The move comes after the U.S. government met the last of three conditions Brazil had set for suspending import duties on U.S. goods.
Washington will give Brazil about $147.3 million per year in damages to be used for a "technical assistance" fund to benefit farmers.
The fund may also be used to support the cotton sector in in countries in sub-Saharan Africa and in Haiti, the U.S. Department of Agriculture said in a statement on the agreement with Brazil.
"The fund is scheduled to continue until the next Farm Bill or a mutually agreed solution to the Cotton dispute is reached," the statement said.
"During the next 60 days, the United States and Brazil will continue their work by negotiating a framework for reaching a mutually agreed solution to resolve the Cotton dispute," the USDA said.
Previously the United States had agreed to make some short-term tweaks to its export credit guarantees and to reduce barriers to pork and beef imports from Brazil.
Brazil was set to impose tariffs and lift intellectual property right protections on $829 million of U.S. goods, which would have been its right after a 2009 World Trade Organization ruling against U.S. cotton subsidies.
Earlier this month it suspended the measures for two weeks to try to reach an agreement.
Over the next two months Brazil and the United States will attempt to hammer out the details to an agreement they have reached in principle.
Brazilian President Luiz Inacio Lula da Silva has already celebrated the accord as a done deal.
"Thank God, we reached an accord and cotton will lose subsidies and poor countries of Africa like Benin ... will be able to live more comfortably and export cotton to the world market," Lula said during a ceremony in the capital Brasilia.
Diplomats, trade experts and business leaders are closely watching the case, one of a few in which the World Trade Organization has allowed the wronged party to retaliate against a sector not directly involved in a dispute. Brazil would be the first country to apply cross-retaliation under WTO rules. (Reuters)
