Cotton and International Trade: Unfair Prices for the Developing World
In
the post WTO era, ever since agriculture was opened
up to free global trade, world prices of cotton have
witnessed a sharp and steady decline. Despite the
avowal to cut protection in agriculture, the post WTO era has not seen any reduction in protection that
is being given to farmers in rich developed countries
like the US and the European Union. The subsidies
given by the US to its cotton farmers have largely
been accepted to be the reason for the spectacular
decline in cotton prices at a global level.
The reason for this is that since the government provides
a large range of domestic support, US cotton farmers
increase their production unlimitedly and in much
excess of domestic demand. This excess is then dumped
in the international market, which makes the world
cotton supply much larger than demand and brings down
cotton prices. This is possible since the US has various
export promotion programmes like credit promotion
and other direct payments for making US cotton globally
competitive, which, though disguised as non-subsidies,
actually help to dump this surplus in the international
market. Some of it is given as compensation to US
farmers if their actual price is higher than the world
price (See step 2 payments in
the box below). This obviously encourages the
US producer to dump a huge supply on the international
market. Not surprisingly, world prices have declined
steadily since 1995 and reached a 29 year low in 2001.
While Cotton prices have declined by more than 60
percent since 1995, U.S. subsidies to its 25,000 cotton
farmers reached 3.9 billion dollars in 2001-02, double
the level of subsidies in 1992. Interestingly, the
value of subsidies provided by American taxpayers
to the cotton barons of Texas and elsewhere in 2001
exceeded the market value of output of cotton by around
30 per cent. In addition, this subsidy is provided
to only the richest 10% of US farmers who get 73%
of the total cotton subsidies. The rest of the cotton
farmers in America hardly benefit from these subsidies.
This actually shows that US subsidies, though largely
domestic, is actually for the benefit of the export
market.
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World Production of Cotton
Between 1998-99 and 2002-03 the US has increased its
production at an annual rate of 5.45% (Table 1). It
reached its peak in 2001-02, producing a staggering
20, 303 thousand bales of cotton. Interestingly, its
surplus of production over domestic demand has also
increased steadily from 3,517 thousand bales in 1998-99
to 9,909 thousand bales in 2002-03. This is close
to a three-fold increase in surplus levels over a span
of just 4 years and represents a 29.56 % annual growth
rate. Stocks show a much lower growth rate of 8.70%
per annum. This is not surprising since the huge production
is dumped into the export market. World production
also shows a huge increase between 1998-99, and 2001-02
when it reached peak levels. From a figure of 85,
298 thousand bales in 1998-99, it went up to 98,463
bales in 2001-02.
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A look at table 1 shows that the US has increased
its export market share drastically between 1998-99
and 2002-03. From a share of 18.16% in 1998-99, America’s
share in world exports jumped to 38.96 % in 2002-03.
This represents a huge annual average growth rate
of 28.99% between these two years. Obviously, nudged
on by its subsidy programme, US exports have been
able to keep pace with its surplus growth rate.
Only in the last two years does the US show a decline
in production and a subsequent decline in World production
has generated a surplus of use over production, resulting
in an increase in world prices.
Global Prices of cotton and
the US
In 2001-02, global prices were around 42 cents per
pound, the fourth year in succession that they were
below the long-term average of 72 cents per pound
(Table 2). Even the most efficient producers are now
operating at a loss, unable to cover the costs of
production. Marketing projections by the International
Cotton Advisory Committee (ICAC) suggest that prices
will remain chronically depressed in the foreseeable
future. Forecasts point to a modest recovery in 2003,
but prices look likely to remain at between 50-60
cents per pound until 2015 if present conditions continue.
Table 2 and Chart 1 show the spectacular decline in
the Cotlook Index A, the indicator for the global
prices of cotton. The annual indices according to
both calendar and crop year (the latter is the more
relevant timeframe) reflect this pattern. However,
only in the last one-two years have there been some
improvement in the global prices of cotton. That is
largely because of the fact that due to the rock-bottom
price in 2001-02, global stocks had been drawn down
subsequently. But unless the subsidies are cut soon,
the imbalance in the world market will continue.
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Since it has managed
to bring in such a large supply, the subsidies given
by the US government has brought down international
prices considerably. Consequently, after 1995 when
the Agreement on Agriculture came into effect, global
prices continued to fall reaching the lowest ever
level in 29 years in 2001. It is not surprising, and
only goes to prove the trade distorting nature of
US subsidies, that this all-time-low in global prices
coincide with the highest level of US subsidies in
2001-02. The subsidies managed to bring the largest
ever supply of cotton by US farmers to the export
market around 2001 and 2002.
This price pattern is ironical considering agricultural
prices were supposed to increase after the Agreement
on Agriculture. A less protected international agricultural
market and the removal of subsidies by the developed
countries were supposed to improve cotton prices and
therefore improve the lot of poor farmers in poorer
countries. However, the reality turned out to be rather
different.
The Developing World
Estimates by the International Cotton Advisory Committee
(ICAC), using its World Textile Demand Model, indicate
that the withdrawal of American cotton subsidies would
raise cotton prices by 11 cents per pound, or by 26
per cent.
The refusal to cut cotton subsidies by the US has
adversely affected the condition in many developing
or least developed countries, which are exporters
of cotton. The government of India puts its losses
at $1.3 billion, Argentina at over $ 1 billion, and
Brazil at $ 640 million in 2001-02. However, countries
located in Africa, especially Benin, Burkina Faso,
Chad and Mali, who depend heavily on cotton exports
for their economic conditions, have been hit the hardest
by the secular decline in prices. In 11 countries
in Africa, cotton export earnings bring in one fourth
of all export revenue. In the four above-mentioned
African countries, 30 per cent of total export earnings
and over 60 per cent of earnings from agricultural
exports come from cotton. According to Oxfam, U.S.
cotton subsidies are destroying livelihoods in Africa
by encouraging over-production and product dumping.
According to an Oxfam Report (2001), costs of production
for one pound of cotton are three times higher in
the US than in Burkina Faso. Other major producers
like Brazil also have far lower production costs.
In spite of this, the US has expanded production in
the midst of the price slump. Obviously cotton subsidies
help them to increase production unlimitedly, and
then dump that higher production in world markets.
Other countries have consequently suffered as a result
of both lower prices for exports and loss of world
market share. While the US improved its share gradually
to a massive 40% of the world market, other major
exporters who could not subsidies their exports suffered
a decline. Uzbekistan’s share dropped from 16.11%
to 11.46%, and that of Mali from 4.01% to 2.78% between
1998-99 and 2002-03. In fact this decline had started
even earlier. Burkina Faso’s share increased
marginally but it lost out in real terms due to the
steady decline in global prices of cotton.
For India, the subsidies mean a huge loss. Though
India is a net importer at the moment, and therefore
Indian consumers can take advantage of the price
decline, Indian farmers are losing out heavily.
Imports are flooding the Indian market, whereas if
subsidies were cut, Indian cotton could have become
much more competitive. The trend of international
prices over the last few years has driven many of the
poorer and smaller cotton farmers to suicide. This
phenomenon has taken on alarming proportions since
most of the farmers who have gone into cotton
production have had to take heavy loans in order to
meet production needs. However, regular slumps in
international prices have meant that they were unable
to capture enough of the world market, nor able to
recover enough profits to be able to repay their loan.
Simultaneously and more crucially, they are forced to
compete with international cotton supply even in the
domestic market.