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.

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.

Table 1 >> Click to Enlarge

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.

Table 2 >> Click to Enlarge

Chart 1 >> Click to Enlarge

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.