Presented by
Terry
Townsend
Executive Director
International
Cotton Advisory Committee
The world cotton industry is suffering through one of the most painful periods for producers in the approximately 200 years since the invention of the cotton gin. The Cotlook A Index (an indicator of the world average price) fell to just 50% of the 30-year average in October 2001 at the peak of harvest and sales activity, and the average price this season will be the lowest since 1972/73. When adjusted for inflation and rising input costs, the average cotton price this season may be the lowest in history.
The harm being done by low cotton prices to the world economy and to the economies of numerous countries is significant. Cotton is grown in over 80 countries, and the activities associated with growing, handling and ginning cotton provides a significant source of income for approximately one billion people each year. Exports of cotton lint represent a significant portion of the foreign exchange earnings of countries as diverse as Burkina Faso and Uzbekistan. Among the Least Developed Countries, Benin, Burkina Faso, Chad, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Madagascar, Malawi, Mali, Mozambique, Niger, Sudan, Tanzania, Togo, Uganda, and Zambia are cotton producers. The loss to the economies of producing countries this season caused by the decline in nominal cotton prices to their lowest level in three decades is approximately $13 billion.
A number of competitive market factors are contributing to the decline in world cotton prices. Weak consumer demand resulting from a decline in economic activity in 2001 is causing world cotton consumption to fall this season. In addition, improved technology, the strength of the U.S. dollar, and the expansion of cotton production into new areas contributed to the increase in the world cotton supply in 2001.
However, government measures that insulate producers in some countries from variations in market prices and result in increases in production in those countries, despite declines in market prices, are also contributing to the current imbalance between world cotton supply and demand. In published reports to member governments, the Secretariat has identified eight countries accounting for approximately half of world cotton production that provide direct income or price support subsidies to producers in their countries. The Secretariat of the ICAC estimates that the season average of the Cotlook A Index would be at least 30% higher this season in the absence of government measures than is actually taking place.
Remedies for the declines in cotton prices will have to address the sources of imbalance between supply and demand. Cotton industries are working to expand the demand for cotton, and market conditions are leading to a reduction in supply.
Already, there are signs of improved economic growth in major economies. The quantity of cotton moving in international trade is expanding, and consumption next season is expected to rise to a record high. In order to further strengthen the market for cotton, the ICAC has facilitated the formation of the International Forum for Cotton Promotion (IFCP) to work with cotton producing countries to form national cotton industry organizations funded by their private sectors. The work of the IFCP is designed to bring together under one umbrella in each country all segments of the cotton production and processing chain to speak with one voice on matters of shared interest and to provide positive information about cotton to domestic consumers. The goal of the IFCP is to enhance the international demand for cotton one country at a time, and an initial activity in the achievement of this goal is to encourage all countries to require fibre content labels in all textile products sold at retail. The support of the FAO and international commodity bodies for the fibre-content initiative will be appreciated.
Low cotton prices will reduce the supply of cotton next season, especially in those countries that do not provide government measures. The decline in prices is affecting Northern Hemisphere planting activity underway now for the 2002 harvest, and world production in 2002/03 may decline by 10%, helping to restore the competitive balance in the world cotton market. Nevertheless, despite improvements in demand and a reduction in world supply, an imbalance in the world cotton market is expected to continue, and cotton prices are forecast to remain well below the long run average during the next several years. Government measures that protect some producers and encourage continued production of cotton in some countries is prolonging the period of below-average international prices.
The talks on agriculture currently being conducted under the auspices of the World Trade Organization (WTO) are of critical importance to the world cotton industry, and WTO negotiators must ensure that the talks on agriculture are of relevance to cotton producers. Issues associated with government measures have been discussed often in the ICAC. At its 60th Plenary Meeting in September 2001 in Zimbabwe, a number of governments expressed the view that subsidies lower world cotton prices and cause the burden of adjustment to lower cotton prices to fall heavily on producers in countries with limited or no government support. The ICAC urged member countries to adopt policies to reduce and eventually eliminate the negative effects on trade caused by direct government assistance to cotton production and trade, to encourage the WTO to urgently consider trade distortions on the world market caused by measures taken by some governments, and to advise WTO negotiators to move forward with constructive proposals to reduce the trade and production distortions caused by policies implemented by some governments.
The agreement reached in Doha in November 2001 to begin a new round of talks on agriculture under the WTO is encouraging. However, there is a concern that talks in the WTO may not address the needs of the cotton industry or of other labor-intensive high valued commodity industries located primarily in developing countries. WTO Trade Ministers at their meeting in Doha called for 1) the reduction, with a view to phasing out, of export subsidies, as well as 2) substantial improvements in market access and 3) substantial reductions in trade-distorting domestic support. There is a concern that the first goal of reducing export subsidies will take precedence over other considerations. It is important for trade negotiators to note that export subsidies are not as significant a source of distortion in the world cotton economy as they are in the grain and oilseeds markets. Therefore, the cotton industry is anxious to ensure that the goal of reducing trade-distorting domestic support must receive equal consideration with the goal of reducing export subsidies within the context of WTO negotiations. For this objective also, of ensuring attention to the goal of reducing domestic support within the context of WTO negotiations, the ICAC seeks the support of other international organizations.
The ICAC and The World Bank are co-sponsoring a conference in Washington, DC in July 2002 on the subject of Cotton and the WTO in order to highlight the importance of the world cotton industry to the economies of developing countries and to draw attention to the need for a successful outcome to WTO talks on agriculture with an emphasis on reducing subsidies that distort production. Representatives of all international organizations with an interest in agriculture and economic development are invited to participate in the conference.
