In evaluating the proposed cotton policy regime in the EU, which consists of a combination of a fully decoupled single farm payment and a production-linked area payment scheme, two main conclusions can be drawn from the simulation results: first, if the proposed policy regime would have been in effect during the reference period (2000-2003), cotton producers would have, on average, been better-off compared to the present policy regime. The magnitude of change, i.e., the additional farm income, depends clearly on the value of the supply elasticity. Second, the proposed policy regime would have also resulted in savings to taxpayers in supporting cotton farmers. This could be achieved by reducing the amount not necessarily transferred to producers. In this sense and in a second best world, the proposed policy regime may be viewed as a Pareto improvement compared to the present policy regime. Thus the qualitative results of this study confirm Council's expectation that the proposed policy regime will increase TES and it will lead to an improvement in cotton farmers income, measured in terms of producers' surplus.
On the other hand, the simulation results support the OECD (2001a) assertion that an area payment scheme, even when implemented with a requirement to plant, is more efficient in transferring income to farmers and less production distorting than market price support (i.e., the present cotton policy regime). Even though the area payment scheme with a fully decoupled single farm payment increases TES and the rate of decoupling, it is not sufficient to eliminate deadweight loss. Thus there is still a portion of total taxpayers' support that would not be transferred to cotton producers. This portion is estimated to be less than 6 or 7 percent of total budgetary cost. Nevertheless, the predicted decrease in unginned cotton production will result in greater under-utilization of ginning capacity in both Greece and Spain, but the problem is expected to be bigger in Spain where there is significant under-utilization of capacity even with the present policy regime.
Finally, we would like to mention that national authorities might face some difficulties in implementing the proposed policy regime, particularly the area payment scheme. Given the high annual variability of the world price for ginned cotton, which induces uncertainty to the price of unginned cotton, national administrators of the proposed policy regime should find efficient ways of setting appropriately the per unit area payment in a year-to-year base. Since the area payment is a production-linked measure, these decisions will directly affect farmers' production decisions regarding the area of land to be planted with cotton. Thus, instead of only output price risk, farmers may face some policy-induced uncertainty related to the area payment. These problems could be avoided if the area payment was based on historical references and thus was fully decoupled. In that case, however, production would have been reduced even further.
