03
Apr-03
Jun-03cents per pound
United States A-Index 
 WT/DS267/R/Add.2 
Page I-313 
 
 
Export Prices to Philippines
0.0020.0040.0060.0080.00100.00
Aug-99 Oct-99 Dec-99 Feb-00
Apr-00
Jun-00 Aug-00
Oct-00
Dec-00
Feb-01
Apr-01
Jun-01 Aug-01
Oct-01
Dec-01
Feb-02Apr-02 Jun-02
Aug-02
Oct-02 Dec-02
Feb-03
Apr-03
Jun-03cents per pound
United States A-Index 
 
100. Brazil presents in Exhibit Bra-383 the underlying data on all 40 of the markets where Brazil and the United States export their upland cotton.  Th is underlying data is presented in a variety of 
different graphs; one set compares Brazilian exports to the A-Index;
136 another compares US exports 
to the A-Index,137 and a third combines Brazilian and US export prices.138   
 101. Many of the 40 markets show only very lim ited amounts of Brazilian exports.  Compared to 
the volume of US exports, Brazilian exports  during MY 1999-2002 were  relatively small 
(representing approximately 1 per cent of total world market share).
139  Thus, when the monthly 
export data is examined on a country-by-country b asis, there are very few third country markets 
where Brazil exported in each of the 48 months in MY 19999-2002, i.e., where there is a complete set 
of 48 data points.  Nevertheless, even the limited data points for each of the 40 countries shows that 
Brazilian export prices generally tracked A-Index prices.    
102. Many of the graphs also reflect fairly widely  ranging data point prices, particularly where the 
import volumes are not very great.
140  By contrast, country markets with very high volumes of 
imports141 tend to have much more stable import prices that closely follow the A-Index.  This is why 
the US high-volume import data gra phs provide reliable evidence of pricing trends in some of the 40 
country markets examined.  There are various reas ons that explain the widely ranging pricing data 
points.  First, while US and Brazilian cottons may have the same staple length, their quality may 
differ significantly which, in turn , impacts their respective price.142  For example, California A-Index 
cotton is consistently sold at a premium in world markets because its superior quality allows it to be 
                                                      
136 Exhibit Bra-387 (Brazil Export Prices v A-Index by Country). 
137 Exhibit Bra-388 (US Export Prices v A-Index by Country). 
138 Exhibit Bra-386 (Brazil and US Export Prices by Country). 
139 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 4 and 76). 
140 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country).  Examples are Belgium, Pakistan, 
South Africa. 
141 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country).  Examples are Argentina, China, 
India, Italy, Portugal, Philippines, Thailand. 
142 Brazil’s 9 September Further Submission, Annex II (Statement of Andrew Macdonald, paras 9-10).  WT/DS267/R/Add.2 
Page I-314  
 
used in production of finer cotton fabric.
143  During certain period between MY 1999-2002, both 
Brazil and the United States exported cotton with a high staple length or a particularly good quality to 
a third country market, resulting in higher prices.  This no doubt accounts for much higher US prices 
compared to Brazilian cotton in some markets such as France, Germany, and Portugal.   
 
103. Second, smaller monthly export sales to a thir d country market with relatively few imports 
may result in much higher prices than large vol ume sales to large importers.  Larger consuming 
countries (with larger consumers) can demand volume price premiums and selle rs can export at higher 
volumes and lower prices based on economies of scal e.  The country data of the world’s largest 
importers such as China, Hong Kong, Taiwan, and Indonesia, for example, closely match A-Index 
price trends.144  But even larger importing countries data reflects an occasional month where prices 
diverge from the overall trend.  This may be due to  the fact that smaller shipments were purchased 
quickly on a spot basis at higher prices.    104. Third, some exports or forward contracts for export sales are fixed-price contracts, which may 
be executed months before export takes place.
145  For example, a yarn spinner or textile producer in 
Brazil may contract to purchase 100 tons of US cotton on 1 January 2002 at an import price fixed at 40 cents per pound at that date, but when the cott on is actually exported on 1 June 2002 the A-Index 
price may be 50 cents.  This type of contract with  terms fixed at execution rather than on delivery may 
explain a number of country market graphs where there is a delayed reaction of the country price to declines or increases in the A-Index prices.  However, even where th ere is a delay in response, the 
longer-term trends in most markets thereafter track the downward or upward clim b of A-Index prices.   
 105. But even with the limitations in the monthly da ta for individual country markets, the data on 
the whole strongly supports the conclusion that world prices do influence local export market prices.  Any anomalies in smaller importing country markets are notably eliminated by using the weighted 
average analysis of monthly data from all 40 markets where Brazil and US cotton exports are found.  
With the vast bulk of US – and most of Brazilian cotton – being exported to large volume markets, the 
combined analysis shows the close relationship between A-Index prices and both Brazilian and US 
prices.   Indeed, the Chief Statistician of the ICAC, who has extensive experience with individual 
country and world market pricing data, came to the following conclusions:   
 
For all importing non-pro ducing countries, domestic prices follow the Cotlook A 
Index, taking into account appropriate location and quality differentials and the 
quality differential for the particular type of  cotton needed by the spinning industry. 
Prices of imported cotton in  producing countries also follow the Cotlook A Index, 
with appropriate location and quality differ entials.  The international market for raw 
cotton is relatively open, with rather lo w imports taxes (averaging less than 5 per 
cent. The US having one of the highest). 
                                                     
 
143 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(California/Arizona cottons “is 
usually about 2 cents more expensive than Memphis”).  See also Brazil’s 9 September Further Submission, 
para. 241, figure 17 (showing California A-Index quotes at higher prices than Brazil A-Index cotton which is 
comparable to Memphis).   
144 See Exhibit Bra-387 (Brazil Export Prices v A-Index by Country), Exhibit Bra-388 (US Export 
Prices v A-Index by Country) and Exhibit Bra-384 (Import Prices from Various Countries). 
145 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC)(“Actual prices of imported cotton, 
in non-producing as well as in producing countries, are based on the A Index or on New York Futures . . . on the day of the contract (concluded prior to shipment, and cotton can be sold more than one year forward).  As a 
result, the average price of imports (value divided by quantity) for a specific period is not directly related to 
prevailing market prices.”).   WT/DS267/R/Add.2 
Page I-315 
 
 
Domestic prices of cotton produced and c onsumed locally are influenced by the 
supply and demand situation in the country but are not disconnected from international prices.
146   
Individual Country Market Import Price Data 
 
106. Additional evidence responsive to the Panel’ s question is found in various third country 
market import pricing data that was collected since 9 December 2003 by Brazilian embassies around 
the world.  The data and the graphs are set out in Exhibit Bra-384.  This data is available in two forms: (1) monthly import data from all sources, and (2) annual import data from all sources.  While 
this information is not available to Brazil for many  of the 40 export market countries, the available 
evidence confirms the other third country market data discussed above.   
 107. Monthly import data is available from Argentina, Ecuador, Hong Kong, Japan, Spain, 
Thailand, and the Ukraine.  The data generally s hows a close relationship between the movement of 
import prices and the movement of the A-Index.  For example, set out below are graphs representing 
the data from Ecuador, Hong Kong, Japan and Spain:   
 
Equador Import Prices
00.10.20.30.40.50.60.70.8
Aug. 99
Oct-99
Dec. 99
Feb. 00
April 00June 00
Aug. 00Oct-00
Dec. 00 Feb. 01 April 01
June 01 Aug.01 Oct-01Dec. 01
Feb.02
April 02June 02
Aug. 02Oct-02
Dec. 02 Feb. 03
April 03
June 03
Month/YearDollar per poundImport Prices
A-Index
 
 
                                                      
146 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).   WT/DS267/R/Add.2 
Page I-316  
 
 
Import Prices in Hong-Kong
00.10.20.30.40.50.60.7
Aug. 99
Oct-99Dec. 99
Feb. 00 April 00
June 00
Aug. 00
Oct-00
Dec. 00 Feb. 01
April 01
June 01 Aug.01
Oct-01Dec. 01
Feb.02
April 02 June 02
Aug. 02
Oct-02
Dec. 02Feb. 03 April 03
June 03
Month/YearDollar per poundA-Index
Hong-Kong Import Price
 
 WT/DS267/R/Add.2 
Page I-317 
 
 
 
Japan Import prices
00.10.20.30.40.50.60.70.8
Aug. 99
Oct-99
Dec. 99
Feb. 00
April 00
June 00
Aug. 00
Oct-00
Dec. 00 Feb. 01
April 01
June 01
Aug.01 Oct-01
Dec. 01
Feb.02
April 02June 02
Aug. 02 Oct-02
Dec. 02
Feb. 03
April 03June 03
Month/YearDollar per poundJapan Import prices
A-Index
Spain Import prices
00.10.20.30.40.50.60.70.8
Aug. 99
Oct-99Dec. 99
Feb. 00
April 00
June 00 Aug. 00
Oct-00
Dec. 00 Feb. 01 April 01June 01
Aug.01 Oct-01
Dec. 01 Feb.02
April 02June 02
Aug. 02Oct-02
Dec. 02
Feb. 03
April 03
June 03
Month/YearDollar per poundA-Index
Import prices
 
 
 The monthly data for these countries reflects fairly high-volume imports from all worldwide sources.  The higher volumes guarantee a more accurate reflection of the bulk of prices within these countries.  
The link between A-Index and import prices is also c onfirmed by the data for Argentina, Thailand and 
the Ukraine in Exhibit Bra-384.  
 WT/DS267/R/Add.2 
Page I-318  
 
108. There is also annual import data available from a few countries.  While annual data does not 
provide as detailed information c oncerning price movements within a year, it also supports a link 
between the A-Index and import prices.  These import prices, in turn, serve as a proxy for prices in the third country market generally.  For example, th e available import data from China, Chile, and the 
United Kingdom is set forth below:
147   
 
 
China Import prices
00.10.20.30.40.50.60.70.8
1999 2000 2001
Calendar YearU.S. DollarChina Import prices
A-Index
 
 
                                                      
147 Exhibit Bra-384 (Import Pri ces from Various Countries). WT/DS267/R/Add.2 
Page I-319 
 
 
Chilean Import prices
00.10.20.30.40.50.60.7
1999 2000 2001 2002
YearDollar Per PoundChilean Import Prices
A-Index
 
 
 
United Kingdom Import prices
00.10.20.30.40.50.60.70.80.9
1999 2000 2001 2002
YearDollar per poundImport prices
A-Index
 
 WT/DS267/R/Add.2 
Page I-320  
 
Individual Country Domestic Prices 
 
109. Finally, Brazil presents a series of graphs  showing domestic prices in those countries for 
which domestic prices were available.  Andrew M acdonald has indicated that most countries do not 
collect or maintain accessible data on domestic upl and cotton prices.  This was confirmed by the 
requests for such data by Brazilian embassies aro und the world.  Therefore, Brazil can only offer 
information on domestic prices from a limited number of countries.  These countries, however, constitute key markets, including the United States, China, Brazil and Pakistan.  110. The record shows that domestic prices within several key producing countries including the 
United States, Brazil, China and Pakistan also reflect  and generally move with  the overall trends of A-
Index prices.  This is shown in the graphs below:
148   
  
U.S. Price Received by Farmers (MY1999-2002)
010203040506070
8 99 2 00 8 00 2 01 8 01 2 02 8 02 2 03 8 03
month / yearcents per pound
US Farm Price
A-Index
 
 
111. This data provides further confirmation of the close link between US domestic prices and the 
A-Index prices.  As set forth below, this close li nk also exists for the domestic Brazilian market where 
most of Brazilian production is marketed:149   
 
                                                      
148 This graph is reproduced from Figure 5 of Brazil’s 9 September Further Submission. 
149 This graph is reproduced from Figure 7 of Brazil’s 9 September Further Submission.  WT/DS267/R/Add.2 
Page I-321 
 
 
 
A-Index v Brazilian Prices (long-term)
0.0020.0040.0060.0080.001 00.001 20.00
month /  year
A-In de x
ESLAQ Index
 
 
112. Finally, the domestic prices of the world’s largest producer and consumer of upland cotton is 
the Chinese market.  Because China is one of the wo rld’s largest importers of upland cotton, it is not 
surprising that its domestic market prices also tr ack the A-Index prices as seen in the graph below:150   
 
                                                      
150 Exhibit Bra-385 (Domestic Pri ces from Various Countries). WT/DS267/R/Add.2 
Page I-322  
 
China Domestic Prices
00.10.20.30.40.50.60.70.8
January 01March 01
May 01
July 01
September 01 November 01January 02 March 02
May 02
July 02
September 02
November 02
January 03March 03
May 03
July 03
Month/YearDollar per poundChina Domestic Prices
A-Index
 
 
A similar pattern also evolves for domestic prices  in another major producers and user of upland 
cotton:  Pakistan.151 
 
Pakistan Domestic Prices
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00
Aug-99
Oct-99Dec-99
Feb-00
Apr-00 Jun-00
Aug-00 Oct-00
Dec-00
Feb-01
Apr-01
Jun-01
Aug-01
Oct-01Dec-01
Feb-02 Apr-02
Jun-02Aug-02
Oct-02
Dec-02
Feb-03
Apr-03
Jun-03
Aug-03Oct-03
Month/YearCents per PoundPakistan
A-Index
 
 
                                                      
151 Exhibit Bra-385 (Domestic Pri ces from Various Countries). WT/DS267/R/Add.2 
Page I-323 
 
 
Conclusion 
 
113. The evidence outlined above and in Brazil’s earlier submissi ons shows that world market 
prices were transmitted to other markets during MY  1999-2002, and that this continues today.  
Whether the data is viewed collectively or individua lly, the data generally shows that Brazilian, US 
and other exporters’ prices to these 42 countries are consistent with movement s and trends in the A-
Index price.  While there are some (particularly low volume) graphs that show monthly differences 
from A-Index trends or movements, Brazil has set forth the quality, contract, and timing factors 
accounting for such anomalies.  The collective st atistical evidence supports the conclusion of the 
ICAC’s chief statistician that “[a]ctual prices of imported cotton, in non-producing as well as in 
producing countries, are based on the Cotlook A Index or on the New York futures” and “the prices of 
the major types of cotton … are affected by the supply and demand situation facing the market as a 
whole.”152  All of this evidence is consistent with the conclusion that these third country market prices 
are heavily influenced by A-Index and New York fu tures prices.  Professor Sumner analysis and the 
studies by USDA economists undeniably show that the US subsidies have suppressed A-Index and 
New York futures prices.  Since these indices are th e benchmarks for prices in those “same markets” 
where US and Brazilian upland cotton were exported, it is indisputable that the US subsidies have 
suppressed the prices in each of the “markets” cited in the introductory paragraph of Brazil’s answer 
to this question.      234. Does "significant" price suppression und er Article 6.3(c) necessarily amount to 
"serious" prejudice within the meaning of Article 5(c)?  Could the level of "significance" of any price suppression under Article 6.3(c) determine whether any prejudice under Article 5(c) rises 
to the level of "serious prejudice"? USA, BRA 
 Brazil’s Answer:
 
 
114. In response to both questions, Brazil, New Ze aland, and Argentina have argued previously 
that whether price suppression is “significant” cannot be judged solely by reference to a non-textually 
based “objective” amount of price suppression.153  Rather, the “significance” of price suppression 
must be assessed with reference to the quality of the impacts of whatever  level of price suppression 
exists on the producers of the like product.  For ex ample, a panel could find that even large amounts 
of price suppression are not “significant” where the complaining party producers had de minimis  
production, or no exports, and/or that the total value of lost revenue from suppressed prices was 
minimal.  On the other hand, very large producers of a commodity product like upland cotton would suffer serious prejudice from even smaller “objectiv e” levels of price suppression in terms of the 
amount of lost revenue.   
 115. The Panel’s question really comes down to  whether Article 6.3 of the SCM Agreement 
requires a two step process – first, an objective finding of an amount of price suppression that is 
“significant,” and second, whether the complaining pa rty Member suffers serious prejudice from such 
“significant” levels of price suppression.  Brazil doe s not believe the text requires such a two-step 
process for the reasons outlined above and in previous  submissions.  However, the facts of this case 
show that even if such a test were required,  the amount of price suppr ession caused by the US 
subsidies is significant and far from de minimis .  Brazil has also submitted undisputed evidence that 
its producers have suffered considerable losses in  revenue from suppressed prices that could have 
                                                     
 
152 Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).   
153 Brazil’s 9 September Further Submission, paras. 251-259;  Brazil’s 7 October Oral Statement, 
para. 30;  Brazil’s 27 October Answers to Questions, paras. 119-122.  New Zealand’s 3 October Further 
Submission, paras. 2.21-2.27;  New Zealand’s 8 October Oral Statement, para. 8;  Argentina’s 3 October Oral 
Statement, para. 36;  Argentina’s 8 October Oral Statement, para. 38. WT/DS267/R/Add.2 
Page I-324  
 
been used for further investment in  high-yielding lower cost production.
154  By any measure, this 
evidence establishes both “significance” of the price suppression and “serious prejudice” to the interests of Brazil.     235. Please comment on paragraphs 8, 9 and 10  of the US 2 December oral statement, in 
particular, why the average Brazilian price is show n as lower than the average US price.  BRA 
 
Brazil’s Answer:
 
 
116. Brazil previously has set forth its reasoning why evidence of lower Brazilian prices in some 
markets is irrelevant to the issue of whether or not all the prices in those markets were suppressed by 
the global effects of US subsidies.155  This global price transferra l mechanism is and remains the 
relevant analysis of Brazil’s Article 6.3(c) price suppression claim as Brazil has outlined in its Answer to Question 233.  Brazil sets forth its comments a nd rebuttal to paragraphs 8, 9 and 10 of the US 2 
December Oral Statement and Exhibit US-75 below.       
 
Cumulative Analysis of 8 Country Export Prices 
 
117. With respect to the US “price undercutting” ar gument, and in particular the US chart set out 
in Exhibit US-75, the factual assertion that cumulative US prices in the 8 countries examined are 
consistently much higher than Brazilian prices is si mply wrong.  One fundamental error with Exhibit 
US-75 is that the United States did not “weight -average” the data regarding export prices for 
Argentina, Bolivia, Italy, Philippines, Portugal, Indo nesia, Paraguay and India.  Rather, Exhibit US-75 
is based on a simple average, not taking into acc ount whether Brazilian shipments on a monthly basis 
were 2 tons or US shipments the same month we re 100,000 tons.  In addition, the US chart (and 
accompanying data) in Exhibit US-75 provid es no volumes on monthly shipments, provides no 
published backup material, uses a non-public source of  information, and inexplicably does not use 
official USDA Foreign Agricultural Servi ce (FAS) published data on export prices.   
 118. Using the proper monthly weighted averag e methodology and FAS’s own official export 
pricing data together with the Brazilian G overnment’s official export pricing data,
156 the collective 
situation in the eight countries examined in Exhi bit US-75 looks completely different than the US 
chart in that exhibit:    
                                                     
 
154 Brazil’s 9 September Further Submission, Section 6 and Annex III.  See also Exhibit Bra-283 
(Statement by Christopher Ward – 7 October 2003). 
155 Brazil’s 2 December Oral Statement, paras. 14-19  (providing evidence and references to other 
evidence supporting Brazil’s clams);  Brazil’s 9 September Further Submission, Section 3.3.4.9.   
156 This data was discussed in so me detail in Brazil’s Answer to Question 233 and is contained in 
Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). WT/DS267/R/Add.2 
Page I-325 
 
 
Weighted Average U.S. and Brazil Export Prices to Argentina, Bolivia, Italy, 
Philippines, Portugal, Indonesia and India
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00
Jan-99
Mar-99
May-99Jul-99
Sep-99 Nov-99Jan-00 Mar-00 May-00
Jul-00
Sep-00 Nov-00 Jan-01
Mar-01
May-01
Jul-01Sep-01 Nov-01
Jan-02 Mar-02
May-02
Jul-02
Sep-02
Nov-02
US Weighted Average Brazil Weighted Average A-Index  
 
119. The graph shows that US and Brazilian prices fluctuate with Brazilian prices at times higher 
than US prices and US prices higher than Brazilian prices at other times.  The chart shows that 
beginning in November 2000, US prices plunged al ong with the A-Index prices and that Brazilian 
prices quickly followed, with both US and Brazilian prices remaining at record  lows until near the end 
of 2002 when both started rising again.  Finally, th e chart shows that US prices generally followed the 
movements or trends in A-Index prices (the solid li ne in the graph).  As discussed in Brazil’s Answer 
to Question 233, this is what is relevant for a price suppression claim under Article 6.3(c) as opposed 
to any alleged “undercutting” by  Brazilian cotton in individual markets as the US claims.    
 
Cumulative Analysis of US and Brazilian Prices in 40 Third-Country Markets 
 
120. Moving beyond the 8 countries in Exhibit US -75 to all 41 countries (including Brazil) where 
Brazil and the US both sold at least some upla nd cotton between MY 1999-2002 further demonstrates 
the absence of so-called “price undercutting” by Br azilian products as alleged by the United States.  
For the period MY 1999-2002, the weighted average price covering a total of 10.5 billion pounds of US upland cotton exported to these same 41 countr ies (including Brazil) is 45.33 cents per pound.
157  
By contrast, the average weighted price of 709 million pounds of exported Brazilian upland cotton to 
40 export markets is 44.65 cents per pound.158  This is a difference of 0.68 cents per pound.  For 
marketing year 2001 – the year when prices plunged to  record lows – the weighted average price of 
US upland cotton in all markets where Brazilian co tton was also exported was 38.83 cents per pound 
while Brazilian weighted average prices to the sam e markets was significantly higher at 44.05 cents 
per pound.159  Brazilian prices were lower than US pr ices during MY 2000 and 2002, but were higher 
than US prices in MY 1999.160  This is hardly evidence of “price undercutting” by Brazilian upland 
cotton.   
 
                                                      
157 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  
158 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). 
159 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  
160 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  WT/DS267/R/Add.2 
Page I-326  
 
121. These very close relationships – as well as movements – of Brazilian and US  cumulative 
prices in the 41 countries are reflected in cumulativ e weighted average monthly prices in the graph 
below:
161   
 
Export Prices Total
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00100.00
Aug-99Oct-99
Dec-99 Feb-00
Apr-00
Jun-00
Aug-00
Oct-00 Dec-00Feb-01
Apr-01
Jun-01
Aug-01 Oct-01
Dec-01
Feb-02 Apr-02 Jun-02
Aug-02 Oct-02
Dec-02
Feb-03
Apr-03
Jun-03cents per pound
U.S. Brazil 
 
122. This graph illustrates the absolute closen ess of prices between Brazilian and US prices, 
particularly after mid-2001.  But it also shows very similar movements  in prices between Brazilian 
and US exports.  And, as discussed in Brazil’s Answer to Question 233, these similar movements are 
further evidence of the influence of the global pricing mechanisms on prices received by US and Brazilian exporters in third country markets.    
Individual Third-Country Analysis of Brazilian and US Export Prices 
 123. When US and Brazilian prices in the 40 indi vidual markets are examined, the evidence does 
not support the United States’ broad assertion that Brazilian prices are consistently lower than US prices.  In some of the key textile producing countri es where US exporters ship large quantities of US 
upland cotton – Hong Kong, Taiwan, India, Pakist an, and Vietnam – US prices during MY 1999-2002 
were lower  than Brazilian prices.
162   
 124. In other large consuming (textile producing) countries, while US prices were somewhat 
higher than Brazilian prices, the volume of US exports vastly exceeded the volume of Brazilian 
exports, including China (120 times greater), Bangl adesh (26 times greater),  Colombia (9 times 
greater), Indonesia (17 times greater), Japan (35 tim es greater), Korea (3384 times greater), and Peru 
(631 times greater).
163  Huge volumes of US exports in these 7 markets compared to the volumes of 
Brazilian exports suggest that US exports, not Br azilian exports, play a dominating role in the 
conditions of competition in those markets.   
                                                     
 
161 Exhibit Bra-386 (Brazil and US Export Price by Country). 
162 A complete set of graphs for each of the 40 c ountries country markets and the underlying data are 
set forth in Exhibit Bra-383 (Brazil and US Export Da ta on Export Quantities and Values by Country) and 
Exhibit Bra-386 (Brazil and US Export Prices by Country).  
163 Exhibit Bra-383 (Brazil and US Export Data on  Export Quantities and Values by Country).   WT/DS267/R/Add.2 
Page I-327 
 
 
125. Indeed, overall, the cumulative volume of US  exports to the 40 countries where Brazilian 
exports were shipped was 15 times  greater than the volume of Brazilian exports.164  For Brazilian 
exports to secure any sales, let alone increase market share in competition with heavily subsidized US 
exports in these markets, it would not be surprisi ng that textile consumer s of upland cotton would 
expect Brazilian exporters to discount their prices.   Andrew Macdonald confirmed that such discount 
pricing was necessary for non-Brazilian cottons to compete with US cotton.165  This is particularly 
true in Argentina, Bolivia, Chile, Colombia, Ec uador, Indonesia, Peru, South Korea, Turkey and 
Venezuela where US exporters received the benefit of US export credit guarantees.166  No exporter of 
non-US cotton could hope to compete with those export credits without discounting its upland cotton prices.
167   
 
126. But even where the volume of Brazilian expor ts was greater than US exports, the evidence 
does not suggest the absence of overall price suppression from the effects of US subsidies.168  
Brazilian exports were greater than  US exports in only 10 of the 40 countries (Argentina, Bolivia, 
Cuba, Poland, France, Germany, Greece, Portugal, South Africa, and Spain) over the MY 1999-2002 
period.  These 10 countries represented a tiny fraction – 0.49 per cent – of total US exports during 
MY 1999-2002 to the 41 countries, and onl y 37.5 per cent of Brazilian exports.169  Yet, even without 
significant US exports to these countries, the domest ic prices of these countries still largely followed 
A-Index prices, as discussed in Brazil’s Answer to Question 233.    127. Further, in the 10 countries where the volum e of Brazilian exports was larger than the 
United States, Brazilian prices were higher than US prices in 3 of the 10 countries – Poland, Greece, 
and South Africa.
170  Further, US prices in 4 of the 10 countries – France, Germany, Spain, and 
Portugal – were much higher than Brazilian prices.171  The very low volume of US exports to these 
same four countries suggests that far higher quality US cotton was sold in these countries which produce low-volume specialized cotton textile products.
172  Finally, US and Brazilian prices were very 
close in remaining 3 countries – Argentina, Bolivia, and Cuba.173  Thus, contrary to the US 
arguments, this evidence does not suggest that Br azilian prices are suppressing US prices, even in 
those markets where there are larger volumes of Brazilian imports.    128. Similarly, the unqualified US assertion that “the Brazilian A-Index qu ote is consistently 
below the US A-Index quote”
174 is both untrue as well as irrelevant to the question of whether US 
production subsidies caused suppression of world and third country market prices.  Comparing US 
Memphis A-Index prices with Brazil A-Index prices shows the following graph:175   
 
                                                      
164 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country). 
165 Brazil’s 9 September Further Submission, Annex II, para. 50. 
166 Exhibit Bra-73 (Summary of Export Credit Guarantee Programmes, FY 1999-2003) and Exhibit 
Bra-299 (“Summary of FY 2003 Export Credit Guarantee Activity,” USDA, Covering GSM 102, GSM 103 and SCGP). 
167 Brazil’s 9 September Further Submission, Annex II, paras. 49-53.  
168 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
169 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
170 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
171 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
172 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
173 Exhibit Bra-383 (Brazil and US Export Data on Quantities and Values by Country).   
174 US 2 December Oral St atement, para. 10.   
175 Based on Exhibit Bra-242 (A and B-Index Quotes from Major Producers), extended to 
November 2003 using Cotton Outlook quotes.  WT/DS267/R/Add.2 
Page I-328  
 
 
Brazil and U.S. A-Index
30405060708090
08 200010 200012 200002 200104 200106 200108 200110 2001 12 200102 2002 04 2002
06 2002 08 2002
10 2002
12 2002
02 2003
04 2003
06 2003
08 2003
10 2003
month/yearcents per poundBrazil A
U.S. Memphis
 
 
129. As the Panel can see from the graph, since October of 2001, the US Memphis A-Index price 
has been slightly higher or slightly lower than the Brazilian A-Index price.176  But throughout the 
entire period, the movements of both US Memphis and Brazilian A-Index prices track each other very 
closely.177  This is the key fact illustrating the transmission of global price-suppressing effects as 
discussed in Answer to Question 233 supra.     
 Domestic Prices for Brazil, US and China  
130. Nor does the record support the US claim th at Brazilian prices undercut US export prices to 
the Brazilian market.  Indeed, the evidence suggests th e opposite.  More than 90 per cent of Brazilian 
production of upland cotton was sold in Brazil during MY 1999-2002.
178  Imports represented 
approximately 20 per cent of Brazilia n consumption dur ing MY 1999-2002.179  US exports to Brazil 
represented 21 per cent of Brazilian imports with a total of 306 million pounds of US upland cotton 
exported to Brazil180 in MY 1999-2002.181  US annual weighted average export prices to Brazil were 
lower in every year except MY 2000 when US exports volumes fell to very low levels.182  
Significantly, in MY 1999, when US export volumes to Brazil represented 17.6 per cent of very large 
Brazilian imports of upland cotton, the US weighted average prices were 10.27 cents below Brazilian 
domestic prices.183  Similarly, in MY 2002, when US exports represented 50 per cent of total 
Brazilian imports, US export prices were 4.57 cents per pound lower than Brazilian domestic 
                                                      
176 The US comparison between the Brazilian quote and the California/Arizona quote is misleading 
given the much higher quality of the latter cotton, as discussed above. 
177 The absence of data in MY 2002 for Memphis cotton was due to weather-related quality problems 
according to Gerald Estur of the ICAC.  See Exhibit Bra-375 (Information Provided by Gerald Estur, ICAC).   
178 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76). 
179 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76). 
180 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  
181 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 76). 
182 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  
183 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country).  WT/DS267/R/Add.2 
Page I-329 
 
 
prices.184  This evidence confirms the testimony of  Andrew Macdonald that Brazilian textile 
purchases of cotton used, inter alia, US imports – or the threat of US imports – to negotiate lower 
Brazilian domestic pri ces during MY 1999-2002.185  It may also be an effect of US GSM 102 export 
credit guarantees.  And this evidence further confirms  the price suppressing effects of US subsidies in 
the Brazilian market.  
 
Conclusion 
 
131. The evidence set out above refutes the inappropr iate non-weighted average analysis in Exhibit 
US-75, and confirms the effects of the US subsid ies in each market where Brazil and the US upland 
cotton were found in MY 1999-2002.  Any “compet ition” between US and Brazilian cottons took 
place against the background of subsidy-distorted mark etplaces.  In the final analysis, the fact that 
selected US prices are higher186 or lower in the A-Index or in individual third country markets is 
largely irrelevant to the question whether US s ubsidies are causing significant price suppression “in 
the same market” where US and Brazilian cotton is marketed.  Rather, as Brazil has established, it is 
the impact of the US subsidies on the global suppl y and demand factors that suppresses prices in the 
world market as well as in the third countries where upland cotton is marketed.  This means that the 
prices in each of those 40 third country markets – as well as the Brazilian and US markets – were 
already suppressed before any cotton was shipped by US or Brazilian exporters. 
 132. Finally, the generalized price-suppression eff ect manifests itself in all 42 individual country 
markets
187 in which Brazilian upland cotton is consumed.  Professor Sumner estimates that over 
40 per cent of US upland cotton exports during MY 1999-2002 would not have been made but for the 
US subsidies.188  Forty per cent fewer US exports necessarily means lower, or even non-existent, US 
exports in many of the 40 markets where Brazil e xported its upland cotton.  Had significant volumes 
of US upland cotton not received Step 2 export paym ents, US exports and, thus, the amount of US 
upland cotton competing with Brazilian cottons would ha ve been lower.  Similarly, far fewer bids of 
US upland cotton financed by the GSM 102 programme may well have meant higher prices for Brazilian exporters and/or an expanded market share in each of these markets.   
236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 December 
oral statement).  Please provide a conceptually analogous chart to Exhibit US-63 with respect to 
data relating to the US interpretati on of "world market share".  USA 
 237. Could a phenomenon that remains at approximately the same level over a given period of time be considered a "consistent trend" within the meaning of Article 6.3(d)?  Do parties 
have any suggestions as to how to determine a "c onsistent trend", statistically or otherwise?  
BRA, USA 
 
                                                     
 
184 Exhibit Bra-383 (Brazil and US Export Data on Export Quantities and Values by Country); Exhibit 
Bra-389 (Brazilian Domestic Price Data) updating Exhibit Bra-240 (International, US and Brazilian Prices).   
185 Brazil’s 9 September Further Submission, Annex II , para. 47 (“local purchasers of Brazilian cotton 
will frequently threaten to import fore ign cotton if they consider the price of local cotton to be too high.”).  
186 See Brazil’s 9 September Further Submission, Figure 17 (US California A-Index prices were higher 
than Brazilian prices). 
187 40 export markets plus the United States and Brazil. 
188 Brazil’s 9 September Further Submission, Annex I, Table 5a.  This conclusion is conservative in 
view of the huge $12.5 billion loss that would have b een suffered by US producers  with no US subsidies 
between MY 1997-2002. WT/DS267/R/Add.2 
Page I-330  
 
Brazil’s Answer:
 
 
133. In responding to this question, Brazil starts fro m the ordinary meaning of the term “consistent 
trend.”  A “trend” means “a general course, tendency or drift.”189  “Consistent” means “congruous, 
compatible with, not contradictory, marked by uniformity or regularity.”190  A consistent trend within 
the meaning of Article 6.3(d) therefore means a non-contradictory tendency marked by regularity. 
 134. Generally, a phenomenon that remains at approxi mately the same level could be considered a 
consistent trend.  However, read in the context of Article 6.3(d), which speaks of an “increase that 
follows a consistent trend over a period when subsid ies have been granted,” the consistent trend must 
reflect the increase in the world market share of a Me mber over its previous three-year average.  Thus, 
for a given period of time, the world market share of a Member could remain at approximately the 
same level and be compatible with a finding of a cons istent trend.  Yet, there will not be a consistent 
trend, within the meaning of Article 6.3(d), if duri ng the final year there is no increase of a Member’s 
world market share over its previous three-year average.  It follows that over the period when 
subsidies have been granted there must be a regular  tendency of an increase in the world market share 
of a Member – although no increase in each and every year is required for the conditions of 
Article 6.3(d) to be fulfilled.   135. This interpretation is confirmed by the scope  of Article 6.3(d), which applies to primary 
products or commodities.  The parties agree that th is includes agricultural products that necessarily 
will be affected by favourable or adverse weat her conditions.  The United States, for example, 
repeatedly asserts that the weather-related problems of  MY 1998 mean that data for that year should 
be disregarded.  These weather-related effects alone could cause in particular years the world market 
share of a Member to increase or decrease.  This may well be the reasoning behind requiring examination of a longer trend in Article 6.3(d).  But to require a constant increase in the world market 
share during each year “when subsidies have b een granted” would render the disciplines of 
Article 6.3(d) largely inutile for agricultura l products faced with weather-related production 
fluctuations.  136. Brazil has offered data on the US world ma rket share over the period since MY 1996 as well 
as since MY 1986.
191  The data shows that the trendline for the US world market share increases 
whether based on MY 1996 or MY 1986 as the starti ng point.  The Panel’s question asks for guidance 
on the conditions for a finding whether this trend is consistent.  137. Brazil cautious that statistical methods may not  be helpful in analyzing the consistency of a 
trend within the meaning of Article 6.3(d) for two reasons:  first, Article 6.3(d) is concerned with 
yearly data over a relatively short period.  That mean s that only very few data points will be available, 
which will affect the statistical significance of any results.  Second, as discussed above, it is the nature 
of world market shares in agricultural products to fluctuate due to weather-r elated effects.  This 
phenomenon tends to further weaken any statistical significance of methods analyzing the consistency 
of a trend.    
138. With these considerations in mind, Brazil s uggests that the Panel analyze the trendlines 
offered by Brazil
192 and decide whether on their face they demonstrate – as Brazil has argued – a trend 
consistent with a finding that the effect of the subs idies is an increase in the US world market share 
for upland cotton.  Brazil believes they do, particul arly if the severe MY 1998 decline is disregarded. 
                                                      
189 The New Short Oxford English Dictionary 1993 edition, p. 3384. 
190 The New Shorter Oxford English Dictionary, 1993 edition, p. 486. 
191 Brazil’s 27 October Answers to Questions, paras. 123-129 and Brazil’s 9 September Further 
Submission, Sections 3.4 and 4.12.2. 
192 Brazil’s 27 October Answers to Questions, paras. 123-129 and Brazil’s 9 September Further 
Submission, Sections 3.4 and 4.12.2. WT/DS267/R/Add.2 
Page I-331 
 
 
 139. However, Brazil has also run a regression an alysis for the trends over the period MY 1986-
2003, MY 1996-2003 and MY 1996-2002, with the r esults being reproduced in the graphs below.
193 
 
US World Market Share Upland Cotton (MY 1986-2003)
y = 0.866x + 18.4
R2 = 0.4438
051015202530354045
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing yearpercentage
 
 
                                                      
193 The results are based on data as reported in Exhibit Bra-302 (Revised and Extended Data on Article 
6.3(d) Claim). WT/DS267/R/Add.2 
Page I-332  
 
U.S. World Market Share Upland Cotton (MY 2003)
y = 2.7379x + 17.428
R2 = 0.6033
051015202530354045
1996 1997 1998 1999 2000 2001 2002 2003
marketing yearpercentage
 
 
U.S. World Market Share Upland Cotton (MY 2002)
y = 2.8107x + 17.21
R2 = 0.5171
051015202530354045
1996 1997 1998 1999 2000 2001 2002
marketing yearpercentage
 
 
The R2 – the measure for the fit of a regression analysis – varies between 0.44 for MY 1986-2003 and 
0.60 for MY 1996-2003.  The R2 demonstrate that there is a positive relationship between the US 
world market share and its increase over time.  In view of the limited number of observations and the nature of the commodity market in qu estion, this is a very high number. 
 WT/DS267/R/Add.2 
Page I-333 
 
 
238. According to the US interpretation of the term "world market share": 
  (a) should the domestic consumption of closed markets be added into the 
denominator?   
 
 (b) if US production and consumption in creased by the same percentage, whilst the 
rest of the world's production and co nsumption remained steady, would this 
imply an increase in the US "world market share" by a different percentage?   
  (c) does Saudi Arabia have a small wo rld market share for oil?  USA   
 
239. How does the US respond to Brazil's assertions  that, under the US interpretation of the 
term "world market share":    (a) there would be no WTO disciplines on production-enhancing subsidies that 
increase a Member's world market sha re of exports?  (see paragraph 64 of 
Brazil's 2 December oral statement); 
  (b) a Member's exports would have to be disregarded in calculating their "world 
market share" in terms of "world co nsumption"? (see e.g. paragraph 65 of 
Brazil's 2 December oral statement)  USA 
 
240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) of the SCM Agreement ?  Do these provisions apply separately?  If not, could it indicate that "world 
market share" is intended to mean the same  as "share of world export trade"?  USA 
 
241.  How does the US reconcile its data on co nsumption for 2002 in US Exhibit 40, Table 1 
with the "consumption" data it refers to in it s 30 September submission, paragraph 34, Exhibit 
US-47 or US-71?  USA  242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land owners?  If not all of the benefits go to land own ers, what proportion goes to producers?  USA 
 
243. Can the Panel assume that any support at all, even marketing loan programme payments, benefits upland cotton if an upl and cotton producer has other agricultural 
production besides upland cotton?  USA  
244. What proportion of the 2000 cottonseed payments benefited producers of upland cotton , 
given that payments were made to first handlers , who were only obliged to share them with the 
producer to the extent that the revenue from sale of the cottonseed was shared with the 
producer? (see 7 CFR §1427.1104(c) in Exhibit US-15). BRA 
 
Brazil’s Answer:
 
 
140. Brazil does not know “what proportion of the 2000 cottonseed payments” were paid directly 
to producers of upland cotton by first handlers.  A ny such information would be within the exclusive 
control of USDA.  Therefore, Brazil looks forward to the United States providing this information in its 19 January comments.  
 
141. However, there is evidence that the MY 2000 cottonseed payments – together with the MY 
1999 and MY 2002 payments – benefited upland cotton pro ducers either directly or indirectly.  First, 
producers who ginned their own cott on received payments directly as “first handlers.”  But even 
producers who did not gin their own cotton received i ndirect benefits because the purpose and effect 
of the subsidy was to prevent producers from having to pay more for ginning because of low WT/DS267/R/Add.2 
Page I-334  
 
cottonseed prices.  This was made clear by the official USDA announcement of the USDA Secretary 
Glickman in announcing the MY 2000 cottonseed payments:    
Agriculture Secretary Dan Glickman announced today that USDA will propose to pay cotton farmers and ginners about $74 million to help offset losses from low 1999-
crop cottonseed prices. 
Because of those low prices, many gins were unable to meet operating expenses 
normally covered by cottonseed revenues a nd some cotton farmers had to pay higher 
ginning costs,” Glickman said. “This discretionary programme will help farmers 
make up this lost income .” 
The proposed payments would be made  to cotton gins based on seed tonnage 
produced from the 1999 crops of upland and Extra Long Staple cotton. USDA plans to propose that gins share cottonseed programme payments with cotton farmers 
commensurate with any increased 1999-cr op ginning charges as a condition of 
accepting programme payments .
194 
142. This analysis makes it clear that upland cotton producers in MY 1999-2000 were required to 
pay more for ginning when cottonseed prices fe ll because ginning companies accept as part of the 
payment for ginning the cottonseed produced from the ginning process of raw cotton.  The benefits of 
the cottonseed programme to producers explains why the NCC strongly supported the “the establishment of a permanent programme for cottonseed” during the debate for the 2002 FSRI Act.
195  
In testimony before Congress, the Chairman of the NCC stated as follows: 
 
Cottonseed is a critical component of total farm revenue  generated from cotton 
production.  From 1994-1998, co ttonseed accounted for approximately 13 per cent of 
the total value of cotton production, averaging $58 per acre.  Unfortunately cottonseed prices weakened significantly in 1999 as a result of weak crushing 
demand ads well as low oilseed prices.  Cott onseed values remain well below those of 
previous years.  The special cottonseed payment authorized by Congress for the 1999 
and 2000 marketing years were vitally important on boosting producer income
 and 
helping to maintain the industry’s ginning infrastructure.196 
143. Finally, the importance of cottonseed paymen ts to producers is further demonstrated by 
comparing the costs of ginning to the value of co ttonseed.  This is illustrated in the graph below:197   
 
                                                      
194 Exhibit Bra-390 (“Glickman Proposes Cottonseed Payment Programme,” USDA News Release, 
29 February 2000)  (emphasis and underlining added). 
195 Exhibit Bra-41 (Congressional Hearing, “The Future of Federal Farm Commodity Programmes 
(Cotton),” House of Representatives, 15 February 2001, p. 5). 
196 Exhibit Bra-188 (Testimony of James Echols, Chairman of the National Cotton Council before the 
Committee of Agriculture, Nutrition and Forestry of the US Senate, 17 July 2001, p. 9). 
197 This graph is based on per pound figures for the value of cottonseed and the cost of ginning per 
pound of cotton lint produced as calculated from Exhibit Bra-323 (Costs and Returns of US Upland Cotton 
Farmers, MY 1997-2002).  They calculated figures are reproduced in Exhibit Bra-391 (Cost of Ginning and 
Value of Cottonseed per Pound of Cotton Lint).  WT/DS267/R/Add.2 
Page I-335 
 
 
Cost of Ginning vs Value of Cottonseed
024681012
1997 1998 1999 2000 2001 2002
YearsCents Per PoundCost of Ginning per pound of cotton lint
Value of cottonseed per pound of cotton lint
 
 
144. This graph shows that producers were the pr imary beneficiaries of the cottonseed programme. 
When cottonseed prices declined in  MY 1999, ginning costs exceeded  cottonseed prices by 2.18 cents 
per pound of cotton lint.198  This gap between ginning costs and cottonseed prices totalled 
$170.5 million.199  Congress authorized $185 million in cottonseed payments in MY 2000200, which 
covered much of the MY 1999 losses.  As noted, it was upland cotton producers – not ginners – who 
were required to pay the $170.5 million difference in MY 1999 between the costs of ginning and the 
value of the cottonseed.  When cottonseed prices again plunged in  MY 2001 and MY 2002, Congress 
provided relief to producers with the 2002 cotton seed payments.  For example, the $50 million in 
cottonseed payments in MY 2002 covered part of a gap of $73 million between the ginning cost and 
the value of the cottonseed.201  Thus, this evidence suggests not only that cottonseed payments were 
support to upland cotton within the meaning of Article  13(b)(ii) of the Agreement on Agriculture, but 
that these payments, while relatively small in comp arison to the billions of dollars paid to US 
producers, nevertheless, provided yet further s ubsidies supporting large quantities of US upland 
cotton production.   
  
245. Can a panel take Green Box subsidies into  account in considering the effects of non-
Green Box subsidies in an action based on Articles 5 and 6 of the SCM Agreement ?  BRA, USA 
 
                                                     
 
198 Exhibit Bra-391 (Cost of Ginning and Value of Cottonseed per Pound of Cotton Lint). 
199 This figure has been calculated based on the pri ce gap of 2.18 cents per pound multiplied by the MY 
1999 production of 16.294 million 480-pound bales (Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, 
January 2003, p. 4). 
200 Brazil’s 9 September Further Submission, Table 1. 
201 This figure has been calculated based on the pri ce gap of 0.92 cents per pound multiplied by the MY 
2002 production of 16.531 million 480-pound bales (Exhibit Bra-391 (Cotton and Wool Outlook, USDA, 
12 December 2003, Table 1).  WT/DS267/R/Add.2 
Page I-336  
 
Brazil’s Answer:
 
 
145. The Panel is well aware of Brazil’s view that  all of the US subsidies are non-green box.  But 
if the Panel were to find that certain of the subs idies are green-box subsidies, then under the specific 
circumstances of this dispute, Article 13(a)(ii) of  the Agreement on Agriculture prohibits – during the 
implementation period – the effects of these subsidie s being included along with other effects of non-
green box subsidies in assessing Brazil’s actionable subs idy claims.  Professor Sumner’s analysis in 
Annex I of Brazil’s 9 September Further Submission permits the Panel to examine both the individual 
as well as collective effects of the various US s ubsidies.  In response to Question 146, Professor 
Sumner analyzed the production, export and pr ice effects of all of the subsidies except PFC 
subsidies.202  This analysis would also permit the Panel to  ensure that effects caused by, for example, 
PFC payments, were not attributed to the effects caused by the other non-green box subsidies.    146. After the 9-year implementation period of th e Agreement on Agriculture, there is nothing in 
that Agreement that exempts the effects of green box subsidies from being considered by panels in 
actions based on Articles 5 and 6 of the SCM Agreemen t.  Subsidies that conform to Annex 2 of the 
Agreement on Agriculture are exempt from the re duction commitments established under Article 6, 
but there is nothing in Articles 5 or 6 of the SCM Agreement that provides for any type of exemption, 
beginning in 2004.  On the contrary, Article 5 of  the SCM Agreement clearly states the Members 
should not cause, “… through the use of any subsidy … adverse effects to the interests of other 
Members.”  The only exception provide d therein refers to the temporar y exception of Article 13 of the 
Agreement on Agriculture.   
  
246. Can a panel take prohibited subsidies into account in considering th e effects of subsidies 
in an action based on Articles 5 and 6 of the SCM Agreement ?  BRA, USA 
 
Brazil’s Answer:
 
 
147. Yes, the Panel is requi red to take into account all non-green box subsidies, including 
prohibited subsidies in assessing Brazil’s Article 5 and 6 claims under the SCM Agreement.203  Even 
if the Panel were to conclude that the effects of prohibited subsidies, such as Step 2 and export credit 
guarantees, should not be assessed for the purposes  of Brazil’s Article 5 and 6 claims, Professor 
Sumner’s analysis permits the Panel to analy ze such claims for those non-green box and non-
prohibited subsidies (marketing loan payments, crop insurance subsidies and contract payments).   
  247. Can the Panel take into account trends and volatility in market and futures prices of 
upland cotton after the date of establishment of the Pa nel?  If so, how do they affect the analysis 
of Brazil's claim of a threat of serious prejudice?  BRA, USA 
 
Brazil’s Answer:
 
 
148. Yes.  Nothing prevents the Panel from cons idering – in assessing Brazil’s threat of serious 
prejudice claims – the volatility of the upland cotton market and current and likely futures price developments after the date of establishment of th e Panel.  Brazil has proposed that the Panel follow 
the guidance of the GATT EC – Sugar Exports panels and the Appellate Body in US – FSC  and 
analyze whether there is any mechanism that stems,  or otherwise controls, the flow of US upland 
                                                     
 
202 Brazil’s 27 October Answers to Questions, paras. 114-118 and Exhibit Bra-301 (Additional Results 
from Professor Sumner’s Model, Table “Impact of rem oval of all domestic support except PFC/direct payments 
and crop insurance). 
203 See Brazil’s 27 October Answer to Question 145(b).   WT/DS267/R/Add.2 
Page I-337 
 
 
cotton subsidies and whether these mandated and unlim ited subsidies constitute a permanent source of 
uncertainty in the upland cotton market.204   
 149. The Panel’s question raises both legal and factua l issues.  First, as a legal matter, Brazil has 
previously argued that it is appropriate for the Pane l to consider pricing, export, production, acreage 
and other evidence occurring after the da te of establishment of the Panel.
205  The Panel’s terms of 
reference in this case involve both present and threat of serious prejudice claims ( i.e., matters) with 
each of these types of claims overlapping during the period of MY 2002.  Thus, the “matter” before 
the Panel has not changed (and cannot) since the establishment of the Panel.    
150. In “making an objective assessment of the matter,” the Panel must make “an objective 
assessment of the facts of the case” pursuant to DSU Article 11.  Nothing in the text of DSU 
Article 11 suggests that this objective assessment of  “facts” cannot include collecting and analyzing 
facts occurring after the establishment of a Panel.  Indeed, there are a number of precedents in which 
panel’s have considered eviden ce that came into existence after the date of the establishment of a 
panel.
206  As with investigating authorities in trade reme dy investigations, a “period of investigation” 
for a WTO Panel in an Article 5 and 6 claim is useful for assessing whether present or threatened 
effects presently exist.  There is nothing in the text  of Part III of the SCM Agreement or the DSU that 
suggests that the time period for the collection of ev idence or data to investigate must stop with the 
establishment of the Panel.    
151. The second question raised by the Panel’s question is a factual one, i.e., what weight should 
the Panel give to the most recent evidence of volatility  in the cotton futures and spot markets?  It is 
fact that upland cotton prices have risen – and falle n – significantly since the Panel was established in 
March 2003.  For example, futures prices for the nearby March 2004 contract rose from 55.80 cents 
on 6 March 2003 to a high of 86 cents on 30  October before falling to 72.32 cents on 
19 December 2003.
207  But the record shows that such vola tile futures price increases – and decreases 
– also occurred between MY 1999-2002.208  And they will no doubt ex ist during MY 2003-2007.   
 152. In assessing whether there is a threat of seri ous prejudice, the Panel should be cautious about 
relying too heavily on only 3-4 months worth of the most recent data.  Indeed, the Appellate Body has 
cautioned that “competent authorities are required to  examine the trends in [data] over the entire 
period of investigation,” because the “analysis could be easily manipulated to lead to different results, 
depending on the choice of end points.”
209  Similarly, in Argentina – Footwear the Appellate Body 
held that “competent authorities are required to co nsider the trends in imports over the period of 
investigation (rather than ju st comparing the end points).”210  The panel in Argentina – Peach 
Safeguards stated that “[t]the most recent past should not be considered separ ately from the overall 
                                                      
204 See Brazil’s 18 November Further Rebuttal Submission, Section 4. 
205 Brazil repeatedly in its many submission to the Panel refers to data that originates after the 
establishment of the Panel, including in these answers to the Panel’s questions. 
206 Panel Report, India – Quantitative Restrictions , WT/DS90/R, para. 5.161-5.163 (“In this case the 
parties and the IMF have supplied information concerning the evolution of India’s balance of payments and 
reserve situation until June 1998.  To the extent that such information is relevant to our determination of the 
consistency of India’s balance of payments measures wi th GATT rules as of the date of establishment of the 
Panel [18 November 1997], we take  it into account.”);  Panel Report, Japan – Apples , WT/DS245/R, para. 8.49;  
GATT Panel Report, Korea – Beef , BISD 36S/268, paras. 122-123. 
207 Exhibit Bra-393 (Futures Prices  as of 19 December 2003). 
208 See Exhibit Bra-311 (Side-By-Side Ch art of the Weekly US Adjusted World Price, the A-Index, the 
nearby New York Futures Price, the Average Spot Market Price and Pri ces Received by US Producers from 
January 1996 to the Present). 
209 Appellate Body Report,  US – Steel Safeguards , WT/DS248/AB/R, paras 353-356. 
210 Appellate Body Report, Argentina – Footwear , WT/DS121/AB/R, para. 129. WT/DS267/R/Add.2 
Page I-338  
 
trends during the period of analysis,” as otherwis e the resulting picture may be “quite misleading.”
211  
The Panel in this case performs a task similar to  a domestic competent authority in a trade remedy 
case.    153. The Panel has before it two different met hodologies to judge the present price levels and 
threat of serious prejudice.  The first methodology before the Panel is the use of baseline projections 
such as the USDA’s and FAPRI’s baseline projections to assess the effects of mandated US subsidies in the year ahead.  Professor Sumner’s analysis based on the January 2003 FAPRI baseline, shows that the US subsidies continue to maintain larg e amounts of US production whether prices are high or 
low.  Professor Sumner found that during MY 2003-2007 annual US production would be 19.4 per 
cent lower leading to a reduction in projected US exports by 32.4 per cent annually and world prices 
that would be 8.3 per cent higher absent the US subsidies.
212  Similarly, Professor Ray of the 
University of Tennessee also found significant pr oduction, export, and price suppressing effects from 
the US subsidies from MY 2003-2007.213  These findings by two of the leading US economists cannot 
be ignored by the Panel.   
 
154. A second far less valid methodology would be to use the US “futures methodology.”  This 
methodology would examine the December futur es price at the time of planting (January-
March 2004).  What is significant about current futu res prices (in December 2003) is that the “futures 
market” is predicting that prices will fall in MY 2004.  The December 2003 price of the December 2004 futures contract is 65.85 cents per pound as of 19 December 2003, while the 
March 2004 futures contract is 72.32 cents per pound.
214  Assuming that the current 65.85 cents per 
pound December 2004 futures contract price will continue during the planting decision marking time between January-March 2004, the expected adju sted world price will be 52.48 cents per pound
215 and 
the expected average MY 2004 price received by US producers would be 59.73 cents per pound.216  
This means that US producers “expect” to receive  a considerable CCP payment of 6 cents per pound 
in MY 2004 (65.73 cents minus 59.73 cents).   
 155. As discussed by Professor Sumner on 3 December, given the probability distribution of the expected adjusted world price,
217 producers would also expect to receive some marketing loan 
payments because producers expect with a certain pr obability that the adjusted world price would be 
below the marketing loan rate trigge ring marketing loan payments.   
 
156. As with the period MY 1999-2002, the existi ng (December 2003) price levels in the upland 
cotton world and US markets mean that US prod ucers will be planting in  2004 for government 
support during MY 2004, not for the market.  This constant theme was recently emphasized by the 
world’s largest cotton trader, William Dunavant:   
 
The [US] farm programme can return more  when prices are low rather than when 
prices are high . . . [and] [t]he loan deficiency payment created by the farm programme is the name of the game – not  necessarily the futures price or the cash 
price . . .  
                                                     
 
211 Panel Report, Argentina – Peach Safeguards , WT/DS238/R, para. 7.64-7.65 citing para. 138 of the 
Appellate Body Report in US – Lamb . 
212 Exhibit Bra-326 (Results of Professor Sumner’s Modified Model, Table B). 
213 See Brazil’s 9 September Further Submission, paras. 204-205.  
214 Exhibit Bra-393 (Futures Prices  as of 19 December 2003). 
215 Exhibit Bra-370 (The Difference between th e Average World Price and the Nearby December 
Futures Contract Price).   
216 The spread of 6.12 cents has been calculated based on the data in Exhibit Bra-370 (The Difference 
between the Average World Price and the Nearby December Futures Contract Price) and the average farm price 
in Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5). 
217 See Exhibit Bra-371 (Simple Example of the Calcula tions of Marketing Lon Benefits (Probability 
Distribution)). WT/DS267/R/Add.2 
Page I-339 
 
 
It’s interesting that we project nearly an  8 per cent increase in world production [in 
MY 2003], but US production is forecast to rise only slightly.  This tells me the world 
is certainly more price sensitive and responsive than the US cotton producer.   I think 
the nature of our farm programme de finitely creates this situation.  Cotton futures 
prices need to rise to nearly 70 cents a pound to make cash prices better than the 
farm programme protection.218   
In addition, Mr. Dunavant emphasized that US  producers “must have” the GSM-102 programme “if 
we are to export the quantities needed to support ou r level of cotton production in this country [ i.e., 
the United States].”219  These statements by the world’s lead ing cotton trader confirm the significant 
effects that have existed and will continue to exis t at current price levels because of the mandatory 
nature of the subsidy programmes. 
 157. Finally, nothing about the price levels that  have increased since 18 March 2003 has changed 
in any way the mandatory nature of the US subsidies.  At current price levels, producers would receive benefits from crop insurance subsidies, direct  payments, and indirectly from Step 2 payments 
and export credit guarantees.  Whether prices are at 70 cents per pound or 30 cents per pound, US 
producers know and expect that they will be protected  by the wide range of US subsidies.  When US 
prices decline, as they inevitable will, US producer s will be provided direct production incentives to 
continue producing at any price level.  Historical  data convincingly demonstrates that this downside 
risk protection guarantees high leve ls of production.  Brazil proved that US planted acreage remains 
high within relatively narrow ranges whether market prices increase or decrease.  This lack of US 
producers’ production response to huge costs overruns of  $12.5 billion over six years or to record low 
prices, or even to increasing prices, is at the heart of Brazil’s threat case.  While the cumulative price-
suppressing and export-enhancing effects of the US s ubsidies may be smaller now than they were on 
18 March 2003, they are, and will remain significan t for MY 2003 and for MY 2004 based on current 
prices.   
 
158. In sum, Brazil reiterates its arguments that  taking all available data into account, the US 
subsidies pose a threat of serious prejudice to the inte rests of Brazil, in violation of Articles 5(c) and 
6.3 of the SCM Agreement and GATT Articles XVI:1 and XVI:3.
220 
  VI. Step 2 
 
248. In respect of the level of Step 2 payments in certain time periods, the Panel notes, inter 
alia, footnote 129 in the US first written submission; footnote 33 in the US 18 November further 
rebuttal submission; and Exhibit BRA-350.  Have  Step 2 payments ever been zero since the 
elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002?  In what 
circumstances could a Step 2 payment be zero?  How does the elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002 affect your response? BRA, USA 
 
Brazil’s Answer:
 
 
159. Under the 2002 FSRI Act (with the elimination of the 1.25 cent per pound threshold), Step 2 
payments will be zero when the lowest US A-I ndex quote is equal or below the average A-Index.221  
Thus, for Step 2 payments to expire, the lowest US  quote will have to be one of the cheapest of the 
                                                      
218 Exhibit Bra-392 (“William Dunavant Says: Overpr oduction Thwarts Cotton Price Upturn,” Western 
Farm Press). 
219 Exhibit Bra-392 (“William Dunavant Says: Overpr oduction Thwarts Cotton Price Upturn,” Western 
Farm Press). 
220 See Section 4 of Brazil’s 18 November Further Rebuttal Submission. 
221 Exhibit Bra-29 (Section 1207 (a) of the FSRI Act). WT/DS267/R/Add.2 
Page I-340  
 
only five quotes making up the given A-Index.  Du ring MY 2002, there were zero Step 2 payments 
during five weeks: 20 September, 27 September,  4 October, 11 October and 18 October 2002.
222  
 160. By contrast, during MY 2001, Step 2 payments were zero during 15 weeks: 14 December, 21 December, 28 December, 4 January, 11 January, 18 January, 25 January, 1 February, 8 February, 
15 February, 22 February, 1 March, 8 March, 15 March, and 22  March.
223 
 161. The elimination of the 1.25 cent per pound threshold under the 2002 FSRI Act has reduced the likelihood of zero payments under the Step 2 programme because the lowest US quote must now 
be even lower relative to the A-Index for Step 2 pa yments to expire.  It also means that the US 
government will pay the entire difference between th e cheapest US price quote for the A-Index and 
the A-Index itself.   
249. The Panel notes that the definition of eligible "exporter" in 7 CFR 1427.104(a)(2) 
includes "a producer":   
  (a) How does this reconcile with Brazil's argument that Step 2 "export payments" 
do not directly benefit the producer?
224  How, if at all, would this be relevant for 
an analysis of the issue of export contingency under the Agreement on 
Agriculture  or the SCM Agreement ?  BRA 
 
Brazil’s Answer:  
 
162. As set out in Brazil’s Answer to Question 1 25, Step 2 payments generally are not received by 
US producers but rather by eligib le exporters and domestic users.225  Of course, it is theoretically 
possible for a producer to receive directly Step 2 payments when the producer meets the definition of 
an exporter “regularly engaged in  selling eligible upland cotton for exportation from the 
United States.”226  However, the fact that most US producers do not directly receive Step 2 payments 
does not mean that they do not benefit indirectly from Step 2 payments.  Quite the contrary.  Step 2 
payments support significant quantities of planted upland cotton acreage, production and exports by 
stimulating the demand for high-cost and high-priced US cotton.227  Brazil has provided considerable 
evidence of these effects in its earlier submissions th at has never been rebutted by the United States.228   
 163. The answer to the second question is “not at all. ”  Exporters are only eligible to receive Step 2 
export payments if they produce evidence to CCC th at they have exported an amount of US upland 
cotton.  Thus, payments are conditional upon proof of  export.  Exporters will not receive any Step 2 
export payments if they have not produced evidence of the export of US upland cotton.  In sum, the 
fact that producers – in their capacity as exporters  – may benefit from Step 2 export payments does 
not impact the export contingency of these payments.   
                                                     
 
222 Exhibit Bra-350 (Weekly St ep 2 Certificate Values). 
223 Exhibit Bra-350 (Weekly St ep 2 Certificate Values). 
224 For example, Brazil's response to Panel Question 125, paragraph 14.  
225 Brazil’s 27 August Answers to Question, para. 14.   
226 Exhibit Bra-37 (7 CFR 1427.104(a)(2)). 
227 See Brazil’s 9 September Further Submission, Annex I, table I.5f.  
228 Sections 2.6.7, 2.6.8, 4.1, 5.1 and 5.2 of Brazil’s 24 June First Submission; Section 3 of Brazil’s 
22 July Oral Statement; Brazil’s 24 July Closing Statement, paras. 21-22; Section 4 of Brazil’s 22 August 
Rebuttal Submission; Section 3.3.4.7.5 of Brazil’s 9 September Further Submission;  Section 3.7.3 of Brazil’s 
18 November Further Rebuttal Submission. WT/DS267/R/Add.2 
Page I-341 
 
 
(b) How does this reconcile with Dr. Glauber's statement in Exhibit US-24, p. 3 
(referring to "the 1990 Farm Bill and subsequent legislation") that Step 2 
payments do not go directly to the producer?  USA 
 (c) What proportion of Step 2 "export payments" go to producers?  Please supply 
supporting evidence.  USA 
 
VII. Remedies 
 
250. Does Brazil seek relief under Article XVI of GATT 1994 in respect of expired measures?  
What type of recommendation would the Panel be authorized to make?  (Brazil further 
submission, paragraph 471 (iii))  BRA 
 
Brazil’s Answer:
 
 
164. Brazil does not seek relief under GATT Article  XVI of GATT 1994 in respect of expired 
measures, which Brazil understands the Panel to me an only the legal instruments consisting of the 
1996 US Farm Bill providing, inter alia, for production flexibility contract payments, as well as the 
various emergency appropriation Acts in 1998-2001 providing, inter alia, for market loss assistance 
payments.229   
 
165. With respect to the second ques tion, the Appellate Body held in US – Certain EC Products, 
that a panel may not make a recommendation to the DSB that a Member bring a measure into 
conformity with its WTO obligations  if that measure no longer exists.230  Therefore, as detailed in 
paragraph 471(x) of Brazil’s 9 September Furt her Submission, Brazil requests the Panel to 
recommend that the United States bring its existing measures providing or facilitating the payment of 
subsidies to producers, users and exporters of upl and cotton into conformity with GATT Article XVI. 
  
251. In light, inter alia , of Article 7.8 of the SCM Agreement , if the Panel were to find that any 
subsidies have resulted in adverse effects to the interests of another Member within the meaning 
of Article 5 of the SCM Agreement , should it make any recommendation other than the one set 
out in the first sentence of Article 19.1 of the DSU?  BRA  
Brazil’s Answer:
 
 
166.  Yes.  If the Panel agrees with Brazil that th e US subsidies to upland cotton cause and threaten 
to cause serious prejudice to the interests of Brazil, in violation of Article 5 of the SCM Agreement, 
the Panel should recommend pursuant to Article 7. 8 of the SCM Agreement that the United States 
remove these adverse effects or withdraw the subsidies.231 
 
252. Without prejudice to any findings by the Panel, if the Panel were to find that any of the 
challenged measures constitute prohibited subs idies within the meaning of Article 3 of the SCM 
Agreement , what are the considerations that should guide the Panel in making a 
recommendation under Article 4.7 of the SCM Agreement  relating to the time period "within 
which the measure must be withdrawn"? What should that time period be? BRA  
                                                     
 
229 Brazil’s claims under Articles 5(a) and 6(c) of the SCM Agreement do include the continuing 
adverse effects today and in the future of subsidies provided under these expired legal provisions.  See Brazil’s 
24 July Closing Statement, paras 4-7.   
230 Appellate Body Report, US – Certain EC Products , WT/DS165/AB/R, para. 81  
231 See Brazil’s 9 September Further Submission, paras. 471(viii) and 471(ix). WT/DS267/R/Add.2 
Page I-342  
 
Brazil’s Answer:
 
 
167. Brazil suggests that the Panel follow th e precedent of all previous WTO panels232 that made 
findings of prohibited subsidies and specify that the measure must be withdrawn within 90 days.233  
  VIII. Miscellaneous 
 
253. Regarding the adjustment authority related to Uruguay Round compliance in s.1601(e) 
of the FSRI Act of 2002 (the so-called "circuit-breaker provision"): 
 
 (a) Does it relate to export credit gu arantees, crop insurance and cottonseed 
payments? 
  (b) Does it relate only to compliance with AMS commitments? 
 
 (c) Is the authority discretionary?  If so, can its exercise be limited by the legislative 
branch of government?  
  (d) How would the Secretary exercise her au thority to prevent serious prejudice to 
the interests of another Member?  How would she exercise her authority to 
prevent a threat of serious prejudice to the interests of another Member?  At 
what time and on the basis of what type of information would she exercise her authority?   
  (e) What does "to the maximum extent practicable" mean?  In what circumstances 
would it not be practicable for the Secretary to exercise her adjustment 
authority? USA 
 254. Would payments made after the date of panel establishment be mandatory under the 
marketing loan, direct payments, counter-cyclical payments and user marketing certificate (step 2) programmes, but for the circuit-breaker provision?  USA 
 
255. How does Brazil respond to US assertions concerning the circuit-breaker provision? (see 
US 2 December oral statement, paragraph 82).  Does this mean that US subsidies cannot be "mandatory" for the purposes of WTO dispute settlement?  BRA 
 Brazil’s Answer:
 
 
168.  The United States has admitted what the text of the “circuit breaker” provision in 
Section 1601(e)(1) of the 2002 FSRI Act already makes clear,  i.e. that it only applies to “total 
allowable domestic support levels under the Uruguay Round Agreements,” i.e., “total AMS.”234  The 
United States further acknowledges that this provi sion “is not specifically addressed to forestalling 
                                                      
232 Panel Report, Brazil – Aircraft , WT/DS46/R, para. 8.5;  Panel Report, Canada – Aircraft , 
WT/DS70/R, para. 10.4;  Panel Report, Australia – Leather , WT/DS126/R, paras. 10.6-10.7, Panel Report, 
WT/DS139/R and WT/DS142/R, paras. 11.6-11.7 and Panel Report, Canada – Aircraft II , WT/DS222/R, 
para. 8.4. 
233 Brazil notes that the panel in US – FSC took account of the fact that the US tax system could only 
be changed from the beginning of the next fiscal year and therefore set the 1 October 2001 as the deadline for 
withdrawing the FSC subsidies “without delay.” 
234 US 2 December Oral Statement, para. 82 WT/DS267/R/Add.2 
Page I-343 
 
 
serious prejudice.”235  Indeed, no provision in US law is designed to forestall serious prejudice to US 
trading partners caused by US agricultural subsidies specifically in support of upland cotton .   
 169. The current US “total AMS” is $19.1 billion.  As long as the United States stays below this level, there is no legal provision in the 2002 FSRI Act granting the Secretary of Agriculture any 
authority to stem, or otherwise control, the amount  of upland cotton subsidies.  Indeed, the numerous 
mandatory provisions of the 2002 FSRI Act text cited in Brazil’s earlier submissions
236 requires the 
Secretary to make the payments to which eligib le producers, users and exporters have a legal 
entitlement.  No exceptions for upland cotton are provi ded for.  Thus, these provisions continue to be 
mandatory in all circumstances where the US total AMS is below $19.1 billion.  The Appellate Body 
and WTO panels have held that measures are ma ndatory where they cannot be applied in a WTO 
consistent manner in certain circumstances.237   
 170. And even were the US total AMS to exceed $19.1 billion, the text of Section 1601(e)(1) does 
not mandate any reductions if it is not “practicabl e” to do so.  Nor does the text mandate an even, 
across the board, cut for all programme crops.  For example, the Secretary appears to have the 
discretion to cut corn or wheat subsidies but retain  the full amount of upland cotton subsidies.  Brazil 
will provide further comments on the “circuit breaker ” provision on 19 January in response to the US 
Answers to Questions 253-254.     
256. The United States submits that the Panel ca nnot make rulings without allocating precise 
amounts of payments to upland cotton production .  However, to the extent that such precise 
data is not on the Panel record, to what extent  can the Panel rely on less precise data, and on 
reasonable assumptions, in fulfilling its duty under Article 11 of the DSU  in this case?  USA 
                                                     
 
235 US 2 December Oral St atement, para. 82.   
236 Brazil’s 9 September Further Submission, para . 423 (summarizing the evidence and the specific 
statutory provisions of the 2002 FSRI Act and the 2000 ARP Act mandating payments by USDA).   
237 Appellate Body Report, Argentina – Textiles and Apparel , WT/DS56/AB/R, paras. 48-54, 62;  Panel 
Report, US – Export Restraints, WT/DS194/R, para. 877.   WT/DS267/R/Add.2 
Page I-344  
 
ANNEX  I-8 
 
 
ANSWERS OF THE UNITED STAT ES TO QUESTIONS POSED  
BY THE PANEL FOLLOW ING THE SECOND  
SUBSTANTIVE MEETING OF THE PANEL 
 
(22 December 2003) 
 
 
A. TERMS OF REFERENCE 
 
 192. Regarding the interest subsidie s and storage payments listed by the 
United States in its response to the Panel's Question No. 67: 
 
(a) Please provide a copy of the regulat ions under which they are currently and 
under which they were provided during the marketing years 1996-2002;   
 
1. For interest subsidies and storage paym ents under the 1996 Act (marketing years 1996-2002), 
the relevant regulations are found at 7 CFR 1427.13 a nd  1427.19 (2000 ed.) (first published at 61 FR 
37601, 18 July 1996).1  Under the 2002 Act, those rules are found at 7 CFR 1427.13 and 1427.19 
(2003 ed.) (first published at 67  FR 64459, 18 October 2002).2  We describe and discuss these 
provisions below in response to part "(b)" of this question.  
 
(b) Please indicate whether there are any su ch payments which are not provided to 
implement the repayment rate for upland cotton within the marketing loan programme.  USA 
 2. Interest subsidies and storage payments  are support provided in connection with the 
marketing loan programme.  On a forfeit of warehouse-stored upland cotton under loan, the 
Commodity Credit Corporation (CCC) pays warehou se charges for the loan period (even though the 
farmer had title during that period) and forgives inte rest.  7 CFR 1427.13 (2000 ed. and 2003 ed.).  As 
for redemption of cotton under loan, repayment ra tes depend on the world market price.  If the 
repayment amount set on that price is low enough, CCC may have to forgive interest and pay storage 
charges because the repayment amount will not be  enough to satisfy the loan amount and those 
charges.  See 1427.19(e) (2000 and 2002).  By contrast, if  the repayment rate set on the world market 
price is high enough, the producer pays both.  Id.  In general, if the loan is repaid, there is not an 
interest subsidy at all; rather, in 7 CFR Part 1405, it is provided that CCC will charge the sum of (1) 
the rate that CCC pays the Treasury and (2) anothe r 1 per cent per annum.  We are not aware of any 
other payments that would be responsive to the panel’s question. 
                                                     
 
1 See Exhibit US-117 (7 CFR 1427.13 and 1427.19 (2000 ed.)). 
2 See Exhibit US-118 (7 CFR 1427.13 and 1427.19 (2003 ed.)). WT/DS267/R/Add.2 
Page I-345 
 
 
 
194. Does the United States maintain its po sition stated in response to the Panel's 
Question No. 67 that "it would not be approp riate for the Panel to examine payments 
made after the date of panel establishment"?  If so, please explain why.  Can Brazil comment on this statement?  BRA, USA 
 3. In response to the Panel’s Question 67, whic h asked the parties "to calculate and submit 
estimates of  the AMS for upland cotton  for marketing years 1992, 1999, 2000, 2001 and 2002," the United States stated, in the context of its calcula tion of the AMS for marketing year 2002, that "it 
would not be appropriate for the Panel to exam ine payments made after the date of panel 
establishment, on which the Panel’s terms of refere nce were set.  Measures taken after the Panel was 
established cannot be within the Panel’s terms of reference."
3  The United States continues to believe 
that this statement is accurate.  Past panels have fr equently been confronted wi th the issue of the date 
as of which measures should be examined.  Panels  have generally determined to examine those 
measures as of the date of panel establishment as a matter both of terms of reference as well as for 
practical reasons (for example, so as to allow findings to be made with respect to a measure 
withdrawn after the panel was established but before panel proceedings were completed). 
 4. The Panel’s terms of reference were set by the DSB at its meeting on 18 March 2003, namely, 
"[t]o examine, in the light of the relevant provisi ons of the covered agreements cited by Brazil in 
document WT/DS267/7, the matter referred to the DSB by Brazil in that document and to make such 
findings as will assist the DSB in making the recommenda tions or in giving the rulings provided for in 
those agreements."
4  In that panel request, Brazil identifi es the measures at issue as "prohibited and 
actionable subsidies provided to US producers,  users and/or exporters of upland cotton."5   In Brazil’s 
answer to question 19 from the Panel, Brazil clarified: "Brazil’s Request for Establishment of a Panel (‘Panel Request’) challenges two types of domestic support ‘measures’ provided to upland cotton and 
various different types of export subsidy measures.  The first type of domestic support "measure" is 
the payment of subsidies  for the production and use of upland cotton.  These payments were and 
continue to be made between MY 1999 to the present (and will be made through MY 2007) through 
the various statutory and regulatory instruments liste d on pages 2-3 of Brazil’s Panel Request.   Brazil 
referred to these payments at pages 2-3 of th e Panel Request as ‘subsidies and domestic support 
provided under’ or ‘mandated to be provided’ under the various listed statutory and regulatory 
instruments.   Brazil has tabulated the different types of payments (i.e., the measures) made under 
these legal instruments in paragraphs  146-149 of its First Submission."
6  That is, to the extent that 
"payments" are at issue (as opposed to Brazil’s challenge of certain legal instruments "as such")7, the 
"measure" is "the payment of subsidies for the production and use of upland cotton."  Only those 
payments made through the date of panel establis hment could be "measures at issue" within the 
meaning of DSU Article 6.2 (as opposed to meas ures not yet taken, such as the Agricultural 
Assistance Act of 2003, which had not been en acted at the time of Brazil’s panel request). 
 5. Thus, for purposes of the Panel’s Peace Clause an alysis or the evaluation of the "effect of the 
subsidy" for purposes of the Panel’s actionable subsidies analysis, Brazil’s choice to obtain 
establishment of this Panel several months into  the 2002 marketing year but well before that 
marketing year was completed necessarily impact s the payments ("measure") that the Panel may 
examine.  The payment of subsidies after  panel establishment cannot alter the measures within the 
Panel’s terms of reference and properly before the Panel, just as the cessation of payments after panel 
establishment would not prevent the Panel from making findings as to those payments that had been 
made as of the date of establishment. 
                                                     
 
3 US Answer to Question 67 from the Panel, para. 134 (11 August 2003). 
4 WT/DSB/M/145, para. 35. 
5 WT/DS267/7, at 1. 
6 Brazil’s Answer to Question 19 from the Panel, para 15 (emphasis added). 
7 Brazil’s Answer to Question 19  from the Panel, para. 16. WT/DS267/R/Add.2 
Page I-346  
 
 
B. ECONOMIC DATA 
 
195. Does the United States wish to rev ise its response to the Panel's Question 
No. 67bis, in particular, its statement that "the United States ... does not maintain 
information on the amount of expenditu res made under the cited programmes to US 
upland cotton producers"?  Did the United States make enquiries of the FSA in the course of preparing its original answer? 
 
6. Question No. 67 bis inquired about annual amounts gran ted to upland cotton producers per 
pound and in total expenditures under each of the de coupled payment programmes.  The United States 
of course conferred with US Department of Agriculture personnel, including FSA personnel, 
concerning this question and reporte d to the Panel that USDA "does not maintain information on the 
amount of expenditures made under the cited programmes to US upland cotton producers."
8  T h a t  
response remains accurate today: because those pa yments are decoupled from current production, 
expenditures under such programmes are not tracked by whether the recipient produces upland cotton.  
In fact, the United States does not collect producti on data based on actual harvesting figures reported 
by farmers;  we do not understand Brazil to have asserted the contrary.9 
 
7. Brazil has also not asserted that the United St ates maintains information on the receipt of 
decoupled payments for upland cotton base acres by upland cotton producers.  Rather, it has presented 
a novel methodology developed by the Environmental Working Group (EWG) to compare disparate data separately collected by the United States to attempt to infer that information.  
10EWG compared 
the farm numbers of recipients of decoupled pa yments for upland cotton base acres with the farm 
numbers of recipients of marketing loan payments  in marketing years 2000-2002.  It bears emphasis 
that the latter database is not a production data base based on actual harvesting figures reported by 
farmers; the marketing loan database merely reco rds the quantities of cotton on which a recipient has 
received payments.  By comparing the matches by  farm number between the two databases, EWG 
calculated that the share of decoupled payments for upland cotton base acres paid to upland cotton 
"producers" (that is, recipients of marketing loan  payments) was 71.3 per cent in marketing year 2000, 
76.9 per cent in marketing year 2001, and 73.6 per cent in marketing year 2002.    8. As we have previously mentioned
11, using the marketing loan payments database to identify 
"producers" would be contingent on marketing year prices; only if prices are sufficiently low would a 
high proportion of pro duction of a crop receive marketing loan pa yments.  This appears to have been 
the case for upland cotton in some recent marketing years but will not always be so (for example, no marketing loan payments are being made in the 2003 marketing year) and was not the case for other 
commodities (in marketing year 2002, total marketing loan payments  of only $16.3 million for 
soybeans, $16.3 million for corn, and $16.1 million for wheat were made).
12 
                                                      
8 US Comments and Answer to Additional Question, para. 20. 
9 We do note that the record reflects the extens ive evidence the United States has presented on the 
programmes and crop in question, from the actual data of amounts paid under the programmes to the amounts of 
cotton that have been planted from year to year.  Fu rther, in response to a Brazilian request for certain 
information that was presented for the first time at th e second panel meeting, th e United States generated, 
through significant expenditures of time and resources, aggregate and farm-by-farm records for both the "PFC" 
and "DCP" period for every "cotton farm" in the United States, including the planting records for all such farms.  
These data were transmitted on 18 and 19 December 2003. 
10 See Brazil’s Further Rebuttal Submission, para. 31  ("If USDA was able to provide comprehensive 
payment data for all (or most) payments in an electronic format, it is also able to generate information  on 
subsidy payments made to farms.") (emphasis added). 
11 US Opening Oral Statement at Second Panel Meeting, para. 29. 
12 Exhibit US-93.  For this reason, it is fallacious for Brazil to argue that the specialization of cotton 
farms on cotton is show by the alleged fact that "[i]n MY 2002, 92.45 per cent of marketing loan payments for 
all crops made to farms producing upland cotton were ma de with respect to upland cotton."  Brazil’s Further WT/DS267/R/Add.2 
Page I-347 
 
 
 
9. We note that Brazil has not made any adjustme nt in the outlay figures it has presented to the 
Panel for purposes of both Peace Clause and its actionable subsidy claims to reflect the fact that the EWG percentages are substantially lower than the 87 per cent revision made by Brazil to correct its 
initial Peace Clause analysis.  The adjustment resu lting from the EWG data in the total decoupled 
payments for upland cotton base acres made to upland cotton "producers" is also substantial.  Since 
Brazil presents the EWG percentages as Brazil's ow n data, Brazil has effectively conceded that its 
own figures should be corrected at least as follows:  
Decoupled payments for upland cotton base acr es to upland cotton "producers" ($ millions) 
 Brazil initial amount13 Brazil corrected amount14 EWG amount15 
1999 PFC 616 547.8 no data presented 
1999 MLA 613 545.1 no data presented 
2000 PFC 575 541.3 373.4 
2000 MLA 612 576.2 436.7 
2001 PFC 474 453 364.3 
2001 MLA 654 625.7 402.8 
2002 Direct 523 485.1 451.4 
2002 CC 1077 998.6 893.5 
 
 
The Panel can see a rather striking decline in the d ecoupled payments at issue that have not been 
reflected in Brazil’s argumentation to the Panel.   10. We note further, however, that the EWG figur es do not end the story.  These figures represent 
only the first step in a proper calculation of th e decoupled payments received by upland cotton 
producers that benefit upland cotton.  For example, as detailed in the US answer to question 242 from 
the Panel, the literature on decoupled payments i ndicates that these payments benefit the owners of 
the base acres on which payments are made; paymen ts made on rented acres will be captured by 
landowners through increased rent or other arrangements.  Brazil itself has conceded that as of 
marketing year 1997 – that is, only the first y ear after introduction of the production flexibility 
contracts – already 34-41 cents per dollar  of production flexibility contract payment were capitalized 
into land rents.
16  Thus, based on its own evidence , Brazil should have adjusted the EWG figures 
downwards by 22 to 27 per cent  to reflect the capture by landowners (who are not producers) through 
increased rent of 34-41 per cent of decoupled paym ents on the 65 per cent of cotton acres that are 
rented.17  Furthermore, this study as of marketing year  1997 is consistent with the evidence presented 
by the United States that as rental contracts come  up for renewal the full value of the decoupled 
                                                                                                                                                                     
Rebuttal Submission, para. 26.  If prices were above the respective loan rates for other crops produced by a farm 
also producing upland cotton, then logically the share of marketing loan payments for upland cotton will be 
high, given that upland cotton prices were so low in marketing year 2002.  The fallacy of Brazil’s argument is 
further demonstrated by reviewing the data submitted by the United St ates on 19 December 2003.  In the 
aggregated data file "Dcpsum.xls", for marketing year 2002 upland cotton planted area represented only 30.7 
per cent of total cropland for "cotton farms" (13.541 milli on acres out of total cropland of 44.036 million acres). 
13 Brazil’s First Written Submission, paras. 148-49. 
14 Brazil’s Answer to Question 67 from the Panel, para. 130 (adjusted amount of decoupled payments 
for upland cotton base acres estimate d as "support for upland cotton"). 
15 Brazil’s Further Rebuttal Submission, para. 23 (EWG data on amount of decoupled payments for 
upland cotton base acres received by upland cotton "producers") 
16 Brazil’s Answer to Question 179 from the Panel, para. 165; Brazil’s Opening Oral Statement at the 
Second Panel Meeting, para. 57. 
17 See Exhibit US-69 (cost of production data published by the Economic Research Service, based on 
the 1997 ARMS survey, showing cotton producers owning 35 per cent of land they operate). WT/DS267/R/Add.2 
Page I-348  
 
payments on rented acres will be captured by landowners and capita lized into land values.
18  Thus, to 
reflect the benefit to upland cotton producer s, the EWG data should be adjusted downwards by 65 per 
cent to reflect the fact that "[n]ot all operators [producers] can therefore be considered as true 
beneficiaries of the [PFC] programme, since co mpetitive cropland rental markets work to pass 
through payments from PFC recipients who are tenants to the owners of base acres."19  Only those 
upland cotton producers who are owners of upland cotton base acres will receive the benefit of those 
decoupled payments.  11. Finally, to answer the Panel’s question on the total payments for upland cotton base acres that 
benefit upland cotton producers would require in formation relating to the total value of each 
recipient’s production.  The EWG figures, adjusted to account for the capture of 65 per cent of those 
payments by owners of base acreage who are not cott on producers, would need to be allocated across 
the total value of production in order to calculate th e subsidy benefit to upland cotton.  Brazil has not 
brought forward information to permit that allocati on; in fact, as discussed in more detail in the US 
answer to question 256 from the Panel, Brazil has not even claimed that such an allocation is 
necessary.  Accordingly, it does no t appear possible to calculate th e total payments to upland cotton 
producers that benefit upland cotton nor any per pound measurement.  
196. Please provide the latest data for the 2002 marketing year on payments under 
the marketing loan, direct payments, count er-cyclical payments, user marketing 
certificate (step 2) programmes and export credit guarantee programmes.  BRA, USA 
 12. Data for marketing loan and user marketi ng certificate programmes are for upland cotton only 
and are current as of 12 December 2003.
20 
 
•  Marketing loan programme (includes lo an deficiency payments, marketing loan 
gains, and certificate gains): $832,836,963 
•  Step 2 payments (data are on a October 2002 - September 2003 fiscal year basis): 
$415,379,000 
 13. Data for direct payments and counter-cyclical  payments are presented for upland cotton base 
acres only and are current as of 12 December 2003.
21 
 
•  Direct payments: $181,811,374 million.  (Because the 2002 marketing year was a 
transition year between the 1996 and 2002 farm bills, $436,805,000 in Production 
Flexibility Contract payments were made in 2002.) 
•  Counter-cyclical payments: $1,309,471,167 
 
14. Data for export credit guarantee programme s are only available on a fiscal year basis 
(October 2002 - September 2003) and apply to all cotton.   No breakout is available for upland cotton.  
The value of registration guarantees is $234,423,344.  This figure repr esents the coverage applied for 
by exporters, not actual exports.  An exporter may apply for a guarantee but not actually ship the 
goods.22  Outstanding claims are $280,898, less than one-tenth of one per cent of the value of 
                                                      
18 See US Further Rebuttal Submission, paras. 75-77. 
19 Burfisher, M. and J. Hopkins.  "Farm Paym ents: Decoupled Payments Increase Households’ 
Well-Being, Not Production."  Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 44 (Exhibit US-78) 
20 Source:  Official data base of the Commodity Credit Corporation, maintained by the Farm Service 
Agency, USDA; latest data are unpublished and may differ from published FSA data. 
21 Source:  Official data base of the Commodity Credit Corporation, maintained by the Farm Service 
Agency, USDA; latest data are unpublished and may differ from published FSA data. 
22 Published data on guarantee values can be found in Export Assistance, Food Aid, and Market 
Development Programmes, FY 2003 Summary  at http://www.fas.usda.gov/excr edits/quarterly/archive.html.  
Data for FY 2003 found in this report  are current as of 9/30/03 and differ  slightly from these figures, which 
reflect exporter activity through mid- December, including cancellations and reserve activity. Data for FY 2003 WT/DS267/R/Add.2 
Page I-349 
 
 
registrations (further evidence, speci fic to cotton export credit guarant ees in particular, that premiums 
are more than sufficient to cover operating costs and losses).  
197. Please provide actual data for 2002/2003 for US exports, US consumption and 
per cent of world consumption to replace the projected data in Exhibit US-47.  If 
available, please provide projected data for 2003/2004 to replace the forecast data.  USA 
 
15. The 11 December 2003 World Agricultural Supply and Demand Estimates  report, published 
by USDA’s Office of the Chief Economist, the Depa rtment’s official commodity estimates, provide 
the latest data available.  Note that 2002/03 is s till considered an estimate and 2003/04 is considered a 
projection.
23 
 
US and World Cotton Consumption   (1,000 480-lb bales) 
 2002/03 (e) 2003/04 (p) 
US exports 11,900 13,200 
US mill use 7,270 6,200 
Total US consumption24 19,170 19,400 
World consumption 97,930 97,690 
US as a per cent of world 19.6% 19.9% 
 
 
The updated data show that the US world market share  is basically unchanged from Exhibit US-47; in 
fact, US world market share usi ng the 11 December 2003 data is the same (19.6 per cent) as reported 
in the exhibit.25   Viewed in conjunction with the data in Exhibit US-47, the data further confirm that 
there has been no increase in US world market sh are following a consistent trend over a period when 
subsidies to upland cotton have been granted. 
 
 198. Please comment on the respective merits of the price-gap calculations of 
MY1992 deficiency payments in US comments of  27 August, footnote 14 ($867 million), 
and Brazil's response to the Panel's Question No. 67 ($812 million).  
 
16. The two calculations use similar methodologi es to measure MY 1992 deficiency payments.  
Both measures calculate deficiency payments as  the deficiency payment rate times eligible 
production.  Both the US and Brazil measures use th e same deficiency payment rate for MY 1992 of 
15 cents per pound.  The difference between the tw o measures can thus be attributed to how each 
calculated the amount of production eligible for deficiency payments. 
 
17. In their response to the Panel’s Question No . 67, Brazil provides a simplistic calculation of 
payment production by multiplying the upland cotton programme yield times the amount of area eligible for deficiency payments.  Bu t as the United States previously indicated
26, the average 
programme yield for deficiency payment recipi ents in MY 1992 was 601 pounds per acre and the 
average programme yield for 50/92 recipients was 628 pounds per acre.  By contrast, Brazil 
                                                                                                                                                                     
found in this report are current as of 9/30/03 and diff er slightly from these figures, which reflect exporter 
activity through mid-December, includin g cancellations and reserve activity. 
23 USDA Office of the Chief Economist, World Agricultural Supply and Demand Estimates , 
11 December 2003 (Exhibit US-119). 
24 The US consumption figure includes imports.  However, US cotton imports are often zero and, even 
when positive, have accounted for less than one per cent of consumption over the past decade.  See USDA, 
Economic Research Service, Fibers Yearbook, Appendix  Table 2, Upland Cotton Supply and Use (Exhibit US-
120). 
25 See also  US Opening Oral Statement at th e Second Panel Meeting, para. 13. 
26 US Comments and Answer to Additional Question, para. 8 fn. 14. WT/DS267/R/Add.2 
Page I-350  
 
incorrectly estimates programme yields to be 531 pounds per acre.  This underestimates deficiency 
payments for MY 1992.  18. The US calculation uses the methodology set out in paragraphs 10 and 11 of Annex 3.  
Consistent with the 1995 US WTO notification, pa yment production is the sum of production eligible 
for basic deficiency payments and production eligib le for 50/92 payments.  Eligible production for 
basic deficiency payments in 1992 was equal to 5,544 million pounds (9.226 million acres times the 
average programme yield of 601 pounds per acre) .  Multiplying the price gap times eligible 
production gives basic deficiency payments equal to  $832 million.    The same formula is used to 
calculate deficiency payments under the 50/92 programme .  For 1992, the price gap is the same as that 
calculated for the basic deficiency payments (15 cents per pound).  Eligible production under the 
50/92 programme was 254 million pou nds (404 thousand acres times the average programme yield of 
50/92 participants of 628 pounds per acre).  Defi ciency payments under the 50/92 programme were 
thus equal to $35 million (0.92 times 254 million times $0.15).   Total deficiency payments under the 
price gap methodology were thus equal to $867 million ($832 milli on plus $35 million). 
 
19. We also note that this calculation is con servative in that it uses the actual payment acreage 
(that is, acres planted for harvest or participa ting in the 50/92 programme on which payment was 
received) rather than eligible acreage to calculate  the "quantity of production eligible to receive the 
applied administered price."
27  Using instead the base acreage minus the 10 per cent acreage reduction 
figure and the 15 per cent normal flex acr es (14.9 million effective base acres28 x 0.75 = 11.175 
million acres) and multiplying by the programme yi eld (602 pounds per acre), the "quantity of 
production eligible to receive the administered price" is 6,727 million pounds, yielding a price gap 
deficiency payment calculation of $1,009 million.  
201. Is data available to show the proportion of US upland cotton production sold 
under futures contracts, and th e prices under those contracts, at different times during 
the marketing year?  If so, please provide summarized versions to the Panel.  How does a futures sale impact the producer's en titlement to marketing loan programme 
payments?  BRA, USA 
 
20. In April 1999, the US General Accounting O ffice published a report on farmers’ use of risk 
management strategies.
29  Based on survey data from the 1996 USDA Agricultural Resource 
Management Study, the study showed that betw een 35 and 57 per cent of cotton farmers used a 
hedging instrument in 1996.  (The ranges reflect a 95 per cent confidence interval.)  In addition, an 
estimated 63 to 89 per cent of cotton farms used cash forward contracts in 1996.30  These survey 
results suggest that even seven years ago a larg e proportion of cotton farmers either directly or 
indirectly priced their cotton off of organized futures and options markets. 
 21. For 18 December 2003, total open interest for all cotton futures contracts on the New York Board of Trade was 79,283 contracts
31 while open interest for all cotton options contracts on the 
                                                      
27 Agreement on Agriculture, Annex 3, para. 10. 
28 See Exhibit Bra-105, Annex 2 (1st source document: US Department of Agriculture, Provisions of 
the Federal Agricultural Improvement and Reform Act of 1996 , at 142) (giving 1992 e ffective base acreage of 
14.9 million acres); id., Annex 2 (2nd source document: Daniel A. Sumner, Farm Programmes and Related 
Policy in the United States , at 4) (same). 
29 US General Accounting Office.  Agriculture in Transition:  Farmers’ Use of Risk Management 
Strategies .  GAO/RCED-99-90. April 1999. See page 9, table 4 (Exhibit US-121) 
30 A forward contract is defined as a cash market tran saction in which two parties agree to buy or sell a 
commodity or asset under agreed-upon conditions.  For example, a farmer agrees sell, and a ginner or 
warehouse agrees to buy, cotton at a specific future time for an agreed-upon price or on the basis of an agreed 
on pricing mechanism (such as a futures or options market).  See Exhibit US-121, page 22. 
31 See, Exhibit US-122. WT/DS267/R/Add.2 
Page I-351 
 
 
NYBOT totalled 320,657 contracts.32  Based on a contract size of 50,000 pounds, total open interest 
on futures and options contracts represent 41.7 milli on bales.  While a bale of cotton may be hedged 
several times throughout the marketing chain, we not e that 41 million bales is approximately 2.3 times 
the total size of the US upland cotton crop.  A futur es or options contract transaction has no effect on 
a producer’s entitlement to marketing loan programme payments. 
 
202. Concerning paragraph 7 of the US oral statement, are the expected cash prices 
shown for February only?  Can the US provi de the prices for January and March of 
each year as well?  USA 
 
22. The following tables show the average daily closing futures price for the December contract 
for January, February and March, as well as the aver age for the three months.  As the United States 
previously noted33, the differences between months is small.  As outlined in para graph 162 of the US 
further rebuttal submission, the expected cash price is calculated as the futures prices minus a 5-cent 
basis. 
 
Average Daily December Futures Closing Prices ($/lb) 
Contract Month  
Month DEC 
1999 DEC 
2000 DEC 
2001 DEC 
2002 DEC 
2003 
January 0.6335 0.5912 0.6188 0.4295 0.5808 
February 0.6027 0.6131 0.5863 0.4218 0.5960 
March 0.5980 0.6233 0.5321 0.4292 0.5975 
Average January – 
March  
0.6114 
  
0.6092  
0.5791  
0.4268  
0.5914 
 Source: New York Board of Trade (Exhibit US-124)  
Expected Cash Price ($/lb) 
Month MY 1999 MY 2000 MY 2001 MY 2002 MY 2003 
January 0.5835 0.5412 0.5688 0.3795 0.5308 
February 0.5527 0.5631 0.5363 0.3718 0.5460 
March 0.5480 0.5733 0.4821 0.3792 0.5475 
Average January – 
March  
0.5614 
  
0.5592  
0.5291  
0.3768  
0.5414 
 
Source: Futures Price minus 5-cent cash basis.  205. Does the United States accept or agree with the EWG data submitted by Brazil?  If not, 
please explain your reasons.  USA  
23. USDA provided the EWG with payment data un der a Freedom of Information Act Request.  
Although the United States can confirm the data tr ansmitted to EWG was correct, we do not know if 
the data has changed after EWG further processed the in formation.  Taking that data at face value, the 
United States would note the following. 
                                                     
 
32 See, Exhibit US-123. 
33 US Further Rebuttal Submission, para. 162 fn. 124 ("The United States notes that the January-March 
average futures price for December delivery does not differ  significantly from the Febr uary average presented in 
the text."). WT/DS267/R/Add.2 
Page I-352  
 
 24. As was reported in the US Answer to Panel Question 125(5) and the US oral statement of 
2 December, a preliminary review of data from the Farm Service Agency shows that approximately 47 per cent of upland cotton farms eligible for d ecoupled income support payments planted no cotton 
in marketing year 2002.  This number is consis tent with the Environmental Working Group data 
presented by Brazil in its further rebuttal submission that showed the per cent of farms receiving only 
contract payments in 2000, 2001, and 2002 (46, 45, and 45 per cent, respectively).
34  Thus, the EWG 
data support the US position that decoupled inco me support is, in fact, decoupled from production 
decisions since nearly half of historic upland cotton farms no longer plant even a single acre of 
cotton.35 
 
25. The EWG data also show that Brazil’s 14/16  adjustment to decoupled payments, even on 
Brazil’s faulty allocation theory, is too small an adjustment.  Brazil has asserted that 87 per cent of 
decoupled payments for upland cotton base acres ar e received by upland cotton producers and support 
to upland cotton.  However, the EWG data suggest that in marketing years 2000, 2001, and 2002 only 71, 77, and 74 per cent, respectively of upland cotton base acreage payments went to farms that planted upland cotton.  Thus, the EWG data suppor t the US position that Brazil has overestimated and 
failed to properly calculate the subsidy benefit to upland cotton provided by these payments.  For 
further detail, please see the US answer to question 195.  26. We also note a serious misuse of the EWG data when Brazil claims that, because 
approximately 92 per cent of total marketing loan payments received in MY 2002 by farms planting 
upland cotton were upland cotton payments, therefore such farms must predominantly produce cotton.  
In fact, marketing loan payments crucially depend on  whether prices are above or below the loan rate 
for the crop at issue.  Soybeans and corn saw high prices in MY 2002, meaning few marketing loan 
payments were made in MY2002.
36  Furthermore, the data collected by the United States in response 
to Brazil’s request for certain in formation demonstrate that for MY 2002 upland cotton planted acres 
accounted for only 29.4 per cent of total cropland of those farms receiving production flexibility 
contract payments for upland cotton base acreage.  Thus, the EWG data on marketing loan payments 
does not support an inference that farms producing upl and cotton are so "specialized in upland 
cotton"37 that it would be "reasonable" to attribute decoupled payments for upland cotton base acres 
almost entirely (87 per cent) to upland cotton.  
 
206. Please explain how the graph in paragraph 40 of the US further rebuttal 
submission was derived.  In so doing, pl ease clarify whether the figures are on a cents 
per pound basis or some other basis.  Wh at averaging method was used?  Can you 
prepare individual charts showing average US and Brazilian cotton prices for each of 
those third country markets?  USA 
 
27. The data were based on official export data  reported by the United States and Brazil, as 
obtained and published in the "World Trade Atlas".  The World Trade Atlas is a service that monthly 
provides world-wide trade information for a fee.   28. The United States reports its export values to  the World Trade Atlas as F.A.S. and Brazil 
reports its values as F.O.B.  
 
                                                     
 
34 Brazil’s Further Rebuttal Submission, para 23. 
35 Indeed, even Brazil states that "the evidence still suggest s that there are a large number of very small 
farms  (with base acreage resulting from production dating back as far as MY 1981-85) that no longer produce 
upland cotton ," Brazil’s Further Rebuttal Submission, para. 27 (emphasis added), which would seem to support 
the US view that contract payments are decoupled from production decisions. 
36 See US Opening Oral Statement at the Second Panel Meeting, para. 29. 
37 See Brazil’s Further Rebuttal Submission, para. 26. WT/DS267/R/Add.2 
Page I-353 
 
 
Free Along Ship Export Value (F.A.S.) – The value of exports at the seaport, airport, or 
border, port of export, based on the transaction price, including inland freight, insurance, and 
other charges incurred in placing the merc handise alongside the carrier at the port of 
exportation.  The value, as defined, excludes the cost of loading the merchandise aboard the 
exporting carrier and also excludes freight, insura nce, and any charges or transportation costs 
beyond the port of exportation . 
 
Free On Board (F.O.B.)  – A standard reference to the price of merchandise on the border or 
at a national port.  In F.O.B. contracts, the seller is obliged to have the goods packaged and 
ready for shipment at the place agreed upo n, and purchaser agrees to cover all ground 
transport costs and to assure all risks in th e exporting country, together with subsequent 
transport costs and expenses incurred in lo ading the goods onto the chosen means of 
transport. 
 FOB is greater than FAS except when the vessel is not changed at the port of export, in which case the 
values are equal. 
 29. The World Trade Atlas publishes an average un it price for exports.  The average unit price is 
calculated by dividing the value of the exports by the quantity for selected HS codes.  Average unit 
prices are expressed in dollars per kilogram.  This  value was converted to dollars per pound for the 
graphs.   
 
30. The graph in paragraph 40 of the US furthe r rebuttal submission is a comparison of simple 
average unit prices of cotton exports from the Unite d States and Brazil to Argentina, Bolivia, Italy, 
Philippines, Portugal, Indonesia, Paraguay, and Indi a.  The data for each third country market is 
provided in the following table. WT/DS267/R/Add.2 
Page I-354  
 
 
Unit Export Values to Selected Countries 
 
U S              
Country 
 3Q/99 4Q/99 1Q/00 2Q /00 3Q/00 4Q/00 1Q /01 2Q/01 3Q/01 4Q /01 1Q/02  2Q/02 
Argentina 0.71 0.71 0.42 0.49 na na na na na na  na na 
Bolivia na 1.15 1.15 na na na na 0.76 na na na na 
India 0.96 0.46 0.51 0.55 0.64 1.04 0.74 0.50  0.43 0.36 0.38 0.42 Indonesia 0.61 0.59 0.56 0.57 0.59 0.65 0.65 0.57 0.49 0.50 0.50 0.45 
Italy 0.90 0.81 0.80 0.98 0.73 0.93 0.90 0.92 0.92 0.67 0.76 0.70 
Paraguay na na na na na na na na na na na na 
Philippines 0.50 0.42 0.41 0.41 0.53 0.54 0.52  0.44 0.42 0.41 0.41 0.38 
Portugal 0.97 0.93 0.92 0.92 0.98 0.75 1.17 1.14 0.92 0.57 1.03 0.94 
Average 0.78 0.72 0.68 0.65 0.70 0.78 0.79 0.72 0.64 0.50 0.61 0.58 
 
Brazil             
Country 3Q/99 4Q/99 1Q/00 2Q /00 3Q/00 4Q/00 1Q/01 2Q/ 01 3Q/01 4Q/01 1Q/02 2Q/02 
Argentina 0.54 0.51 0.58 0.54  0.54 0.52 0.50 na 0.38 0.35 0.37 na 
Bolivia na na na na 0.47 0.48 0.47 na na na na na 
India na  na na na 0.49 0.50 0.50 0.53 0.49 0.43 0.36 0.36 
Indonesia na na na na 0.49 0.49 0.48 0.47 0.50 0.47 0.47 0.45 
Italy na na na na 0.48 0.51 0.54 0.56 0.46 0.44 0.39 0.37 
Paraguay na na 0.50 na na 0.55 na na 0.50 na na na 
Philippines na na na na na 0.59 0.52 0.53 0.52 0.49 0.36 na 
Portugal na na na na 0.49 0.51 0.54 0.56 0.47 0.42 0.35 0.37 
Average 0.54 0.51 0.54 0.54 0.49 0.52 0.51 0.53 0.47 0.43 0.38 0.39 
Source: World Trade Atlas WT/DS267/R/Add.2 
Page I-355 
 
 
207. Please indicate whether any of the measur es challenged in this dispute obliges cotton 
farmers to harvest their crop in order to recei ve the benefit of the programme (subsidy). 
 
31. One programme at issue in this dispute requi res that a cotton farmer harvest upland cotton in 
order to receive payment: the marketing loan progra mme.  In addition, the user marketing certificate 
programme (Step 2) requires that upland cotton have  been harvested and marketed although payment 
is made to upland cotton users and not to farmers directly.  
208. Please provide data for the marketin g years 1992 and 1999-2002 of the "quantity 
of production to receive the applied admini stered price" (Agreement on Agriculture, 
Annex 3, paragraph 8) for purposes of a  pr ice-gap calculation of support through the 
marketing loan programme.   
 
32. The marketing loan programme is a direct  payment to support producer income that is 
"dependent on a price gap," namely, the differen ce between the loan rate and the Adjusted World 
Price.  Thus, the price-gap calculation of support would be calculated under paragraphs 10 and 11 of 
Annex 3 of the Agreement on Agriculture on "non-ex empt direct payments," not paragraph 8 on 
"market price support."  That said, the calculations  to quantify the support under these provisions are 
similar.  Under paragraph 10, "non-exempt direct payments which are dependent on a price gap shall 
be calculated either using the gap between the fixed reference price and the applied administered price 
multiplied by the quantity of production eligible to re ceive the administered price, or using budgetary 
outlays." 
 33. Under the 1990 Act, only produc tion produced on cotton base acres or other programme crop 
base acres was eligible for mark eting loans.  Based on the 1992 Compliance Report  (Exhibit US-39), 
11,164,726 acres programme acres were planted to upl and cotton.  Based on an average crop yield of 
694 pounds per acre
38, 7,748,319,844 pounds or 16,142,333 480-lb bales, would have been eligible 
for marketing loans in 1992.  34. Under provisions of the 1996 farm bill, upla nd cotton planted on farms with any programme 
crop base were eligible for marketing loans.  While  production data are not collected by the Farm 
Service Agency, the following quantities of upland cotton were put under loan or collected a loan 
deficiency payment in 1999, 2000, 2001 and 2002. 
 
Upland cotton loan activity (pounds ) 
 Quantity receiving loan 
deficiency payment Quantity placed under 
loan Total 
1999 3,393,678,940 4,290,958,570 7,684,637,510 
2000 3,499,431,430 4,349,621,850 7,849,053,280 
2001 2,618,109,300 6,718,513,500 9,336,622,800 
2002 1,603,527,850 6,292,102,810 7,895,630,660 
 
 Source: USDA, Farm Service Agency, Loan Deficiency Payment and Price Support 
Cumulative Activity as of 10 December 2003.   Available at: http://www.fsa.usda.gov/dafp/psd  
 35. Thus, compared to MY1992, the quantity of cotton placed under marketing loans or receiving 
loan deficiency payments in MYs 1999, 2000, and 2002 were similar.  In MY 2001, as a result of 
exceptional weather conditions and yields, a mu ch larger quantity of cotton was eligible. 
 
36. As noted above, the price gap calculation invo lves comparing a fixed reference price to an 
applied administered price.  Under paragraph 11 of  Annex 3, the fixed reference price "shall be based 
                                                     
 
38 See Upland Cotton Fact Sheet at 4 (Exhibit BRA-4). WT/DS267/R/Add.2 
Page I-356  
 
on the years 1986 to 1988 and shall generally be the act ual price used for determ ining payment rates."  
The applied administered price for marketing loan payments is the marketing loan rate.  The fixed 
reference price is the average over 1986 to 1988 of the Adjusted World Price (the "actual price used 
for determining payment rate").  
37. The average Adjusted World Price for 1986-88 was 53.65 cents per pound – that is, higher 
than the loan rate in marketing years 1992 (52.35 cents per pound), 1999-2001 (51.92 cents per pound), and 2002 (52 cents per pound).  The result is th at the gap between the fixed reference price 
and the applied administered price is always nega tive as would be the AMS calculation.  When these 
price gap calculations for marketing loan payments  are utilized, negative numbers result, reflecting 
the decrease in support from the 1986-88 level.  Sim ilarly, if the applied administered price for 
marketing years 1999-2002 were compared to the 1992 applied administered  price, the resulting 
negative numbers would again show the decrease in  the level of support from MY 1992.  Thus, the 
large budgetary expenditures for marketing loan paymen ts in recent years obscu res the fact that the 
level of support decided by the United States had declined; the price gap calculation, on the other 
hand, reflects this reduction in support.  As the Un ited States demonstrated in  its rebuttal submission, 
by calculating both deficiency payments and marketing loan payments using a price gap 
methodology, the upland cotton AMS reveals that in  no year have the challenged US measures 
granted support in excess of that decided during the 1992 marketing year.
39 
 
 
209. It is understood that the data in the graph in paragraph 5 of the US oral 
statement are as at harvest time, while the da ta in the graph in paragraph 39 of Brazil's 
oral statement are as at planting time. Please explain why the trend of US acreage increase/decrease differs between these two graphs. BRA, USA  
 38. The planted and harvested area differ becau se of abandonment.  Over the period 1965 to 
2003, the rate of abandonment (abandoned acres di vided by total acres) for US upland cotton 
averaged 8.3 per cent, but the rate will vary from y ear to year primarily because of weather, primarily 
in the Southwest.  In 1997, for example, weather in the Southwest was generally good and the 
abandonment rate for that year was only 3.6 per cent.   By contrast, dry weather in Texas, Oklahoma 
and parts of the Southeast in 1998 led many farm ers to abandon their cotton crop  because of poor 
yields, resulting in an abandonment rate of 20 per cent.  
Planted and Harvested Upland Cotton Acres  (1,000 acres) 
Crop year Planted acres Harvested acres Abandoned acres Rate of 
abandonment 
1995  16,717 15,796 921 5.5% 
1996  14,395 12,632 1,763 12.2% 
1997  13,648 13,157 491 3.6% 
1998 13,064 10,449 2,615 20.0% 
1999  14,584 13,138 1,446 9.9% 
2000 15,347 12,884 2,463 16.0% 
2001 15,499 13,560 1,939 12.5% 
2002 13,714 12,184 1,530 11.2% 
                                                      
39 See US Rebuttal Submission, paras. 115.  In that calculation, the United States conservatively 
assigned a value of zero to marketing loan payments th at in every instance were negative under the price gap 
methodology.  Had the United States used the actual negative values resulting from the calculation, the AMS 
would have been even smaller for those years with a lower loan rate (marketing years 1999-2001) and larger eligible production (marketing year 2001).  The end result would have been the same, however: in no year 
would upland cotton support (as measured by an upland cotton AMS) have exceeded the 1992 marketing year 
level. WT/DS267/R/Add.2 
Page I-357 
 
 
Crop year Planted acres Harvested acres Abandoned acres Rate of 
abandonment 
2003  13,451 11,939 1,512 11.2% 
  Source: USDA, National Agricultural Statistics Service, Acreage, various issues. 
  
Change in U.S. Upland Cotton Acreage from Previous Year
-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%
1996 1997 1998 1999 2000 2001 2002 2003Planted
Harvested
 
 
 39. Comparing the per cent change from the prior year of planted and harvested US upland cotton 
acreage shows that movements in acreage figures are fairly similar, as one would expect.  
 210. Are worldwide planted acreage figures available?  BRA, USA 
 40. To our knowledge, planted acreage figures ar e not available on a consistent basis across 
countries. No other sources (including ICAC) carry worldwide-planted area.  Harvested area is the 
standard, but in reality many countries do not have a sophisticated system for data collection.  To 
provide a comparative analysis of US acreage chang es to the rest of the world, the United States has 
therefore used harvested acreage, the mo st reliable acreage measure available. 
 
211. Brazil presents a graph in paragra ph 59 of its further rebuttal submission 
indicating the increasing cumulative loss in curred by cotton producers.  Please comment 
on the argument that US cotton producers could not continue operating without subsidies.   In particular: 
 
(a) to what extent does the use of 1997 su rvey technological coefficients with 
annually updated values affect the results?  
 
41. Brazil’s cost of production argument is based  on erroneous facts and arguments.  Brazil points 
to dated average total cost  of production data over a randomly selected period, compares this to 
market revenue, and proclaims that any "gap" must  be covered by subsidies.  The United States has 
identified several fatal conceptual and factual flaws in Brazil’s analysis.
40  For example, Brazil 
ignores the evidence on record that a significant number (approximately 47 per cent) of traditional (and likely high-cost) upland cotton producers no longer plant upland cotton.  This structural shift in 
                                                     
 
40 US Further Rebuttal Submission, paras. 105-51. WT/DS267/R/Add.2 
Page I-358  
 
the industry is not reflected in cost of production data.  In addition, Brazil treats the only sources of 
farm income as cotton market prices and governme nt payments, ignoring crop diversification and 
off-farm sources of income.  By ignoring alternativ e revenue sources, Brazil invalidates its claim that 
only government payments could serve to  cover any alleged cost-revenue gap. 
 
42. But most importantly, Brazil has no legal b asis for its argument.  Brazil argues that the 
Appellate Body in Canada - Dairy (21.5)  has stated that total costs ar e the relevant measure, but that 
reasoning is inapt here.  The only question in that  dispute was whether a practice involved an export 
subsidy within the meaning of Article 9.1(c) of  the Agriculture Agreemen t.  Solely because the 
question was to determine whether certain milk provided to processors constituted a payment for 
purposes of Article 9.1(c) did the Appellate B ody opt to use the average cost of production.
41  
However, the Appellate Body explicitly recognized that "a producer may well decide to sell goods or 
services if the sales price covers its marginal costs. "  The Appellate Body also noted that cost of 
production can be measured "in at least two ways":  (1) per unit average total cost of production and 
(2) marginal cost of production.42  Here, the issue for which Braz il seeks to use total costs is not 
whether a subsidy exists but to evaluate the effect of the subsidy, an altogether different analysis.  
Thus, Canada - Dairy (21.5)  provides no support Brazil’s average total cost argument. 
 
(a)  to what extent does the use of 1997 survey technological coefficients with 
annually updated values affect the results? 
 
43. As described in detail in previous US submissions43, the combination of, among other things, 
the boll weevil eradication programme and the extr aordinary adoption rates of biotech cotton have 
combined to lower producers’ costs and enhance ne t revenues.  Despite the difficulty in providing 
precise figures on the extent of cost savings and ne t revenue increases for the cotton sector that have 
occurred since the 1997 USDA ARMS cost and return s survey, the rapid adoption of biotech cotton 
(over 90 per cent of area in key producing States) su ggests farmers are reaping significant benefits in 
terms of net returns.  These cost savings have b een analyzed and documented in a wide range of 
studies.  44. In June 2002, the National Center for F ood and Agricultural Policy (NCFAP) compiled 
40 case studies of 27 crops to documen t the benefits of biotechnology.
44  These case studies were 
done by various universities.  Among other findings, one  study found that adoption of insect resistant 
biotech cotton in states in the Southeast and Sout hwest experiencing high infestations of budworm 
resulted in a $20 per acre increase in net income .  Another study that examined the use of 
herbicide-resistant cotton in several Mid-Sout h states estimated producers saved $133 million 
annually in weed control costs. 
 
45. The post-1997 updates of the cost of pr oduction data assume the same technological 
coefficients as the 1997 survey – for example, pounds of seed per acre, the number of pesticide 
applications per acre, etc.  Brazil correctly  notes that the ERS/USDA updated COP data from 1997 
show increased seed costs, which reflects the use of higher-cost biotech seed.45  To the extent those 
inputs become more costly (for example, as biot ech seed replaces conventional), cost increases are 
captured by the updating process through input pri ce indexes.  What is not captured is the cost savings  
from technological changes that alter the mix of production activities and inputs.  New survey data 
                                                      
41 The specific issue addressed was limited to whether the supply of certain milk to processors 
constituted a "payment" on the export of milk "financed by virtue of governmental action." 
42 Canada-Dairy: First Recourse to 21.5 , AB-2001-6, para. 94. 
43 US Further Submission, paras. 46-54; US Further Rebuttal Submission, paras. 123 -132. 
44 Plant Biotechnology: Current and Potential Impact For Improving Pest Management in US 
Agriculture:  An Analysis of 40 Case Studies.   Leonard P. Gianessi, Cressida S. Silvers, Sujatha Sankula and 
Janet Carpenter.  NCFAP, June 2002.  The full report can be found at http://www.ncfap.org/40CaseStudies.htm. 
45  Further Rebuttal Submission of Brazil, 18 November, para. 72. WT/DS267/R/Add.2 
Page I-359 
 
 
will incorporate new technological coefficients as we ll as changes in such pr actices as direct pesticide 
costs, changes in tillage, application and cultivation trips, and handweeding.  Many of the cost-saving 
aspects of biotechnology or other new practices ( no-till farming) cannot be accurately captured by 
simply updating old cost data by price indices.  T hus, relying on such updated cost data that reflects 
an outdated technological mix is in error. 
 
(b) to what extent do producers base pl anting decisions on their ability to cover 
operating costs but not whole farm costs? USA      
 
46. As explained in some detail in the US Fu rther Rebuttal Submission of 18 November, the 
agricultural economics profession is clear that shor t-run production decisions are made based on the 
ability of a producer to cover his variable or operating costs.46  All economic models that attempt to 
capture supply response (producer planting behaviour) use variable costs in the equations, not total 
costs.  Examples include the FAPRI baseline projecti ons model (a variation of which was used by Dr. 
Sumner), the ERS baseline projections model, a nd the Economic Research Service’s FAPSIM model, 
the results of which are cited by Brazil.47  No economic model of which we are aware looks to total 
costs as the relevant costs for producer planting decisions.  47. One can do the same exercise as done by Brazil in paragraph 59 of  its further rebuttal 
submission, but using the economically correct  variable costs instead of total costs.
48  Even using the 
technologically- and structurally-dated cost-of-pr oduction data based off the 1997 ARMS survey, in 
all years except the extraordinary year of 2001, av erage market returns more than covered variable 
costs, allowing producers to earn a sufficient margin  to pay off other fixed costs, a conventional 
agricultural business practice, as  noted by Christopher Ward.49   Instead of a cumulative loss of 
$332.79 per acre over the 6-year period as claimed by Brazil, producers had a cumulative net margin of $592.65 per acre.  Clearly, if all years were like 2001, US cotton farmers would go out of 
business.
50  But because most US cotton farmers regularly cover their variable costs – and then some 
– they can survive a year like 2001.   
Cumulative net returns ($ per acre) 
 
Item 1997 1998 1999 2000 2001 2002 
Variable costs 271.46 230.87 244.26 296.38 284.24 278 
Market revenue 545.55 356.1 314.8 375.18 271.4 307.83 
Net return 274.09 125.23 70.54 105.8 -12.84 29.83 
Cumulative net 
return 274.09 399.32 469.86 575.66 562.82 592.65 
 
 Source: USDA, Economic Research Service,  www.ers.usda.gov/data/costsandreturns  
                                                      
46 US Further Rebuttal Submission, 18 November 2003, para. 117.  Brazil continues to inappropriately 
make all its cost-revenue arguments using  total costs.  Brazil cites the Appellate Body decision in Canada – 
Dairy 21.5 III as support for using a total cost of production figure but that decision was unique to those 
circumstances and involved export subsid ies.  That decision does not refu te accepted wisdom and long-standing 
economic theory, as well as farmers’ usual business practices. 
47  Exhibit Bra-222. 
48  See http:/www.ers.usda.gov/data/costsandreturns/. 
49  Further Rebuttal Submission of Brazil, 18 November 2003, para. 58. 
50 Even Mr. Christopher Ward was unable to cove r his variable costs in 2001.  Statement of 
Mr. Christopher Ward at the Second Session  of the First Panel Meeting, para. 6. WT/DS267/R/Add.2 
Page I-360  
 
 
212. Brazil states in paragraph 37 of its oral  statement that studies of Westcott and 
Price found that the effect of the programme on cotton is to add an additional 1 to 1.5 million acres during marketing years 1999-2001 and to suppress US prices by 5 cents 
per pound. Does the US reject these findings? Why or why not?   
 
48. While an interesting "academic" analysis  of the impacts of the US marketing loan 
programme, the Westcott and Price study Analysis of the US Commodity Loan Programme With Loan 
Provisions (Exhibit BRA-222) is not relevant for the Panel’s assessment of the matter before it.  In 
this study acreage decisions are based on an expected  net returns which includes as the expected price 
term as the higher of the lagged market price or the loan rate plus additional marketing loan facilitated 
revenue.  Since the period of analysis for the stud y is 1998 through 2005, rather than actual data, the 
authors used USDA’s 2000 baseline.  This baselin e incorporates actual data for years prior to 
marketing year 1998 and partial marketing year 1999 to make projections about prices and other 
factors for marketing year 1999 forward. Thus th e study is based on projections except for MY1998.
51 
 
49. A panel, however, cannot base its findings on hy pothetical market conditions instead of actual 
conditions.  That is, Brazil must show that US do mestic support has actually caused serious prejudice 
in a given year based on actual market conditions and not that under some assumed conditions US 
domestic support programmes have impacted prices.  Since the study is based on projected prices, the 
analysis is not useful for the Panel in dete rmining whether US support programmes have caused 
serious prejudice to Brazil.  
50. Putting aside the issue that the study is based  on projections and not actual market conditions 
for the 1999-2001 period, the United States believes the study results overstate the impacts of the US 
marketing loan programme for two reasons: (1) the e xpectation of prices used and (2) the overstated 
additional marketing loan facilitated revenue.  
51. As previously discussed, the authors used USDA’s 2000 baseline as the input into the USDA 
FAPSIM model.  To represent farmers’ price exp ectations, the simulation uses lagged prices from the 
projections in the USDA’s 2000 baseline.  The model uses the higher of lagged market prices or the 
loan rate plus additional marketing loan facilita ted revenue (fixed at 14 cents per pound for cotton).  
Using the price projections in the USDA 2000 baselin e, farmers would expect the marketing loan 
programme to kick in for the period 1999-2001.  The problem here is that the price expectations used 
by the model are not consistent with  the price expectations the farmers actually held  at the time of 
planting for prices at harvest.  As the United States provided in its opening statement at the Second Meeting of the Panel with the Parties, the futures pr ices at the time of planting indicated that prices 
would be above the marketing loan rate during this period.  
Harvest Futures Prices at Planting Time Co mpared to USDA Baseline Expected Prices  
(cents per pound) 
 MY1999 MY2000 MY2001 
Futures Price 1/ 60.27 61.31 58.63 
Expected Cash Price 2/ 55.27 56.31 53.63 
1/ February New York futures price for December delivery. 
2/ Futures price minus 5 cent cash basis.  
  
                                                     
 
51 In fact, the study found marketing loans to have negligible impacts in 1998.  See Exhibit BRA-222, 
p. 16. WT/DS267/R/Add.2 
Page I-361 
 
 
As the futures prices demonstrate, market expectations at the time of planting for marketing years 1999-2001 was that prices would be above the mark eting loan rate and hence no marketing loan 
benefits.  Therefore, the marketing loan programme  would not have had the impact this study found. 
 52. In addition to having the wrong expectations about price le vels and the marketing loan 
programme being tripped, the study has overstate d the potential additional market loan facilitated 
revenue that can be achieved.  The authors used a fixed rate of 14 cents to represent this additional 
revenue above the loan rate when the marketing loan  programme kicks in.  Their justification for this 
figure is that this was their calculation for 1998.  The authors do not provide  any discussion as to why 
conditions in 1998 were indicative of conditions to continue for the near  future that would keep this 
margin at 14 cents.  This margin is based on the fact  that farmers can pick the date to make the claim 
for the marketing loan gain/deficiency payment and th en sell the cotton at a later date.  The premise is 
that a farmer is able to sell when prices have incr eased relative to the date they made their claim.  
However, in reality, there is no such guarantee.  It is just as possible that prices will fall below the 
price when the claim was made.  In fact, the additional revenue has not been as large as in MY1998.
52  
In MY1999, the annual average was 6.1 cents, MY2000 was 5.8 cents, and MY2001 was 1.3 cents.  
As Exhibit US-126 demonstrates, the margin fluctuates from month to month, with the value in several months even negative, implying that a farmer  that did not sell his crop at the time he received 
the marketing loan payment earned less than  the marketing loan rate.  Using a much lower value for 
this additional revenue above the loan rate when th e marketing loan rate kick s in would have reduced 
the impact of the study’s result. 
 
53. By request of the Payment Limitations Commission, Westcott and Price updated this analysis using actual prices for MY2001.  As the United States has discussed at the panel meetings and in its 
further rebuttal submission, this will overstate the impact of the marketing loan programme because it 
assumes that farmers had perfect foresight.  That is , the model is calibrated to the actual values that 
occurred in that year while, in fact, producers coul d not have anticipated such events when planting 
decisions occurred.  This overstates the eff ects of the programme because the model assumes 
outcomes that were unanticipated by producers when they made their planting decisions.   
 54. This overstatement is similar to the other third party studies that used actual outlays for 
marketing loans when calculating the price wedge.  As the United States argued when critiquing those 
models, a more appropriate method to determine the im pact is to look at expectations based on futures 
prices relative to the marketing loan rate.  If the fu tures prices are above the loan rate, the programme 
will have a negligible impact on planting decisions since farmers are not expecting benefits from the 
programme.  
55. For these reasons, the United States finds the results from these studies not relevant for the 
Panel in making its assessment of the effect of the marketing loan programme.  
213. What differences, if any, can be observe d in the results of econometric models in 
the literature which use lagged prices and those which use futures prices to analyse the effect of prices on planting decisions?  BRA, USA 
 56. In this dispute two approaches have been advocated in determining farmers’ expectations 
about prices.  Brazil and its economic consultant have used lagged prices as the mechanism to gauge 
farmers’  expectations about prices.  Dr. Sumner wrote:  
Of course, it is impossible to know precisely what individual growers expect.  I have 
adopted the long-standing approach of FAPR I, and other models[,] to approximate 
                                                     
 
52 See Exhibit US-126 for calculations using the authors’ formulation of the additional marketing loan 
facilitated revenue realized per unit for MY 1998-2003 (partial year), using actual data. WT/DS267/R/Add.2 
Page I-362  
 
these expectations by using the current y ear final realized market prices as the 
expectation for the following season’s price.
53 
 
The lagged prices used by Brazil and its economic c onsultant can at best, be an approximation of 
farmers’ price expectations.  That is because the lagged prices used in Brazil’s analysis incorporate 
pricing information that occurs after US farmers make their planting decision  (that is, prices from 
April through July of a given marketing year when  planting decisions are taken in the January to 
March period).  Therefore, by necessity, farmers cannot  be looking at a lagged price that incorporates 
prices that do not yet exist.  57. The United States, on the other hand, has a dvocated the use of futures prices, a market 
determined expectation of prices.  As Mr. MacD onald, Brazil’s own witness, has explained, the New 
York futures price is a key mechan ism used by cotton growers, traders and consumers in determining 
current market values as well as the contract prices  for forward deliveries, in the domestic US and 
non-US markets.
54   
 58. The use of futures by market participants is supported by a US government study.  In 
April 1999, the US General Accounting Office publishe d a report on farmers’ u se of risk management 
strategies.
55  Based on survey data from the 1996 USDA Ag ricultural Resource Management Study, 
the study showed that between 35 and 57 per cent of cotton farmers used a hedging instrument in 
1996.  (The ranges reflect a 95 per cent confidence inte rval.)  In addition, an estimated 63 to 89 per 
cent of cotton farms used cash forward contracts in 1996.56  These survey results suggest that a large 
proportion of cotton farmers either directly or indir ectly price their cotton off of organized futures and 
options markets. 
 59. Furthermore, economic literature supports the United States’ approach.  For example, in his 
classic paper on rational price expectations, Muth (E xhibit US-48) argued that there is little evidence 
that expectations based on past prices are economic ally meaningful.  Additionally, in a 1976 paper 
Gardner (Exhibit US-49) contended that the future pr ice for next year’s crop is the best proxy for 
expected price.   60. Unfortunately, the use of futures prices in a multi-commodity modelling framework for 
extended time projection is cumbersome.  First, equa tions must be developed that can predict values 
for futures contracts in simulation analysis.  S econd, many commodities lack an organized futures 
exchange (e.g., grain sorghum).  For these reasons , large-scale models like those used by FAPRI, 
USDA and the US Congressional Budget Office typically  use lagged prices rather than futures prices 
as proxies for price expectations.  61. Nonetheless, the use of lagged prices may resu lt in biased results.  Over the long term, where 
there is reasonable stability in markets, lagged prices function adequately as a proxy for price 
expectations.  However, in those years, as in th e period under investigation here, when unexpected 
exogenous shocks such as China dumping stocks and unexpected yields worldwide due to good 
weather conditions, lagged prices are poor predictors of  expected prices.  Future prices, by contrast, 
are more efficient because they are based on more current information. 
 
                                                     
 
53 Brazil’s Further Submission, Annex I, para 18. 
54 Exhibit BRA-281, para 13 (statement by Andrew MacDonald) 
55 US General Accounting Office.  Agriculture in Transition:  Farmers’ Use of Risk Management 
Strategies .  GAO/RCED-99-90. April 1999. See page 9, table 4 (Exhibit US-125). 
56 A forward contract is defined as a cash market tran saction in which two parties agree to buy or sell a 
commodity or asset under agreed-upon conditions.  For ex ample, a farmer agrees to sell, and a ginner or 
warehouse agrees to buy, cotton at a specific future time for an agreed-upon price or on the basis of an agreed 
on pricing mechanism (such as a futures or options market).  See Exhibit US-125, page 22. WT/DS267/R/Add.2 
Page I-363 
 
 
62. For example, during marketing years 2000, 200 1, 2002, and 2003, lagged prices significantly 
understate the harvest season prices expected by producer s as seen in the futures prices at the time of 
planting. The use of lagged prices thereby inflate the e ffect of the marketing loan rate.  In fact, those 
lagged prices would have to be increased by 8-25 pe r cent, depending on the year, to equal the harvest 
season price actually expected by produ cers as indicated by the futures price.57  For the period MY 
1999-2003, only MY 2002 exhibits expected prices be low the marketing loan rate when using futures 
prices.  However, over that same period, when lagge d prices are used as expected  prices, the loan rate 
is higher than the expected price in every year over this period  except MY1999.  Thus, it is a 
significant error for Brazil and Dr. Sumner to use la gged prices instead of the futures prices Brazil’s 
own expert explained to be the more accura te gauge of farmers’ price expectations. 
 
Harvest Futures Prices at Planting Time Compared to "Lagged Prices"(cents per pound) 
 MY1999 MY2000 MY2001 MY2002 MY2003 
Futures Price 1/ 60.27 61.31 58.63 42.18 59.6 
Expected Cash Price 2/ 55.27 56.31 53.63 37.18 54.6 
Lagged Prices 3/ 60.2 45 49.8 29.8 44.5 
Difference -4.93 11.31 3.83 7.38 10.1 
 
1/ February New York futures price for December delivery. 
2/ Futures price minus 5 cent cash basis.  3/ Prior crop year average farm price, weighted by monthly marketings.
58 
 
63. Looking more specifically at Dr. Sumner’s analysis in Annex I provides further evidence of 
the bias of lagged prices relative to future pri ces.  Consider the 2002 crop year.  In the Sumner 
analysis, area response to the removal of the cotton loan programme results in a 36 per cent reduction 
in US planted area – the largest single effect for any of the years considered in his analysis.  Based on 
lagged prices, price expectations for 2002 were  29.8 cents per pound, a 40 per cent reduction from 
2001 levels.  Yet, the futures market data sugge sts a far smaller reduction in expected price.  
December futures prices taken as the average daily  closing values in February 2002 averaged 
42.18 cents per pound, a 28 per cent drop from year earlier levels.  Based on Dr. Sumner’s range of supply response elasticities of 0.36 to 0.47, a decl ine of this magnitude would suggest a drop in 
acreage of 10 to 13 per cent from the preceding year.  In fact, actual US cotton acreage dropped 12 
per cent (from 15.5 million acres in 2001 to 13.7 m illion acres in 2002) suggesting acreage levels 
entirely consistent with world market conditions an d price expectations.  Thus, in marketing year 
2002, lagged prices would significantly overestimate th e decline in plantings in the absence of a 
marketing loan rate.  
 
64. While the United States would agree with Braz il that it is impossible to know precisely what 
individual farmers’ price expectations are, the United States argues that futures prices provide the 
most current expectations of market participants.  The United States disagrees with the approach used 
by Brazil in its analysis to rely solely on lagged prices and ignore information provided by futures prices.  While it may be impractical to include fu tures prices in some m odels, modelling convenience 
is no justification to ignore these objective, mark et-based price expectations, and the biased results 
from using lagged prices do not assist the Panel in making an objective assessment of what is the 
effect of the US marketing loan programme.  
                                                     
 
57 US Further Rebuttal Submission, paras. 164-65. 
58 Exhibit US-90. WT/DS267/R/Add.2 
Page I-364  
 
C. DOMESTIC SUPPORT 
 
214. Please provide a copy of regulations regarding the marketing loan programme and loan deficiency payments published at 58 Federal Register 15755, dated 24 March 1993.  What does this regulation indicate about the target price?  USA 
 65. Please see US Exhibits 117 and 118.  In these document, the Department of Agriculture set 
the level of support for the 1993 marketing year .  For example, the Department announced a 
marketing loan rate of 52.35 cents per pound.  In a ddition, the Secretary did not exercise his discretion 
to alter the effective price, which by statute was to be "not less than" 72.9 cents per pound.
59  We also 
note that the March 24 notice lowered the acreage re duction percentage (the share of base acreage on 
which deficiency payments could not be obtained) from 10 to 7.5 per cent.  
215. Please expand or comment on the statement at paragraph 91 of the US further 
rebuttal submission that the counter-cyclical target price ceases to be paid when the 
farm price rises above 65.73 cents per pound.   In this scenario, should the Panel 
disregard Direct Payments?  BRA, USA 
 
66. Direct payments are made to producers rega rdless of the price level; no production of upland 
cotton or any other crop is required to receive paym ent, and the recipient may additionally leave the 
land in conserving use.  In contrast, the counter-cyc lical payment is continge nt on farm prices falling 
below the target price of 72.4 cents per pound less the direct payment rate of 6.67 cents per pound.  
Thus, at farm prices near to or over the 65.73 cen ts threshold, the counter-cyclical payment will be 
reduced or eliminated.  
216. How many times have upland cotton pr oducers been able to update their base 
acres since 1984?  How do upland cotton produ cers come to note the possibility of future 
updating?  Please provide examples of relevant material.  BRA, USA 
 
67. Under the 1990 Act, base acreage for purposes of  deficiency payments was calculated as the 
average, minus the high and low year, of the previous five years plantings.  There was no updating of base acres by upland cotton producers since the base period was always a rolling average of the 
previous five years.  In effect, to increase acreage base,  a producer had to overplant his or her current 
acreage base.  The 1990 Act penalized producers who overplanted their base by declaring them 
ineligible for farm programme payments in the year  they overplanted their base.  For this reason, 
participation in the programme was quite high.  
68. The 1996 Act eliminated deficiency paymen ts in favour of decoupled production flexibility 
contract payments.  The Act also did away with  the rolling five-year average approach for base 
acreage.  Instead, crop base acreage was based on the am ount of base acreage that would have been in 
effect under the 1990 farm bill for the 1996 crop y ear.  Producers maintained  the same acreage base 
over the 1996 through 2001 crop years, without current plantings affecting their base acreage. 
 
69. The 2002 Act allowed producers either to  retain base acreage as under the production 
flexibility contracts or to update their base area e qual to the average acreage planted and prevented in 
1998-2001.  The latter option allowed decoupled paymen ts to be made with respect to soybeans and 
other oilseeds, which did not have base acreage unde r the 1990 Act.  This new crop acreage base 
cannot be updated as it extends for the life of th e 2002 Act (that is, through the 2006 crop year). 
 
70. We note that the likelihood of further base upda ting would appear small.  Currently, there is 
no authority for future base updating.  Any changes would have to originate in Congress where there 
                                                     
 
59 7 USC 1444-2 (Exhibit US-5). WT/DS267/R/Add.2 
Page I-365 
 
 
would likely be an associated budgetary cost.  Give n the current US fiscal situation, increases in the 
agricultural budget are seen as unlikely.  
217. What is the reason for reducing paym ents under the PFC and direct payments 
programmes for planting and harvesting fruit,  vegetables and wild rice on certain base 
acreage?   Please comment on the statements by the European Communities that "the 
reduction in payment for fruit and vegetables, if the EC understands correctly, is in fact 
designed to avoid unfair competition within the subsidising Member." (EC oral statement at first session, first substant ive meeting, paragraph 29) and "To find 
otherwise would not permit a WTO Member wishing to introduce decoupled payments 
to take account of important elements of internal competition (…)" (EC response to 
Panel third party Question No. 5).  
 
71. The limitation only applies to base amounts of acr eage, and to that end it is worthy of note 
that the US December 18-19 filings indicate that co tton farms plant less than one-third of their total 
cropland to cotton.   Of note, too, is that fruit a nd vegetable prohibition came into play before 1996 in 
connection with the "flex acre" concept of the 1990 fa rm bill as reflected in the provisions of 7 USC 
1464 (1988 ed.  Supp. III) as enacted at that time.  It  continues to be the case under the 1996 and 2002 
Farm Bill, as with the 1990 Bill, that the restric tions on plantings is only limited to the base acres 
amount of the farmer’s cropland.   
72.  
    
 
   73. Paragraph 6 prohibits basing payments on pr oduction requirements, not basing payments on 
not producing.  As the United States earlier pointed out, consider a situation in which a recipient of 
direct payments produces fruits and vegetables and sees the direct payment reduced.  How could that 
recipient receive the entire payment to which he  or she is entitled?  The marginal amount of 
decoupled payment is not "related to, or based on, the type or volume of production" undertaken by 
the producer since the recipient n eed not produce anything at all.  Rather, to receive the marginal 
payment, the recipient need merely refrain from pr oducing fruit, vegetables, or wild rice.  Thus, the 
extra amount of payment is not "related to, or based on" production; if anything, it is "related to, or 
based on" non-production (of certain crops).  
218. Please comment on the testimony of USDA Chief Economist Keith Collins cited 
in paragraph 36 of Brazil's oral statem ent regarding the trade-distorting and 
production-distorting nature of the marketing loan payments.   
 74. We agree with the statement of Dr. Collins that marketing loan payments are potentially 
production- and trade-distorting.  The United States has consistently notified upland cotton marketing 
loan payments as cotton-specific amber box payments in its WTO Domestic Support notifications.  The issue in this dispute is not whether marke ting loan payments are potentially production- and 
trade-distorting, but the degree to which they ha ve actually distorted production and trade in a 
particular year, given market prices and other relevant factors.  75. The degree of distortion caused by the marke ting loan programme depe nds on the relationship 
of the expected harvest price to the loan rate at the time of planting.  If the expected price is below the 
loan rate, the loan rate may provide an incen tive to plant cotton because farmers will receive a WT/DS267/R/Add.2 
Page I-366  
 
government payment for the difference between the loan rate and the adjusted world price.   For this 
reason, we believe that the marketing loan progr amme was more distorting in 2002 when expected 
cash prices were below loan rates at planting than  in 2001, when expected cash prices were higher 
than loan rates at the time of planting.  However, as explained previously, the observed decline in 
upland cotton planted acreage in marketing  year 200 2 was commensurate with the decline in futures 
prices over the year before. 
 
D. EXPORT CREDIT GUARANTEES 
 
219. Under the Agreement on Agriculture  the general position is that the use of export 
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e) 
which are not so listed, may only be used within the limits of the product specific reduction commitments specified in Part IV of Members' Schedules.    One might therefore have expected that Article 3.3 of the Agreement on Agriculture  would have 
prohibited the use of both listed and non-listed export subsidies in excess of reduction 
commitment levels in the case of scheduled pr oducts and, in the case of non-scheduled 
products, would have simply prohibited the use of any export subsidy.  Instead, the Article 3.3 prohibition is limited in both cases to export subsidies listed in Article  9.1. 
What significance, if any, does this contextual aspect have for how Article 10.2 might be interpreted having regard, inter alia , to:  
 
(a) the fact that export performance-relat ed tax incentives, which like subsidised 
export credit facilities were considered  as a possible candidate for listing as an 
Article 9.1 export subsidy in the pre-D ecember 1991 Draft Final Act negotiations, 
have been held (for example, in United States - Tax Treatment for Foreign Sales 
Corporations , WT/DS108) to be subject to the anti-circumvention provisions of  
Article 10.1; and  
 
(b) the treatment of international food aid and non-commercial transactions under 
Article 10?  USA 
  
76. The United States has previously noted the unremarkable fact that Article 9.1 of the 
Agreement on Agriculture sets forth a list of six ve ry specific practices known to the drafters and 
deemed to constitute export subsidies under that Agreement.
60  The specific identification and 
description of these export subsidy practices, well- known and notorious in the agricultural trade 
sector,  served at least three purposes in the text.  First, under Article 3.3, these particular practices 
were unambiguously subject to the export s ubsidy reduction commitments of each member. 
 
77. However, certain limited exceptions to this  rule constitute the second and third purposes of 
the specific list of export subsidies in Article 9.1:  Article 3.3 is by its terms "subject to the provisions 
of paragraphs 2(b) and 4 of Article  9."  Article 9.2(b) has since lapsed, but while in effect  permitted a 
Member to provide export subsidies listed in Article 9.1 in a given year in excess of the corresponding 
annual commitment levels in the Member’ s schedule, subject to the cumulation limits of 
Articles 9.2(b)(i)-(iv).  Under Article 9.4, durin g the implementation peri od, developing country 
Members were not required to unde rtake export subsidy commitments with respect to export subsidies 
listed in Articles 9.1(d) and 9.1(e), except not to ap ply them in a manner that would circumvent their 
reduction commitments.  
78. Unlike export performance-rela ted tax incentives, which are not expressly mentioned in the 
Agreement on Agriculture, export credit guarantees were  subject to an altogether separate treatment 
and commitment: exclusion from the export subs idy disciplines altogether until agreement on 
                                                     
 
60  US First Written Submission (11 July 2003), para.  161. WT/DS267/R/Add.2 
Page I-367 
 
 
internationally agreed disciplines.  Under Article 10.2, Members were (and continue to be) obligated 
to work toward the development of such di sciplines, and once agreed, adhere to them. 
 79. Question 219 suggests one might have expected  Article 3.3 to have prohibited the use of both 
listed and non-listed export subsidies in excess of  reduction commitment levels in the case of 
scheduled products and, in the case of non-scheduled  products, to have simply prohibited the use of 
any export subsidy.  Article 8, however, serves this  specific role.  It imposes the obligation not to 
provide export subsidies otherwise than in confor mity with the Agreement on Agriculture and with 
the commitments specified in th e respective Members’ schedules. 
 
80. The anti-circumvention provisions of Article 10. 1 further highlight the separate treatment of 
export credit guarantees.  That article explicitly recognizes that "non-commercial transactions" shall 
not be used to circumvent export subsidy commitments.   This phraseology is di stinctly similar to that 
of item (h) in Addendum 10, entitled "Export Competition:  Export Subsidies to be subject to the terms 
of the Final Agreement," dated August 2, 1991, am ong the series of addenda to the Note on Options 
circulated by Chairman Dunkel.
61  That item(h) addressed: "Export credits provided by governments 
or their agencies on less than fully commercial terms."  81. However, instead of making any connecti on between "non-commercial transactions" and 
export credits, the Members agreed in the very ne xt section - Article 10.2 as ultimately adopted - to 
provide wholly distinct treatment to export cr edits, export credit guarantees and insurance.  The 
reference to circumvention for no n-commercial transactions in the current Article 10.1 would have 
been the obvious place to draw the distinction that New Zealand and Brazil claim the Members 
allegedly made between "commercial"  and "non-commercial" export credits.
62  But the text simply 
does not support this fictional argument.  
82. Article 10.4 provides further support that expor t credits are part of a work programme to 
develop disciplines for them and consequently are not currently subject to the other disciplines of 
Article 10.  Article 10.4 of  the Agreement on Agriculture ties the discipline on food aid to terms negotiated elsewhere: the Food Aid Convention and the United Nations’ Food and Agriculture 
Organization (FAO).  This specific set of disciplines applicable to food aid demonstrate the situation 
that will apply once the negotiations mandated under Artic le 10.2 are completed.  They also illustrate 
an approach comparable to the negotiations th at subsequently occurred in the OECD and as 
contemplated in paragraph 5 of A ttachment 5 of the Harbinson Text.
63  Once internationally agreed 
disciplines are achieved, then it w ill be possible for a given export credit practice to circumvent export 
subsidy disciplines as a result of failure to comply with the export credit disciplines.64 
 
221. In respect of the table in paragraph 1 61 of the US August 22 rebuttal submission 
(concerning the cohort specific treatment of export credit guarantees), the Panel notes 
the subsequent US agreement (footnotes 82 and 96 in US further submission of 
30 September 2003; footnote 160 in US 18 November further rebuttal submission) to Brazil's assertion (footnote 67 in Brazil's 27 August 2003 comments on US rebuttal submission) that the total figure net of re-estimates should be $230,127,023 instead of the figure which originally appeared ($381,345,059). 
 
(a) Please submit a corrected table reflect ing all of the necessary information to 
produce this result, to the extent this is possible for the reasons indicated in 
footnote 96 in US further submission of 30 September 2003. 
                                                     
 
61 MTN.GNG/AG/W/1/Add. 10 (2 August 1991) (Exhibit US-27) 
62 See, New Zealand Answers to Question 35 of Pa nel to Third Parties, Brazil Answer to Panel 
Question 71(a); US Rebuttal Submission (22 August 2003), para. 144-145 
63 Exhibit US-9 
64 See US First Written Submission (11 July 2003), fn. 150. WT/DS267/R/Add.2 
Page I-368  
 
 
GSM 102/GSM-103/SCGP 
Subsidy Estimates and Reestimates By Cohort 
 
Original 
Subsidy Cohort 
Reestimates 
by Fiscal 
Year  Total Subsidy 
Estimate 
Cohort Estimate FY93-00 FY01 FY02 FY 03 Reestimates Net of 
Reestimate
        
1992 267,426,000  166,136,256 -599,604,000 27,030,201 14,823,708 -391,613,835 -124,187,835
1993 171,786,000 -10,556,906 -257,206,000 23, 017,631 16,571,778  -228,173,497 -56,387,497
1994 122,921,000 -82,345,960 -77,135,000 2,228,985 41,521,000 -115,730,975 7,190,025
1995 113,000,000 -40,555,149 -105,216,000 2,823,516 -6,351,460 -149,299,093 -36,299,093
1996 328,000,000 896,907 -386,916,000 7,611,330 44,934,327 -333,473,436 -5,473,436
1997 289,000,000 0 -237,316,000 19,845,279 50,733,713 -166,737,008 122,262,992
1998 301,000,000 0 -237,271,000 14,661,079 - 15,693,431 -238,303,352 62,696,648
1999 158,000,000 0 -68,758,000 51,146,455 -144,434,351 -162,045,896 -4,045,896
2000 195,000,000 0 -91987247 -61,534,936 -153,522,183 41,477,817
2001 103,000,000 -33497152 16,381,864 -17,115,288 85,884,712
2002 97,000,000 40008586 40,008,586 137,008,586
        
Total for all 
Cohorts  2,146,133,000  33,575,148 -1,969,422,000 22,880,077 -3,039,202 -1916005977 230127023
        
Source:  FSA Budget Division  Reestimate Documentation and Apportionment Documents. 
There were no reestimates apportioned during FY 1998 through FY 2000. 
 
 
(b) Please clarify whether and how the Panel should treat the figures in Exhibit 
BRA-182 for the net lifetime re-estimates for each respective cohort.  
 83. The United States has no objection to use of th e figures in the column entitled "Net lifetime 
reestimate amount" in Exhibit Bra-182 in lieu of the column entitled "Reestimates" in the table that accompanied paragraph 161 of the US Rebuttal S ubmission (22 August 2003) and reproduced in the 
response to question 221(a) immediately above.  Th e figures are intended to represent the same thing. 
 
84. The Panel will first note that with respect to the figures corresponding to cohorts 1997-2002, 
Exhibit Bra-182 and the table previous ly submitted by the United States match. 
 85. Differences appear with respect to cohorts 1992-1996.  The United States attempted to explain the disparity in footnote 96 of its Further Submission of 30 September 2003.  These 
differences would appear to be related to the cumu lative re-estimates applied to these cohorts within 
the calculations of the budgets in fiscal years 1993-2000.  The United States noted that it was 
searching for internal documentation to corroborate the figures included in the table previously 
submitted to the Panel.  In the absence of such  documentation and unable to explain the relatively 
minor disparity in figures, the United States necessarily accepts Exhibit Bra-182. 
 
86. In fact, the United States’ initial figures we re more conservative than these official figures 
which show profitability in every year during the period 1992-1996.  The following table illustrates 
this result:  WT/DS267/R/Add.2 
Page I-369 
 
 
Cohort Estimate Re-estimates (B ra-182) Net of Re-estimates 
1992 267426000 -370963000 -103537000
1993 171786000 -239160000   -67374000
1994 122921000 -133746000   -10825000
1995 113000000 -159564000   -46564000
1996 328000000 -333407000     -5407000
1997 289000000 -166737000   122263000
1998 301000000 -238304000     62696000
1999 158000000 -162046000      -4046000
2000 195000000 -153522000      41478000
2001 103000000 -17115000      85885000
2002  97000000  40009000    137009000
 
  
These figures show that all of the first five cohor ts (1992-1996), including 1994, are profitable.  The 
figures for these years, unlike the more recent cohorts , reflect much more complete data for actual 
operating experience (although 1999 is already showing profitability).  
(c) The Panel notes that the CCC 2002 financial statement in Exhibit BRA-158 
refers to annual "administrative" expen ses of $4 million, and that the US has 
also referred to this figure in its submissions (e.g. US first written submission, paragraph 175).  Please confirm whet her the figures in the table in 
paragraph 161 of the US August 22 rebuttal submission (or a corrected version thereof) includes "administrative expen ses", of approximately $4 million per 
year over the period 1992-2002, and expl ain why (or why not) this affects the 
substantive result .  
 87. The figures in the table in paragraph 161 do not include administrative expenses.  Imputed 
administrative costs are not subject to the re-est imation process but are reflected separately in the 
budget.
65  The United States has previously acknowledge d that it would be appropriate to apply an 
administrative expense as an operating cost of the programme.66   Consequently, it would be 
appropriate to add the administrative expense appli cable to a particular cohort as an operating cost. 
 
(d) Please identify what is considered an "administrative expense" for this purpose. 
 88. The Commodity Credit Corporation (CCC) has no physical presence.  It also has no 
employees.  The "administrative expense" in the budget is simply a reasonable approximation for budgetary purposes of the value of services supplied by US Department of Agriculture agencies and 
personnel in the administration of this par ticular programme subsumed within the CCC. 
 
89. The relevant provision from the applicable appropriations legislation for fiscal year 2003 
reads as follows:  
COMMODITY CREDIT CORPORATION EXPORT LOANS PROGRAMME ACCOUNT (INCLUDING TRANSFERS OF FUNDS) 
 
For administrative expenses to carry out the Commodity Credit Corporation's export 
guarantee programme, GSM 102 and GSM 103, $4,058,000; to cover common overhead 
expenses as permitted by section 11 of the Commod ity Credit Corporation Charter Act and in 
conformity with the Federal Credit Reform Act of 1990, of which $3,224,000 may be 
                                                     
 
65 See US First Written Submission (11 July 2003), para. 175 and fn. 160. 
66 US Answers to Panel Question 77 (11 August 2003), para. 146. WT/DS267/R/Add.2 
Page I-370  
 
transferred to and merged with the appropriati on for "Foreign Agricultural Services, Salaries 
and Expenses", and of which $834,000 may be transferred to and merged with the 
appropriation for "Farm Service Agency, Salaries and Expenses." 
 Also, paragraph 38 of Statement of Fede ral Financial Accounting Standard No. 2
67, originally issued 
23 August 199368, provides: 
 
Costs for administering credit activ ities, such as salaries, legal fe es, and office costs, that are 
incurred for credit policy evaluation, loan and loan guarantee origination, closing, servicing, monitoring, maintaining accounting and computer systems, and other credit administrative 
purposes, are recognized as administrative expen se.  Administrative expenses are not included 
in calculating the subsidy costs of direct loans and loan guarantees. 
   
(e) The Panel notes the US statement in paragraph 160 of its answers to Panel 
questions following the first meeting that  all cohorts are still open although the 
1994 and 1995 cohorts will close this year.  Is  this still an accurate statement?  If 
not, please indicate whether any cohort s have since "closed" for the period 
1992-2002. 
 
90. Although the United States has not completed th e formal administrative steps to close cohorts 
1994 and 1995, all financial transactions necessary to  do so are complete.  Consistent with figures 
reflected in the 2004 Budget Federal Credit Supp lement Table 8 (Exhibit Bra-182), the net of 
reestimate figure for each of cohorts 1994 and 1995 will be negative, i ndicating profitability. 
   
(f) The Panel notes the current "high" fi gures for 1997 and 1998 indicated in the 
original US chart.  Pending their confirmation and/or updating by the US, why 
does the US assert that a cohort will necessarily reach a "profitable" result (for 
example, the 1994 cohort, which has almost closed still indicates an outstanding amount)?  Do "re-estimates" reflect also  expectations about a cohort's future 
performance?  
 
91. Until a "closing reestimate" occurs with respect to a particular cohort, which is made "once all 
the loans in the cohort have been repaid or written off,"
69 each reestimate does necessarily reflect 
certain expectations about a cohort’ s future performance.  "Reestimates  mean revisions of the subsidy 
cost estimate of a cohort (or risk category) based  on information about the actual performance and/or 
estimated changes in future cash flows of the cohort."70  Generally, reestimates must be made 
immediately after end of each fiscal year. 
 
92. With the passage of time, of course, each reestimate necessarily more closely reflects actual 
results.   In the case of the GSM-102 export cred it guarantee programme, for example, after three 
fiscal years have elapsed both the actual amount of guarantees and the actual amount of defaults are known.   
93. With respect to the 1994 cohort alone, as noted in the response to Panel Question 221(b) 
above, the numbers from Table 8 of the Federal Credit Supplement (Exhibit Bra-182), indicate profitability.  As noted in the immediately preced ing response, although the United States has not 
                                                     
 
67 See Answer to Question 228, infra , regarding the Federal Accounting Standards Advisory Board 
68 Statement of Federal Financial Accounting Standards No. 2: Accounting for Direct Loans and Loan 
Guarantees, issued 23 August 1993, pp. 187-267. (Exhibit US-127) 
69 See OMB Circular A-11 (Exhibit Bra- 116), section 185.6, page 185-15.  See also, US Rebuttal 
Submission (22 August 2003), paras. 155-156 and fn. 189; US Answers to Panel Question 81(d) 
(11 August 2003), paras. 162-163. 
70 OMB Circular A-11 (Exhibit Bra- 116), Section 185.3(x), p. 185-12 WT/DS267/R/Add.2 
Page I-371 
 
 
completed the formal administrativ e steps to close cohorts 1994 a nd 1995, all financial transactions 
necessary to do so are complete.  Consistent with figures reflected in the 2004 Budget Federal Credit 
Supplement Table 8 (Exhibit Bra-182), the net of reestimate figure for each of cohorts 1994 and 1995 will be negative, indicating profitability.  
94. With respect to 1997 and 1998, the United States of course cannot with absolute certainty 
predict the future .  A principal issue with respect to the 1997 cohort concerns Pakistani and 
Ecuadorean defaults.  All of this debt has been rescheduled and is now fully performing.  These 
rescheduled amounts currently involve approximately  $209 million of outstanding principal alone.  
Consequently, the United States has every reason to  believe that 1997 cohort will ultimately reflect 
profitability. 
 95. With respect to the 1998 cohort over $30 m illion of Ecuadorean and Russian (private sector) 
outstanding principal are in performing reschedulings.  
(g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its 
examination, as suggested in paragr aph 198 of the US further rebuttal 
submission?  
 
96. The United States has previously noted that the original subsidy estimate in the US budget 
begins with an historically overly optimistic proj ection of the actual use of the programme and then 
the use of government-wide estimation rules is re quired, including mandated risk assessment country 
grades without regard to the actual experien ce specific to the CCC export credit guarantee 
programmes.
71  The original subsidy estimate for these c ohorts, like the original subsidy estimate for 
all cohorts, necessarily reflects no actual operati ng experience with respect to that cohort. 
 
97. Subsequent downward reestimates (i.e., goo d performance) are calculated not from the 
original subsidy estimate but from the actual figure corresponding to amounts of guarantees actually issued.
72  Although this budgetary convention exaggera tes the apparent negative performance in all 
years, this exaggeration is particularly acute in the nearer term.  As reflected in the table entitled 
"CCC Export Credit Guarantee Programme Levels - Annual President’s Budgets and Actual Sales 
Registrations - FYs 1992-2004" accompanying pa ragraph 148 of the US Further Submission 
(30 September 2003), actual sales registrations are onl y reflected in budgetary figures two fiscal years 
following the fiscal year of the particular cohort.  For the 2002 cohort, therefore, the actual sales 
registrations of $3,388 million contrasts with the estimated programme level of $3,926 million in the 
immediately preceding budget.  Similarly, for the 2001 cohort, the actual fi gure of $3,227 million is 
also more than one-half billion dollars less than the anticipated programme level of $3,792 million 
reflected in the preceding budgets.  For this reason, the tables set forth in response to questions 221(a) 
and 221(b) commence with an "estimate" figure corresponding to the actual level of sales registrations.  98. More significant in direct response to the ques tion, as reflected in the tables above in response 
to questions 221(a) and 221(b), is the trend of negative reestimates (i.e., better than expected 
performance).  They are uniformly large for all cohorts for 1999-2000.  This trend has also 
commenced with respect to the 2001 cohort.  It is reasonable to expect that in the fullness of time the 
data will similarly reflect further negative reestimat es for cohorts 2001 and 2002.   This is likely to 
become more pronounced as the terms of the guarantees issued during this time expire.  
99. For the foregoing reasons, the United States submits that the current budgetary subsidy 
estimate figures do not accurately reflect the proper relationship of premia to long-term operating costs and losses (if any) with respect to cohorts  2001 and 2002.  Although over the long-term the 
                                                     
 
71 US Further Submission (30 September 2003), paras. 147-148. 
72 See US Further Submission (30 September 2003), paras. 148-149. WT/DS267/R/Add.2 
Page I-372  
 
subsidy estimate / re-estimate process will inco rporate information relating to actual operating 
experience, the original subsidy estimate figures in  the budget do not reflect any operating experience 
for the respective cohort.  Thus, those subsidy estimat es cannot properly be used as part of an analysis 
of whether the export credit guarantee programmes confor m to Item (j) of the Illustrative List (i.e, the 
sufficiency of premia to cover long-term operating  costs or losses (if any)). 
 
(h) Why should the Panel "eliminate", in  addition, the 2000 cohort, as also 
suggested in paragraph 198 of the US further rebuttal submission for which information is presumably more "complete"?   
 
100. The Panel is of course correct to note that the data for the 2000 cohort is necessarily more 
complete than with respect to the subsequent  cohorts.  And, as the United States would have 
anticipated, the large negative reestimates have comme nced for the 2000 cohort.   As we are now in 
the third month of  fiscal year 2004, all out standing GSM-102 and SCGP guarantees will have 
expired, and the next budget cycle reestimat e process will necessarily reflect that fact. 
 
101. The same points made in the immediately pr eceding response to question 221(g) apply to the 
2000 cohort.  Of particular note with respect to th is cohort, however, is the very large difference 
between the original projected level of use refl ected in the 2000 budget ($4,506 million) and the 
actual level of sales registrations reflected in the 2002 budget for that cohort ($3,082 million).  This 
difference, approaching $1.5 billion of initially over estimated utilization, has a profound effect on the 
budgetary depiction of programme performance a nd required estimates (although the tables set forth 
above eliminate this distortion in the US budget by starting from the estimate figure corresponding to actual sales registrations).   
(i) Under the US approach, at what point in time could a Panel ever make an 
assessment of the programme, if it had to wait for each cohort to be completed 
before it could be "properly" assessed?  Wh y is it inappropriate for the Panel to 
include these "most recent years" in its evaluation, as the US suggests in paragraph 199 of its 18 November further rebuttal submission?  USA  
 
102. Fortunately, neither the Panel nor the United St ates has to answer this question entirely in the 
abstract.  First, Brazil and the United Stat es agree that an examination beyond 10 years is 
inappropriate.
73  Indeed, as the United States has noted, to subject the programme to the analytical 
yoke of the unique circumstances of the Polish and Ira qi defaults over 10 years ago would effectively 
require elimination of the programme altogether.74  Item(j) analysis requires a certain retrospection to 
make the requisite comparison be tween premia and net operating r esults of the programme.  The 
question therefore becomes at what point does the fi nancial data yield a sufficiently accurate picture 
to render this judgment.  103. The United States has noted that the budgetary  figures inherently tend to exaggerate negative 
performance of the programme.  This is more pronoun ced in the "most recent years" for the reasons 
noted above.   As noted in the immediately precedin g sub-question(h), in the case of fiscal year 2001 
and 2002 cohorts, the original budgetary subsidy estimates do not reflect any operating results of 
those cohorts.  In contrast, cohorts 1992-1999, ta ken as a whole, currently reflect a net negative 
reestimate (i.e., profitable performance).  Although it is theoretically conceivable that status could 
change, every indication in the trends related to  the programme, including most specifically the 
uniform performance of reschedulings, indicate that the negative reestimates will grow, not diminish, 
in time.   
                                                     
 
73 The most recent manifestation is Brazil’s statem ent in paragraph 81 of its 2 December 2003, Oral 
Statement: "Item(j) requires the Panel to determine whet her the ‘programmes,’ . . . charge premium rates that 
meet operating costs and losses over a period that the United States and Brazil agree should be 10 years." 
74 US Rebuttal Submission (August 22, 2003), paras. 172-174 WT/DS267/R/Add.2 
Page I-373 
 
 
 104. Consequently, the United States believes the Panel has sufficient data  to determine that 
premium rates are adequate to cover long-term operating costs and losses of the programmes.  
222. For GSM 102, 103 and SCGP, please provide year-by-year amounts from 1992 to 
2003 with respect to: (i) cumulative outstanding guarantees; (ii) claims paid; (iii) 
recoveries made; (iv) revenue from premiums; (v) other current revenue, including interest earned; (vi) interest charges paid; a nd (vii) administrative costs of running the 
programmes.  Please indicate any allocation methodologies used to calculate administrative costs.  USA 
 105. The chart constituting  Exhibit US-128 sets fo rth the information requested.  This data is 
current through November 30, 2003.  As the Pane l will note, claims outstanding plus interest and 
administrative expenses are now well below premia plus  interest otherwise collected or earned.  This 
current data clearly reflects that premia are ade quate to cover long-term operating costs and losses. 
 
106. For each of cohorts 1992-1996, $3 million of administrative costs are allocated.  For each subsequent cohort, $4 million of such costs are allo cated.  These are the figures reflected in the table 
accompanying paragraph 132 of Brazil’ s Oral St atement of July 22, 2003, and the corresponding 
references to the US budget cited therein.  As Exhibit US-128 breaks out activity for each of 
GSM-102, GSM-103, and SCGP, these respective administ rative costs have then been allocated based 
on the relative registration values of these programmes.   Interest costs and revenue (see response to 
question 224 and table therein) have similarl y been allocated based on registration value. 
  
223. Are the premium rates applicable to GSM 102, 103 and SCGP subject to regular 
review as to their adequacy in enabling th e operating costs and losses associated with 
these programmes?  If so, what criteria or benchmarks are taken into consideration for 
this purpose? Secondly, how do the premium rates applied compare with the implicit 
cost of  forfaiting transactions and with premiums for export credit insurance?  USA 
 
107. Premium rates applicable to GSM-102, GSM- 103, and SCGP are reviewed annually.  The 
premia rates vary by programme, length of cove rage, and repayment interval.  For GSM-102, the 
premium ranges from 15.3 cents per $100 of coverage to about 66 cents per $100 of coverage.  Under 
SCGP, a two-tier fee schedule exists.  For up to 90 da ys, the fee is 45 cents per $100 of coverage.  For 
91 to 180 days, the fee is 90 cents per $100 of cove rage.  A higher fee structure for longer term is 
viewed as an incentive to exporters to opt for a shorter term and correspondingly reduce the likelihood 
of claims, and therefore potential operating losses, associated with the programmes.  Premia for both 
GSM-102 and SCGP are currently subject to a statutory cap of one per cent.
75 
 108. Private commercial quotes for export credit in surance are simply not  available to the 
United States.  As the United St ates has previously noted, however
76, commercial insurers do offer 
export credit insurance covering agricultural comm odities.  According to a background paper on 
export credits prepared by the WTO Secretaria t: "While guarantees could be unconditional, they 
usually have conditions attached to them, so that in practice there is little distinction between credits 
which are guaranteed and credits which are subject to insurance."77 
 
109. With respect to forfaiting, the United States si milarly does not have access to specific implicit 
rates available in the marketplace.  The United States notes, however, that an importer does not 
necessarily realize any benefit from a CCC export credit guarantee.   CCC has no role in the 
arrangements between the foreign bank issuing the le tter of credit and the importer, which is typically 
                                                      
75 See US Answer to Panel Question 85 (11 August 2003), paras. 181-183. 
76 US Answer to Panel Question 76 (11 August 2003), para. 144 
77 Export Credits and Related Facilities , G/AG/NG/S/13 (26 June 2000) WT/DS267/R/Add.2 
Page I-374  
 
the account party under the letter of credit.  Conseq uently, the importer may have to pay its bank in 
full upon disbursement under the documentary letter of credit.  The existence of an export credit 
guarantee transaction also has no necessary effect on th e pricing of financing or letter of credit fees 
that the importer’s bank may charge.  In this resp ect, the export credit guarantee transaction is less 
favourable to the importer than a forfaiting transaction.
78  As the United States has previously 
observed, forfaiting and export credit guarantee transac tions compete as a method for trade financing 
over comparable tenors in similar markets, but it is difficult to make direct comparisons of implicit 
rates even among forfaiting transactions themselves.79    
 
 224. Please indicate how the CCC's cost of borrowing was treated in the 2002 
financial statement of the CCC, in Exhibit BRA 158.  
 
110. In the 2002 financial statements of the CCC,  the cost of borrowing is treated as interest 
expense.  It is included as part of the Net Cost of Operations set forth in Exhibit US-129, entitled 
"Commodity Credit Corporation Consolidated Statem ent of Net Cost (Note 13) for the Fiscal Year 
Ended 30 September 2002)."  A separate column is  presented for Foreign Programmes, of which the 
Export Credit Guarantee programmes are a part .  Borrowing costs are subsumed within 
"Intragovernmental Gross Costs".  CCC also earns interest on monies held by Treasury.  These interest collections become a component of "intrago vernmental earned revenue."  The net result is the 
difference between these two figures in a given year.  
111. With respect to the export credit guarantee pr ogrammes specifically, this "interest on debt to 
Treasury" and "interest on uninvested funds" are refl ected in the financing account portion of each 
budget.  As interest expense and revenue are nec essarily homogenized numbers, they are not readily 
allocated to cohorts.  Actual interest expense and revenue figures for a particular fiscal year are set 
forth in line 00.02 and 88.25 of the financing acc ount provisions of each budget.  The following table 
sets out these figures, which are also reflected in the table responding to question 222 above. 
                                                     
 
78 See, generally, US Further Submission (30 September 2003), paras. 157-162 
79 US Rebuttal Submission (22 August 2003), para. 189-191 WT/DS267/R/Add.2 
Page I-375 
 
 
 
CCC Export Credit Guarantee Programme -- Financing Account 
Payments of Interest on Borrowings from Treasury (00.02) and 
Interest Earned on Uninvested Funds (88.25) 
Programming Years 1992 – 2002 
($ Millions) 
 
 
Annual President’s Budgets 
 
Programme Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 
 
1992 Actuals             
   Interest on      
  Borrowings   
$0           
   Interest Earned  (1)           
 
1993 Actuals             
   Interest on  
  Borrowings    
$0          
   Interest Earned   (16)          
 
1994 Actuals             
   Interest on  
  Borrowings     
$0         
   Interest Earned   (0)         
 
1995 Actuals             
   Interest on  
  Borrowings      
$10        
   Interest Earned    (0)        
 
1996 Actuals             
   Interest on  
  Borrowings       
$61       
   Interest Earned     (26)       
 
1997 Actuals             
   Interest on  
  Borrowings        
$62      
   Interest Earned      (26)      
 
1998 Actuals             
   Interest on  
  Borrowings         
$62     
   Interest Earned       (54)     
 
1999 Actuals             
   Interest on  
  Borrowings          
$62    
   Interest Earned        (0)    
 
2000 Actuals             
   Interest on  
  Borrowings           
$62   
   Interest Earned         (99)   WT/DS267/R/Add.2 
Page I-376  
 
 
Annual President’s Budgets 
 
Programme Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 
 
2001 Actuals             
   Interest on  
  Borrowings            
$104  
   Interest Earned          (125)  
 
2002 Actuals             
   Interest on  
  Borrowings             
$93 
   Interest Earned           -61 
 WT/DS267/R/Add.2 
Page I-377 
 
 
 
225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if 
so,  please indicate the accounting regulation or  principle used.  If a "written off" debt is 
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest 
received in relation to the debt during the time it was "written off"?  USA 
 112. A complete response to this question requires a vocabulary distinction between "write off" for 
purposes of CCC accounting and debt forgiveness.  A "w rite off" conventionally is used to describe 
debt that CCC itself independently determines to be unc ollectible.  This determination is made by the 
Controller of CCC. 
 
113. Debt forgiveness, on the other hand, refers to  multilaterally agreed debt forgiveness, usually 
through the Paris Club, that is subsequently  implemented by the United States and CCC through 
legislation or other internal mechanisms to elimin ate the outstanding debt.  As a result, in the more 
common parlance, that debt too is written off. 
 
114. Historically, debt forgiveness is far larg er than independent "write off."  CCC has 
independently written off as uncoll ectible only approximately $190,0 00 of private sector debt with 
respect to the export credit guarantee programmes as follows:  
Cohort Fiscal Year of Write Off Country Amount 
Pre-1992 1995 Nigeria $129,000
Pre-1992 1999 Argentina     48,000
1992  1999 Russia and Former Sovie t 
Union     13,000
 
 Debt forgiveness:  
Cohort Fiscal Year of forgiveness Country Amount 
Pre-1992 1991, 1994 Poland $1,406,000,00080
Pre-1992 1997 Yemen          1,686,000
Pre-1992 1999 Honduras          5,951,000
Pre-1992 2002 Former Yugoslavia          3,343,000
Pre-1992 2002 Tanzania          8,806,000
 
 
None of the foregoing debt in either table has been recovered. 
  
226. If a debt was "written off" more than ten years ago, does it still create a cost to 
the programme?  If so, how is this reflected  in the 2002 financial statement of the CCC, 
in Exhibit BRA 158 (or any other material)?  
 
115. The provisions of the Federal Credit Reform Act first took effect with fiscal year 1992, which 
commenced on 1 October 1991.   Write-offs before  1 October 1991 would have no continuing effect 
in the current financial statements of CCC, as such write-offs would have been reflected as part of the 
operating loss of the corporation, which in turn was replenished through the annual appropriations 
process in the year following such write-off. 
 
                                                      
80 This amount is approximate as it requires allocation of write off related to debt arising from various 
programmes. WT/DS267/R/Add.2 
Page I-378  
 
116. Write-offs after 1 October 1991 also would not independently create an expense.  Upon 
payment of a claim on an export credit guarantee, CCC receives a fully subrogated position to collect 
from the defaulting obligor.  As a result, this debt  is then reflected as a loan receivable for both 
budgetary and financial statement purposes.   In accordance with paragraph 61  of Statement of Federal 
Financial Accounting Standard No. 2,
81: 
 
When post-1991 direct loans are written off, the unpaid principal of the loans is removed 
from the gross amount of loans receivable.  Concurrently, the same amount is charged to the allowance for subsidy costs.  Prior to the write-off, the uncollectible amounts should have 
been fully provided for in the subsidy cost allowance through the subsidy cost estimate or 
reestimates.  Therefore, the write-off would have no effect on expenses. 
 
227. The United States has indicated that Brazil continues to "mischaracterize" the 
amount of $411 million in the 2002 financial statement of the CCC, in Exhibit BRA 158, 
pp. 18 & 19.  Can the United States please i ndicate how it believes this amount - referred 
to on p. 19 of the Exhibit as "Credit Guarantee Liability-End of Fiscal Year" - should be 
properly characterized?  How, if at all, do es it represent CCC operating costs or losses? 
USA 
  
117. Brazil wrongly describes this amount as "record losses . . . for its guarantee programmes over 
the period 1992-2002."
82  This figure does not represent a loss.  It is a prospective  estimate at a 
particular moment in time of anticipated expe rience under the programme.   It is, like the budget 
figures, an estimate.  118. The $411 million figure is simply another manifestation of the estimate and re-estimate 
process required under the Credit Reform Act of 1990  and reflected in the budget figures of the 
United States.  As a result, it is another depiction, albeit in a different format, of the results of the 
estimate and re-estimate process.  119. Just as the estimate figures in the budget proceed in a downward direction (i.e., good performance), one would expect this corresponding est imate figure in the CCC Financial Statements 
to do the same.  And it does.  On the correspondi ng page of the Notes to Financial Statements 
30 September 2003 and 2002
83, the $411 million figure has declined to $22 million. 
 120. As reflected on page 19
84 of Exhibit Bra-158 and on its 2003 analog, the $411 million figure 
and the more recent $22 million figure are the result net of "interest rate reestimate" and "technical/default reestimate".  The figure, net of such total subsidy reestimates, is then brought 
forward to the subsequent year (as is manifest on page 19 from 2001 to 2002 and in turn from 2002 to 
2003).  Prior years’ figures similarly brought forward are also figures net of "total subsidy reestimates".   121. Furthermore, Appendix E of the Statements of Federal Financial Accounting Concepts and 
Standards of the Financial Accounting Standards Advi sory Board is a consolidated glossary of terms 
                                                     
 
81 Exhibit US-127. 
82 The most recent example of this repeated asser tion is in paragraph 84 of the 2 December 2003, 
Statement of Brazil. 
83 Audit Report, Commodity Credit Corporation, Financial Statements for Fiscal Years 2003 and 2002, 
Note 5, page 19.  (Exhibit US-129). 
84 The information and format of this page are required by Statement of Federal Financial Accounting 
Standards No. 18: Amendments To Accounting Standards for Direct Loans and Loan Guarantees In Statement of Federal Financial Accounting Standards No. 2, Ap pendix B: Schedule B, entitled "Schedule for Reconciling 
Loan Guarantee Liability Balances."  Exhibit US-125 , p. 990 (Exhibit US-125:  
http://www.fasab.gov/pdf/cod4.pdf
  pages 967-993). WT/DS267/R/Add.2 
Page I-379 
 
 
applicable to GAAP for federal entities.  That glo ssary defines "liability" as: "For Federal accounting 
purposes, a probable future outflow or other sacrifice of resources as a result of past transactions or events."  Loss, on the other hand, is: "Any expense or  irrecoverable cost, often referred to as a form of 
nonrecurring charge, an expenditure from which no present or future benefit may be expected."
85 The 
$411 million figure in the 2002 Financial Statements  and the $22 million figure in the 2003 Financial 
Statements describe "credit guarantee liability," not loss. 
 
228. What accounting principles should th e Panel use in asses sing the long-term 
operating costs and losses of these three program mes?  For example, if internal US 
Government regulations require costs to be  treated differently to generally accepted 
accounting principles, is it incumbent on the Panel to conduct its analysis in accordance 
with that treatment?  BRA, USA 
 
122. Financial statements of the Commodity Cred it Corporation are prepared in accordance with 
generally accepted accounting principles (GAAP), ba sed on accounting standards promulgated by the 
Federal Accounting Standards Advisory Board (FASAB).86  In October, 1999, this board was 
designated by the American Institute of Ce rtified Public Accountants (AICPA) as the 
standards-setting body for financial statements of  federal government entities, with respect to the 
establishment of generally accepted accounting principl es.  On October 19, 1999, AICPA adopted an 
amendment to its Code of Professional Ethics to  recognize accounting standards published by the 
FASAB as GAAP for federal financial reporting en tities.  The amendment recognized FASAB as the 
source of GAAP for federal entities.  Conseque ntly, no incompatibility of accounting principles 
exists.  
E. SERIOUS PREJUDICE  
 
230. Please comment on Brazil's views on Ar ticle 6.3 of the SCM Agreement as stated 
in paragraphs 92-94 of its further submission. USA  
 
123. Brazil’s arguments fail to convince.  First, Br azil complains that "[t]here is no valid basis for 
the US interpretation that the word "may" in the chapeau of Article 6.3 of the SCM Agreement [to] 
mean[] that a complainant - in addition to demonstr ating the existence of one of the effects listed in 
the subparagraphs, e.g., significant price suppression - must also make a separate showing of ‘serious’ 
prejudice."
87  Brazil may choose to believe there is no "va lid" basis, but there is a clear textual basis 
for the US interpretation: the ordinary meaning of the word "may."  124. The ordinary meaning of "may" is "have ability or power to; can."
88  Therefore, the chapeau 
of Article 6.3 permits but does not require a findi ng that serious prejudice exists when one of the 
situations in Article 6.3 is demonstrated.   125. Second, Brazil argues that the use of "may" in Article 6.3 is merely intended to reflect that there are "situations in which the four enumerat ed types of serious prejudice exist but are not 
actionable."   For example, Brazil points to Article 6.7, which delineates certain circumstances in 
which displacement or impeding of exports shall not arise, and Article 6.9, which states that Article 6 
does not apply to measures that conform to the Peace Clause.  Brazil’s argument is badly flawed.  The ordinary meaning of the chapeau to Article 6.3 do es not suggest that serious prejudice must arise if 
one of the situations in Article 6.3 exists.  If the drafters had intended merely to suggest that 
exceptions to Article 6.3 exist, they succeeded in stead in creating a provision that does not compel 
                                                     
 
85 Statement of Federal Financial Accounting Concepts and Standards (May 2002), Appendix E, pages 
1140-1141 (Exhibit US-130). 
86 The website for the FASAB is www.fasab.gov. 
87 Brazil’s Further Rebuttal Submission, para. 92. 
88 New Shorter Oxford English Dictionary , vol.1, at 1721. WT/DS267/R/Add.2 
Page I-380  
 
any finding of serious prejudice in a circumstance in which one of the criteria under Article 6.3 is met, 
even when the circumstances in Articles 6.7 and 6.9 are met.    126. Indeed, the text of Article 6 does reflect Memb ers’ decision to create in Articles 6.1 and 6.2 
exactly the sort of mandatory presumption / excepti on structure that Brazil attempts to read into 
Article 6.3.  Article 6.1 states that "[s]erious pr ejudice in the sense of paragraph (c) of Article 5 shall 
be deemed to exist in [certain] case[s]" (emphasis added).  Article 6.2 states that, " [n]otwithstanding 
the provisions of paragraph 1, serious prejudice shall not be found  if the subsidizing Member 
demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph 3" (emphasis added).  By wa y of contrast, Articles 6.3 and 6.7 do not use mandatory 
language (for example, "shall be de emed to exist" / "shall not be found") to establish a presumption / 
exception relationship.  Rather, the language of Ar ticle 6.3 is permissive, and Article 6.7 is not 
expressed as an exception to a mandatory finding under Article 6.3.  127. Brazil’s reference to Article 6.9 is inapt.   We note that Article 6.9 does not limit its 
application to situations under Article 6.3.  Rather, it states: "This Article does not apply to subsidies 
maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture" 
(emphasis added).  The language of Article 6.9 indicates that it applies to all of the provisions under 
"[t]his Article."  Thus, according to Brazil’s logi c, every affirmative use of the word "shall" in 
Article 6 (for example, Article 6.1: "Serious prejudi ce shall be deemed to exist . . . ."; Article 6.4: 
"[D]isplacement or impeding of exports shall include  . . . ."; Article 6.5: "[P]rice undercutting shall 
include . . . .") should have been written "may" to re flect the fact that "even where the requirements of 
[that provision] are fulfilled," the "subsidies are ex empt from action by virtue of the peace clause of 
Article 13 of the Agreement on Agriculture."  Those other provisions do use the term "shall," 
however, suggesting that the term "may" in Article  6.3 was used deliberately and according to its 
ordinary meaning. 
 
128. Finally, Brazil asserts that "Article 6 is silent on the nature of the alleged additional 
requirements for a finding of ‘serious’ prejudice."
89  This is not wholly accurate.  For example, as 
Question 229 from the Panel to Brazil notes, the ch apeau to Article 6.3 indicates that "[s]erious 
prejudice . . . may arise in any case where one or several of the following apply " (emphasis added).  
Therefore, the Panel could conclude that where more  than one prong of Article 6.3 is satisfied, the 
likelihood that the result is "serious prejudice" in creases.  Furthermore, Brazil points to additional 
details provided in Article 6.4 on displacement or  impedance and in Article  6.5 on price undercutting 
as suggesting that a finding of "serious prejudice" must  result if one prong of Article 6.3 is satisfied.  
However, Brazil draws no consequence from the lack of" detailed definitions" capable of application 
for Articles 6.3(a), 6.3(c) (significant prices suppression, price depression, or lost sales), or 6.3(d).   
 
129. Finally, Brazil claims that the United States did not assert and the panel in Indonesia - 
Automobiles  did not find any separate "serious prejudice" requirement in Article 6.3.  As the 
United States notes in its answer to Question 234, th e permissive ("may") language of the chapeau to 
Article 6.3 would not preclude the Panel from c oncluding that a finding under one prong of 
Article 6.3 suffices to establish serious prejudice.  As Article 6.8 suggests, "the existence of serious 
prejudice  should be determined on the basis of the information submitted to or obtained by the panel" 
– that is, on a case-by-case basis.  Thus, the Panel will be called upon to exercise its judgment on the 
quality of the evidence on causation and on the extent  of any alleged effects.  To reiterate one 
hypothetical example suggested at the second panel meeting, were a complaining party to make a 
prima facie  case that one unit  of its exports had been displaced from the market of the subsidizing 
Member, the situation in Article 6.3(a) would techni cally have been demonstrated.  Such a situation, 
however, would lend itself to the exercise of the Panel’s discretion not to find serious prejudice.  This is the type of flexibility that the chapeau to Article 6.3 gives the Panel and which Brazil ’s 
interpretation would read out of the Subsidies Agreement. 
                                                     
 
89 Brazil’s Further Rebuttal Submission, para. 94. WT/DS267/R/Add.2 
Page I-381 
 
 
 
231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM 
Agreement are relevant context for the Pane l's interpretation of Article 6.3?  USA 
 
130. The United States believes that both Article 6.1 and Annex IV of the Subsidies Agreement 
provide relevant context for interpreting "serious prejudice" within the meaning of Article 5(c) and 
Article 6.3.  As the Panel’s question notes, Artic le 6.1 has expired pursuant to Article 31, which 
established that Article 6.1 would "apply for a period of five years, beginning with the date of entry 
into force of the WTO Agreement," unless the Committee on Subsidies and Countervailing Measures determined to extend its applica tion.  Annex IV is entitled, "Calculation of the Total Ad Valorem 
Subsidization (Paragraph 1(a) of Article 6)," and by its terms establishes a methodology to calculate 
"the amount of a subsidy for the purpose of paragraph 1(a) of Article 6."  Thus, since the provision it is meant to implement is no longer in effect, A nnex IV as well is no longer directly applicable. 
 131. The context provided by these provisions, of course, must be judged in light of the fact that 
Members did not agree to extend Article 6.1(a).  That is, it is highly relevant that the provision 
establishing a rebuttable presumption of serious prejudice upon a showing of a 5 per cent ad valorem  
subsidization rate was allowed by Members to lap se.  On the other hand, no decision on whether to 
extend Annex IV was contemplated or taken pursuant to Article 31.  In addition, we note that in 
United States – Countervailing Measures (EC) , the Appellate Body relied on Annex IV as context in 
interpreting another provision of the Subsidies Agreement.
90   Thus, although the underlying provision 
attaching a consequence to a certain subsidizati on rate lapsed, it is appropriate to examine how 
Members agreed in Annex IV a subsidy not tied to  the production or sale of a given product would be 
allocated across the total value of  the recipient’s production.   
 132. The Panel must utilize some methodology to determine the benefit to upland cotton from a 
subsidy not tied to production of upland cotton.  For example, Part V does not expressly set out an 
allocation methodology, but the same methodology of  allocating an untied subsidy across the total 
value of the recipient’s production is applied by  several Members (for example, the European 
Communities and the United States) for purposes of their countervailing duty law.  Indeed, Brazil 
itself has proposed in the Negotiating Group on Rules that Members adopt a "guideline" on 
calculating the amount of the subsidy for countervailing duty purposes precisely setting out the 
methodology contained in Annex IV.
91  The Panel should consider whether Brazil’s refusal to 
countenance any allocation of the decoupled payments it has challenged is credible given the fact that 
Brazil in its Rules proposal and Annex IV as agreed by Members both express the same approach to allocating non-tied subsidies across production.  Thus, the United States believes that Annex IV 
continues to provide useful contex t for the necessary task of identify ing the products that benefit from 
a subsidy not tied to the production or sale of a given product. 
 
234. Does "significant" price suppression und er Article 6.3(c) necessarily amount to 
"serious" prejudice within the meaning of Article 5(c)?  Could the level of "significance" of any price suppression under Article 6.3(c) determine whether any prejudice under Article 5(c) rises to the level of "serious prejudice"? 
 133. "Significant" price suppression under Article 6.3(c) does not necessarily amount to "serious 
prejudice" within the meaning of Article 5(c).  Th is conclusion flows from the ordinary meaning of 
                                                     
 
90 WT/DS212/AB/R, para. 112.  Similarly, in United States – FSC: Article 22.6 , Arbitrator cited the 
expired Articles 8 and 9 as "helpful . . . in understand ing the overall architecture of the Agreement with respect 
to the different types of subsidies it sought an d seeks to address."  WT/DS108/ARB, note 56. 
91 Paper by Brazil, Countervailing Measures: Illustrative Major Issues, TN/RL/W/19, at 6 
(7 October 2002) ("If the benefit of a subsidy is limited to a particular product, the denominator should reflect 
only sales [production/exports] of that product.  If this is not the case, the denominator should be the recipient’s 
total sales."). WT/DS267/R/Add.2 
Page I-382  
 
the text of Article 6.3(c): "Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any 
case where one or several of the following apply."  The ordinary meaning of "may" is "have ability or 
power to; can."  Therefore, the existence of one of the situations in Article 6.3 is a necessary condition 
for a finding of serious prejudice but may not be sufficient.    
134. Brazil argues that the use of "may" in Article 6. 3 is merely intended to reflect that Article 6.7 
delineates certain circumstances in which displacemen t or impeding of exports shall not arise.  
However, the ordinary meaning of the chapeau to Article 6.3 does not suggest that serious prejudice must arise if one of the situations in Article 6.3 exis ts.  Further, the text of Article 6 reflects Members’ 
decision to create just such a mandatory presumpti on / exception structure in Article 6.1 and 6.2.  
Article 6.1 states that "[s]erious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to 
exist in [certain] case[s]" (emphasis added).  Article  6.2 states that, "[n]otwithstanding the provisions 
of paragraph 1, serious prejudice shall not be found  if the subsidizing Member demonstrates that the 
subsidy in question has not resulted in any of th e effects enumerated in paragraph 3" (emphasis 
added).  Article 6.3 and 6.7 do not use mandatory language ("shall be deemed to exist" / "shall not be 
found") to establish a presumption / exception relations hip.  Rather, the language of Article 6.3 is 
permissive, and Article 6.7 is not expressed as an ex ception to a mandatory finding under Article 6.3. 
 135. At the same time, the United States does not be lieve the text of the chapeau to Article 6.3 
precludes  a finding of serious prejudice where only "significant price suppression" by the subsidized 
product "in the same market" as a like product and no other situation in Article 6.3 has been 
demonstrated.  Thus, it is conceivable that the ef fect of a subsidy could be price suppression so 
significant that it alone rises to the level of serious  prejudice to the interests of another Member.   
 136. We recall that Brazil’s interp retation is that price suppression would be "significant" even at a 
level of 1 cent per pound because this coul d still "meaningfully affect" its producers.
92  The use of the 
term "significant," however, would seem to be inte nded to prevent insignificant price effects from 
rising to the level of serious prejudice.  For ex ample, were the term "significant" omitted from 
Article 6.3(c), any production subsidy (for example, a per- unit payment of 0.0001 cents per pound of 
production) would be deemed to satisfy Article 6.3(c) because any increase in production resulting 
from the subsidy would theoretically  result in some price effect.  Coupled with Brazil’s reading of 
"may arise" in the chapeau of Article 6.3, this would result in any production subsidy running afoul of 
Articles 5 and 6, effectively undermining the separ ation of Part III of the Subsidies Agreement on 
"Actionable Subsidies" from Part II on "Prohibited Subsidies."  
236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 
December oral statement).  Please provide a conceptually analogous chart to Exhibit 
US-63 with respect to data relating to the US  interpretation of "world market share".  
  
137. The graph shows the year-over-year percenta ge change in the world market share over 
1996-2002.  US world market share is defined as in Exhibit US-47 as the quantity of consumption of US cotton (domestic mill use + exports)  relative to world cotton consumption.  
 
138. The annual change in the US market share is  relatively slight with the exception of 1998 
when severe drought, primarily in Texas, caused US production to fall significantly. 
                                                     
 
92 See Brazil’s Further Submission, para. 256.   WT/DS267/R/Add.2 
Page I-383 
 
 
 
Change in  Market Share Percentage
-6%-4%-2%0%2%4%6%
1996 1997 1998 1999 2000 2001 2002*United States 
Rest of  World
 
 
  
237. Could a phenomenon that remains at approximately the same level over a given 
period of time be considered a "consistent t rend" within the meaning of Article 6.3(d)?  
Do parties have any suggestions as to how to  determine a "consistent trend", statistically 
or otherwise?  BRA, USA 
 
139. It would not appear that a phenomenon (world market share) that remains at approximately 
the same level over a given period of time could be considered a "consiste nt trend" within the 
meaning of Article 6.3(d).  This follows from the text  of Article 6.3(d) itself because the "effect of the 
subsidy" must be an increase  in world market share (as compared  to the preceding three-year period), 
and "this increase [must] follow[] a consistent trend over a period when subsidies have been granted."  
Thus, if world market share remains at approximate ly the same level over a given period of time, the 
trend would not be an "increase" in world market share; hence, the trend would not be a "consistent 
trend" within the meaning of Article 6.3(d).  And, in fact, the data do not demonstrate that US world 
market share has increased following a consistent  trend over a period when subsidies have been 
granted.
93 
 
238. According to the US interpretation of the term "world market share": 
 (a) should the domestic consumption of  closed markets be added into the 
denominator?   
 
140.  It is not clear from the Panel’s question what is meant by "closed markets," but the US 
reading of Article 6.3(d) is that "world market shar e . . . in a particular subsidized primary product or 
commodity" means just that: a Member’s share of th e world market in, for example, upland cotton.  
There is nothing in the text of Article 6.3(d) that supports excluding any portion of the "world" from 
the analysis.  For this reason, Brazil’s reading of th is provision as solely relating to world export trade 
necessarily excludes any portions of the "world market" for upland cotton that do not import, no 
                                                     
 
93 See, e.g. , US Opening Statement at the Second Panel M eeting, paras. 12-13 ("That is, the facts 
demonstrate that since marketing y ear 1996, US world market share ha s increased and then decreased in 
alternating years, and US world market share in marketin g year 2002 (19.6 per cent) is lower than in marketing 
years 1996 and 1997 (20.4 and 21.6 per cent, respectively)."). WT/DS267/R/Add.2 
Page I-384  
 
matter the size of that market.  Such a result runs c ontrary to the ordinary meaning of the terms of the 
provision.  141. We note that excluding consumption from "closed markets" in the world market share calculation would increase the overall market share of the United States (and other suppliers) because 
the total world consumption figure would be lower.  However, the variation in market share across 
years would not change appreciably assuming that the level of consumption in closed markets was relatively constant.  
(b) if US production and consumption in creased by the same percentage, whilst the 
rest of the world's production and co nsumption remained steady, would this 
imply an increase in the US "world market share" by a different percentage?   
 
142. The United States interprets this question as asking whether the US market share would 
increase if an increase in US cotton consumption was completely supplied by increased US 
production without any changes to the consumption a nd supply patterns of the rest of the world.  
Under the US approach to "world market sh are," US world market share would increase.
94  T h e  
amount of increase in the US world market sh are would depend largely on the size of US 
consumption relative to world consumption.  143. Under Brazil’s approach to Article 6.3(d) , however, an increase in a Member’s cotton 
consumption that was completely supplied by increased production by that Member would result in 
no change in that Member’s world market share sinc e there was no change in the Member’s exports.  
Brazil’s approach, therefore, would allow a larger or even dominant cotton consumer to provide huge 
per-unit production subsidies that increased the sh are of its own domestic consumption that its 
producers supplied without any discipline under Article  6.3(d), regardless of the impact on other 
Members who could potentially supply that increasi ng domestic consumption.  Such a result runs 
contrary to the ordinary meaning of "world market  share" in Article 6.3(d) since the term "world 
market" would captures impacts both in the market of  the subsidizing Member (as in Article 6.3(a)) 
and in third-country markets (Articles 6.3(b) and 6.3(c)).   
(c) does Saudi Arabia have a sma ll world market share for oil?  
 144. The relevance of this question is not entirely clear since Article 6.3(d) does not speak of 
"large" or "small" world market shares.  That is, it is only a certain increase  in world market share, 
from whatever level, that follows a consistent tr end over a period when subsidies have been granted 
that is relevant to the 6.3(d) analysis. 
 
145. Nonetheless, we note that Saudi Arabia expor ts crude oil but also refines petroleum into 
products that it consumes and refines as well.  Ba sed on 2000 world petroleum supply and disposition 
data for 2000, Saudi crude oil exports account for a bout 16 per cent of total world exports.  Using an 
analogous measure for consumption (exports plus  domestic consumption–i.e., refining–divided by 
total world consumption) gives a market share of 12 per cent. 
 
239. How does the US respond to Brazil's assert ions that, under the US interpretation 
of the term "world market share":   (a) there would be no WTO disciplines on production-enhancing subsidies that 
increase a Member's world market sha re of exports?  (see paragraph 64 of 
Brazil's 2 December oral statement); 
 
                                                     
 
94 US world market share = (US domestic use of US cotton + US exports)/world consumption of cotton WT/DS267/R/Add.2 
Page I-385 
 
 
(b) a Member's exports would have to be disregarded in calculating their "world 
market share" in terms of "world co nsumption"? (see e.g. paragraph 65 of 
Brazil's 2 December oral statement)  
 
146. (a)  We note that Brazil must repeatedly insert the term "export" into the phrase "world market share of export" or "world export share" in order to convey a meaning restricting the term 
"market share" to exports.  That is because the ordina ry meaning of "world market share" would be all 
those markets in which cotton is consumed.  Further,  Brazil’s argument is overs tated.  There would be 
disciplines on production-enhancing subsidies, even  those that increase a Member’s world market 
share of exports  (even though that is not an WTO obligation in and of itself).  Under Article 6.3(d), 
for example, a Member’s world market share is de termined by its domestic consumption plus exports 
of the product it produces.  If a subsidy increased  the Member’s exports, and domestic consumption 
and world consumption remained the same, the increase in the Member’s exports alone would 
increase that Member’s world market share.   
147. Further, production-enhancing subsidies with  export effects could be inconsistent with 
Article 5(a) (injury), Article 6.3(b) (displace or impede exports to third country markets), Article 6.3(c) (lost sales), or GATT 1994 XVI:1 (serious prejudice).  148. (b) It is interesting that Brazil, which roundl y rejects the use of any concepts from Part V or 
Annex IV of the Subsidies Agreement or from th e Safeguards or Anti-Dumping Agreements when 
these are inconvenient for it, here tries to introduce "the ordinary meaning in a trade remedy context 
of ‘domestic consumption’."  The Panel’s task is not  to interpret the term "d omestic consumption" but 
rather the "world market share of the subsidizing Member in a particular subsidized primary product 
or commodity".  The United States has proposed that the US share of the world market for upland cotton must be measured by that portion of worl d consumption of upland cotton satisfied by US 
upland cotton.  That necessarily must include US  domestic consumption satisfied by US upland 
cotton.  Again, we note that a relevant "market"  for serious prejudice purposes is the market of the 
subsidizing Member under Article 6.3(a).  There is no b asis in the text or context of 6.3(d) to exclude 
that market from the "world market" identified in 6.3(d).  
240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) 
of the SCM Agreement?  Do these provisions apply separately?  If not, could it indicate 
that "world market share" is intended to  mean the same as "share of world export 
trade"?  
 
149. GATT 1994 Article XVI:3 provides some context to reading Article 6.3(d).  Both provisions 
are addressed to subsidies that have effects on prim ary products.  However, the context they provide 
also consists of the differences  in their respective texts.  GATT 1994 Article XVI:3 is limited to 
export subsidies, as Brazil acknow ledged and agreed in the Tokyo Round Subsidies Code.  (Brazil 
does not, because it cannot, deny that in the T okyo Round it expressed its understanding that GATT 
1994 Article XVI:3 applies only to export subsidi es.  The Panel can judge how credible it finds 
Brazil’s change of opinion in this dispute.)   GA TT 1994 Article XVI:3 relies on an "equitable share" 
concept that panels and Members found incapable of definition or application.  Moreover, Brazil has 
not provided any objective definition in this dispute of the "equitable share" concept but to argue that 
anything other than a non-subsidized level of export s is inequitable, a reading that would convert 
Article XVI:3 into a prohibition on domes tic subsidies with production effects. 
 
150. Article 6.3(d) of the Subsidies Agreement, on the other hand, applies to all subsidies and has 
objective criteria that are capable of application.  This provision sets forward a mechanical test: a 
Member’s share of the world market for a product mu st be greater than preceding 3-year average, and 
the increase must follow a consistent trend over a period when subsidies have been granted.  
Therefore, there is no "inequitable share" concept to  deal with, and the consistency of a Member with 
its obligations is a straightforward matter to determine. WT/DS267/R/Add.2 
Page I-386  
 
 151. The United States does not see any basis to say that "world market share" was intended to 
mean the same as the "share of world export trad e".  The key difference is the use of the term 
"market" instead of "export".  The term "market" can, of course, mean a domestic market; its meaning 
is not limited to markets in international trade.  "E xport" refers to cross-border transactions; therefore, 
a more limited set of transactions would be of interest.  As a result, the term "world market share" 
requires that one look at all places where upland co tton is consumed and determine what portion of 
world consumption of is satisfied with US upland cotton.  
241.  How does the US reconcile its data on consumption for 2002 in US Exhibit 40, 
Table 1 with the "consumption" data it refers to in its 30 September submission, 
paragraph 34, Exhibit US-47 or US-71?  USA 
 
152. In paragraph 34 of the 30 September s ubmission and in the accompanying table, 
"consumption" is used to capture both the domestic  use of raw cotton production (that is, the "mill 
use" figure), plus the raw cotton equivalent of textile imports (that is, how much raw cotton is 
incorporated into manufactured cotton textile imports).   This point is crucial to understanding how the 
growth in cotton textile imports has contributed to  the decline in consumption of US domestically 
produced raw cotton for domestic manufacturing, wh ich has resulted in more US domestic cotton 
finding a home in off-shore markets.  That is, much US domestic cotton that is exported returns to the 
United States in the form of textiles and apparel.
95  
 
153. In Exhibits 40, 47, and 71, the data on consumption correspond to the "mill use" data 
described above.  The only difference is that th ese data are on a crop year basis (August - July).  
Therefore, the mill use figure in paragraph 34 of the US further submission will differ slightly from 
the consumption figure in the other exhibits.  They are the same data, adjusted for different periods.  
The most recent domestic consumption (that is, mill use) figure is given in the response to Question 
197.  
242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land 
owners?  If not all of the benefits go to land owners, what proportion goes to producers?  USA 
 154. As noted in the US further rebuttal submission,  the literature on direct payments suggest that 
a large portion of direct payments get capitalized into land values.  As Burfisher and Hopkins (2003) 
note: "Not all operators can . . . be considered as true beneficiaries of the [PFC] programme, since 
competitive cropland rental markets work to pass through payments from PFC recipients who are 
tenants to the owners of base acres."
96  Thus, the effects of increased wealth largely accrue to 
non-operators, and any theoretical production effects are further minimized.  155. In well-functioning markets, asset prices refl ect expectations about the future returns from 
their ownership.  The PFC programme covered a fi xed number of base cropland acres, established in 
1996 when farmers enrolled in the programme, and be nefits did not require current production.  The 
direct link between base acres and the known progr amme benefits allowed the future stream of 
payments to be efficiently capitalized into land values:  
Decoupled payments clearly increase the well-being of the operators who receive them, but only when they are owners of base acres.  Otherwise, land markets allow a 
pass-through of payments from operators  to landowners, via modified rental 
                                                     
 
95 The data in the table in paragraph 34 are on a cal endar year basis in order to match them with the 
import data from the US Bureau of the Census. 
96 Burfisher, M. and J. Hopkins.  "Farm Paym ents: Decoupled Payments Increase Households’ 
Well-Being, Not Production."  Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 44 (Exhibit US-78) WT/DS267/R/Add.2 
Page I-387 
 
 
arrangements. Despite uncertainty over futu re policy, land values already reflect the 
market’s expectations about future programme benefits.97 
 
156. Land values set by sales and rental markets can be examined to see whether they track 
commodity price trends.  If these values diverge fro m prices, it suggests that land markets have 
additionally capitalized the present and expected futu re value of government payments.  As the figure 
from Burfisher and Hopkins (2003) below demonstrates, commodity prices have fallen since 1996 
due to a number of factors while land values have trended upward, consistent  with land capitalization 
of payments.  Land rent data, although more fra gmented, follow the same trend as land values. 
 
 
 
 
 
157. In its 27 October answer to Question 179 a nd in paragraph 57 of its oral presentation of 
2 December, Brazil attempts to minimize the effects of direct payments on land by citing a recent study that showed that 34-41 cents  per dollar of PFC payment were capitalized into land rents in MY 
1997.  However, in citing this study, Brazil effectiv ely concedes the US analys is.  The study cited by 
Brazil analyzes cash rent data in only the first year  following implementation of the 1996 Act and the 
decoupled production flexibility contract payments.  As the authors of the study acknowledge, cash 
rents may be "sticky" and adjust over the long run.
98  For example, not all rental contracts would be 
year-to-year; as additional multi-year rental contract s expire, landowners would be expected to adjust 
rents to capture the value of the decoupled paym ents made with respect to the base acreage on the 
land. 
 158. In the long run, only those upland cotton producers who are owners of upland cotton base 
acres will receive the benefit of those decoupled payments.  Based on 1997 cost of production data, 
about 35 per cent of cotton production is grown by owner-operators.  Therefore, only 35 per cent of 
the value of decoupled payments would benefit upland cotton producers, a nd this subsidy benefit 
would then have to be attributed across the tota l value of the recipient’s production in order to 
determine the benefit to upland cotton.  
243. Can the Panel assume that any support at all, even marketing loan programme 
payments, benefits upland cotton if an upland cotton producer has other agricultural 
production besides upland cotton?  USA 
 
                                                     
 
97 Burfisher, M. and J. Hopkins.  "Farm Paym ents: Decoupled Payments Increase Households’ 
Well-Being, Not Production."  Amber Waves, Vol. 1, Issue 1, (February 2003): 38-45, at 45 (Exhibit US-78) 
98 See Roberts et al. , at 769 (Exhibit Bra-310). WT/DS267/R/Add.2 
Page I-388  
 
159. If the United States has understood the Panel’s qu estion, the answer would appear to be no.  
To explain this answer, we distinguish between three types of subsidies: (1) a subsidy tied to 
production of upland cotton, (2) a subsidy tied to pr oduction of another commodity, and (3) a subsidy 
not tied to the production of any commodity.  In th e first case, a subsidy tied to production of upland 
cotton (for example, marketing loan payments) would be support to upland cotton exclusively, even if 
the upland cotton producer also produces other commod ities.  In the language of Annex IV, a subsidy 
that "is tied to the production or sale of a given produc t" is deemed to subsidize "the recipient firm’s 
sales of that product."
99  Similarly, in the second case, a s ubsidy tied to the production of another 
commodity (for example, marketing loan paymen ts for soybeans) are deemed to benefit that 
commodity exclusively.  Thus, such payments – which depend upon production of a commodity other 
than upland cotton – would not be deemed to benefit upland cotton. 
 160. In the third case, a subsidy not tied to the production or sale of a given product (for example, 
decoupled income payments) would be deemed to subsidize any product sold by the recipient.  
Annex IV establishes that the value of the subsidized  product for such a payment is "the total value of 
the recipient firm’s sales."
100  Logically, a subsidy not tied to a pa rticular product provides a benefit to 
the recipient in the form of increased income.  Sinc e money is fungible, the benefit can be deemed to 
inure to all of the products the recipient produces; a ne utral way of attributing the subsidy to particular 
products is according to their proportion of the firm’s sales.  Thus, for purposes of Subsidies Agreement analysis, such a non-tied payment would be  deemed to benefit upland cotton and any other 
commodity the recipient produces. 
 
161. It is worthwhile to compare these Subsid ies Agreement concepts of payments tied to 
productions or sale and payments not  tied to production or sale to Agriculture Agreement concepts of 
product-specific and non-product-specific.  The two set s of concepts are not identical.  Recall that 
Article 1(a) of the Agreement on Agriculture establis hes that product-specific support is "support . . . 
provided for an agricultural product in favour of th e producers of the basic agricultural product" while 
non-product-specific support is a residual category of  "support provided in favour of agricultural 
producers in general."  Thus, product-specific support  is "tied to the production or sale of a given 
product" within the meaning of the Subsidies Agreement (Annex IV, para. 3) because it must be "provided for an agricultural product" and must be "in favour of the producers of the basic 
agricultural product."   
 
162. Non-product-specific support is not tied to the production or sale of a particular product since 
it is provided to producers in general – for example,  decoupled payments for which the recipient need 
not produce any particular commodity or any commod ity at all.  However, as noted above, such a 
non-tied payment will be allocated over the total value of the recipient’s production.  Hence, it could 
be possible to derive the benefit to upland co tton for purposes of the Subsidies Agreement from 
non-product-specific support.  163. Brazil would take these different concepts a nd suggest that any support that is not tied to 
production must be allocated to a particular cr op; such support would be "support to a specific 
commodity" within the meaning of the Peace Clau se.  However, Brazil’s approach eliminates the 
concept of non-product-specific support for purposes of Peace Clause since a non-tied payment may 
always be allocated according to the recipient’s pr oduction (and, in Brazil’s approach, then be deemed 
"support to a specific commodity").  It would appear anomalous to import into Article 13 of the Agreement on Agriculture a concept from the Subsid ies Agreement (that itself is only reflected in 
Annex IV, which Brazil does not believe  is relevant to actionable subsid ies claims) that renders inutile 
such a key concept from the Agreement on Agricultu re.  Such an interpretation, moreover, runs 
contrary to the ordinary meaning of the phrase "suppor t to a specific commodity."  As the EC pointed 
out, support cannot at the same time be "support to a specific commodity" and "support to multiple 
                                                     
 
99 See Subsidies Agreement, Annex IV, para. 3. 
100 See Subsidies Agreement, Annex IV, para. 2. WT/DS267/R/Add.2 
Page I-389 
 
 
commodities."  And yet, allocating a non-tied paymen t across the total value of the recipient’s 
production necessarily means that the payment is support not to a specific commodity but rather to 
multiple commodities (in fact, any commodities the recipient happens to produce).   
 164. Thus, it is important to distinguish Agreem ent on Agriculture concepts for purposes of Peace 
Clause from Subsidies Agreement concepts for purpo ses of identifying the amount of subsidy benefit 
and subsidized products.  While decoupled paymen ts – properly allocated – may provide support to 
upland cotton within the meaning of the Subsidies Agreement, they do not provide support to a 
specific commodity within the meaning of the P eace Clause.  In fact, such decoupled payments 
provide support to any commodities the recipient happens to produce.
101 
 
245. Can a panel take Green Box subsidies in to account in considering the effects of 
non-Green Box subsidies in an action based on Articles 5 and 6 of the SCM Agreement?  
BRA, USA 
 
165. A subsidy that is green box – that is, confor ms fully to the provisions of Annex 2 to the 
Agreement on Agriculture – is "exempt from actions  based on Article XVI of GATT 1994 and Part III 
of the Subsidies Agreement" pursuant to Article  13(a)(ii) of the Agreement on Agriculture.  
Therefore, green box subsidies may not be taken into account when considering whether a Member 
has caused serious prejudice to the interests of a nother Member through the use of any other subsidy 
for purposes of Article 5 nor when considering th e "effect of" any other subsidy for purposes of 
Article 6.  
246. Can a panel take prohibited subsidies in to account in considering the effects of 
subsidies in an action based on Articles 5 and 6 of the SCM Agreement?  BRA, USA 
 
166. The United States has previously indicated that it takes no position on whether prohibited 
subsidies may be taken into account in considering "the effect of the subsidy" under Article 6 or 
whether the use of any subsidy has caused adverse effects.  We note, however, that there may be 
limited utility in making a finding that a subsidy is  prohibited and then finding that that subsidy 
contributes to "adverse effects" or "serious prejudice."  Once the DSB adopts findings that a subsidy is prohibited, the responding Member is required to withdraw the subsidy without delay under 
Article 4.  If the same measure were to form pa rt of findings that a Member had caused adverse 
effects in the form of serious prejudice, for ex ample, the responding Member would presumably be 
free to argue that the withdrawal of the prohib ited subsidy was sufficient to remove the adverse 
effects.  Thus, as the Panel is charged with ma king findings to promote a prompt settlement of 
disputes, the Panel should not include any subsidy it deems to be prohibited as part off its actionable 
subsidy analysis.  
247. Can the Panel take into account tre nds and volatility in market and futures 
prices of upland cotton after the date of establis hment of the Panel?  If so, how do they 
affect the analysis of Brazil's claim of a threat of serious prejudice?  BRA, USA 
 
167. Under its terms of reference, the Panel is  called upon "[t]o examine, in the light of the 
relevant provisions of the covered agreements c ited by Brazil in document WT/DS267/7, the matter 
referred to the DSB by Brazil in that document."
102  Past panels have concluded that it is appropriate 
to look at the measures at issue in a dispute as of  panel establishment.  By that time, it was already 
                                                      
101 As the United States has noted, finding that non- tied payments, once allocated, could be "support to 
a specific commodity" would rob Members of the ability to design their measures to be consistent with the 
Peace Clause.  For example, if every recipient of decoupled income suppor t, or any other non-tied payment, 
decided to produce upland cotton, a Member could be deemed to have granted support in excess of that decided 
during the 1992 marketing year, solely as a func tion of producer choices, not that of the Member. 
102 WT/DSB/M/145, para. 35. WT/DS267/R/Add.2 
Page I-390  
 
evident that the challenged US measures would not po se a threat of serious prejudice.  For example, 
the 2003 harvest season futures price at planting time – 59.60 cents per pound, or a 54.60 expected cash price – suggested that the marketing loan rate (52.00 cents per pound) would have no or minimal 
effect on planting decisions.
103  The evidence already indicat ed that US acreage movements 
corresponded to acreage changes in the (lar gely unsubsidized) rest of the world.104  The evidence 
already indicated that direct and counter-cyclical  payments have no more than minimal impacts on 
production and trade.  Thus, by the time of panel establishment the evidence did not support a clearly 
demonstrated and imminent likelihood of future serious prejudice.  168. The Panel is not precluded from examining evidence subsequent to panel establishment.  In 
fact, both Brazil and the United States have presented such evidence (of course, which cannot alter the 
Panel’s terms of reference).  For example, act ual market prices and future prices for the 2003 
marketing year confirm that producers are receiving higher prices for their 2003 crop and expect to continue doing so for the remainder of the marketi ng year.  Thus, that evidence arising after panel 
establishment serves to confirm what prior evidence suggested: the evidence does not support a 
clearly demonstrated and imminent likelihood of future serious prejudice. 
 
F. STEP 2 
 
248. In respect of the level of Step 2 payments in certain time periods, the Panel notes, inter alia, footnote 129 in the US first written submission; footnote 33 in the US 
18 November further rebuttal submission; and Exhibit BRA-350.  Have Step 2 payments 
ever been zero since the elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002?  In what circumstances could a Step 2 payment be zero?  How does the elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002 affect your response? BRA, USA 
 169. Step 2 payments have been zero since the elim ination of the 1.25 cents per pound threshold in 
the 2002 farm bill. This occurred in 5 c onsecutive weeks beginning 19 September 2002.  
 170. A Step 2 payment could be zero when the AWP exceeds 134 per cent of the base loan rate 
(52 cents) or the US/North Europe price is less than the Northern Europe price.  If either occurs, the 
rate will be zero for at least 4 consecutive weeks. 
 171. Elimination of the 1.25 cent per pound threshol d increases the range of price differences in 
which a step 2 payment could be triggered and ra ises the resulting payment by 1.25 cents.  To some 
degree, as compared with prior years, the 1.25 cen t threshold elimination may correct for some long 
term changes in the valuation of currencies.  Furthe r, at certain price levels where the market price 
used to determine countercyclical  payments is above the loan ra te but below 65.73 cents per pound, 
the additional impact that the Step 2 payment can have on the market price for US cotton can reduce 
the amount of countercyclical payments received by US producers.  
249. The Panel notes that the definition of eligible "exporter" in 7 CFR 
1427.104(a)(2) includes "a producer":   
 
(a) How does this reconcile with Brazil's argument that Step 2 "export payments" do not directly benefit the producer?   How, if at all, would this be relevant for an 
analysis of the issue of export contingenc y under the Agreement on Agriculture or the 
SCM Agreement?  BRA 
                                                     
 
103 The futures price in the text is the average daily  February closing price for the December contract.  
As noted in the US further rebuttal submission, para. 162 fn. 124., the January through March average daily 
closing price (59.10 cents per pound) is not markedly different. 
104 See, e.g. , US Opening Statement at the Seco nd Panel Meeting, paras. 5-6. WT/DS267/R/Add.2 
Page I-391 
 
 
 
(b) How does this reconcile with Dr. Glauber's statement in Exhibit US-24, p. 3 
(referring to "the 1990 Farm Bill and subsequent legislation") that Step 2 
payments do not go directly to the producer?  USA 
 
172. By referring to "producers" in this context, the US has referred to producers acting in their 
capacity as  producers of cotton, that is as persons with  a risk of loss in cotton that they have planted 
and  harvested.  It could be that some large produ cers of cotton in that sense could also be persons 
who are manufacturers of cotton or exporters who ma rketed their cotton directly overseas.  In that 
sense, they could receive payments just as any other manufacturer or exporter could do, but they 
would be receiving the payment not as a producer of raw cotton but in their other capacity.   
 173. In short, the regulations are drafted simply to  reflect that there may be many ways in which 
the public may organize itself, but we are assured that the same bundle of cotton will only produce one payment and the breaking of the bundle would only come in connection with the manufacturing 
process.  Officials know of no instance in which a payment was made other than for a legitimate 
export or for some sort of legitimate manufacturing effort.  Again, these payments are received by 
such persons in their other capacities and not as  producers of raw cotton.  Such payments simply 
reflect the universal application of the programme to all cotton uses without a market-interfering 
government restriction on who may be a manufacturer or exporter of cotton. 
 
(c) What proportion of Step 2 "export payments" go to producers?  Please supply 
supporting evidence.  USA 
 
174. As of the present writing, the United States do es not have any data or information on how 
many producer/manufacturers there are, or how ma ny producer/exporters there are.  We do not think 
that there are many but we continue to search for a dditional information that might be relevant in this 
regard.  
H. MISCELLANEOUS 
 
253. Regarding the adjustment authority related to Uruguay Round compliance in 
s.1601(e) of the FSRI Act of 2002 (the so-called "circuit-breaker provision"): 
 
(a) Does it relate to export credit gu arantees, crop insurance and cottonseed 
payments? 
 
175. The adjustment authority would not reach export credit guarantees, crop insurance premium 
payments, or the 2003 cottonseed payment.  Secti on 1601(e) of the 2002 Act, codified  at 7 USC 
7991(e), states that if the Secretary determines that expenditures under subtitles A through E of Title I of the Farm Bill (which cover the "programme crop s") subject to the total allowable domestic support 
levels under the Uruguay Round Agreements (as defined in section 2 of the Uruguay Round 
Agreements Act as in effect on the date of enactment  of this Act) "will exceed such allowable levels 
for any applicable reporting period, the Secretary shall, to the maximum extent practicable, make 
adjustments in the amount of such expenditures during that period to ensure that such expenditures do 
not exceed such allowable levels."  Further the st atute provides as to procedure that before making 
any adjustment under that authority,  "the Secr etary shall submit to the Committee on Agriculture, 
Nutrition, and Forestry of the Senate and the Committee on Agriculture of the House of 
Representatives a report describing the determination ma de under that paragraph and the extent of the 
adjustment to be made."   176. It should be noted that interpretation of th is language should take into account that, as we 
have noted throughout, the government cannot predic t how much actual expenditures for programme 
crops will be since those expenditur es are sensitive to factors outside the control of the government.  WT/DS267/R/Add.2 
Page I-392  
 
What is clear is that the Congress thought that th e problems with total dollar commitments, the AMS, 
were the only problem likely to arise given that  Congress did discipline itself to stay within the 
support levels of the Peace Clause.  The con tinuation of decoupled payment programmes was 
anticipated to protect producer income without causi ng distortions that could increase the level of US 
world share or could result in price suppression or depression in particular markets.  To the contrary, 
because the Congress anticipated that US prices woul d still be higher than those elsewhere, the 2002 
Act reauthorizes Step 2 payments.  There was no contem plation that the mere fact of support, because 
of the size of the United States, would ipso fact result in a WTO violation, as Brazil would have the Panel make it through its thr eat of serious prejudice and per se  claims.  This point is made clear in the 
conference report on the 2002 Act, in which the Congress says: 
 
The Conference has made it a priority to cra ft a programme that provides assistance to 
producers in a way that is consistent with  our obligations under the Uruguay Round 
Agreement on Agriculture.
105 
 
177. That said, the circuit breaker provision by its  terms applies only to the cited subtitles of the 
2002 Farm Bill and as such does not address expe nditures under the export credit guarantees 
programme, crop insurance, or cottonseed programme , provided for elsewhere.  Rather, the circuit 
breaker provision addresses only expenditures u nder the programme crop programmes that are 
covered in the cited subtitles – namely, the direct and countercyclical payments, the marketing loan 
payment, and Step 2, for all of the programme  addressed in Title I.  Those programmes would 
include, in addition to other crops that are the mo re traditional "programme crops," payments related 
to sugar, wool, mohair, and peanuts, and various oilseeds.     
 
(b) Does it relate only to compliance with AMS commitments? 
 
178. By reference to 19 USC 3501, the reference in  Section 1601 is to the entirety of the Uruguay 
Round Agreements, which is identified in 19 USC 3501 and described there.  Consequently, the 
provision would arguably recognize any total limits provided for in that agreement; thus, section 
1601(e) applies to the Aggregate Measurement of Support commitments under the Uruguay Round Agreement on Agriculture.  To this point, there has been no specific test to determine the precise 
nature of its limits.  Again, however, it must be pr esumed in light of the history outlined above that 
the Congress contemplated that if there was to be a problem it would be with the AMS limit.  Thus, if there is an AMS problem, the Secretary could limit the expenditures for upland cotton; in that sense, 
those expenditures are not "without limit." 
 
(c) Is the authority discretionary?  If so, can its exercise be limited by the 
legislative branch of government? 
 
179. The authority is not discretionary, but rather  requires that the Secretary take action as the 
statute provides that "the Secretary shall, to the maximum extent practicable, make adjustments" 
(emphasis added).  In adopting this language, th e Senate and House conference members rejected 
"circuit breaker" provisions proposed in the original House version of the farm bill (HR 2646) and original Senate version (Senate amendment to HR 2646) which  would have made the adjustment 
discretionary.
106  However, it should be noted that the statute does contain a Congressional referral 
                                                      
105 Report 107-424, page 469 (printed at 148 Cong. Rec.H1916, May 1, 2002). 
106 Under the original House version: "[T]he Secretary may make adjustments in the amount of such 
expenditures during that period to ensure that such e xpenditures don not exceed, but in no case are less than, 
such allowable levels" (emphasis added).  Under the original Senate version: "Amends Section 161 of the FAIR Act to allow  the Secretary to adjust the amount of domestic support to assure compliance with Uruguay Round 
obligations."  See  Farm Security and Rural Investment Act of 2002, Conference Report to Accompany HR 
2646.  House of Representatives, Report 107-424, 1 May 2002, page 468. WT/DS267/R/Add.2 
Page I-393 
 
 
provision, which presumably would allow the Congress to intervene in the ev ent that the Secretary 
felt it necessary to implement the authority contained in 1601.  
(d)  How would the Secretary exercise her authority to prevent serious prejudice to 
the interests of another Member?  How would she exercise her authority to 
prevent a threat of serious prejudice to the interests of another Member?  At what 
time and on the basis of what type of information would she exercise her authority?   
 
180. To the extent mandated by the statute, the S ecretary would, subject to the foregoing concerns 
about the breadth of the statute, adjust the program me provisions to provide for reduced expenditures.  
But, as indicated, the statute does not appear to c ontemplate any such finding of serious prejudice, but 
rather is seemingly focussed more particularly on the overall level of expenditures as that was the 
only restriction agreed to in this instance by th e United States and the United States believes its 
programme designs to be in compliance with its WTO commitments.  The United States continues to 
maintain its compliance with the AMS levels as agreed to and with a ll other aspect of its obligations 
under the agreement, as we have shown.  As noted, Congress understood and believed that it was 
acting within traditional levels and with the allowed levels of the agreement. 
 
(e)  What does "to the maximum extent practicable" mean?  In what circumstances 
would it not be practicable for the Secretary to exercise her adjustment authority? 
USA 
 
181. We believe that this provision of the 2002 Act is directed, in th e first instance at least, more at 
domestic complainants in the event that the correct ion by the Secretary, because of the difficulties of 
predicting how much an effect a change could have, could prove more than needed.  If so, this could 
lead, to potential legal claims by US farmers that th ey had been unduly denied benefits that there were 
entitled to receive.  However, this provision could al so contemplate that in some cases the results of 
an adjustment might well be unknown or that cer tain programmes or procedures would be too far 
along in a crop year to allow corrections to be made in any real or fair way, leading to results that otherwise might be objectionable.  
254. Would payments made after the date  of panel establishment be mandatory 
under the marketing loan, direct payments, counter-cyclical payments and user marketing certificate (step 2) programmes, but for the circuit-breaker provision?  USA 
 
182. Not in the sense at least that there are many conditions that a person must meet in order to 
qualify for payments, and in the sense that the paym ents are of course dependent upon the availability 
of funds from the Commodity Credit Corporation (CCC).  The CCC has a large, however limited, borrowing authority which must be replenished from time to time.  Rarely has CCC run out of funds, 
but it has happened for brief periods of time -- and of course, Congress can change the programme at 
any time.  
256. The United States submits that the Panel cannot make rulings without allocating precise amounts of payments to upland cotton production.  However, to the extent that 
such precise data is not on the Panel record, to what extent can the Panel rely on less 
precise data, and on reasonable assumptions, in fulfilling its duty under Article 11 of the DSU in this case?  USA 
 183. Under DSU Article 11, the Pa nel is called upon to make an obj ective assessment of the matter 
before it, which consists of the measures challenged by Brazil and the claims Brazil has advanced.  This assessment must include an objective assessment of  the facts of the case.  It is well-established, 
however, that a Panel is not to make claims for a pa rty, nor to develop evidence for a party.  As the 
Appellate Body explained in Japan – Varietal Testing , it is for the complaining party to bring forward WT/DS267/R/Add.2 
Page I-394  
 
sufficient evidence and arguments to carry its burden of establishing a prima facie  case.  Thus, 
although a panel may be able to draw reasonable in ferences from evidence on the record as part of its 
objective assessment of the facts of the case, su ch inferences cannot take the place of evidence 
necessary for a complaining party to establish its prima facie  case. 
 
184. The difficulty in this dispute arises because Brazil has chosen to challenge decoupled income 
support measures – namely, direct payments and c ounter-cyclical payments – that are not tied to 
production or sale of upland cotton.  For payments that are tied to production of upland cotton – for 
example, marketing loan payments – there is no diffi culty because the subsidy is solely attributed to 
upland cotton.
107  As set out in previous US submissions  and oral statements, however, decoupled 
payments must be allocated across the value of each recipient’s production in order to determine what 
is the benefit to upland cotton within the meaning of  Article 1 of the Subsidies Agreement.  A failure 
to allocate the decoupled payment either would resu lt in arbitrarily assigning subsidy benefits to one 
product over another or would result in double-coun ting of a subsidy as providing a greater benefit 
than the value of the payment. 
 
185. Brazil has not identified evidence that would allow for the challenged decoupled payments to 
be allocated across their recipients’ production (tha t is, attributed to upland cotton and any other 
commodities produced by those recipients).  Thus, Brazil has not established facts necessary for the 
Panel to identify the amount of the challenged subsidy nor evaluate its effects.  Even if there were 
evidence on the record from which "reasonable assump tions" (in the words of the question) could be 
drawn, the Panel could not make those assumptions  because Brazil has not claimed that allocating the 
value of these decoupled payments across the total value of each recipient’s production is necessary.  
That is, while Brazil has improperly sought to ex pand the scope of this dispute by allocating 
decoupled payments received for non-upland cotto n base acres to upland cotton producers, Brazil has 
not claimed that all such payments must be alloca ted across the value of the recipient’s production.  
To the contrary, Brazil has argued that such payments would exclusively  be support to upland 
cotton.108 
 186. As a result, this dispute presents a situation analogous to that in the Japan – Varietals  dispute.  
Were the Panel to agree that to determine the s ubsidy benefit to upland cotton decoupled payments 
not tied to upland cotton production must be allocat ed across the total value of the recipient’s 
production, the Panel could not then seek evidence or  make "reasonable assumptions" relating to such 
an allocation because to do  so would be to make a claim that Brazil has not advanced.  Brazil has 
chosen solely  to argue that decoupled payments for b ase acreage up to the amount of upland cotton 
planted on the farm are support to upland cotton, ignoring the production of any other crops on the 
                                                     
 
107 In the language of Annex IV, "the value of the [subsidized] product shall be calculated as the total 
value of the recipient firm’s sales of that product ."  Subsidies Agreement, Annex IV, para. 3 (italics added). 
108 See Brazil’s Further Rebuttal Submission, pa ra. 24 ("This EWG data also provides the 
amount of upland cotton contract payments attri butable to upland cotton producers, broken down by 
PFC, market loss assistance, direct and counter-cyc lical payments.  These figures are also set out in 
the table above.  However, because some  upland cotton was produced on non-upland cotton contract base, it 
would be necessary to calculate an amount of non-upland cotton contract payments, based on the EWG data, 
that also constitutes support to upland cotton received by producers of upl and cotton."). WT/DS267/R/Add.2 
Page I-395 
 
 
farm.  (For example, with respect to plantings and not production, the data provided to the Panel and 
Brazil on December 18 and 19, 2003, demonstrate th at, in the aggregate for farms planting upland 
cotton in marketing year 2002, upland cotton plan ted acres represented only 48 per cent of total 
cropland on those farms.  One could surmise that Br azil refuses to recognize that decoupled payments 
must be allocated because to do so would inva lidate both Brazil’s Peace Clause analysis, which 
merely took the value of decoupled payments for upland cotton base acres and factored such 
payments by approximately 14/16, and Brazil’s serio us prejudice analysis by eliminating a substantial 
portion of the "$12.9 billion" in payments alleged to have been made to upland cotton.  Nonetheless, 
Brazil has chosen what arguments  and evidence to advance to support its claims – as is its 
prerogative.  The Panel must judge whether those arguments and evidence amount to a prima facie  
case.  Where Brazil has refused to adopt the proper ap proach to allocation of decoupled payments and 
has identified no evidence to allow a proper allocati on, the Panel may not step into the breach and 
make any "reasonable assumptions" to support Brazil’ s claims. WT/DS267/R/Add.2 
Page I-396  
 
ANNEX I-9 
  
COMMENTS OF THE UNITED STATES 
CONCERNING BRAZIL’S ECONOMETRIC MODEL  
 
22 December 2003 
 
 
I. THE SUMNER MODEL PRESENTED BY BRAZIL DOES NOT PROVIDE 
ACCEPTABLE ECONOMIC SUPPORT FOR BRAZIL'S CLAIM OF SERIOUS PREJUDICE 
 
A. INTRODUCTION 
 
1. Our review of Brazil's economic model anal ysis as submitted by Brazil and independently by 
Dr. Bruce Babcock of Iowa State University show s a clear and consistent manipulation of well-known 
econometric tools and mischaracterization of the US cotton programme in order to exaggerate acreage 
and ultimate price impacts.  In particular:  
• The Sumner approach forces changes onto the FAPRI system, and misleadingly claims the 
result as a FAPRI-type analysis; 
 
• Using flawed and often unsubs tantiated economic assumptions, Brazil transformed the FAPRI 
model for its own purposes;  
 
• Every economic result ascribed to a FAPRI-type an alysis by Brazil contains the same flawed 
assumptions originally introduced by Dr. Sumner; 
 
• Brazil did not use the correct models or assump tions according to FAPRI/CARD analysts and 
appears to have even changed the underlying FAPRI baseline in order to exaggerate acreage 
and price impacts of programme removal. 
 2. This critique is directed primarily at Dr. Su mner's model, the results of which were first 
presented to the Panel in Annex I.
1  Brazil continues to cite Annex I as a part of its fundamental 
economic findings.  The United States notes that Brazil has introduced different analytical tools since 
the United States and the Panel requested to see the model used to produce the Annex I results.2  In no 
instance has Brazil appeared to retreat from its impacts cited in Annex I.   
 3. Dr. Sumner's supply-side adaptations or modi fications to the FAPRI model with respect to 
various components of the US cotton programme, such  as direct payments or export credit guarantees, 
continue to be the key reason his model displayed the results presented in Annex I and are carried 
                                                     
 
1 In evaluating Dr. Sumner's impacts (and this critique of them), the Panel should take into 
consideration that Annex I results have not been, and apparently cannot be, confirmed.  The models used and 
outputs obtained were, by their own admission, not retained by Dr. Sumner nor Dr. Babcock.  See, Letter dated 
31 October 2003 from Dr. Bruce Babcock to Dr. Dan Sumner, submitted to Panel by Brazil on 
5 November 2003.  The record remains incomplete with respect to Dr. Sumner's adap tations.  The United States 
has attempted in this critique to note where it has been forced to make assumptions due to missing data. 
2 The United States has based its critique on three Excel  spreadsheets that have been provided by Brazil 
and/or Dr. Bruce Babcock. These include the CARD international cotton model, delivered by Brazil on 13 November, the cotton-only US model provided by Brazil on 18 November;  and the US crops model 
provided by Dr. Babcock on November 26.  A graphical representation of the scope and disclosure of Brazil’s 
modelling system is provided in Exhibit US-113. WT/DS267/R/Add.2 
Page I-397 
 
 
forward into all subsequent econom etric demonstrations using subse quent FAPRI baselines.  In many 
respects, Brazil's Annex I (and subsequent) results ar e caused directly by in troduced changes to the 
FAPRI model.    4. Brazil offers Dr. Sumner's model results as evidence that but for the US cotton programme, 
US cotton acreage would have declined and world pr ices would have increased.  While the US has in 
its submissions and oral statements demonstrated the fatal flaws in Brazil's arguments on subsidy identification, causation, and its actionable subsidies claims, it is clear to the United States that but for 
the significant manipulation and adaptation of the FAPRI model carried out by Brazil and Dr. Sumner, acreage impacts attributed to the US cotton programme by that economic model would 
be far less than reported in Annex I.  As a result, Dr. Sumner’s economic analysis cannot serve as a 
basis for any findings on the effect of challenged US subsidies.  
II. BRAZIL MODEL IS NOT FAPRI/CARD ANALYSIS 
 5. The adaptations and modifications made to the FAPRI model by Brazil have so changed the 
model that Brazil cannot rely on FAPRI's reputation to confirm the results.   
 
• Dr. Babcock, Dr. Sumner's "collaborator" on th e project, states that a FAPRI analysis would 
have used different models and applied different assumptions;  
 
• Thus, Dr. Babcock has stated that the Sumner analysis is "in no way" an official FAPRI 
analysis. 
 
6. In a recent letter, Dr. Babcock, an economist at the CARD located at Iowa State University 
and the "technician" that carried out mu ch of Dr. Sumner's economic analysis
3, cleared up some of the 
confusion regarding the models used in Brazil's an alysis.  In Dr. Babcock's opinion, a true FAPRI 
analysis would have used different models and applied different assump tions to those models to arrive 
at the type of estimate presented by Brazil in its Annex I.  In his letter Dr. Babcock states that the 
analysis carried out by Dr. Sumner and used by Brazil was   
"in no way an official FAPRI analysis a nd if FAPRI had done the analysis, FAPRI 
would have come up with different estimates  of the effects of US cotton subsidies on 
world prices."
4   
7. Dr. Babcock also stresses the differences be tween FAPRI and Dr. Sumner's assumptions used 
to estimate the effects of various components of US cotton policy.  Many of these different assumptions are described in Bra-313 and will be discussed in detail.    8. Dr. Babcock indicates a FAPRI analysis would have used different models.  He states that 
FAPRI would have used different models entirely.   
 
"The domestic model used was not based on the models used for the FAPRI 2003 
baseline.  … the model that FAPRI uses to  conduct domestic and international US 
policy analysis is the US stochastic mode l and the FAPRI international models.  The 
                                                     
 
3 Opening Statement of Dr. Sumner, 2 Dec. 2003, "I have specified equations and parameters which 
adapt the systems to apply to the specific questions of interest in this dispute and I have worked closely with skilled and experienced technicians who have operated the details of the system.  This is the same procedure that 
economists routinely use in performing simulation mode lling in academic research and that they use in 
performing complex econometric statistical analysis.  I rely  on the technician to oper ate the “machinery” of the 
models just as a medical doctor would rely on an X-ra y or Magnetic Resonance Imag ing technician to operate 
those systems and generate results for analysis and interpretation." 
4 Letter from Dr. Bruce Babcock, Exhibit US-114. WT/DS267/R/Add.2 
Page I-398  
 
international cotton model used in Dan's analysis was a stand-alone cotton model 
developed to better understand the role th at China plays in international cotton 
markets."  
 "... FAPRI would have u sed different models ..."
5 
 
9. Dr. Babcock's letter confirms that the concer ns of the United States have been well-founded.  
While cloaking itself in the FAPRI model's reputation,  Brazil and Dr. Sumner's analysis is, in fact, 
something quite different.  The differences between FAPRI and the Brazil analysis reflected in Annex I involve much more than small, "cons ervative" changes.  As the United States will 
demonstrate, Brazil's Annex I analysis relies too heavily on adaptations, modifications and 
adjustments to suggest acceptance based upon FAPRI's reputation.  Brazil's estimates, to a very great 
extent, distort the FAPRI system for the express purpose of achieving pre-conceived results.  10. The United States, after completing as complete a critique of Annex I results as possible in 
this proceeding, respectfully submits that the results indicated in Annex I are significantly 
exaggerated, due either to economic errors or to  Dr. Sumner's introduced biases (most of which are 
discussed in Bra-313 and in Annex I, and many of wh ich contain errors).  Brazil's results set out in 
Annex I and subsequent submissions  have no explanatory power.  
 11. The United States submits that the results in Annex I provide very little guidance to the Panel 
in terms of overall impacts of the US cotton prog ramme.   The United States has stated that the 
FAPRI model as used by Dr. Sumner was an inappropria te tool for the intended job.  This opinion has 
now been confirmed by Dr. Sumner's chief "technician" on this project
6, who has directly stated that 
FAPRI would not have used the models used by Dr . Sumner and would not ha ve made the adaptations 
to that model that he discusses in Annex I and in Br a 313 if it had been requested as an organization to 
conduct this analysis.  
 
A. BRAZIL MODEL NOT COMPARABLE TO FAPRI SYSTEM 
 
12. The differences between Dr. Sumner's analysis and the FAPRI framework are significant.  Those differences arise primarily as a result of Br azil's disagreement with FAPRI and many other 
agricultural economists over the impact of paymen t programmes that are not directly linked to 
production decisions.  There are other important differences.  Most notably, FAPRI does not include crop insurance as a production-distorting progra mme.  The FAPRI model also does not contain 
components designed to estimate production effect s from the export credit guarantee programme, a 
seemingly appropriate choice since Brazil itself has stat ed that it cannot quantify the alleged benefit to 
upland cotton provided by the export credit guarantee programmes.
7 
 13. Whenever the FAPRI modeling system did not tend to show acreage impacts high enough to 
satisfy Brazil in this case, Dr. Sumner simply made modifications to encourage it to do so.  The United States disagrees with these modifications, but  still cannot confirm all of these changes or the 
specific components of each of them.  Second, whenever the FAPRI modeling system did not include 
a programme component challenged by Brazil, Dr. Sumner simply forced acreage impacts of that 
programme onto the system - showing little or no economic foundation for the introduced variables.
8   
 
                                                      
5 Id. 
6 "…FAPRI would have used different models".  Letter from Dr. Babcock, Exhibit US-114. 
7 Paragraph 82 of Answers of Brazil to Questions from the Panel, 27 October 2003. 
8 For example, Brazil cites export impacts ascribed  to the export credit guar antee programme by the 
National Cotton Council of America and uses those impacts without further foundation.  The National Cotton 
Council of America's economic analysis in this instance has no foundation and no demonstrated methodology. WT/DS267/R/Add.2 
Page I-399 
 
 
14. All of these effects, displayed in Annex I, were introduced into the FAPRI system by Dr. 
Sumner.  Dr. Sumner discusses some of his modifications in Bra-313, but not all of them.  Dr. Sumner has never provided the United States with an electr onic, verifiable version of his modifications.  
Efforts by the United States to replicate the Sumner formula using a FAPRI model have been unsuccessful, leading to the conclusion that othe r modifications, adaptations or calibrations are 
involved.   
 
B. ADAPTATIONS TO AND MODIFICATIONS OF FAPRI MODEL RESULTED IN 
EXAGGERATED RESULTS 
 
15. Dr. Sumner’s treatment of decoupled paym ents, crop insurance, and export credits are 
significant deviations from the FAPRI modelling framework.  These changes are forced onto the 
FAPRI system resulting acreage effects that are much gr eater than would ever be anticipated by a true 
FAPRI analysis.  Again, as Dr. Babcock has now candidly stated: 
 
"In addition, the modeling assumptions that Dan used to estimate the effects of the 
various US domestic programme components of US policy are different than FAPRI 
would use if asked to answer the same questions."9 
1. Dr. Sumner exaggerates the impact of decoupled payments as compared to FAPRI’s 
modelling of those payments 
 
16. FAPRI analysis of the impacts of decoupled  programmes (like Production Flexibility Contract 
payments (PFC), Direct Payments (DP), Market  Loss Assistance payments (MLA) and Counter-
cyclical Payments (CCP) was discarded by Dr. Sumn er and replaced with an approach not supported 
by FAPRI, nor supported by the bulk of economic literature on the subject.   
 
17. Dr. Sumner's decoupled effects are differen t than those normally used by FAPRI and were 
supposedly justified by Dr. Sumner's  own estimation of producers' "an ticipation" of future programme 
changes and on his, now proven incorrect, contrive d assumptions about actual planting patterns in the 
United States.10   
 
18. The FAPRI baseline reflects their “mos t-likely” outcome for acreage, production, 
consumption and prices under a defined set of assump tions. Acreage projections for each of the crops 
reflect assumptions and outcomes for market indicat ors and government policy. According to the US 
crops model (Excel file US CROPS MODEL 2002.x ls) sent by Dr. Babcock on 26 November, upland 
cotton acreage in each region is determined by the following equation: 
 CTPLT
i = ao + ao*CTENR i/PD + A*(Vector of Competing Crop Returns i)/PD 
 + Decoupled Payment Impacts i + CRP11 Impacts i + Єi 
 
where 
 CTPLT = upland cotton planted acreage in region i 
 CTENR = expected cotton net returns from the market and the marketing loan in region i  
 PD = general price deflator  A = vector of parameter estimates for competing crops.  
                                                     
 
9 For example, Brazil cites export impacts ascribed  to the export credit guar antee programme by the 
National Cotton Council of America and uses those impacts without further foundation.  The National Cotton 
Council of America's economic analysis in this instance has no foundation and no demonstrated methodology. 
10 Paragraphs 39-44 of US Opening Statement at the Second Session of the First Panel Meeting, 
7 October 2003. 
11 CRP = Conservation Reserve Programme. WT/DS267/R/Add.2 
Page I-400  
 
19. Although the US does not agree that decoupled payments impact planting decisions, it is useful to compare FAPRI’s view of the impacts with that of Dr. Sumner.  20. Looking further into the FAPRI model, one finds that the decoupled payments are not included on a crop-specific basis as done by Dr. Sumn er in his adaptations. Instead, FAPRI allocates 
total decoupled payments across all crops in a region.  First, the total money is put on a per-acre basis 
by dividing the payments by acres planted to the major crops. Second, FAPRI then determines a total 
acreage impact for the region based on the responsiv eness of the total land to the infusion of money. 
Third, the total acreage impact is allocated to th e individual crops in each region based on the crop’s 
share of recent plantings.   
 
• Dr. Sumner discarded this FAPRI approach to  decoupled payments and inserted his own 
"coupling" factor.  
 
• Cotton acreage impacts for US decoupled pr ogrammes as would likely be presented by 
FAPRI are about 0.3%, consistent with the est imates in the economic literature previously 
presented by the United States (e.g., Westcott et al.).
12 
 
• Dr. Sumner's cotton acreage impacts, by contrast, are as high as 15.9% - that is, more than 
50 times larger than what the FAPRI model would indicate.    
 21. The following table provides a comparison of  acreage impacts included in the FAPRI model 
to those calculated by Dr. Sumner.  In the FAPRI model, the acreage contribution of all decoupled 
payments across all major programme crops rang es between 1.4 and 2.6 million acres.  Decoupled 
payments to all crops contribute between 69 and 123 thousand acres to  upland cotton.  If we isolate 
the impact of decoupled payments for upland co tton base acres, the FAPRI model indicates that the 
shift in total cotton plantings ranges between 23 a nd 45 thousand acres, or less than three-tenths of 
one percent of upland cotton area.  Impacts of this  magnitude would not have appreciable impact on 
production and prices.  
 
22. In stark contrast to the FAPRI model are the contrived impacts calculated by Dr. Sumner.  In 
order to present a complete picture to the Panel, the United States presents Dr. Sumner’s impacts in two ways.  In Dr. Sumner’s analysis of decoupled payments, equations (5) and (6) of Exhibit Bra-313 
document his formulas for determining “the amount of cotton acreage that was held in cotton by these 
programme payments”.  This acreage is subtracted from the error term of the equation or the impact 
can also be thought of as a shift in the supply curve.   This impact will be termed the “gross impact” on 
cotton acreage of the programme in question.  Values  for these “gross impacts” have been taken from 
the file FINAL US2003CropsModel WORKOUT.xls (received by the United States on 18 November).  Dr. Sumner’s “gross impacts” of co tton decoupled payments on cotton plantings range 
from a low of 352 thousand acres to a high of 2.2 million acres.  In contrast, the FAPRI model shows 
a gross impact of 23 to 45 thousand acres. Dr. Sumner ’s impacts are almost 50 times larger than those 
included in the FAPRI model.   23. To avoid any confusion by the Panel, the gr oss impacts of the programmes are not the same 
values as the impacts shown in Annex I and Exhibit Bra-325. The results of Dr. Sumner’s scenarios 
reflect his estimate of the net impact of removi ng various aspects of the cotton programme.  Net 
impacts will reflect the fact that producers have  responded to the higher cotton prices under the 
scenario and increased plantings to par tially offset the initial loss in acreage. 
 24. The following table also provides a compar ison of Dr. Sumner’s net acreage impacts of 
removing decoupled payments.  These impacts correspond to the results presented in Annex I.  It is 
                                                     
 
12 Westcott, P., Young, C. E., and Price, M., USDA, ERS, The 2002 Farm Act, Provisions and 
Implications for Commodity markets,  Economic Research Service, Nove mber 2002. (See Exhibit Bra-42) WT/DS267/R/Add.2 
Page I-401 
 
 
worthwhile to note that Dr. Sumner’s net impact s are still 25 times larger than the gross impacts 
derived from the FAPRI model.  Simply put, FAPRI's model would not show the kind of acreage impacts assumed by Dr. Sumner.   
Acreage Impacts of Decoupled Payments (Million Acres)
1999 2000 2001 2002 2003 2004 2005 2006 200799-02 
Avg03-07 
Avg
FAPRI Model Gross Total Area Impact of all 
Decoupled Pymts Across All Crops (1)1.379 1.838 1.912 2.091 1.534 2.180 2.566 2.379 2.101 1.805 2.152
  % of Plantings of All Crops 0.5% 0.7% 0.8% 0.8% 0.6% 0.9% 1.0% 0.9% 0.8% 0.8% 0.8%
FAPRI Model Gross Impact of All Decoupled 
Pymts on Cotton Acreage (2)0.069 0.090 0.092 0.101 0.075 0.105 0.123 0.115 0.101 0.088 0.104
  % of Upland Cotton Area 0.5% 0.6% 0.6% 0.7% 0.5% 0.7% 0.8% 0.8% 0.7% 0.6% 0.7%
FAPRI Model Gross Impact of Cotton 
Decoupled Pymts on Cotton Acreage (3)0.023 0.030 0.031 0.029 0.037 0.042 0.045 0.043 0.040 0.028 0.041
  % of Upland Cotton Area 0.2% 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.3%
Sumner's Gross Impact of Cotton Decoupled 
Pymts on Cotton Acreage (4)0.352 0.437 0.670 0.538 2.185 2.114 2.200 2.038 2.029 0.500 2.113
  % of Upland Cotton Area 2.4% 2.8% 4.3% 3.8% 15.9% 14.2% 14.9% 13.9% 14.2% 3.4% 14.6%
Sumner's Net Impact of Cotton Decoupled 
Payments on Cotton Acreage (5)0.350 0.320 0.510 0.300 1.710 1.190 0.790 0.860 0.850 0.370 1.080
  % of Upland Cotton Area 2.4% 2.1% 3.3% 2.1% 12.4% 8.0% 5.3% 5.9% 6.0% 2.5% 7.5%
FAPRI Model Gross Impact of Cotton 
AMTA/DP Pymts on Cotton Acreage (6)0.018 0.017 0.013 0.014 0.014 0.014 0.014 0.013 0.013 0.016 0.014
  % of Upland Cotton Area 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Sumner's Gross Impact of Cotton AMTA/DP 
Payments on Cotton Acreage (7)0.191 0.164 0.240 0.202 0.575 0.567 0.593 0.544 0.544 0.199 0.565
  % of Upland Cotton Area 1.3% 1.1% 1.5% 1.4% 4.2% 3.8% 4.0% 3.7% 3.8% 1.3% 3.9%
Sumner's Net Impact of Cotton AMTA/DP 
Payments on Cotton Acreage (8)0.190 0.100 0.170 0.120 0.420 0.310 0.200 0.220 0.220 0.145 0.274
  % of Upland Cotton Area 1.3% 0.7% 1.1% 0.9% 3.0% 2.1% 1.4% 1.5% 1.5% 1.0% 1.9%
FAPRI Model Gross Impact of Cotton 
MLA/CCP Pymts on Cotton Acreage (9)0.005 0.014 0.017 0.015 0.023 0.028 0.031 0.029 0.027 0.013 0.028
  % of Upland Cotton Area 0.0% 0.1% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1% 0.2%
Sumner's Gross Impact of Cotton MLA/CCP 
Payments on Cotton Acreage (10)0.161 0.273 0.431 0.336 1.610 1.546 1.607 1.494 1.484 0.300 1.548
  % of Upland Cotton Area 1.1% 1.8% 2.8% 2.4% 11.7% 10.4% 10.9% 10.2% 10.4% 2.0% 10.7%
Sumner's Net Impact of Cotton MLA/CCP 
Payments on Cotton Acreage (11)0.160 0.220 0.340 0.180 1.290 0.880 0.590 0.640 0.630 0.225 0.806
  % of Upland Cotton Area 1.1% 1.4% 2.2% 1.3% 9.4% 5.9% 4.0% 4.4% 4.4% 1.5% 5.6%
(1) Source: File US CROPS MODEL 2002.xls, Model sheet, Row 4484.
(2) Source: File US CROPS MODEL 2002.xls, Model sheet, Row 4475.(3) Source: Calculated in file US CROPS MODEL 2002 NO Decoupled.xls  by setting cotton decoupled payments to zero.
(4) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, sum of Rows 728 and 740.
(5) Source: Sum of Sumner's Net Impacts of AMTA/DP Payments and MLA/CCP Payments.
(6) Source: Calculated by subtracting acreage impacts of NO MLA/CCP from acreage impacts of NO Decoupled payments.(7) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, Row 728.(8) Source: Table I.5b of Annex I.(9) Source: Calculated in file US CROPS MODEL 2002 NO MLA CCP.xls  by setting cotton MLA/CCP payments to zero.
(10) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, sum of Row 740.
(11) Source: Table I.5c of Annex I.
 
 WT/DS267/R/Add.2 
Page I-402  
 
2. Dr. Sumner Assigns Production Effects to Crop Insurance that FAPRI Does Not 
 
25. Dr. Sumner’s arbitrary introduction of crop insurance into his acreage system is a direct departure from the FAPRI model.  Dr. Sumner provides no statistical basis to support his incorporation of crop insurance.  He simply derive s a per-acre value, forces those impacts into the 
acreage system, and treats the results as valid analys is.  There is absolutely no empirical validation 
associated with his results.  26. FAPRI does not explicitly attribute any acreage response to the availability of crop insurance. 
Dr. Sumner’s gross impacts range as high as 1.05 million acres, and net impacts reach 590 thousand 
acres. 
 27. The exclusion of crop insurance from the FAPR I model is warranted.  As the United States 
has previously suggested
13, if one were to consider the covera ge levels obtained by cotton farmers, 
over 90 per cent of insured cotton area would be subj ect to coverage levels agreed by Members to 
have no or minimal trade-distorting effects. 
 28. The United States has also demonstrated that the economic literature examining acreage 
effects of crop insurance is clearly mixed, but have never gone so far as  to attribute production 
impacts as great as those asserted by Brazil.
14  The literature in general refl ects that by its very nature 
the impact of crop insurance on production may be sign ificantly different than its impact on acreage.   
 
29. It seems intuitive to the Un ited States that a dollar provided in the way of an insurance 
premium subsidy (provided to reduce the cost of an  insurance product that pays when the crop is not 
produced) would have different im pacts on producer decisions than a dollar provided to the producer 
when the value of a harvested crop falls short of  some defined level (such as a marketing loan 
payment).  Dr. Sumner's analysis treats them the same.  FAPRI does not.  
 30. Thus, it is significant that the FAPRI mode l does not attribute acreage response to the 
availability of crop insurance.  Dr. Sumner deviat es from that model without any empirical foundation 
in the economic literature.  
Acreage Impacts of Crop Insurance (Million Acres)
1999 2000 2001 2002 2003 2004 2005 2006 200799-02 
Avg03-07 
Avg
FAPRI Model Impact of Cotton Crop 
Insurance Program on Cotton Acreage (1)0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
  % of Upland Cotton Area 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Sumner's Gross Impact of Cotton Crop 
Insurance Program on Cotton Acreage (2)0.584 0.541 0.798 0.808 1.040 1.018 1.056 0.979 0.974 0.683 1.013
  % of Upland Cotton Area 4.0% 3.5% 5.1% 5.7% 7.5% 6.8% 7.1% 6.7% 6.8% 4.6% 7.0%
Sumner's Net Impact of Cotton Crop 
Insurance Program on Cotton Acreage (3)0.580 0.360 0.600 0.540 0.590 0.550 0.420 0.440 0.430 0.520 0.486
  % of Upland Cotton Area 4.0% 2.3% 3.9% 3.8% 4.3% 3.7% 2.8% 3.0% 3.0% 3.5% 3.4%
(1) Source: No impact included in file US CROPS MODEL 2002.xls.
(2) Source: File FINAL US2003CropsModel WORKOUT.xls, Equations sheet, Row 752.(3) Source: Table I.5d of Annex I.
 
 
                                                      
13 US Opening Statement at the Second Session of the First Panel Meeting, 7 Oct. 2003, paras. 45-47. 
14 See Exhibits US-57 through US-60. WT/DS267/R/Add.2 
Page I-403 
 
 
3. Dr. Sumner Assigns a Production Effect to Export Credits that FAPRI Does Not 
 
31. In a further departure from the modelling approach used by FAPRI, Dr. Sumner introduces a 500 thousand-bale impact for export credit programmes.   US exports are reduced by introducing this 
shift in the US export equation.
15  The resulting effect is to lowe r the US price while increasing the 
world price. However, as with Dr. Sumner’s other m odifications, there is no statistical basis for these 
changes.   32. Brazil provides no statistical or other economic  foundation for this level of impact from the 
export credit guarantee programme.  Dr. Sumner's st ated source for the 500,000 bale impact is 
testimony delivered by the National Cotton Council of  America in 2001, a US trade association that 
operates on behalf of the US cotton industry.
16  Brazil presents no evidence of how that estimate was 
calculated and presents no analysis of its own.17   
 33. With respect to any actual effects on world prices caused by the application of the US export 
credit guarantee programme to US cotton exports, Brazil has cited no subsidy component estimates 
and demonstrated no economic analysis.   34. Dr. Sumner's model passes off his 500,000-bale export shift as economic analysis and forces 
it upon the FAPRI model.  Does the Sumner model show acreage impacts from the removal of the export credit guarantee programme?  Of course it does since Dr. Sumner forced it to show those 
impacts.  Brazil, cannot, however, base its estimates  on FAPRI or on any demonstrated analytical 
approach.   
                                                     
 
15 Exhibit Bra-313, page 5, "For the export credit, as explained in the Annex I, I base the estimated shift 
in export demand conservatively on the information provided by the US Cotton Council.  The FAPRI baseline, which assumes continuation of the export credit prog ramme, implicitly includes 500,000 bales of cotton 
attributable to the export credit programme.  So eliminating the programme is implemented by simply 
subtracting 500,000 bales from the intercept of equation 7 in each year." 
16 See Exhibit Bra-41.  The National Cotton Council is a trade association that lobbies the US 
government on behalf of the US cotton industry. 
17 In the 9 September Brazil Submission before the Second Session of the First Panel Meeting, 
paras 192-194, Brazil carried out another economic sleight of hand by implying that Dr. Sumner's export 
estimates with respect to the export credit guarantee program were more conservative than the unsubstantiated 
estimate it cites from the National Cotton Council.  Paragraph 194 of that submission acts as if the NCC 
estimate of a possible 3 cent per pound US price impact and Dr. Sumner's estimate of a .57 cent per pound 
world  price impact are somehow independent analyses - a nd demonstrate Dr. Sumner's conservative approach.  
However, as demonstrated in Bra-31 3, all Dr. Sumner did was force a reduction in US export estimates of 
500,000 bales (using the NCC testimony as his sole  economic foundation), which correspondingly reduced 
prices in the US, which correspondingl y both reduced US acreage and sligh tly increased exports - cutting into 
the initially imposed 500,000 bale shift.  Further, the "different" price estimates were, in fact, estimates of two 
different set of prices - US and world.  Brazil inappr opriately characterized Dr. Sumner’s results as being 
conservative relative to the NCC estimate. (Paragra ph 192, Brazil's Further Submission to the Panel, 
9 September 2003)   Later when the Panel raised a ques tion about the results, Dr. Sumner somehow forced a full 
500,000 bale decline in US exports, ignoring the impact s of price response. (See, for example, Bra-325, last 
category of tables - export credit gu arantee with fixed 500,000 bale impact)  In that response, Brazil also 
maintained the stance that these two "analyses," neith er demonstrating economic foundation, were somehow 
independent, while fairly clearly demonstrating that Dr . Sumner merely took the NCC testimony and imposed a 
500,000 bale demand shift. WT/DS267/R/Add.2 
Page I-404  
 
Export Shifts due to Export Credits (Million Bales)
1999 2000 2001 2002 2003 2004 2005 2006 200799-02 
Avg03-07 
Avg
FAPRI Model Impact of Export Credits on 
Cotton Exports (1)0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Sumner's Gross Impact of Export Credits on 
Cotton Exports (2)0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500
Sumner's Net Impact of Export Credits on 
Cotton Exports (3)0.300 0.290 0.330 0.300 0.300 0.300 0.300 0.310 0.310 0.305 0.304
(1) Source: No impact included in file US CROPS MODEL 2002.xls.
(2) Source: Paragraph 59 of Annex I.(3) Source: Table I.5g of Annex I.
 
 
III. ANNEX I RESULTS USED VARIABLES LOWER THAN CITED NOVEMBER 2002 
FAPRI BASELINE 
 
35. The United States has previously indicated to the Panel its concern that acreage impacts in 
Annex I were based off of the FAPRI preliminary November '02 baseline instead of the more recent 
and readily available final January 2003 FAPRI ba seline.  The United States believes this choice of 
baseline biased the results shown in Annex I.18  A closer review of the Annex I results, however, show 
they were not exactly based off th e November 2002 baseline either.   
 
A. USE OF VARIABLES LOWER THAN NOVEMBER 2002 BASELINE INCREASED ACREAGE 
IMPACTS 
 
• By using prices and other variables that were  even lower than the FAPRI November '02 
baseline, Brazil managed to further increase acre age impacts it attributed to the US cotton 
programme. 
 36. Contrary to the assertions contained in Annex I, it appears that the baseline that is presented 
there is not the FAPRI November 2002 baseline.  The following table provides a comparison of the 
“A” Index from the baseline presented in Annex I with the FAPRI November 2002 baseline as 
provided by Dr. Babcock on 26 November.  
                                                     
 
18 US Opening Statement at the Second Session of the First Panel Meeting, 7 Oct. 2003, para. 36.  WT/DS267/R/Add.2 
Page I-405 
 
 
Comparison of Annex I Baseline with FAPRI November '02 Baseline
2003 2004 2005 2006 2007
"A" Index (Cents/Lb)
  Annex I 50.69 53.44 55.75 57.56 59.60  FAPRI Nov '02 Baseline 52.35 54.74 56.77 58.69 60.52  Change from FAPRI -1.66 -1.30 -1.02 -1.13 -0.92
Upland Cotton Farm Price (Cents/Lb)
  Annex I 44.96 47.74 50.30 51.20 53.89  FAPRI Nov '02 Baseline 45.66 48.83 51.18 52.04 54.67  Change from FAPRI -0.70 -1.09 -0.88 -0.84 -0.78
Upland Cotton Planted Area (Million Acres)
  Annex I 13.780 14.880 14.770 14.650 14.270  FAPRI Nov '02 Baseline 13.782 14.720 14.772 14.658 14.252  Change from FAPRI -0.002 0.160 -0.002 -0.008 0.018
Upland Cotton Production (Million Bales)
  Annex I 16.050 17.420 17.400 17.370 17.010  FAPRI Nov '02 Baseline 16.052 17.215 17.397 17.377 16.982  Change from FAPRI -0.002 0.205 0.003 -0.007 0.028
Source: FAPRI Nov '02 Baseline numbers from file US CROPS MODEL 2002.xls
 
 
37. The baseline used by the Annex I model appears to contain slightly lower cotton planted acreage, different upland cotton production, lower upland cotton farm prices and lower "A" index 
cotton prices than were shown in the FAPRI preliminary November 2002 baseline.
19   
 
B. BASELINE USED IN ANNEX I EXAGGERA TED PROGRAMME EFFECTS BEYOND THAT 
PREVIOUSLY ASSUMED BY UNITED STATES 
 
38. The baseline used in Annex I exaggerated pr ogramme effects even more than previously 
assumed by the United States.  The baseline used in  Annex I contained lower cotton prices than those 
included in the FAPRI November 2002 baseline.  It also contains several other variables that are 
different from the November 2002 baseline.  There is  no basis for this discrepancy, if Dr. Sumner 
actually used the November 2002 FAPRI baseline and,  as stated in Bra-313, "none of the other 
equations in the FAPRI specification are modified to explicitly analyze the removal of US cotton 
programmes".20 
 
IV. BRAZIL'S MODEL HAS NO EXPLANATORY POWER 
 
39. It would be anticipated that a model proposed  to demonstrate effects of removing programme 
components of the US cotton programme and the impact of that removal on planting decisions would also demonstrate the ability to correctly predict planted acreage of upland cotton, given prices and 
other factors.    40. The Sumner-modified model presented in Anne x I does not explain cotton planting decisions. 
 
                                                     
 
19 Brazil's later submissions refer to the November 2002 baseline, paragraph 114 of Brazil’s Further 
Rebuttal Submission of 18 Nov 2003 . 
20 Bra-313, page 5. WT/DS267/R/Add.2 
Page I-406  
 
41. In fact, the simple ratio of cotton to soyb eans expected harvest season futures prices at the 
time of planting, discussed by the United States
21, does a much better job of explaining the movement 
in US cotton acreage than what is found in Dr. Sumner’s formulation.  42. Even an analysis of planting decisions b ased on lagged prices, while not as correlated as the 
ratio of expected futures prices, also does a better job of explaining producer planting decisions than 
does Dr. Sumner's net returns formulation.  43. In fact, the formulation presented in Annex I actually contains a negative correlation between 
expected net revenue and planting decisions in  most cotton regions of the United States.  
 
44. In other words, the Annex I model tends to predict that cotton producers will plant less cotton 
in response to higher returns.   45. In Annex I, Dr. Sumner reports the functi onal form of expected net revenue used in 
determining planted acreage of upl and cotton (equation 1 on page 13).  Empirical results indicate that 
Dr. Sumner’s contrived formulation of expected net revenue does not explai n the movement in US 
plantings of upland cotton.
22  The following table presents correlation coefficients between the 
explanatory variables in Dr. Sumner’s acreage equatio ns and actual acreage levels for each region and 
for the United States over the 1996-2002 period.  
46. Cotton expected net revenue, in nominal term s, calculated according to equation (1) of 
Annex I has a negative correlation with planted acreage in 4 of the 6 cotton-producing regions 
modelled by Dr. Sumner.  Over the 1996-2002 pe riod, those 4 regions accounted for 93% of US 
acreage.  Dr. Sumner’s equations for planted acreage are not solely based on nominal net revenue of 
cotton.  They also take into account competing crops  in each region, and returns are converted to real 
dollars by dividing by a general price deflator.  
 47. The lack of predictive ability of Dr. Sumner’s  acreage equations is best illustrated by the 
correlation between acreage and the Weighted Expected Net Returns for all Crops in real terms.  This 
aggregate net return is calculated by multiplying each parameter estimate by the respective real net 
returns for that crop calculated according to equa tion (1) of Annex I and then summing the resulting 
values.  This calculation incorporates all explanat ory variables that are included in Dr. Sumner’s 
acreage equations with th e appropriate elasticity.  
 48. The correlation results indicate that Dr. Sumner ’s equations are not accurate predictors of the 
movements in cotton acreage.  The correlation in 3 regions is negative, and in two other regions, the 
correlation is weakly positive.  Only in the sma llest production region in the US is there a positive 
correlation that is statistically significant.  
                                                     
 
21 Paragraphs 152-167 of US Further Rebuttal Submission, 18 November 2003. 
22 The calculation of expected net revenue follows the general form indicated by equation (1) of 
Annex I.  Data for expected market and marketing lo an benefits are taken directly from the file FINAL 
US2003CropsModel WORKOUT.xls, which is a cotton-only US model supplied by Brazil.  Exact calculations 
of per-acre PFC, DP, MLA and CCP payments, as well as crop  insurance were not included in the file.  Nor has 
this exact documentation been provided by Brazil.  In the absence of a complete explanation regarding these 
calculations, the US has adopted the following formulas for expected pe r-acre payments for each region i: 
 PFCi = 0.85 * (PFC Payment Rate) * (Programme Yield)i, 
 MLAi = 0.85 * (MLA Payment Rate) * (Programme Yield)i,  DPi = 0.85 * (Direct Payment Rate) * (Programme Yield)i, 
 CCPi = 0.85 * max(0, Target Price – max)(L oan Rate, Farm Price)) (Programme Yield)I, 
The variables for decoupled payments and crop in surance have been calculated for each crop and 
region and included in expected net revenue for the determination of correlation coefficients and explanatory 
power. 
 WT/DS267/R/Add.2 
Page I-407 
 
 
 49. In fact, the explanatory powe r and reliability of Dr. Sumner’s acreage model is far less than 
one explanation of recent movements in cotton acreage provided by the United States, the ratio of cotton to soybeans expected harvest  season futures prices at time of planting.  Because soybeans is a 
major competing crop of cotton in many cotton-pro ducing regions, this ratio expresses the relative 
attractiveness of planting cotton from expected market returns.
23  Simply put, the ratio of expected 
futures prices does a much better job of explaining the movement in US cotton acreage than what is 
found in Dr. Sumner’s arbitrary formulation.  
Correlation of Selected Explanatory Variables with Upland Cotton Planted Area, 1996-2002 Period (1)
Corn BeltCentral 
PlainsDelta 
StatesFar West SoutheastSouthern 
PlainsUS
Sumner's Cotton Expected Net 
Returns (Nominal $)-0.27 0.11 -0.29 0.29 -0.53 -0.09 -0.28
Sumner's Cotton Expected Net 
Returns (Real $)-0.29 -0.08 -0.32 0.38 -0.58 -0.14 -0.30
Sumner's Weighted Expected Net 
Returns for all Crops (Real $)-0.21 0.40 -0.25 0.17 -0.35 0.16 -0.14
Ratio of Cotton and Soybean 
Futures Prices0.55 -0.37 0.66 0.23 0.33 0.63 0.69
Ratio of Lagged Cotton and 
Soybean Farm Prices0.14 -0.64 0.37 0.40 -0.06 0.46 0.40
(1) Source: File FINAL US2003CropsModel Correl 1.xls  
 
50. The statistics are very clear. Dr. Sumner’s methodology of modelling producer expectations 
and planting decisions has no explanatory power, and an alysis based on these equations is not reliable.  
His proposed formulation of net returns is not cons istent with producers’ expectations and acreage 
decisions.  The equations are not reliable for asses sing the removal of US programmes, and this 
applies to not only decoupled payments and crop insurance, but also marketing loans.   
51. Recent historical data clearly indicate that producers are making their decisions on their 
expectations of market prices for cotton and primary competing crops.
24  Furthermore, those price 
expectations are not captured by the naïve approach of  simply using last year’s price to determine this 
year’s acreage decision.  As Brazil’s expert, Mr . MacDonald explained at the second session of the 
first panel meeting, futures markets embody the best  available information about expected prices.  
The data indicate that cotton farmers’ pl anting decisions are made accordingly.   
 
                                                      
23 Paragraphs 5-9 of Answers of the United States of America to the Questions from the Panel to the 
Parties following the Second Session of the First Substantive Panel Meeting, 27 October 2003. 
 PFCi = 0.85 * (PFC Payment Rate) * (Programme Yield)i, 
 MLAi = 0.85 * (MLA Payment Rate) * (Programme Yield)i,  DPi = 0.85 * (Direct Payment Rate) * (Programme Yield)i, 
 CCPi = 0.85 * max(0, Target Price – max)(L oan Rate, Farm Price)) (Programme Yield)I, 
The variables for decoupled payments and crop in surance have been calculated for each crop and 
region and included in expected net revenue for the determination of correlation coefficients and explanatory 
power. 
24 Paragraphs 152-167 of US Further Rebuttal Submission, 18 November 2003. WT/DS267/R/Add.2 
Page I-408  
 
52. The formulations discussed in Annex I do not reflect the expectations of producers and do not 
explain the movement in US cotton acreage.  This is particularly troublesome as those formulations 
are a critical link in Brazil's attempt to ascrib e significant acreage impacts to the US cotton 
programme.  There is no credible statistical evid ence that supports this linkage, and the Annex I 
formulations that form a part of this analytical lin kage fail to accurately explain movement in acreage.   
 
V. DR. SUMNER’S METHODOLOGY DE VIATES FROM FAPRI’S LINEAR 
ACREAGE SYSTEM 
 
53. FAPRI's linear acreage system would tend to ensure that impacts from a static change in 
returns should be the same across several years.  Ho wever, contrary to the normal FAPRI system, the 
Sumner analysis shows impacts that grow substantially over several years.   54. According to the US crops model (Excel file US CROPS MODEL 2002.xls) sent by Dr. Babcock on 26 November, upland cotton acreage in each region is determined by the following 
equation: 
 CTPLT
i = ao + ao*CTENR i/PD + A*(Vector of Competing Crop Returns i)/PD 
 + Decoupled Payment Impacts i + CRP Impacts i + Єi 
where 
 CTPLT = upland cotton planted acreage in region i 
 CTENR = expected cotton net returns from the market and the marketing loan in region i  
 PD = general price deflator  A = vector of parameter estimates for competing crops. Expected net returns for each crop are defined as  (Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield – 
Variable Costs. 
 55. As documented in equation (1) of Annex I, Dr. Sumner modifies expected net returns to 
include his calculations of decoupled payments a nd crop insurance benefits.  The new equations for 
expected net returns are transformed as follows:  
(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield – 
Variable Costs + b
pfc * PFC + b dp * DP + b mla * MLA + b ccp * CCP + CIS, 
where  PFC = per-acre PFC payments  DP = per-acre direct payments 
 MLA = per-acre MLA payments 
 CCP = per-acre counter-cyclical payments  CIS = crop insurance variable  b
pfc , b dp , b mla , b ccp = scaling factors. 
 56. An important aspect of the linear acreage equations as modified by Dr. Sumner concerns the 
response to changes in net returns.  If net returns for cotton change by a given amount, then the impact 
or shift in cotton acreage is determined as a
i*(Change in returns)/PD.  If the change in returns is the 
same across years, then the only difference in terms of the acreage impact is due to the value of the 
price deflator PD.   
A. ACREAGE IMPACTS FOR 2003-07 APPEAR INCONSISTENT WITH 1999-2002 PERIOD 
 57. Dr. Sumner’s acreage impacts attributed to  decoupled payments and crop insurance show 
tremendous variations over the 1999- 2007 period.  Specifically, acreage shifts for the 2003-07 period 
are much larger than those reported for the 1999-02 pe riod.  The larger impacts are not consistent with WT/DS267/R/Add.2 
Page I-409 
 
 
the relative programme values assumed by Dr. Su mner.  In the case of decoupled payments, 
incorporating Dr. Sumner’s “coupling” factors do es not fully explain the differences in impacts. 
 58. The following table provides a comparison of  the average acreage impacts reported in rows 
720-771 of the file FINAL US2003CropsModel WORK OUT.xls.  The averages reflect the two 
periods of the analysis covered by the different farm bills.  The US cannot verify Dr. Sumner’s 
calculations due to insufficient in formation.  However, some basi c calculations cast serious doubt on 
the validity of Dr. Sumner’s analysis.  59. The acreage impacts reported for DP payments over the 2003-07 period are much larger than 
those indicated for PFC payments during 1999-20 02 even though direct payment rates under the 
current farm bill are actually smaller than PFC paym ent rates under the FAIR Act.  Surprisingly, this 
difference cannot be adequately explained by Dr. Sumner's decision to provide much stronger acreage impacts for Direct Payments than he attributed to PFC payments.  Even when the United States 
attempted to incorporate Dr. Sumner's “coupling” fact or, the acreage impacts appear much larger than 
the increased (1.5 times) "coupling" factor would seem to indicate.   
 60. The same concern holds true for MLA and CCP payments.  The acreage impact associated 
with CCP increases by a factor of five while th e effective payment under the 2002 Act is 3.4 times 
larger than the MLA payment.  In the Central Plains , the impact is more than 147 times larger over the 
03-07 period than over 99-02.  The Southeast show s an acreage impact due to CCP that is almost 
8 times the size of that implied for MLA by Dr. Sumner under the 1996 Act. 
 
B. CROP INSURANCE IMPACTS OVER 2003-2007 PERIOD VARY FROM IMPACTS OVER 1999-
2002 
 
61. In paragraphs 52 through 56  of Annex I, Dr. Sumner addr esses his contrived methodology for 
incorporating crop insurance.  He states that the per-acre crop insurance effect on net revenue is the 
same in all years of the analysis, and at the nationa l level, it equals $19 per acre.  He does not indicate 
if the value changes for each region in his acreage sy stem.  That notwithstanding, we do know that the 
impact on net revenue is the same in all years of the analysis.  If that is  the case, then the linear 
specification presented in equation (1) of Annex I would generate roughly the same acreage shift in 
each year of the analysis, with the exception of the impact of the change in the general price deflator.  
Since the price deflator, which is a measure of ge neral price inflation, generally increases over time, 
then the actual impact on acreage should get modes tly smaller over time.  Instead, Dr. Sumner’s 
acreage shifts due to crop insurance increase dramatica lly over the analysis period.  In the early years, 
the impact of $19 in net revenue amounts to fewe r than 600 thousand acres, while it grows to more 
than 1 million acres in 2003.  62. Despite the fact that the perceived bene fit did not change, Dr. Sumner’s methodology 
produced an acreage impact over the 2003-07 period that is roughly 1.5 times larger than over the 
1999-2002 period.  Furthermore, in the case of the Corn Belt, Dr. Sumner’s analysis actually indicates 
that the presence of the crop insurance progra mme has removed acres from cotton production - a 
result that is implausible. WT/DS267/R/Add.2 
Page I-410  
 
99-02 Average 03-07 Average Ratio
AMTA/DP Effective Average 
Payment Rate (Cents/Lb) *1.10 (= 7.34 * 0.15) 1.67 (= 6.67 * 0.25) 1.52
AMTA/DP Acreage Impacts (Mil Acres)
  Corn Belt 0.0015 0.0047 3.03  Central Plains 0.0025 0.0053 2.11  Delta States 0.0390 0.1425 3.65  Far West 0.0004 0.0012 2.84  Southeast 0.0764 0.2734 3.58  Southern Plains 0.0794 0.1380 1.74  Total U.S. 0.1993 0.5650 2.84
MLA/CCP Effective Average 
Payment Rate (Cents/Lb) *1.61 (= 6.42 * 0.25) 5.49 (= 13.73 * 0.40) 3.41
MLA/CCP Acreage Impacts (Mil Acres)
  Corn Belt 0.0023 0.0137 5.96  Central Plains 0.0001 0.0151 147.22  Delta States 0.0872 0.3867 4.43  Far West 0.0022 0.0037 1.67  Southeast 0.0927 0.7307 7.88  Southern Plains 0.1157 0.3983 3.44
  Total U.S. 0.3002 1.5482 5.16
Crop Insurance Average Benefit 
(Dollars/Ac)$19 $19 1.00
Crop Insurance Acreage Impacts (Mil Acres)
  Corn Belt -0.0002 -0.0003 1.52  Central Plains 0.0120 0.0219 1.83  Delta States 0.0596 0.1018 1.71  Far West 0.0012 0.0013 1.06  Southeast 0.2372 0.4609 1.94
  Southern Plains 0.3728 0.4279 1.15
  Total U.S. 0.6826 1.0135 1.48
* Effective Rates Calculated by Multiplying Average Rates by Dr. Sumner's "Coupling" Factor.Comparison of Calculated Payment Rates with Acreage Shifts Reported in FINAL 
US2003CropsModel WORKOUT.xls
 
 
C. SUMNER MODEL ADOPTS NON-LINEAR RESPONSES CONTRARY TO FAPRI 
 
63. In Exhibit Bra-313, Dr. Sumner provides further documentation regarding the analysis of 
decoupled payments and crop insurance.  The new documentation suggests an entirely different 
methodology than presented in Annex I.  WT/DS267/R/Add.2 
Page I-411 
 
 
64. The documentation provided in  Annex I suggests that cotton area is determined by the 
equation:  CTPLT
i = ao + ao*CTENR i/PD + A*(Vector of Competing Crop Returns i)/PD 
 + Єi 
where cotton expected net returns CTENR are determined as  
(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield – 
Variable Costs + b pfc * PFC + b dp * DP + b mla * MLA + b ccp * CCP + CIS. 
 65. Based on this documentation, analyzing the im pacts of no decoupled payments would be done 
by simply setting the decoupled payments to zero.  However, in Exhibit Bra-313, equations (4)-(6) 
suggest a very different methodology for deriving impacts.  Dr. Sumner reports to use the following approach:  Percentage difference in acreage due to programme  
= (Expected programme payments/(Expected progra mme payments + (cotton market & market loan 
net revenue))) * Acreage elasticity.   Acreage impacts would be derived by multiplying the percentage difference in acreage by the baseline 
level of acreage.   
66. The new methodology yields acr eage impacts that vary depending on the level of returns from 
the market and marketing loan.  This methodology expl ains how Dr. Sumner is able to derive varying 
impacts in a scenario where the ch ange introduced into the system is constant, such as the crop 
insurance scenario.  
D. SUMNER FORMULATION IGNORES PRESENCE OF OTHER PROGRAMMES AND 
THEREFORE EXAGGERATES IMPACTS 
 
67. Dr. Sumner’s formulation for isolating th e impacts of each individual programme produces 
exaggerated results.  It is logical to assume that  Dr. Sumner’s baseline acreage represents his most 
likely view based on the presence of all US cotton programmes.  As such, determining the acreage 
impact of each individual progr amme should be done by comparing returns from the programme in 
question with total returns, wher e total returns are defined as  
 
(Lagged Farm Price + max(0, Loan Rate – Lagge d Loan Repayment Price)) * Expected Yield – 
Variable Costs + b pfc * PFC + b dp * DP + b mla * MLA + b ccp * CCP + CIS. 
 68. Dr. Sumner’s approach of comparing returns for the programme in question to returns from the market and marketing loan i gnores the presence of other progra mmes.  Since returns from the 
market and marketing loan are less than total retu rns, then the acreage impa cts for a given programme 
based on Dr. Sumner’s formulation will be larger.  The following table uses data for the Southern 
Plains in 2005 to illustrate the differences.  Fo llowing Dr. Sumner’s documentation of Exhibit Bra-
313, the acreage impacts of decoupled payments an d crop insurance total 671 thousand acres.  If the 
methodology was based on total revenue, then the estimated acreage impact is 543 thousand acres.  
Full details of the calculations are presented in  the file FINAL US2003CropsModel Correl 1 (Exhibit 
US-115). 
 
E. UNITED STATES HAS DIFFICULTY REPLICATING SUMNER RESULTS - EVEN AFTER 
ADOPTING SUMNER METHODOLOGY 
 
69. The estimates prepared by the US are substan tially smaller than those reported by Dr. Sumner 
in the file FINAL US2003CropsModel WORK OUT.xls (submitted on 18 November).  The 
discrepancies are particularly large over the 2003-07 period.  Dr. Sumner reports an average acreage WT/DS267/R/Add.2 
Page I-412  
 
impact due to decoupled payments and crop insu rance of 3.1 million acres over the 2003-07 period.  
Estimates by the US using Dr. Sumner’s formulas find an impact of only 1.2 million acres.  The inability to even remotely replicate Dr. Sumner’s estimates casts serious doubts about the validity of his results.  Dr. Sumner’s calculations app ear to be as arbitrary as his economic logic. 
 
70. Brazil may cite the fact that the elasticity with respect to net returns is lower than the 
estimates published in Table I.3 of Annex I.  While  the United States is not able to verify the 
discrepancy, the elasticities used in  the US calculations are based on data provided in the file FINAL 
US2003CropsModel WORKOUT.xls.  Specifically, the el asticity in each year is determined by the 
formula ( a
i / Value of price deflator)*(Value of net retu rns / Value of cotton acres), where a1 is the 
coefficient on cotton net returns in the regional cotto n acreage equation.  The value of net returns and 
cotton acres are based on regional numbers in each year.  This formulation is consistent with 
Dr. Sumner’s documentation presented in Exhibit Bra-313.  
Example of Southern Plains Acreage Impacts, 2005
(1) (2) (3) = (2)/((1) + (2)) (4) (5) (6) = (3)*(4)*(5) (7)
ProgramMarket 
RevenueProgram 
Revenue% of Market + 
Program RevenueElasticity PlantedEstimated 
ImpactSumner 
Impact
  Direct Payments $109.04 $6.08 5.28% 0.28 6.046 0.090 0.145
  CCP's $109.04 $20.02 15.51% 0.28 6.046 0.265 0.416  Crop Insurance $109.04 $24.67 18.45% 0.28 6.046 0.316 0.446
  Total Area Impact 0.671 1.007
Example of Southern Plains Acreage Impacts, 2005
(1) (2) (3) = (2)/(1) (4) (5) (6) = (3)*(4)*(5) (7)
ProgramTotal 
RevenueProgram 
Revenue% of Total 
RevenueElasticity PlantedEstimated 
ImpactSumner 
Impact
  Direct Payments $159.81 $6.08 3.80% 0.28 6.046 0.065 0.145
  CCP's $159.81 $20.02 12.53% 0.28 6.046 0.214 0.416  Crop Insurance $159.81 $24.67 15.44% 0.28 6.046 0.264 0.446
  Total Area Impact 0.543 1.007
 WT/DS267/R/Add.2 
Page I-413 
 
 
AMTA/DP MLA/CCP Crop Insurance Total
Sumner Reported Impact 0.199 0.300 0.683 1.182
Estimate of Sumner Approach 
Using Market Returns0.197 0.286 0.636 1.119
Estimate of Sumner Approach 
Using Total Returns0.166 0.243 0.587 0.996
AMTA/DP MLA/CCP Crop Insurance Total
Sumner Reported Impact 0.565 1.548 1.013 3.127
Estimate of Sumner Approach 
Using Market Returns0.258 0.718 0.553 1.529
Estimate of Sumner Approach 
Using Total Returns0.179 0.591 0.432 1.2021999-2002 Average Acreage Impact (Million Acres)
2003-2007 Average Acreage Impact (Million Acres)
 
71. The following charts provide a year-by-y ear comparison between Dr. Sumner’s reported 
impacts and estimates prepared by the United States .  The formulas use to generate these estimates 
follow the documentation provided by Dr. Sumner.  In cases where the information was incomplete, 
reasonable assumptions were made to facilitate the calculations.  Complete details are provided in the 
file FINAL US2003CropsModel Correl 125. 
 
72. Estimates by the United States for the 1999-2002  period are reasonably close to those offered 
by Dr. Sumner.  However, there are large discrep ancies over the 2003-07 period.  It is inexplicable 
how the impact between the two periods can be so di fferent.  The differences  cannot be explained by 
Dr. Sumner’s method of incorporating alternative “coupling” factors. 
                                                      
25 Exhibit US-115. WT/DS267/R/Add.2 
Page I-414  
 
AMTA/DP Acreage Shifts for US Upland Cotton (Million Acres)
0.00.10.20.30.40.50.60.7
1999 2000 2001 2002 2003 2004 2005 2006 2007 US Estimate of Sumner's Impacts   Sumner's Reported Impacts  
 
MLA/CCP Acreage Shifts for US Upland Cotton (Million Acres)
0.00.20.40.60.81.01.21.41.61.8
1999 2000 2001 2002 2003 2004 2005 2006 2007
US Estimate of Sumner's Impacts   Sumner's Reported Impacts  
 WT/DS267/R/Add.2 
Page I-415 
 
 
Crop Insurance Acreage Shifts for US Upland Cotton (Million Acres)
0.00.20.40.60.81.01.2
1999 2000 2001 2002 2003 2004 2005 2006 2007
US Estimate of Sumner's Impacts   Sumner's Reported Impacts  
 
 
VI. SUMNER MODIFICATIONS TO FA PRI MODEL DESCRIBED IN BRA-313 
CONTAIN ERRORS  
 73. In Exhibit Bra-313, equation (2) on page 2 states that real net revenue for crop i in year (t-1) 
is a function of the price in (t-1) and the loan rate in (t-1), and other variables.  It is this specification 
for real net revenue that determines acreage in year  t, as described in equatio n (1).  The combination 
of these two equations indicates that the loan rate in  t-1 helps determine acreage in period t.  In other 
words, Dr. Sumner's equation seems to assert it is last year's loan rate, and not the one in effect for 
this year's crop, that determines this year's plantings .  Not only is this completely illogical, but it is in 
direct conflict with acreage equations previously  developed by both FAPRI and USDA.   The 
United States cannot determine if this equation refl ects a lack of knowledge of the model, a broader 
deficiency in economics, or some previously un known modification of the FAPRI or CARD models. 
 
74. Dr. Sumner’s documentation presented in e quation (2) is inconsis tent with equations 
contained in the files US CROPS MODEL 2002.xls (provided by Dr. Bruce Babcock on 26 November) and FINAL US2003CropsModel WORKOUT.xls (provided by Brazil on 
18 November).  Equation (2) defines real net reve nue for crop i by taking the higher of the lagged 
farm price and the lagged loan rate, then multiplying by  trend yield and subtracting variable costs.  He 
further explains that this formulation applies to all crops except cotton and rice, where the marketing 
loan benefit depends on the differe nce between the loan rate and the AWP.  However, in the two 
electronic versions of the crops model, which ha ve been provided by Dr. Sumner and Dr. Babcock
26, 
the formulation of expected net revenue is not consistent with Dr. Su mner’s documentation.  
According to the electronic versions, all crops inco rporate the marketing loan benefit by taking the 
difference between the loan rate and the loan repa yment price.  The United States and the Panel are 
left to wonder why there is a discrepancy between  Dr. Sumner’s documentati on and the models that 
have been provided. 
                                                      
26 File US CROPS MODEL 2002.xls (provided by Dr. Bruce Babcock on 26 November) (Exhibit US-
116) and FINAL US2003CropsModel WORKOUT.xls (provided by Brazil on 18 November) (Exhibit US-115). WT/DS267/R/Add.2 
Page I-416  
 
 75. Exhibit Bra-313 and Annex I provide di fferent and conflicting methodologies for 
incorporating the impacts of crop insurance and d ecoupled payments.  According to equation (1) of 
Annex I, the formula for determining expected ne t revenue has been modified to include per-acre 
decoupled payments and crop insurance benefits.  These net returns then determine cotton planted 
acreage. However, in equation (1a) of Bra-313, Dr . Sumner indicates that net revenue only considers 
returns from the market and the marketing loan.  He then incorporates the impacts of decoupled 
payments and crop insurance by adding some arbitrary acreage impacts into the equation.  As explained earlier
27, the approach presented in Exhibit Bra- 313 only serves to exaggerate his acreage 
impacts. 
 
76. In equation (7), Dr. Sumner documents the equation specification for US cotton exports.  His 
documentation indicates that exports in year t are a f unction of production in t-1, and other variables.  
Dr. Sumner’s model suggests that last year’s producti on directly determines this year’s exports.  This 
is both illogical and a departure from the specification included in the FAPRI framework. 
 
VII. OVERALL PRICE RESPONSIVENESS OF THE ANNEX I MODEL  
 
77. The overall price impacts generated by a mode l are determined by the underlying supply and 
demand elasticities within the system.  If overall  supply and demand are more elastic, or more 
responsive, then an external shock to the system w ill generate a smaller change in price than a system 
that is more inelastic. 
 78. In the case of the scenarios examined by Dr. Sumn er, the external shocks to the model are the 
elimination of various aspects of the US cotton prog ramme.  According to Dr. Sumner’s analysis, the 
removal of the US cotton programme leads to a reduction in planted area, production, and 
subsequently exports onto the world market.  The re duced supplies into the world market generate an 
increase in world price, with the magnitude of th e price increase determined by the overall elasticities 
embodied within the models for fo reign production and consumption. 
 79. The following table provides a comparison of aggregate supply and demand elasticities for foreign area and mill use.  Based on individual coun try elasticities, the response of aggregate foreign 
area and consumption can be calculated based on weights derived from recent historical data.  The 
elasticities reported in Table I.3 of Annex I are used to derive the aggregate elasticities of the Sumner-
CARD international cotton
28 model provided by Brazil on 13 November.  These are compared to 
published research from Dr. Seth Meyer at FAPRI-U niversity of Missouri, which reports more 
responsiveness in both area and consumption.29  
 
Comparison of Model Elasticities 
 Meyer – FAPRI Sumner – CARD 
 Short Run Long Run Short Run Long Run 
Foreign Area 0.45 0.78 0.24 N/A 
Foreign Mill Use -0.37 -0.49 -0.25 N/A 
 
80. The net trade position of countries outside of th e US is one of a net importer.  Since their 
consumption exceeds their production, their excess demand (ED) is defined as demand (D) – supply 
(S).  The responsiveness of their excess demand (E D) is approximated by the elasticity of the 
                                                      
27 Section V.c of this document. 
28 File WDCT2002 Meltdown WORKOUT.xls, provided by Brazil on 13 November 2003. (Exhibit 
US-115.) 
29 Seth D. Meyer, A Model of Textile Fiber Supply and Inter-Fiber Competition with Emphasis on the 
United States of America, Food & Agricultural Policy Research Ins titute, University of Missouri, 2002. WT/DS267/R/Add.2 
Page I-417 
 
 
domestic demand less the elasticity of their domestic supply.  In the case of the Meyer model, the elasticity of excess demand is -0.37 – 0.45 = -0.82.  For the Sumner model, the elasticity of excess 
demand is -0.25 – 0.24 = -0.49.  This fundamental difference has a direct impact on the price impacts 
generated by the model, as evidenced by the fo llowing chart.  The line ED1 represents an excess 
demand curve with more price responsiveness, wh ile ED2 is an excess demand curve with less 
elasticity.  The intersection of excess demand outside  of the United States with excess supply (ESUS) 
from the United States generates an equilibrium price.  When there is a reduction in the excess supply 
from the United States, the elasticity of excess demand, which is reflected by the slope of the line has 
a direst impact on the change in price.  Dr. Sumner’s choice of intern ational supply and demand 
elasticities leads to exaggerated price impacts.  
 
QP
P2
P1
P*
ED1
ED2ESUS
 
VIII. CONCLUSION 
 
81. The Sumner models, as presented by Brazil, are so laden with faulty theory on programme 
impacts and so deviate from the FAPRI standards that they cannot provide any foundation for the 
Panel's analysis of the effect of challenged United States programmes with respect to upland cotton.  
Not only does the Sumner model contain major differences from previous FAPRI work, it also appears to be internally inconsistent as the Unite d States has noted changes in described methodology 
from the original Annex I submission to later s ubmissions, such as Exhibit Bra-313 and subsequent 
documentation.   
 82. Virtually all of the concerns of the United St ates cited in this critique are directed toward 
Brazil economic manipulation that exaggerates acr eage impacts of the United States upland cotton 
programme.   
• Brazil's impacts attributed to decoupled programmes deviate from traditional FAPRI analysis.   
 
• Brazil's impacts attributed to crop insurance programme are not supported by FAPRI analysis.   
 
• Brazil's impacts attributed to the export cr edit guarantee programme have no demonstrated 
economic foundation.  
 
• Brazil's Annex I results used baselines that we re inexplicably lower than even FAPRI's 
preliminary November 2002 baseline.   
 
• Brazil's non-linear approach to results deviated from the traditional FAPRI methodology.   WT/DS267/R/Add.2 
Page I-418  
 
 
• Many of Dr. Sumner's adaptations contain errors.  
 83. In the final analysis, Brazil does not rely on the FAPRI model to prove its case, it relies on its 
manipulation of that model to ensure it obtains the desired results. WT/DS267/R/Add.2 
Page I-419 
 
 
ANNEX I-10 
 
 
BRAZIL'S ANSWERS TO ADDITIONAL QUESTIONS 
FROM THE PANEL 
 
20 January 2004 
  
TABLE OF CASES 
 
 
EC – Sugar Exports I 
(Australia) GATT Panel Report, European Communities – Refunds on Exports of 
Sugar (Complaint by Australia , L4833 - 26S/290, adopted 6 November 
1979 
EC – Sugar Exports II (Brazil) GATT Panel Report, European Communities – Refunds on Exports of 
Sugar (Complaint by Brazil), L/5011 – 27S/69, adopted 10 November, 
1980 . 
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign 
Sales Corporation” , WT/DS108/AB/R, adopted 20 March 2000. 
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916 , 
WT/DS136/AB/R, adopted 26 September 2000. 
US – Corrosion- Resistant Steel Appellate Body Report, United States – Sunset Review of Anti-Dumping 
Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan , 
WT/DS244/AB/R, adopted 9 January 2004. 
 
 
 
List of Exhibits 
 
Agricultural Outlook Tables, USDA, November 2003, Table 19 Exhibit Bra- 394 
“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark 
Lange, President and CEO, National Cotton Council, 6 January 2004. Exhibit Bra- 395 
“Farm Groups Shocked at UC Economist’s Testimony in WTO 
Dispute,” Western Farm Press, 2 September 2003. Exhibit Bra- 396 
“Report of the Commission on the Application of Payment Limitations 
for Agriculture,” August 2003. Exhibit Bra- 397 
Western Farm Press, 7 January 2003  Exhibit Bra- 398 
Acreage Discrepancies.xls Exhibit Bra- 399 List of Publications of Professors  Babcock and Beghin Exhibit Bra- 400 
 WT/DS267/R/Add.2 
Page I-420  
 
257.   The Panel takes note of the Appellate Bo dy Report in United States – Sunset Review of 
Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (DS244), which was circulated to WTO Members on 15 Dece mber 2003.  The Panel is aware that this 
report has yet to be adopted by the Dispute Settlement Body.  Nevertheless, the Panel asks the parties to respond to the fo llowing related questions. 
 
(a)  In that report, the Appellate Body caut ioned against the "mechanistic" application of 
the so-called "mandatory/discretio nary distinction" and stated that the import of this 
distinction may vary from case to case (para. 93).  For the Appellate Body, the question 
of whether a measure is mandatory or not is relevant "if at all" only as part of the 
assessment of whether the measure is, as such, inconsistent with particular obligations.  
How, if at all, are these statements and the related findings concerning the 
mandatory/discretionary distinction in th at Appellate Body Report relevant to: 
  (i)  the legal standard and elements Br azil sets out to establish its export and 
prohibited subsidy claims under the provisions of the Agreement on Agriculture 
and Articles 3.1(a) and (b) of the SCM Agreement, concerning: BRA 
  - Step 2 payments (see, e.g. paras. 244- 245 & 250 Brazil's first written submission; 
Panel Question 109 and parties' responses/comments thereon); and 
 
 - export credit guarantee programmes: GSM-102, GSM-103 and SCGP (see, e.g., 
para. 90 Brazil's oral statement at second Panel meeting).  
  (ii) the legal standard and elements Brazil sets out to establish its serious prejudice 
and "threat of serious prejudice" claims, and in particular, its designation of 
marketing loan; crop insurance; counter-cyclical payments; direct payments 
and Step 2 as "mandatory"?  BRA 
  (iii) the legal standard and elements Braz il sets out to establish its "per se" "serious 
prejudice" claims (e.g. Brazil's 9 September further submission, para. 417 ff; US oral statement at second Panel meeting, para. 86 ff.)? BRA 
 
The Appellate Body’s Decision 
 
1. Prior to answering the Panel’s specific qu estions, Brazil makes the following introductory 
comments.  Generally speaking, with respect to the Panel’s Questions 257(a) – (c), Brazil does not 
believe that the Appellate Body Report in US – Corrosion-Resistant Steel  has a significant impact on 
the legal standards or the elements of Brazil’s “ per se ” or threat of serious prejudice claims.  This is 
because, unlike the USDO C Policy Bulletin in US – Corrosion-Resistant Steel , the measures at issue 
in this dispute, on their face, require the paymen t of subsidies to eligible producers, users, and 
exporters.  The record in this dispute shows that US government officials enjoy no flexibility to apply 
the US subsidy programmes in a WTO-consistent manner.   
 
2. The US – Corrosion-Resistant Steel  decision does make the important conclusion that panels 
cannot reject on a jurisdictional basis “ per se ” claims against measures that on their face are not 
mandatory.
1  This Panel therefore need not examine whether the subsidy measures that Brazil has 
challenged are mandatory as a preliminary jurisdictiona l matter.  However, this does not mean that the 
mandatory nature of measure is not important in deciding the merits of a “ per se ” (or threat of serious 
prejudice) claim.  Indeed, the Appellate Body’s analysis of the merits of Japan’s “ per se ” claims in US 
– Corrosion-Resistant Steel  appeared to turn largely on whethe r the measure was “mandatory”, i.e., 
whether it required USDOC officials to analyze s unset reviews in a WTO-inconsistent manner.  
                                                      
1 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 88. WT/DS267/R/Add.2 
Page I-421 
 
 
 3. The Appellate Body held that  “[w]hen a measure is challenged ‘as such,’ the starting point for 
an analysis must be the measure on its face.  If th e meaning and content of the measure are clear on its 
face, then the consistency of the measure as such can be assessed on that basis alone”.
2  The Appellate 
Body in US – Corrosion-Resistant Steel  found that the “as such” challenge “hinges upon whether [the 
Sunset Policy Bulletin] instruct[s] USDOC to treat dumping margins and/or import volumes as 
determinative or conclusive, on the one hand, or merely indicative or  probative, on the other hand, of 
the likelihood of future dumping”.3  Finding ambiguity in the text of the Bulletin (the use of the word 
“normally” and “good cause”), the Appellate Body he ld that the panel shou ld have examined the 
history of the application of the Bulle tin and individual decisions thereunder.4  Since the panel had 
failed to make the necessary factual findings, the A ppellate Body was unable to complete the analysis 
and to rule on Japan’s claim.5 
 4. Nevertheless, the Appellate Body’s decision appears to stand for the proposition that “ per se ” 
challenges require demonstration that either th e text or the operation of a measure creates 
requirements for government officials to act in a WTO-inconsistent manner.  Where the text is not 
completely clear, the Appellate Body found that pane ls must determine whether the measure creates 
“normative” requirements, i.e., whether the measures are treated as binding by government officials, 
are interpreted as binding on executive branch official s by courts, or are consistently applied in a 
manner suggesting that the measures are considered to be mandates for action.
6  
 
5. Further, the US – Corrosion-Resistant Steel  decision highlights the importance of challenges 
to legal/regulatory measures as a way to avoid re peated WTO dispute settlement challenges in “as 
applied” claims.  In describing what is a “measure,” the Appellate Body recalled:   
 
[I]n GATT and WTO dispute settlement prac tice, panels have frequently examined 
measures consisting not only of particular act s applied only to a specific situation, but 
also of acts setting forth rules or norms that are intended to have general and prospective application.  In other words, instruments of a Member containing rules or norms could constitute a “measure”, irresp ective of how or whether those rules or 
norms are applied in a particular instance.  This is so because the disciplines of the 
GATT and the WTO, as well as the dispute settlement system, are intended to protect 
not only existing trade but also the secu rity and predictability needed to conduct 
future trade .  This objective would be frustrated if instruments setting out rules or 
norms inconsistent with a Member's obliga tions could not be brought before a panel 
once they have been adopted and irrespective of any particular instance of application 
of such rules or norms. It would also lead to a multiplicity of litigation if instruments 
embodying rules or norms could not be cha llenged as such, but only in the instances 
of their application.  Thus, allowing clai ms against measures, as such, serves the 
purpose of preventing future disputes by allowing the root of WTO-inconsistent 
behaviour to be eliminated .
7 
 
6. Consistent with the language  quoted above, Brazil’s various ch allenges to US legal/regulatory 
instruments “ per se ” are intended to protect the security and predictability that Brazil’s upland cotton 
producers need to conduct future trade.  In additio n, resolution of Brazil’s sep arate threat of serious 
                                                      
2 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 168.   
3 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 178.   
4 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, paras. 182-184, 187-189. 
5 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, paras. 189-190. 
6 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, paras. 99, 168. 
7 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 83 (emphasis 
added; references in original omitted). WT/DS267/R/Add.2 
Page I-422  
 
prejudice claim under the EC – Sugar Exports and US – FSC  rationales will prevent future disputes 
by addressing the root cause of the United States’ WTO-inconsistent behaviour – the absence of any 
legal or regulatory limitations on subsidy payments, which creates a structural and permanent source 
of uncertainty in upland cotton markets.
8  Brazil has demonstrated that the mandatory US subsidy 
measures function to guarantee a high level of US  upland cotton production and exports, and by 
definition, act to suppress world prices because of th e increased supply by US producers of a fungible 
commodity.9  Brazil further demonstrated that Braz ilian producers are reluctant to engage in 
significant investments in leasing or purchasing land for upland cotton production because of the 
uncertainty caused by locked-in US production.10  Brazil also recalls its position that requiring an 
“imminent threat” standard, as pro posed by the United States, would in effect require Members such 
as Brazil to litigate claim after claim on the application  of these measures, which threaten to cause 
serious prejudice to its interests.  7. Finally, Brazil notes that the Appellate Body’s conclusions in US – Corrosion-Resistant Steel  
regarding the mandatory/discretionary distinction,  although based on provisions of the Anti-Dumping 
Agreement, are equally relevant to claims under any of the covered agreements, including Brazil’s 
claims under the SCM Agreement, the Agreemen t on Agriculture, and Article XVI of GATT 1994.
11  
 
  (i) the legal standard and elements Br azil sets out to establish its export and 
prohibited subsidy claims under the provisions of the Agreement on Agriculture and Articles 3.1(a) and (b) of the SCM Agreement, 
concerning: BRA 
   - Step 2 payments (see, e.g. paras. 244-245 & 250 Brazil's first written 
submission; Panel Question 109 and parties' responses/comments thereon); and 
Brazil’s Answer
 
 8. Application of the US – Corrosion-Resistant Steel  criteria requires a complainant bringing a 
per se claim to demonstrate that a measure does not provide relevant government officials with the 
flexibility to apply the measure in a WTO- consistent manner.  As Brazil has argued
12, US government 
officials are not provided with any flexibility to ma ke Step 2 subsidies under Section 1207(a) of the 
2002 FSRI Act in a WTO-consistent manner.  Thus, the Act violates Articles 3.3 and 8 of the 
Agreement on Agriculture, and Articles 3.1(a) and 3. 1(b) of the SCM Agreement.  The United States 
has conceded that “subject to th e availability of funds (that is, the availability of CCC borrowing 
authority), Step 2 payments must be made to all those who meet the conditions for eligibility”.13  The 
                                                      
8 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 203-216; Brazil’s 9 September 2003 
Further Submission, paras. 413-436. 
9 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 200-202.   
10 See Annex III of Brazil’s 9 September 2003 Further Submission; Brazil’s 9 September 2003 Further 
Submission, Section 6.3;  Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003); Brazil’s 
18 November 2003 Further Rebuttal Submission, para. 203. 
11 The Appellate Body noted with respect to Article 17.3, the consultation clause of the Anti-Dumping 
Agreement , that there is “no threshold requirement, in Article 17.3, that the measure in question be of a certain 
type”.  Moreover, it has drawn the conclusion from the phrasing of Article 18.4 of the Anti-Dumping 
Agreement  that “the entire body of generally applicable rules, norms and standards adopted by Members in 
connection with the conduct of anti-dumping proceedings” should be potentially subject to dispute settlement.11  
The provisions of Article 17.3 of the Anti-Dumping Agreement are closely modeled on those of GATT Article XXIII:1 which are cross-referenced in Article 30 of the SCM Agreement and Article 19 of the Agreement on 
Agriculture, and the provisions of Article 18.4 are vi rtually identical to Article XVI:3 of the Marrakesh 
Agreement Establishing the WTO. 
12 Brazil’s 24 June 2003 First Submission, paras. 93-96, 244-45 and 250; Brazil’s 22 August 2003 
Comments to the US 11 August 2003 Answers to Questions 92-93, 96, 99 and 107. 
13 US 11 August 2003 Answer to Question 109. WT/DS267/R/Add.2 
Page I-423 
 
 
United States admits that “the CCC has a large” borrowing authority and “ rarely has CCC run out of 
funds  but it has happened for brief periods of time”.14  Indeed, while the 1996 FAIR Act imposed a 
$701 million budgetary limit on the Step 2 programme  during MY 1996-2001, this limit was reached 
by 1999.  At the urging of the NCC, Congress eliminated the spending cap in 2000.15  Unlimited 
funding has existed ever since, including $415 million in expenditures in MY 2002 alone.16  
 
9. The Secretary of the USDA must make paym ents pursuant to the plain text of Section 
1207(a)(1), (2), and (4) of the 2002 FSRI Act (as se t out in paragraph 245 of  Brazil’s 24 June First 
Submission).  Consistent with the US – Corrosion-Resistant Steel  decision, the evidence of mandatory 
payments demonstrates the absence of any flexibility for US officials to apply the programme in a 
WTO-consistent manner.  Even if US authorities, acting in the best of faith, recognize that Step 2 
payments are inconsistent with the US export s ubsidy obligations as well as with the prohibition on 
local content subsidies, Congress has not given them the discretion to stop the payments .  Indeed, 
Congress has created a legal right for eligible r ecipients to demand and receive payments.    
   -  export credit guarantee programmes: GSM-102, GSM-103 and SCGP 
(see, e.g., para. 90 Brazil's oral statement at second Panel meeting).  
 
Brazil’s Answer
 
 10. The Appellate Body Report in US – Corrosion-Resistant Steel  does not affect the legal 
standard and elements set out by Brazil to estab lish its claims against the GSM 102, GSM 103 and 
SCGP programmes under Articles 10.1 and 8 of the Agreement on Agriculture, and under Article 
3.1(a) of the SCM Agreement.  In fact, the mandato ry/discretionary distinction is not relevant to 
Brazil’s claims against the CCC  export credit guarantee progra mmes under Article 10.1 of the 
Agreement on Agriculture. 
 
11. Article 10.1 prohibits circumvention, and the threat of circumvention, of export subsidy 
reduction commitments.  Brazil has demonstrated act ual circumvention, by establishing that with 
respect to both unscheduled products
17 and at least one scheduled product18, the United States has in 
fact circumvented its export subsidy reduction co mmitments.  This is some what akin to an “as 
applied” claim, and it is therefore not releva nt to this claim whether the CCC programmes are 
mandatory or discretionary. 
 12. Brazil has also demonstrated threat of circum vention.  With respect to unscheduled products, 
the Appellate Body has held that it const itutes threat of circumvention to provide any export subsidies 
for unscheduled products.
19  Having proven that CCC guarantees are export subsidies (under 
Articles 1.1 and 3.1(a) of the SCM Agreement, as well as item (j)), and having proven that those 
guarantees are available for unscheduled products20, Brazil demonstrated threat of circumvention, and 
a violation of Article 10.1.  This is the standard set out by the Appellate Body in US – FSC ; it does 
not appear to be relevant to this claim whethe r the CCC programmes are mandatory or discretionary. 
 13. With respect to scheduled products, the test under Article 10.1 is not whether the CCC 
programmes are “mandatory” as opposed to “discre tionary”.  Rather, to determine whether CCC 
export credit guarantees for scheduled products threaten  to lead to circumvention of the US export 
                                                     
 
14 US 22 December 2003 Answ ers to Question 254.   
15 Brazil’s 24 June 2003 First Submission, para. 95. 
16 US 22 December 203 Answer to Question 196, para. 12 (based on October 2002-September 2003 
fiscal year data). 
17 See Brazil’s 2 December 2003 Oral Statement, para. 87. 
18 See Brazil’s 2 December 2003 Oral Stat ement, para. 89 (and note 179). 
19 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 150. 
20 See Brazil’s 18 November 2003 Further Rebuttal Submission, para. 256 (and note 414). WT/DS267/R/Add.2 
Page I-424  
 
subsidy reduction commitments, Brazil has noted th at the test set out by the Appellate Body in US – 
FSC is whether the CCC can “stem[], or otherwise control[], the flow of” CCC export credit 
guarantees.  Brazil has demonstrated that CCC cannot do so.
21  One fact Brazil has noted is that the 
CCC programmes are “mandatory,” as that term is defined in US law.22  (In Brazil’s view, the CCC 
programmes are also “mandatory,” within the meaning of WTO/GATT law). 
 
14. Brazil also claims that the CCC export credit guarantee programmes constitute prohibited export subsidies under Articles 1.1 and 3.1(a) of th e SCM Agreement.  Brazil has demonstrated that 
the CCC programmes confer “benefits ” per se, within the meaning of Article 1.1(b) of the SCM 
Agreement (as well as that they are financial contributions and are de jure  contingent on export).  
Brazil has relied on three types of evidence and argument to make this per se  showing, as summarized 
in paragraphs 231-241 of its 18 November 2003 Further Rebuttal Submission.  These three types of 
evidence and argument demonstrate that every time a CCC guarantee is issued, a benefit is conferred 
per se .  This is effectively the equivalent of sayi ng that the CCC programmes “mandate” a violation. 
 
15. Finally, Brazil also claims that the CCC export credit guarantee programmes constitute 
prohibited export subsidies under item (j) of the Illustrative List of Export Subsidies included as Annex I to the SCM Agreement.  Brazil does not consider that, to the extent the traditional 
mandatory/discretionary principle was modified by the Appellate Body in US Corrosion-Resistant 
Steel , those modifications have any impact on Brazil’s claim.   
 
16. Moreover, Brazil does not consider that it is pa rticularly useful to determine whether Brazil’s 
claim is “as applied” or “as such”, thus neces sitating a determination whether the CCC programmes 
are “mandatory” or “discretionary”.  Indeed, the Appellate Body in US Corrosion-Resistant Steel  
stressed that the “import of the ‘mandatory/discre tionary distinction’ may vary from case to case”, 
cautioning “against the application of this distinction in a mechanistic fashion”.
23  Item (j) imposes a 
sui generis  standard – it calls for an evaluation whether the CCC programmes are offered at premium 
rates that are inadequate to cover the long-term operating costs and losses of the programmes.  Brazil 
has established these elements in two ways.  Firs t, using a number of methodologies, Brazil has 
looked at historical data concerning premiums collected and costs and losses incurred, to establish that costs and losses incurred exceeded premiums collected over a 10-year period.
24  Second, Brazil used 
statements by USDA’s Office of the Inspector General and the US General Accounting Office to 
establish that premium rates for the CCC programmes,  and not just premiums collected, do not and 
will continue not to meet costs because they do not, and are not adjusted to, offset credit risks, and 
are, further, capped at one per cent.25   Given the forward-looking nature of this analysis, Brazil does 
not agree with the United States that item (j) ne cessarily “requires a certain retrospection”.26  
  (ii) the legal standard and elements Brazil sets out to establish its serious prejudice 
and "threat of serious prejudice" claims, and in particular, its designation of 
marketing loan; crop insurance; counter-cyclical payments; direct payments and Step 2 as "mandatory" 
                                                     
 
21 See Brazil’s 2 December 2003 Oral Statement, pa ras. 90-91; Brazil’s N ovember 2003 Further 
Rebuttal Submission, paras. 258-262. 
22 Exhibit Bra-295 (2004 US Budget, Federal Credit Supplement, Introduction and Table 2 (CCC 
Export Loan Guarantee Programme classified as “Manda tory” in Table 2, and in the “Introduction”, the Office 
of Management and Budget states that Table 2 provides  “the programme’s BEA classification under the Budget 
Enforcement Act (BEA) of 1990 as discretionary or mandatory”). 
23 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 93.   
24 See Brazil’s 18 November 2003 Further Rebuttal Subm ission, paras. 243, 245-253 and the references 
cited therein. 
25 See Brazil’s 18 November 2003 Further Rebuttal Submission, para. 252 (and all citations).  Given 
the forward-looking nature of this analysis, Brazil does no t agree with the United States  that item (j) necessarily 
“requires a certain retrospection”. (US 22 Dece mber 2003 Answers to Questions, para. 103). 
26 US 22 December 2003 Answer s to Questions, para. 103. WT/DS267/R/Add.2 
Page I-425 
 
 
 Brazil’s Answer
 
 17. The US – Corrosion-Resistant Steel  decision does not significantly change Brazil’s analysis 
of its serious prejudice or threat of serious prejudi ce claims.  There has never been an issue whether 
the statutes and regulations providing for the five US  subsidies referred to in the Panel’s question are 
“mandatory” – this has been clear from the face of  the statutory and regulat ory provisions, as set out 
in Brazil’s earlier submissions a nd even acknowledged by the United States.27  The record establishes 
that marketing loan, crop insurance, direct and c ounter-cyclical payments, and Step 2 payments are 
“mandatory” provisions – payments  and expenditures are required to  be made by US Government 
officials to eligible producers, users or exporters.
28  
 18. The mandatory nature of the US subsidies is relevant to (a) Brazil’s “per se” claims as well as (b) Brazil’s threat of serious prejudice claims that do not involve claims regarding the “ per se ” 
validity of the statutes.  The evidence of mandatory  (or “normative”) measures is a required element 
for Brazil’s “ per se ” claims.  And a threat of serious prejudice under Article 6.3 and 5(c) will be more 
likely to exist if the subsidies are mandatory, i.e., that  the subsidies must be paid to eligible producers, 
exporters, and users.   The record demonstrates that there are no provisions in US law limiting the 
payments, and, thus, limiting the threat of serious prejudice (i.e., significant price suppression, increased world market share for US exports, or in equitable share of world trade).  The so-called 
“circuit-breaker” in the 2002 FSRI Act is not applicab le to individual commodities, but instead only 
to total US AMS.
29  The United States has admitted that there is no provision in US law that stops 
subsidy payments when serious prejudice is caused to other WTO Members.30  In particular, there was 
no flexibility provided to US government officials to limit upland cotton payments at any time during MY 1999-2002.   When prices plunged to reco rd lows in MY 2001 and MY 2002, USDA poured 
funds into sustaining high levels of US upland cott on production and exports.  Th e participants in the 
world market know this will happen again when pri ces fall.  And world producers, such as those from 
Brazil, as well as traders discovering prices in the Ne w York futures markets, know that this means 
that US production and exports will remain high for the remainder of the 2002 FSRI Act.
31   
 
                                                      
27 See Brazil’s 9 September 2003 Further Submission, Sections 4.2.1-4.2.5 (summarized in paragraph 
423);  US 27 October 2003 Answer to Question 162, para 95 (“The statutory authority for marketing loan 
payments, step 2 payments, and counter-cyclical payments  does not provide the Secretary with the authority to 
arbitrarily decline to make these payments to qualified re cipients.”);  para. 97 (“there is no present limit on the 
total amount of payments that can be made under each of these programmes although for counter-cyclical 
payments a maximum total outlay can be calculated using the base acres, base yields, and maximum payment 
rate for each commodity produced during the historical base period”.).     
28 See also Brazil’s Answer to  Question 257(b) below. 
29 US 2 December 2003 Oral Statement para 82.  US 22 December 2003 Answer to Question 253, para. 
180. 
30 US 22 December 2003 Answer to Question 253, para . 180 (the circuit-breaker provision “does not 
appear to contemplate any such finding of serious prejudice, but rather is seemingly focused more particularly 
on the overall level of expenditures as that was the only restriction agreed to in this instance by the United States … ”.). 
31 The absence of any “circuit breaker” for upland cotton is significant given the fact that producers of 
upland cotton received far more per unit and ad valorem subsidies than any other US commodity during MY 
1999-2002 (Brazil’s 9 September 2003 Further Submission, para. 4).   No other US crop has a 
“competitiveness” subsidy such as Step 2, which paid $415 million to US users and exporters of upland cotton 
in MY 2002.  No other US crop had counter-cyclical pa yments of over $1 billion in MY 2002.  No other US 
crop had such large per unit marketing loan payments during MY 1999-2002.  These huge guaranteed payments, 
along with the unlimited  amount of upland cotton that can receive be nefits from marketing loan, Step 2, and 
crop insurance subsidies, together with the very high per-acre direct and counter-cyclical payments (compared 
to other programme crops), together constitutes strong ev idence that these measures have not, are not, and will 
not be applied in the future in a WTO-consistent manner. WT/DS267/R/Add.2 
Page I-426  
 
19. This permanent threat of serious prejudice is similar to “threat of ci rcumvention” of export 
subsidy reduction commitments, under Article 10.1 of the Agreement on Agriculture.  In US – FSC, 
the Appellate Body held that th e absence of any legal mechanism that can “stem[], or otherwise 
control[], the flow of”
32 subsidies creates a threat  of circumvention.  Again, as in this dispute, in US – 
FSC and EC – Sugar Exports , there was no legal mechanism to lim it the amount of potential subsidies 
that could be paid.  The threat was and is tangible 
 20. The price-trigger mechanism contained in certain of the programmes does not minimize the 
threat of serious prejudice.  In fact, the very ex istence of the mandatory marketing loan, Step 2 and 
counter-cyclical payment programme alone impacts fa rmers’ planting decisions.  Even when farmers 
expect market price levels that would not trigger these payments, farmers know that there is a certain 
likelihood that their expectations will turn out to be wrong and prices will turn out much lower than 
anticipated.  However, history has taught US upland cotton producers to know with certainty that they 
will not suffer any economic harm from their misperception of prices for the upcoming marketing year.  Any downside market revenue risk is covere d by the combined effect s of the marketing loan 
and counter-cyclical payment programmes, as well as by  the effects of certain crop insurance policies 
such as revenue insurance.  In short, the mandato ry US subsidies mean that high US production and 
exports are guaranteed.    21. Further, these programmes have effect s on production decisions of US farmers via a second 
mechanism, as Brazil and Professor Sumner have  detailed at the second meeting of the Panel.
33  Even 
if farmers expect upland cotton prices (cash prices as well as the adjusted world price) to be above the 
trigger prices for marketing loan, counter-cyclical and Step 2 payments, farmers will expect with a 
certain likelihood that prices might nevertheless turn out to be below these trigger prices, i.e., farmers 
have a probability distribution for expected prices.   Given this probability distribution, Professor 
Sumner explained at the second meeting of the Pane l that farmers would still expect some payments 
from these programmes.34  Thus, these programmes impact farmers planting decisions, increasing and 
locking in a high US supply of upland cotton that causes adverse effects.  22. Finally, Brazil has demonstrated that the “ch illing effect” of guaranteed US subsidies leads to 
reduced investment of Brazilian fa rmers in upland cotton production.
35  Indeed, USDA itself 
acknowledges – with respect to soybeans, but equally applicable to upland cotton – that low 
international prices have had negative impacts on additional investments and increases in production 
in Brazil.36  This “chilling effect” is the result of Brazili an and other countries’ farmers’ perception of 
the threat of serious prejudice from the US upland cotton subsidies.  
 (iii) the legal standard and elements Braz il sets out to establish its "per se" "serious 
prejudice" claims (e.g. Brazil's 9 September further submission, para. 417 ff; US 
oral statement at second Panel meeting, para. 86 ff.)? 
 
                                                     
 
32 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
33 See Brazil’s 2 December 2003 Oral Statement, para. 48 and Exhibit Bra-371 (Simple Example of the 
Calculation of Expected Marketing Loan Benefit);  Brazil’s 22 December 2003 Answers to Questions, 
para. 155. 
34 Exhibit Bra-371 (Simple Example of the Calculation of Expected Marketing Loan Benefit). 
35 Brazil’s 9 September 2003 Further Submission, Section 6.3 and Annex III; Exhibit Bra-283 
(Statement of Christopher Ward – 7 October 2003); Brazil’s 18 November 2003 Further Rebuttal Submission, para. 203. 
36 Brazil’s 9 September 2003 Further Submission, para. 455 and Exhibit Bra-263 (“Argentina & Brazil 
Sharpen Their Competitive Edge,” USDA, Agricultural Outlook, September 2001, p. 32). WT/DS267/R/Add.2 
Page I-427 
 
 
Brazil’s Answer  
 23. As detailed in Brazil’s answer to Question 25 7(a)(ii) and (b), marketing loan, Step 2, crop 
insurance, direct and counter-cyclical payment subsidies are mandatory within the traditional 
mandatory/discretionary distinction.  Thus, the Appellate Body decision in US – Corrosion-Resistant 
Steel  does not affect the legal standard and elements for Brazil’s per se  claims against those subsidy 
programmes.
37 
 
(b) How and to what extent are the legal and regulatory provisions cited in paras. 415 and 
423 of Brazil's 9 September further submissi on "normative" in nature and treated as 
binding within the US legal system (see, e.g ., para. 99 of the Appellate Body Report)?  
Does your response differ depending on whether the payments are dependent upon market price conditions? BRA 
 
Brazil’s Answer
 
 
24. Brazil understands the ordinary meaning of  “normative” to be “establishing a norm or 
standard of; deriving from or implying a standard or norm; prescriptive”.38   In the sense of the term 
used by the Appellate Body in US – Corrosion-Resistant Steel , the US statutes and regulations 
summarized in paragraphs 415 and 423 of Brazil’s 9 Se ptember Further Submission39 are “normative” 
because they establish (a) obligations for US offici als to make payments, and (b) legal rights for 
eligible producers, users, and exporters to receive the payments.  As used by the Appellate Body, the 
term “normative” includes as a subcategory the gr oup of measures that are mandatory, within the 
meaning of the traditional mandatory /discretionary distinction.   
 25. The United States has acknowledged that the “statutory authority for marketing loan 
payments, step 2 payments, and counter-cyclical pa yments does not provide the Secretary with the 
authority to arbitrarily decline to make  these payments to qualified recipients”.
40  In addition, the 
direct payment provisions of the 2002 FSRI Act simila rly provide that “payment [is] required” and the 
“Secretary shall make direct payments to producers on farms for which payment yields and base acres are established”.
41  Finally, the crop insurance payment provisions of the 2000 ARP Act also create 
“norms” in the form of mandated payments of subsidies for “catastrophic risk protection” and 
“alternative catastrophic covera ge” that “shall” be provide d to all eligible producers.42  Thus, the 
statutory and regulatory provisions mandating payments for each of these five types of subsidies are, 
by any reasonable definition, “normative” measures.     26. The Panel asks further whether Brazil’s r esponse differs depending on whether the payments 
are dependent upon market price cond itions.  The answer is “no”.   
 27. As Brazil has argued before, the fact that  marketing loan, counter-cyclical and Step 2 
payments may not be made due to higher prices does not mean that these subsidy programmes are not mandatory.
43  The focus for deciding whether a measure is mandatory or discretionary is on whether it 
                                                      
37 While a per se claims against non-mandatory measures under Article 5(c) and footnote 13 of the 
SCM Agreement seems possible, the Panel is not faced with  such a situation in this case, as all the measures 
challenged by Brazil are, in fact, of a mandatory nature. 
38 New Shorter Oxford Dictionary, 1993 edition, p. 1941. 
39 Each of these statutory and regulatory provisions were discussed in more detail in paragraphs 312-
341 of Brazil’s 9 September 2003 Further Submission. 
40 US 27 October 2003 Answer to Question 162, para 95.   
41 Brazil’s 9 September 2003 Further Submission, para. 333 citing Section 1103(a) of the 2002 FSRI 
Act. 
42 Brazil's 9 September 2003 Further Submission, para. 319 citing Section 508(b)(1), (2), and 
508(c)(1)(A) of the 2000 ARP Act. 
43 Brazil’s 7 October 2003 Oral Statement, paras. 50-51. WT/DS267/R/Add.2 
Page I-428  
 
provides government officials with the discretion to implement the measure in a WTO-consistent 
manner.
44  But the terms of the statutes/regulations provide no discretion or flexibility to any US 
Government official when low prices trigger the required marketing loan and counter-cyclical 
payments or when high prices lead payments to phase out temporarily.  Rather, price levels are an eligibility condition for payment, similar to cond itioning eligibility of a producer for contract 
payments on his not growing fruits and vegetables.   
 28. Objective conditions, such as market price m ovements, or objective eligibility criteria are not 
appropriately considered in determining whet her a measure gives an implementing official 
“discretion” to act in a WTO-consistent fashion.   For example, the FSC measure payments were only 
available where the income concerned was of fore ign origin.  Despite the fact that non-foreign 
sourced income would thus be excluded from FSC benefits, the measure was still found to threaten 
the circumvention of export subsidy requirements.  Similarly, Step 2 payments are only available if an 
exporter is regularly engaged in the business of exporting upland cotton.  The fact that a USDA 
official cannot legally make a Step 2 payment to  a non-eligible exporter does not make the Step 2 
programme “discretionary”.  And the fact that no marketing loan payments are available for upland 
cotton when the adjusted world price exceeds 52 cents per pound does not mean that the billions of 
dollars of payments made dur ing MY 1999-2002, when prices were below that level, were 
“discretionary”.    29. The United States argues that  measures are “discretionary” if there are any conditions 
attached to payments – regardless of whether th e executive official is permitted to exercise any 
discretion in refusing to make the payment.  Such an interpretation would read out any meaning to the 
“mandatory/discretionary” distinction.  Of course, at some level of abstraction, it is possible to create scenarios under which subsidies might not be paid.  For example, the US Congress could decide to impose actual limits on CCC funding or change  the 2002 FSRI Act to include a cotton “circuit-
breaker” provision to limit cotton payments.   Bu t these theoretical possibilities do not make the 
existing mandatory text of the 2002 FSRI and 2000 ARP Act discretionary.    30. However, even if these existing texts were not  mandatory on their face (which they are), the 
US – Corrosion-Resistant Steel  decision teaches that the Panel must give weight to the long-term 
application of the measure to determ ine its normative character.  The fact that billions of dollars in 
marketing loan, Step 2, counter-cyclical and direct  payment were paid to US upland cotton producers, 
users and exporters of upland cotton over the past four years is highly relevant evidence for that 
determination.  So is the fact that billions more will be paid before the 2002 FSRI ends in MY 2007.  
The provisions of these programmes have never been applied in a “discretionary” manner.  Not a single eligible upland cotton farmer, user or exporter has been denied payment under these 
programmes by USDA officials.  This is because th ere is simply no discretion vested in any US 
official to decide, independent of any objective ma rket conditions or eligibility criteria, not to make 
these payments.  Therefore, they are mandatory within the meaning WTO/GATT precedent, including 
the US – Corrosion-Resistant Steel  decision.   
 
 (c) Does Brazil challenge as "mandatory" the "subsidies" themselves, the subsidy 
programmes or the legal/regulatory provisions for the grant or maintenance of 
those subsidies, or something else?  BRA 
 
Brazil’s Answer
 
 
31. With respect to the Panel’s question, Braz il does not believe that there is any difference 
between the “subsidy programmes” and the “legal/reg ulatory provisions” for the grant or maintenance 
of the subsidies.    
                                                     
 
44 Appellate Body Report, US – 1916 Act , WT/DS132/AB/R, para. 100. WT/DS267/R/Add.2 
Page I-429 
 
 
32. With respect to Brazil’s “ per se ” claim, it challenges as “mandatory” the legal/regulatory 
provisions for the grant or maintenance of the subsidies.45  
 33. Brazil’s “threat of serious prejudice” claim also challenges as “mandatory” the legal/regulatory provisions for the grant or maintena nce of the subsidies.  However, in this claim 
Brazil is not challenging the text of these provisions in the traditional “ per se ” sense, but rather under 
the rationale of the EC – Sugar Exports  precedent.  Under this claim, the mandatory nature of the 
largely unlimited subsidies required to be provided in MY 2003-2007 under the 2002 FSRI Act and 
the 2000 ARP Act (and implementing regulations) is key evidence demonstrating an ongoing, 
significant threat of significant price suppression and increased and inequitable US world market 
shares in the period MY 2003-2007.   
 34. In Brazil’s view, a “threat of serious prejudice” claim is, in the Panel’s word, “something else” – a sui generis  claim.  Brazil considers that the Appellate Body was advising against slavish 
adherence to the “ per se ” and “as applied” labels – intim ately related to the traditional 
mandatory/discretionary distinction – when it cautioned in US – Corrosion Resistant Steel  “against 
the application of this distinc tion in a mechanistic fashion”.
46  If a claimant proves the elements of a 
threat claim, as set out in EC – Sugar Exports  and US – FSC , it succeeds on the merits, regardless 
whether the claim is labelled “ per se ” or “as applied” – terms which are not themselves found in 
Part III of the SCM Agreement.    
35. In the case of a “threat” claim, this note of caution is particularly apt.  In proving its threat of 
serious prejudice claim, Brazil has followed the rationale in EC – Sugar Exports  and US – FSC,  
demonstrating the “mandatory” natu re of the legal/regulatory instruments by which the subsidies are 
paid, together with the unlimited am ount of products that may receive the subsidies, and the extent to 
which those legal/regulatory instruments fail to stem or control the flow of the subsidies.
47  Brazil has 
backed up this evidence with historical data rega rding the unlimited way in which the legal/regulatory 
instruments have been applied to grant payments  to US upland cotton farmers during the period MY 
1999-2002.   36. This data gives context to the nature and extent of the threat posed by the mandatory 
legal/regulatory instruments at hand.  The data is critical, because it demonstrates that even if the 
measures are not mandatory (which they are), the US authorities have always applied the measures in 
a way that would cause serious prejudice.  Since payments have never been withheld, the data 
demonstrates, at the very least, that the US author ities treat the measures as “ normative”, as that term 
was used by the Appellate Body in US – Corrosion Resistant Steel .
48 
 
37. Brazil turns now to its claims regarding the three CCC export credit guarantee programmes.  
As discussed in Brazil’s response to question 257(a )(i), Article 10.1 prohibits circumvention, and the 
threat of circumvention, of export subsidy reduc tion commitments.  As discussed above, Brazil has 
demonstrated actual circumvention with respect to both unscheduled products and at least one scheduled product.  This is somewhat akin to an “as applied” claim agains t guarantees issued under 
the CCC programmes.  It is therefore not releva nt to this claim whether the CCC programmes are 
mandatory or discretionary. 
 38. Brazil has also demonstrated that the three CCC programmes pose a threat of circumvention.  Brazil’s threat of circumvention claims are ag ainst the programmes as such.  With respect to 
unscheduled products, it constitutes threat of circumvention to provide any export subsidies for 
                                                     
 
45 Brazil’s 9 September 2003 Further Submission, paras. 422-423.    
46 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 93. 
47 Brazil refers the Panel to the additional discussion regarding the mandatory nature of the US 
measures and Brazil’s threat of serious prejudi ce claim in its Answer to Question 257(a)(ii) supra . 
48 Appellate Body Report, US – Corrosion-Resistant Steel , WT/DS244/AB/R, para. 93. WT/DS267/R/Add.2 
Page I-430  
 
unscheduled products.  Under US – FSC , it does not appear to be relevant to this claim whether the 
CCC programmes are mandatory or discretionary.  W ith respect to unscheduled products, the test 
under Article 10.1 is whether export subsidies are made available to those products.  With respect to 
scheduled products, the test under Article 10.1 is also not whether the CCC programmes are 
“mandatory” as opposed to “discretionary”.  Rather, the question set out in US – FSC  is whether the 
CCC can “stem[], or otherwise control[], the flow of” CCC export credit guarantees.  Brazil has 
demonstrated that CCC cannot do so.  39. Brazil turns now to its claims under Articles 1. 1 and 3.1(a) of the SCM Agreement, which are 
against the CCC programmes themselves.  Brazil has demonstrated that the CCC programmes confer 
“benefits” per se , within the meaning of Article 1.1(b) of the SCM Agreement (as well as that they are 
financial contributions and are de jure  contingent on export).  Brazil has demonstrated that every time 
a CCC guarantee is issued, a benefit is conferred per se .  This is effectively the equivalent of saying 
that the CCC programmes themselves “mandate” a vi olation, under the traditional meaning of the 
mandatory/discretionary principle. 
 
40. Finally, Brazil’s claims under item (j) of the Illustrative List of Export Subsidies are both against guarantees granted under the three CCC programmes, and against the CCC programmes 
themselves.  First, Brazil has demonstrated that, retrospectively, costs and losses incurred by the 
programmes exceeded premiums collected over a 10-year  period.  This is somewhat akin to an “as 
applied” claim against guarantees issued under the CCC programmes.  It is therefore not relevant to 
this claim whether the CCC programmes are mandatory or discretionary.  Second, Brazil has 
demonstrated that, looking forward, premium rat es for the CCC programmes, and not just premiums 
collected, do not and will continue not to meet costs because they  do not, and are not adjusted to, 
offset credit risks, and are, further, capped at one percent.
49  As statements by USDA’s Office of the 
Inspector General and the US General Accounti ng Office demonstrate, the CCC programmes do not 
have the flexibility under US law to offset credit ri sks and meet costs.  This is effectively the 
equivalent of saying that the CCC programmes themselves “mandate” a violation, under the 
traditional meaning of the mandatory/discretionary principle.  
(d) Does the "requirement" upon the CCC to make available "not less than" $5.5 billion 
annually in guarantees have a normative character and operation? (see, e.g. Brazil's 
response to Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) & 
(b); paragraph 201 of US 18 November furt her rebuttal submissions).  Is this 
requirement "mandatory"?  If so, how does th e CCC have "discretion" not to make this 
amount of guarantees available in a given year?  USA 
 Brazil’s Comment
 
 41. Brazil offered the evidence mentioned by the Panel (as well as evidence regarding CCC’s 
obligation to make available an a dditional annual amount of at least $1 billion in direct credits or 
guarantees for exports to “emerging markets”
50) to demonstrate, with r espect to scheduled products, 
its threat of circumvention claim under Article 10.1 of the Agreement on Agriculture.  Brazil has 
already noted that the test under Article 10.1 is not whether the CCC programmes are “mandatory” as 
opposed to “discretionary”.  Rather, to determin e whether CCC export credit guarantees for scheduled 
                                                      
49 For this reason, Brazil does not agree with the United States that an item (j) analysis necessarily 
“requires a certain retrospecti on” (US 22 December 2003 Answers to Questions, para. 102). 
50 See Exhibit Bra-366 (7 U.S.C. § 5622 note, “Promotion of Agricultural Exports to Emerging 
Markets, para. (a) (“The Commodity Credit Corporation shall make available for fiscal years 1996 through 2002 
not less than $1,000,000,000 of direct credits or export credit guarantees for exports to emerging markets under section 201 or 202 of the Agricultura l Trade Act of 1978 (7 U.S.C. 5621 and 5622), in addition to the amounts 
acquired or authorized under section 211 of the Act (7 U.S.C. 5641) for the programme.”)).  See also Exhibit 
Bra-367 (Section 3203 of the 2002 FSRI Act (extending mandate to 2007)). WT/DS267/R/Add.2 
Page I-431 
 
 
products threaten to lead to circumvention of th e US export subsidy reduction commitments, the test 
set out by the Appellate Body in US – FSC  is whether the CCC can “stem[], or otherwise control[], 
the flow of” CCC export credit guarantees.  Braz il has demonstrated that CCC cannot do so. 
 
(e) Does the US agree that, under the Budget Enforcement Act of 1990, the Office of 
Management and Budget classifies the export credit guarantee programmes as 
"mandatory" (see Brazil's response to Panel Question 142, para. 89)?  Does this exempt 
the programmes from the requirement to receive new Congressional budget authority 
before it undertakes new guarantee commitments (e.g. Exhibit BRA-117 (2 USC 661(c)(2))?  USA  
 
Brazil’s Comment
 
 42. As noted in Brazil’s response to question 25 7(a)(i), Brazil has provided evidence that the 
CCC programmes are “mandatory,” within the meani ng of that term under US law (although that is 
not to say that the CCC programmes are not al so mandatory, within the meaning of WTO/GATT 
law).  
258. Please submit a detailed explanation of th e method by which one could calculate total 
expenditures to producers of upland cotton under th e four relevant programmes on the basis of 
the data which it seeks.  BRA 
 
Brazil’s Answer
 
 43. Brazil appreciates the opportunity to describe to the Panel the methodology that it will apply 
to the data, should the United States produce it on 20 January 2004.  As the Panel noted in its 
12 January Communication, the United States faile d on 18/19 December 2003 to comply with its 
obligation to provide the requested data in a non- “scrambled” form.  Therefore, Brazil is not in a 
position to apply the methodology discussed below and to  present its results to the Panel today.  If the 
United States does not produce non-scrambled and othe rwise complete data responsive to the Panel’s 
request, on 28 January 2004, Brazil will provide furt her comments and make requests as appropriate.   
 
44. Generally, Brazil’s methodology will calcula te the amount of expenditures that support 
upland cotton production by examining farm-specific c ontract and planted acreage data.  For each of 
these farms, Brazil would calculate the amount of contract payments for each crop for which the 
upland cotton farm has base acreage.
51  To that end, for each crop, the amount of contract payment 
units (as provided by the United States52) would be multiplied by the payment rate for the subsidy 
programme (PFC, market loss assistance, direct and counter-cyclical payments) in the marketing year 
in question.53  Brazil will allocate crop contract payments to the respective crop for which they are 
made for each farm, up to the amount of acreage actually planted to that crop.  For example, any contract payment for an upland cotton base acre th at is actually planted to upland cotton is deemed 
                                                     
 
51 These crops include all crops that constitute programme crops for purposes of the PFC, market loss 
assistance, direct and counter-cyclical payment programmes. 
52 In case the United States does not provide the paym ents units with its 20 January 2004 data, they can 
be easily calculated by multiplying the contract acreage fo r a crop with the payment yield for that crop.  The 
payments units are calculated as 85 percent of that figure. 
53 Exhibit Bra-394 (Agricultural Outlook Tables, USDA, November 2003, Table 19 provides payment 
rates  for PFC, direct and counter-cyclical payments in  a column called “income support rates” for marketing 
years 1999-2002.  However, rice payments for MY 2002 a ppear to be reported in er ror, since no rice counter-
cyclical payments were made.  In fact, the full ri ce counter-cyclical payment was made in MY 2002 ( see Exhibit 
Bra-173 (Revised Estimate of Support Granted by Comm odity via Counter-Cyclical Payments)).  The full rice 
CCP is $1.65 ( see Exhibit Bra-27 (“Side by Side Comparison of the 1996 and 2002 Farm Act, p. 2-5) report the 
rice target price as $10.50 per cwt, th e direct payment rate as $2.35 per cwt and the loan rate as $6.50 per cwt, 
resulting in a full CCP payment of $1.65 per cwt or $0.00748 per pound). WT/DS267/R/Add.2 
Page I-432  
 
support to upland cotton.  If non-upland cotton base acres on a farm are planted to upland cotton, payments made for these base acres would also be deemed to constitute support to upland cotton.   
 45. Application of Brazil's methodology would require the writing of a simple computer 
programme that calculates the contract payments th at constitute support to up land cotton for any farm 
in the United States that receives contract payments  and plants upland cotton.   The individual farm 
data would then be tabulated to calculate a tota l amount of expenditures provided in support of the 
production of upland cotton.      46. Brazil provides below additional details concer ning its methodology.  The data that has been 
withheld by the United States will show farms with  many different combinations of base acreage and 
upland cotton plantings.  There may be farms with  more upland cotton base acres than planted acres, 
or with less base acres than planted acres.  There ma y be farms that plant onl y upland cotton, or farms 
that have other programme crops as well.  Finally, farms may have more or less crop base acreage than they plant to programme crops.  Brazil systematically presents below a number of sample farms 
and illustrates how its allocation methodology will be applied to the actual data for each type of 
farms.  47. In a first step, Brazil considers three general categories of upland cotton farms:  (1) those with 
fewer planted upland cotton acres than upland cotton  base acres, (2) those with more planted upland 
cotton acres than upland cotton base acres, and (3) those planting cotton with out any upland cotton 
base acres.
54  The table below illustrates this for the three categories of farms: 
 
Sample Farm No. Farm 1 Farm 2 Farm 3 
Type of Cotton Farm Farm With Cotton 
Plantings Below Cotton Base Farm With Cotton 
Plantings Exceeding Cotton Base Farm With Cotton 
Plantings But No Cotton Base 
Cotton Base 100 acres 100 acres 0 acres 
Cotton Plantings 50 acres 150 acres 100 acres 
Payments Allocated In A First Step Payments for 50 
Cotton Base Acres Payments for 100 
Cotton Base Acres No Payments for 
Cotton Base Acres 
 
Sample Farm 1 plants 50 acres of its 100 upland cotton base acres to upland cotton.  Thus, any 
payments for these 50 upland cotton base acr es constitute support to upland cotton.55  Since contract 
payments for all acres planted to upland cotton are allocated therewith, the calculation ends for this 
farm (and any farm in a similar position).  Any pa yments associated with the other 50 upland cotton 
base acres are not considered, as they do not cons titute support to upland cotton.  Sample Farm 2 
plants 150 acres of upland cotton, but has only 100 acres of upland cotton base.  The entire upland 
cotton base payments, therefore, constitute support to upland cotton.  Sample Farm 3 plants 100 acres 
of upland cotton, but has no upland cotton base.  No  upland cotton base payments can be allocated in 
this case.  Thus, in this overly simple methodolog y, support to upland cotton would be calculated only 
by adding up the amount of upland cotton payments  received on land that currently produces upland 
cotton.  However, Brazil believes the Panel should also include as support to upland cotton contract 
payments on non-upland cotton base acreage that is cu rrently planted to upland cotton.  For example, 
for Sample Farms 2 and 3 above, for which payments for less upland cotton acres than actually 
planted were allocated in this first step, additiona l contract payments made for other contract crop 
base could be allocated as support to upland cotton in a second step, provided they are available on 
                                                      
54 In later steps, Brazil will discuss what happens when the farms have other crop contract payment 
base and how this may be allocated. 
55 The amount payments results from multiplying the pa yment rate for the contr act crop, including for 
upland cotton, by the amount of base acres involved.  The respective contract payment amounts to 85 per cent of 
this figure.  Payment rates are published by USDA, see Exhibit Bra-394 (Agricultural Outlook Tables, USDA, 
November 2003, Table 19). WT/DS267/R/Add.2 
Page I-433 
 
 
the farm.  These additionally allocated contract paym ents stem from contract payments made for other 
crops and not allocated to these other crops.  48. However, as with upland cotton contract paymen ts, any contract payments for other crop base 
would be primarily assigned as support to the prod uction of those crops.  As with upland cotton 
contract payments, any other programme crop base payments are treated as support to those crops up 
to the amount of base acreage that is actually plante d to the respective programme crop.  Payments on 
any further base acreage for those programme crops ar e allocated to the crops for which planted acres 
exceed base acres.  The following table il lustrates this for Sample Farm 4: 
 
Sample Farm 4    
Crop Cotton Rice Corn 
Crop Base 100 acres 100 acres 100 acres 
Crop Plantings 160 acres 40 acres 100 acres 
Crop Base Allocated as 
Support for the Crop in Question 100 acres 40 acres 100 acres 
Remaining Crop Base 
Available for 
Allocation 0 acres 60 acres 0 acres 
Crop Plantings To 
Which Additional 
Payments Will Be Allocated 60 rice acres 0 acres 0 acres 
 
Sample Farm 4 plants three crops (upland cotton, ri ce and corn) having 100 base acres for each crop.  
All 100 corn base acres are planted to corn and, thus , any corn contract payments made for the corn 
base constitute support to corn.  However, only 40 of the 100 rice base acres are planted to rice and, 
consequently, only payments for those 40 rice base acres constitute support to rice.  Sample Farm 4 
plants 160 acres of upland cotton, but has only 100 upland cotton base acres.  Thus, all payments on 
the entire 100 upland cotton base acres represent support to cotton.  In addition, payments for the 60 
rice base acres not planted to rice but to upland co tton also represent support to upland cotton.   
 49. Sample Farm 4 was a farm for which the tota l base acreage and the total acreage planted to 
programme crops were equal.  However, there may be instances in which farms plant more (or less) 
acreage to programme crops than they used to do in the past establish ing their base acreage. 
 50. The following two tables explain how Brazil’s methodology addresses the issue of farms that plant more acreage to programme crops than they have base acreage (Sample Farm 5) and farms that 
plant less acreage to programme crops than they have base acreage (Sample Farm 6).
56  In Brazil’s 
methodology, payments available for allocation – i.e., not allocated to the programme crop itself – are 
pooled and allocated proportionally to  the remaining programme crop acreage.57  Brazil’s approach of 
pooling payments from additional base acres not planted to the respective programme crop and 
allocating these payments proportionally as support  to crops, for which plantings exceeds base 
acreage, ensures that a single dollar is not allo cated to two different crops, resulting in double 
                                                      
56 Brazil exemplifies the principle for farms with less upland cotton base than upland cotton plantings, 
but the same principle applies to farms without any upland cotton base. 
57 Since the United States has not provided the data necessary to do this allocation, Brazil has no 
information on how often such situations actually occur.  However, the record strongly suggests that not many 
farms would be able to plant more program crops than they have base acreage.  In particular for upland cotton, Brazil has demonstrated that it is not economically po ssible to produce this crop w ithout contract payments.  See 
inter alia  Brazil’s 2 December 2003 Oral Statement, paras.  26-27 and Exhibit Bra-353 (Cumulative Loss From 
Upland Cotton Production MY 1997-2002 Without Contract Payments). WT/DS267/R/Add.2 
Page I-434  
 
counting.
58  It also ensures that each contract paymen t dollar is allocated to a programme crop, as 
exemplified by the calculations for Sample Farms 5 and 6 below.  51. The first table shows the allocation of contr act payments on Sample Farm 5, a farm with 
fewer planted (370 acres) than base acres (400 acres). 
 
Sample Farm 5     
Crop Cotton Corn Wheat Rice 
Crop Base 100 acres 100 acres 100 acres 100 acres 
Crop Plantings 140 acres 120 acres 40 acres 70 acres 
Crop Base 
Allocated as 
Support for the 
Crop in Question 100 acres 100 acres 40 acres 70 acres 
Remaining Crop 
Base Available for Allocation 0 acres 0 acres 60 acres 30 acres 
Crop Plantings To 
Which Additional Payments Will Be Allocated 40 acres 20 acres 0 acres 0 acres 
Pooled Available 
Crop Base 60 Wheat Base Acres and 30 Rice Base Acres 
Allocated Share 
of Payments on 
Pooled Crop Base 40/60th or 2/3rd 20/60th or 1/3rd 0 0 
Allocation 100 Cotton Base 
Acres and 2/3rd of 60 Wheat and 30 Rice Base Acres (40 and 20) 100 Corn Base 
Acres and 1/3rd of 60 Wheat and 30 Rice Base Acres (20 and 10) 70 Wheat Base 
Acres 30 $rice Base 
Acres 
 52. The second table shows the allocation of contr act payments on Sample Farm 6, a farm with 
more planted (410 acres) than base acres (400 acres). 
                                                     
 
58 The United States alleges that Brazil’s 14/16th methodology would allocate the same contract 
payments to two different crops resulting in double counting ( see e.g.  US 2 December 2003 Oral Statement, 
para. 27).  The US claim about double counting by Brazil originates in an entirely erroneous understanding of 
Brazil’s 14/16th methodology.  As explained many times, Brazil used this methodology only as a proxy, since 
the United States refused to provide the very data th at would allow the calculati on of the exact amount of 
support to upland cotton from contract payments.  It makes the assumption that for any acre planted to upland 
cotton an average contract payment in the amount of an upland cotto n contract payment is received. WT/DS267/R/Add.2 
Page I-435 
 
 
 
Sample Farm 6     
Crop Cotton Corn Wheat Rice 
Crop Base 100 acres 100 acres 100 acres 100 acres 
Crop Plantingq 125 acres 125 acres 80 acres 80 acres 
Crop Base 
Allocated as 
Support for the Crop in Question 100 acres 100 acres 80 acres 80 acres 
Remaining Crop 
Base Available for Allocation 0 acres 0 acres 20 acres 20 acres 
Crop Plantings To 
Which Additional Payments Will Be 
Allocated 25 acres 25 acres 0 acres 0 acres 
Pooled Available 
Crop Base 20 Wheat Base Acres and 20 Rice Base Acres 
Allocation 100 Cotton Base 
Acres and 1/2 of 
20 Wheat and 20 Rice Base Acres (10 and 10) 100 Corn Base 
Acres and 1/2 of 
20 Wheat and 20 Rice Base Acres (10 and 10) 80 Wheat Base 
Acres 30 Rice Base 
Acres 
 
53. In both cases, the contract payments on wheat and rice base acres that are not allocated to production of these crops (as current plantings are below the base acreage) are pooled.  The resulting 
amount of contract payments is distributed as suppor t to upland cotton and corn with the share of both 
crops corresponding to the ratio of plantings to which additional payments are allocated.
59  
 
54. This same principle would be  applied for farms that have no upland cotton base acreage .  For 
these farms, contract payments would be allocated to upland cotton solely from the pool of payments 
made on crop base not planted to the respective progra mme crop.  This is illustrated in the table below 
(Sample Farm 7).  
Sample Farm 7    
Crop Cotton Rice Corn 
Crop Base 0 acres 100 acres 100 acres 
Crop Plantings 100 acres 50 acres 50 acres 
Crop Base Allocated as 
Support for the Crop in Question 0 acres 50 acres 50 acres 
Remaining Crop Base 
Available for 
Allocation 0 acres 50 acres 50 acres 
Pooled Available Crop 
Base 50 Rice Base Acres and 50 Corn Base Acres 
Crop Plantings To 
Which Additional Payments Will Be Allocated 50 Rice Base Acres 
and 50 Corn Base Acre 0 acres 0 acres 
                                                      
59 Additional payments will only be allocated to planted crop acres exceeding the amount of base 
acreage. WT/DS267/R/Add.2 
Page I-436  
 
 55. For Sample Farm 7 with no upland cotton base but 100 acres of upland cotton plantings, 
contract payments would be allocated from the rice and corn base not allocated to these crops.  In this 
case payments on 50 rice and 50 corn base acres are a llocated to upland cotton.  On average, the per-
acre payment from those crop base acres is similar to the amount of upland cotton base acre 
payments.WT/DS267/R/Add.2 
Page I-437 
 
 
ANNEX I-11 
 
ANSWERS OF THE UNITED STAT ES TO FURTHER QUESTIONS 
FROM THE PANEL TO THE PARTIES  FOLLOWING 
THE SECOND PANEL MEETING 
 
20 January 2004 
  
257. The Panel takes note of the Appellate Body  Report in United States – Sunset Review of 
Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (DS244), 
which was circulated to WTO Members on 15 Dece mber 2003.  The Panel is aware that this 
report has yet to be adopted by the Dispute Settlement Body.  Nevertheless, the Panel asks the parties to respond to the fo llowing related questions. 
 
(d)   Does the "requirement" upon the CCC to  make available "not less than" $5.5 billion 
annually in guarantees have a normative charact er and operation? (see, e.g. Brazil's response to 
Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) & (b); paragraph 201 of US 18 November further rebuttal submissions) .  Is this requirement "mandatory"?  If so, 
how does the CCC have "discretion" not to make th is amount of guarantees available in a given 
year?  USA  
 
1. With respect to the Panel’s first question,  the United States notes that the Appellate Body’s 
discussion of the “normative character and operation” of an instrument came in the context of its 
explanation of how to determine whether an instrume nt is a “measure” subject to challenge in dispute 
settlement and that the Appellate Body distinguis hed this question from the separate question of 
whether the instrument, if a measure, ma ndates a breach of a WTO obligation under a 
“mandatory/discretionary” analysis.
1  The Appellate Body explicitly noted that it was not undertaking 
a comprehensive examination of the relevance or si gnificance of that analysis and, indeed, simply 
applied it.2  An analysis of the normative character a nd operation of this “requirement” to make 
available not less than $5.5 billion in guarantees is not necessary because the parties do not dispute 
whether the “requirement” is a “measure.”  
 
2. Under a “mandatory/discretionary” analysis, the relevant question would be not whether the 
requirement to make available $5.5 billion in gua rantees per year is as such inconsistent with a 
provision of the WTO agreements (since Brazil has not  claimed that it is), but rather whether the 
provisions establishing the export credit guarant ee programmes mandate a breach of any WTO 
obligation.  As we have explaine d, they do not.  As an initial matter, the requirement that the CCC 
“make available . . . not less than $5,500,000,000 in credit guarantees” does not mandate that the CCC 
actually issue any particular level of credit guarantees.3  This law merely requires that CCC “make 
available” certain guarantees; the actual issuance of guarantees, however, is within the discretion of 
the Commodity Credit Corporation, which “may guara ntee the repayment of credit made available to 
                                                      
1 Appellate Body report, United States - Sunset Review of Anti-Dumping Duties on Corrosion-Resistant 
Carbon Steel Flat Products from Japan (“US -Sunset Review) , WT/DS244/AB/R, adopted 9 January 2004, 
paras. 78, 81-82, 89, and 93. 
2 US Sunset Review , paras. 93, 156, and 172-174. 
3 As the United States has previously noted, except for programme year 1992, CCC has never  issued 
$5.5 billion in guarantees in any year during the period 1992 to the present.  Sales registrations have been as low 
as $2.876 billion for programme year 1997 and have generally hove red in the range of $3.0  billion - $3.2 billion.  
Further Rebuttal Submission of the United States (18 November 2003), para. 201; US Further Submission 
(30 September 2003), para. 148 and accompanying table entitled CCC Export Credit Guarantee Program Levels, 
Annual President’s Budgets and Actual Sale s Registrations, Fiscal Years 1992-2004. WT/DS267/R/Add.2 
Page I-438  
 
finance commercial export sales of agricultural commodities”.
4  The statute makes clear that “[e]xport 
credit guarantees issued pursuant to this section shall contain such terms and conditions as the 
Commodity Credit Corporation determines to be necessary”.5 
 3. The United States has elsewhere noted the various discretionary elements in the operation of 
the programme that tamp down the actual issuan ce of guarantees.  These include the regulatory 
authorities permitting non-issuance of guarantees with respect to any individual application for an 
export credit guarantee or to suspend the issuance  of export credit guarantees under any particular 
allocation; limitations on commodities with respect to  which guarantees may be made available, total 
guarantee value for individual commodities, destinati on,  time within which export must occur, and 
internally established exposure limits applicable to individual bank obligors.
6 
 4. Furthermore, and more importantly, Brazil’s own approach would require a showing that the 
programmes mandate that the premium rates will be  insufficient to cover long-term operating costs 
and losses of the programmes.  Brazil has not made such a showing, for the simple reason that the 
programmes do not so mandate.  The Commodity  Credit Corporation (“CCC”) has discretion 
concerning numerous aspects of any guarantees it ma y issue, such as the destinations, types of 
commodities, and length of term of the guarantee.  Al l of these aspects could affect the question of the 
long-term operating costs and losses of the programm es.  For example, the credit risk involved in 
some destinations may be less than for others.  Simila rly, the risk associated with a guarantee of credit 
extended for one year may be less than  for credit extended for three years. 
 
5. Thus, while the provisions establishing the export credit guarantee programmes are measures, 
they do not mandate an inconsistency with any WT O obligation.  Putting aside the US argument that 
export credit guarantees are not subject to export subs idy disciplines by virtue of Article 10.2 of the 
Agreement on Agriculture until Members conclude  their ongoing negotiations and agree on such 
disciplines, there is no basis to presume, on the basis of the law itself, that the export credit guarantee 
programmes provide export subsidies and threaten to lead to circumvention of US export subsidy 
reduction commitments.
7  Because the CCC retains the discretion to issue particular guarantees and 
attach terms and conditions as set out above, the statute alone does not allow a presumption that 
premium rates will be insufficient to cover long-te rm operating costs and losses of the programmes.  
Thus, Brazil’s argument that the CCC is mandated to “make available” $5.5 billion in export credit 
guarantees cannot alter the fact that the CCC has disc retion to control the guarantees actually provided 
and the terms of those guarantees; as a re sult, no WTO inconsistency is mandated. 
 
(e)  Does the US agree that, under the Budget  Enforcement Act of 1990, the Office of 
Management and Budget classifies the export credit guarantee programmes as "mandatory" 
(see Brazil's response to Panel Question 142, para. 89)?  Does this exempt the programmes from 
the requirement to receive new Congressional  budget authority before it undertakes new 
guarantee commitments (e.g. Exhibit BRA-117 (2 USC 661(c)(2))?  USA  
 
6. The Budget Enforcement Act of 1990 (“BE A”) divides spending into two types: 
“discretionary” spending and “direct” spending.8  “Discretionary” spending means budget authority 
                                                      
4 7 U.S.C. 5622(a)(1), (b); see also id.  5622(k) (imposing requirement that certain percentages “of the 
total amount of credit guarantees issued  for a fiscal year [be] issued ,” not merely made available, with respect to 
certain products) (italics added). 
5 7 U.S.C. 5622(g). 
6 US First Written Submission (11 July 2003), fn. 134; 7 C.F.R. Sections 1493.10(d), 1493.40(b) 
(Exhibit US-6); US Answer to Panel Question 5 (11 August 2003), para. 12 (Exhibit US-12); US Rebuttal 
Submission (22 August 2003), paras. 180-182; US Further Submission (30 September 2003), paras. 153-156; 
US Answer to Panel Question 142 (27 October  2003), paras. 56-57. 
7 See Brazil’s Answer to Question 142 from the Panel, para. 88 (27 October 2003). 
8 See OMB Circular A-11 (2003), Section 15: Basic Budget Laws (available at: 
http://www.whitehouse.gov/ omb/circul ars/a11/current_ year/s15.pdf). WT/DS267/R/Add.2 
Page I-439 
 
 
controlled by annual appropriations acts and the ou tlays that result from that budget authority.  
“Direct” spending (commonly referre d to as “mandatory” spending)9 means budget authority and 
outlays resulting from permanent laws as well as “entitlement authority”.10  That is, whether spending 
is “mandatory” for purposes of the BEA is an ac counting classification issue and does not control 
whether a measure is “mandatory” for a mandatory  / discretionary analysis for WTO purposes.  
 
7. The Office of Management and Budget cl assifies the export credit guarantee programmes as 
“mandatory” because the “budget authority is prov ided by law other than appropriation Acts”.11  As a 
result, although the export credit guarantee progra mmes are exempt from the ordinary requirement 
that budget authority be provided in advance through annual appropriations acts, they remain subject 
to the continuing availability of budget authority in  law other than annual appropriations legislation.  
Of note, the Office of Management and Budge t has also recognized: “While mandatory and 
discretionary classifications are used for measuring compliance with the BEA, they do not determine 
whether a programme provides legal entitlement to a payment or benefit ”12 (italics added).  Thus, the 
classification of these programmes as “mandatory” for purposes of the BEA merely means that the 
budget authority is not “discretionary”, th at is, “provided in appropriation Acts”.13  This accounting 
classification does not alter CCC’s considerable discre tion in operating the pr ogrammes, as explained 
in more detail in the US answer to Question 257(d), and does not make the programmes “mandatory” 
for purposes of a mandatory/discretionary analysis. 
                                                      
9 See OMB Circular A-11 (2003), Section 20: Terms and Concepts (available at: 
http://www.whitehouse.gov/omb/circu lars/a11/current_ year/s20.pdf). 
10 This distinction between discretionary spending, mandatory direct spending and mandatory 
entitlement spending is reflected in the applicable stat utory definitions.  2 U.S.C. Section 900(7) and 900(8) 
provide:  
“(7) The term ‘discretionary appr opriations’ means budgetary resources  (except to fund direct-spending 
programmes) provided in appropriation Acts. 
 
“(8) The term ‘direct spending’ means— (A) budget authority provided by law other than appropriation Acts; 
(B) entitlement authority; and 
(C) the food stamp programme 
11 2 U.S.C. 900(8). 
12 OMB Circular A-11 (2003), Section 20.9 (emphasis added). 
13 2 U.S.C. 900(7).