provided in section 15 (c) of the act, and for refunds on goods exported as provided in section 17 (a) of the act, net collections from the processing tax on cotton are expected to amount to about $116,000,000. No allowance is made in this calculation for receipts from the floor stocks tax on cotton products, since refunds are to be made on floor stocks when the tax is wholly terminated. Exhibit 1 of this report shows the estimated receipts and expenditures in connection with the cotton production control program.

EFFECT OF THE TAX

Two factors make the processing tax on cotton of slight effect on prices received by producers. First, the United States normally exports between 55 and 60 percent of its cotton crop. Since no tax is levied on cotton for export, the price to foreign buyers is not appreciably affected by the processing tax on domestic consumption, and the price paid by domestic mills cannot be less than that offered by foreign buyers. The tax, therefore, is an additional cost attached to cotton in domestic consumption, over and above the export price for cotton. It does not increase the price to foreign buyers or place American cotton or cotton goods on an unfavorable competitive basis abroad. Second, the domestic demand for textile materials is relatively inelastic. Domestic mills will pay relatively high prices for cotton and consume large amounts of it when the consumer demand is strong, but when demand is weak consumption is decreased, even though prices are low.

Reviewing the trend of cotton prices for the year, it is found that the price received by producers ranged from 5.5 cents per pound to 6.1 cents per pound during the period from January through April. With the inauguration of the cotton acreage program, the decline in the value of the dollar, and the improvement of business activity, cotton prices rose. A part of the rise was undoubtedly speculative, and prices of industrial stocks were affected in much the same way as cotton prices. At the peak reached in July, prices received by farmers averaged 10.6 cents per pound. In August and September, prices to producers averaged 8.8 cents per pound, then rose to an average of 9.6 cents for November and December. Although they lost a part of the mid-summer rise, prices to producers since the establishment of the cotton processing tax have been above those of any month in the previous 2 years with the exception of July 1933. For the 1932-33 cotton year, prices received by producers averaged 6.5 cents per pound, compared with 5.7 cents per pound for the previous year. There is no evidence that prices to producers have been materially affected by the cotton processing tax. (Further details of the effect of the processing tax will be found in Chapter 16 of this report headed "Incidence of Processing Taxes.")

COTTON CONSUMPTION ACCELERATED

With the improvement in domestic business activity and the rise in prices, cotton consumption in the United States rose from 441,203 bales for the month of February 1933 to 697,261 bales for the month of June. If the rate of consumption during June had continued, an annual consumption of more than 8,367,000 bales would have resulted. This is higher than domestic consumption has ever been, even in years of peak prosperity.. Although demand had improved

significantly it was not to be expected that consumption could long be maintained at such record level. Consumption fell somewhat in July, but was still at the high level of 600,000 bales. It continued to recede in August and September after the tax was imposed. The rates of consumption were 588,570 bales in August, 499,486 in September, 503,873 in October, 475,368 in November, and 348,393 in December. For each month up to December, after the processing tax went into effect, domestic cotton consumption, despite the moderate recession from the summer high point, was above that for the corresponding month of any year since 1929. If the rate of consumption during the first quarter of 1933-34 is continued throughout the year, domestic cotton consumption will total 6,368,000 bales, which is higher than the consumption for any year since 1928-29. It is evident, therefore, that the cotton processing tax has not prevented a satisfactory recovery in cotton consumption. Its adverse effects have been limited to certain instances in which cotton is in competition with other commodities.

One of the very important problems arising with respect to the processing tax on cotton is the burden that it may put on consumers of cotton products. Prices of cotton goods to consumers rose sharply during the spring and early summer of this year. In many instances this rise was greater than could be attributed to the rise in raw cotton prices, demonstrating that manufacturers' margins had increased. (It should be noted, however, that these margins were unusually narrow at the beginning of 1933.) Later in the summer increased wages per hour, under N.R.A. codes, were followed by further widening of margins between raw cotton and finished cotton articles.

PER CAPITA COST SMALL

As noted above, net receipts from the cotton processing tax are expected to amount to $116,000,000 for cotton consumed during the marketing year 1933-34. This is equivalent to approximately 93 cents per person in the United States during the year, or less than 8 cents per month. The Agricultural Adjustment Administration has given close attention to determine whether the processing tax is being used as an excuse for charging exorbitant prices to consumers. Since the cotton processing tax has made possible the cotton adjustment program of 1933, which was accompanied by an increase in actual and potential incomes to cotton producers of $431,760,000, as indicated by December estimates of the value of the crop and payments and option profits obtained by cotton producers, it is probable that the benefits to wage earners from the stimulus to business activity much more than offset the burden of the tax.

CONVERSION FACTORS

At the time the cotton processing tax was established, it was necessary, for purposes of convenience and for other reasons, to have a simplified set of conversion factors, or percentages, for calculating the amount of raw cotton contained in various finished products. Thereafter a comprehensive study was made of the wastes involved in manufacturing cotton articles and, effective December 1, a more elaborate set of conversion factors was established. Under the new regulations approximately 500 conversion factors have been established, and a figure for noncotton content has been established for each article.

COMPETITIVE COMMODITIES

In order not to destroy market outlets for basic agricultural commodities with respect to which processing taxes are established, the. Agricultural Adjustment Act provides that compensatory taxes shall be established on commodities found to compete with basic agricultural commodities where the tax on the basic commodity will result in excessive shifts in consumption between such commodities or products thereof. On July 31 and August 1 a formal hearing was held upon commodities alleged to compete with cotton. Although considerable testimony was introduced at that hearing, the evidence was not considered adequate for the determination of whether or not competition exists within the meaning of section 15(d) of the act. Accordingly, intensive study of this problem was begun. Subsequent hearings on specific commodities alleged to compete with cotton were held on October 2, 3, and 4, and November 9 and 10.

It has been found that the cotton processing tax is causing and will cause the processors of cotton disadvantages in certain fields in competition from jute and paper. Compensatory taxes have been established upon processing of jute fabric into bags, and the processing of jute yarns into twines of 275 feet and longer per pound. Both of these taxes are at the rate of 2.9 cents per pound of jute processed. A compensatory tax has also been established on the processing of paper into the following products: Multiwall bags, 2.04 cents per pound; coated paper bags, 3.36 cents per pound; open-mesh paper bags, 2.14 cents per pound; paper towels, 0.715 cent per pound; and gummed paper tape, 4.06 cents per pound. The rates of these compensatory taxes were determined according to the formula laid down for such taxes in the Agricultural Adjustment Act, which is: "If the Secretary of Agriculture finds * * * disadvantages in competition exist or will exist * * * the compensating rate of tax on the processing" of the competing commodity shall be that "necessary to prevent such disadvantages in competition. * In no case shall the tax imposed upon such competing commodity exceed that imposed per equivalent unit, as determined by the Secretary, upon the basic agricultural commodity." Net revenue from compensatory taxes will probably be at an annual rate of between $10,000,000 and $12,000,000 for jute and about $3,000,000 for paper.

* *

The alleged competition between cotton and certain other commodities is still under investigation.

IV. HANDLING OF COTTON FOR OPTION CONTRACTS

Acquisition of cotton for carrying out the Government's option contracts with producers, specific provision for which had been made in the Agricultural Adjustment Act, was assigned to the Agricultural Adjustment Administration on June 5. To a major extent, the transaction developed out of Federal Farm Board stabilization operations in which the Government acquired interest in a large amount of cotton. By June 7 an agreement had been reached between the Secretary of Agriculture and the Farm Credit Administration as to the terms, conditions, and provisons applicable to acquisition of this cotton. It provided that the Secretary of Agriculture take over at once nearly 2,400,000 bales and this consisted of 455,200 bales of cotton represented by future contracts on the New York Cotton Exchange; 1,128,774 bales of actual cotton, then in process of being acquired by

the Farm Credit Administration from the American Cotton Cooperative Association; and a quantity of cotton, estimated at 788,000 bales, commonly known as "seed and crop production loan cotton", being cotton pledged by producers to the Secretary of Agriculture to secure loans made by the Secretary for crop production during several years preceding 1933. Jurisdiction over this production-loan cotton had passed from the Secretary of Agriculture to the Farm Credit Administration by virtue of an Executive order dated May 27, 1933, according to which this cotton was to be reduced to possession by the Farm Credit Administration and assigned to the Secretary of Agriculture.

WEIGHT OF ACTUAL COTTON VARIES

All of the figures were to some extent an approximation, with due allowance to be made for such excess or deficiency as might develop from an actual checking of the cotton. (It should be explained that wherever in this report actual or spot cotton is referred to, the figures designate what are known as "box" or "ginned" bales, that is to say, bales as they come from the cotton gin of an irregular weight ranging from 350 to 600 pounds each. Where reference is made to futures contracts, or bales optioned, the figures designate bales of an even-running weight of 500 pounds each of an average grade of middling and staple seven-eighths inch. For example, 152,800 bales of futures contracts averaging 500 pounds each may be exchanged for 144,561 bales of actual cotton averaging 528 pounds each. The aggregate weight would be the same.)

The amount of cotton futures held by the Secretary was increased from 455,200 to approximately 950,000 bales when the Farm Credit Administration, in lieu of delivering production loan cotton in the form of actual cotton, substituted cotton futures contracts. Later, deliveries of actual cotton reduced the amount of futures to approximately 835,000 bales.

Also, some of the actual cotton delivered to the Secretary by the Farm Credit Administration had to be converted into futures. This consisted of nearly 100,000 bales of long-staple cotton, that is, cotton measuring 16 inches or more in staple. In that form it was not suitable for meeting the options offered to producers, which were based on -inch middling cotton. Hence the Secretary determined to sell, as rapidly as the market would absorb it, all of the extra-staple cotton, replacing it with cotton futures contracts, which would represent bales of cotton uniform as to grade, staple, and weight and easily disposed of.

COMPTROLLER GENERAL GAVE APPROVAL

Under date of July 10, 1933, therefore, the Secretary addressed a communication to the Comptroller General of the United States, asking, in advance, approval of the Comptroller of his action in taking over the Farm Credit Administration cotton futures contracts and outlining a proposed method of handling these contracts. By letter dated July 18, 1933, the Comptroller General approved the plan as outlined.

In accordance with this plan, the Secretary sold 15,497 bales of the long-staple cotton. These sales were for delivery on installments running through a period of months. The premiums for extra staple were agreed upon at the time of the sale and the base price was to be fixed

by the buyer at his discretion. Up to the time of this report 10,398 bales of this cotton had been delivered and the price fixed and the proceeds collected. Against this the Secretary had purchased 9,200 bales of futures, thus replacing the cotton that had been delivered. Purchase of more futures to replace the remaining 5,122 bales when and as they should be delivered was contemplated.

SUPPLY OF ACTUAL COTTON INCREASED

The amount of actual or spot cotton acquired by the Secretary from the Farm Credit Administration was 1,582,400 bales. Later, when the cotton pool described elsewhere in this report was created for the handling of the optioned cotton, it was found advisable to increase the stock of spot cotton, so as to be prepared to meet the offers of option holders wishing to join the pool. It happened that among the futures acquired from the Farm Credit Administration were 152,800 bales represented by December futures contracts and 64,800 bales represented by January futures contracts-an aggregate of 217,600. When the need for increasing the amount of actual cotton arose, this was accomplished by taking 217,600 bales against the December and January futures, accepting delivery of this number of bales of cotton from cotton merchants who had outstanding short futures contracts and giving in return long futures contracts. Thus futures contracts for 217,600 bales were canceled off the exchange. The supply of actual cotton in the hands of the Secretary was thereby increased to 1,800,000 bales.

As the matter stood, on January 1, 1934, the Secretary of Agriculture had acquired 1,800,000 bales of actual cotton of varying net weight-the equivalent of 1,869,000 bales of 500-pound weightand 618,300 bales of futures contracts. Except for final formalities, this completed the acquisition of cotton from the Farm Credit Administration and made available a total of 2,487,300 bales for meeting the options held by cotton growers. No transactions in either futures or actual cotton were carried on except those made necessary in carrying out the terms of section 3 of the act.

COTTON HANDLED FOR SECRETARY BY COOPERATIVES

Physical handling of the more than 1,500,000 bales of actual cotton acquired by the Secretary directly from the Farm Credit Administration was carried on by two cotton cooperatives under contract with the Secretary. At the time of its acquisition, this cotton was being handled by the American Cotton Cooperative Association and its subsidiary organizations under contracts or agreements with the Federal Farm Board, the Department of Agriculture, or other governmental agency. Investigation showed that the most economical and satisfactory method of handling the cotton would be to make the American Cotton Cooperative Association-which had the necessary personnel, quarters, tabulating machines, and equipment for handling the enormous volume of cotton-the agent of the Secretary, performing all the services of a factor. The association agreed to market the cotton for a carrying charge of 25 cents per bale per annum and a selling charge of 50 cents per bale, but it was provided that the carrying charge should not be paid for the year in which the cotton was sold.