Cotton: Trade issues for the ACP

Contents

1. Background and key issues
2 Latest developments and implications for the ACP
2.1 The cotton sector today: what are the issues?
2.1.1 Cotton production
2.1.2 Consumption
2.1.3 Import – export trade flows
2.1.4 Price trends
2.2 Challenges for ACP cotton: towards fairer world trade
2.2.1 The cotton problem a the WTO
2.2.2 African cotton in search of outlets
2.2.3 Sectoral support: the cotton component of the AAACP programme
Information sources

About this update

CTA’s Executive brief: Cotton: Trade issues for the ACP, was published in December 2008 and in CTA’s Agritrade: ACP–EU Trade Issues (2009 Compendium). This update consists of:

1. Background and key issues: briefly summarising the original executive brief, and where necessary, updating developments related to key issues;

2. Latest developments and implications for the ACP: reviewing developments that have taken place since the publication of the original executive brief; Examining the implications of recent developments for the ACP countries concerned.

The original executive brief (2008) is available on request from agritrade-mail@cta.int.

1. Background and key issues

Between 1960 and 2008, the cotton sector changed profoundly. World cotton production more than doubled, growing from just under 10 million tonnes in 1960 to almost 26 Million tonnes in 2008. Nevertheless, since 2004, world production has stagnated and over the last two years has fallen. Countries producing more than 100,000 tonnes of cotton generally account for around 90% of world production; in 2008 China, the USA, India and Pakistan together produced almost 70%. On the other hand, other once important cotton-producing counties, such as Mexico and Peru, have gradually ceased production. Finally, new market entrants have emerged, such as the EU and certain sub-Saharan African countries (Burkina Faso, Benin, Mali and Zimbabwe).

The lengthy fall in cotton prices on international markets was interrupted during the 2007/2008 season following the increase in the prices of most foodstuffs, which resulted in competition for arable land. The areas traditionally used for growing cotton declined as a result of a switch to more profitable crops, thereby leading to a fall in world production. Because of this fall in supply, prices began to rise in mid-2008. However, as a result of the world economic crisis in 2008/2009, which led to a fall in demand, they began to trend downwards again at the end of 2008.

In the ACP region, cotton production has increased strongly since the mid-1980s. Although the 27 ACP cotton-producing countries represent only 2% of world production, twelve of them account for 90% of total ACP production. West and Central African countries as a whole account for more than 70% of ACP production and Tanzania, Zimbabwe and Zambia represent 25% of production.

Cotton is a cash crop for the ACP countries and the bulk of production is exported. In some countries these exports produce more than 60% of total export revenue, which makes the countries in question particularly dependent on cotton, and vulnerable to international price variations. Accordingly, they are ‘price takers’ on world markets.

Table 1: Share of cotton in the exports of African countries (by % of the value of total exports)

* Between 2001 and 2005, Chad’s total exports rose 16-fold, following the start of oil drilling in 2003, while the value of cotton experts has remained the same.

Source: FAOSTAT, 2008 (latest available data)

As the leading cotton-exporting country, the USA has a major influence on world prices. The massive subsidies offered to American cotton producers have been criticised, in particular by the ACP countries, as being responsible for the weakness of cotton prices on international markets. Even if the true impact of these production subsidies on world prices is difficult to measure, it is certain that without them world cotton production would be located differently, since production costs in 2004 were around US$0.35/lb in Benin, US$0.45 in Pakistan, US$0.50 in Brazil, US$0.80 in the USA and more than US$1.00 in the EU according to the International Cotton Advisory Committee (ICAC). As the EU accounts for only a tiny percentage of the world production of cotton fibre, its internal support regime has a limited effect on the world market.

Despite the increase in cotton prices on world markets between the end of 2007 and 2008, this increase has not been passed on to West African prices since the dollar’s weakness against the CFA franc (linked to the euro), has completely cancelled the increase in international cotton prices (see chart below).

The EU plays a minor role on the cotton market, since it represents only 1% of world production and does not export cotton. However, its Common Agricultural Policy (CAP) provides important support to European cotton producers. The cotton support system was put in place in 1981 when Greece joined the European Economic Community. When Spain and Portugal joined the Community market in 1986, followed by Bulgaria in 2007 joined the Community market, this increased the number of countries covered by the Common Organisation of the Market (CMO) in the cotton sector. This production-support system was called into question in 2004 and a system was finally adopted in 2008 which provides for the ‘decoupling’ of 65% of aids (that is to say independent of production), with the remaining 35% continuing to be linked to production; a ceiling per country has been fixed for the surface areas eligible for aids (370 000 ha for Greece, 48 000 ha for Spain).

2 Latest developments and implications for the ACP

2.1 The cotton sector today: what are the issues?

2.1.1 Cotton production

For the 2008/2009 season, world production of cotton fibre amounted to approximately 23.4 million tonnes, compared with 26.2 million tonnes during the previous season according to the ICAC. It is dominated by China, which represents more than 25% of world production, followed by India with almost 21%, and the USA (12%), Pakistan (8%), Uzbekistan and Brazil (approximately 5% each) and the African countries of the CFA franc zone, which together account for 2% of world production.

The decline in production noted since the 2007/2008 season can be explained in particular by two key factors: even if cotton prices on international markets have increased, they have not reached the levels recorded by most other agricultural products, which explains why many producers have stopped cultivating cotton. Moreover, the unfavourable climate conditions are another factor which needs to be taken into consideration.

The 2008/2009 economic crisis also weighed heavily on production levels. The weak demand for cotton resulted in a fall in cotton prices. This crisis situation encouraged cotton producers to turn to foodstuffs such as cereals which are seen as less expensive and more profitable. The ICAC expects production to continue to fall during the 2009/2010 season (around 22 million tonnes) before increasing again the following season.

Table 2: Annual production of the main cotton-producing countries 1960-2009

Sources: USDA, ICAC

As regards the ACP cotton-producing countries, the 2008/2009 season was marked by a strong decline in production (see the table below). In total the production of the 12 main ACP cotton producers fell by 23.7% between 2008 and 2009 ; the fall was almost 50% between 2005 and 2009. The surge in food-product prices together with an increase in the price of the input products needed to cultivate cotton have favoured the emergence of alternative crops which are seen as more profitable.

Table 3: Cotton production of African countries (in thousands of tonnes)

Sources: USDA, ICAC

Changes in world cotton production have also been marked in recent years by an increase in the cultivation of transgenic Bt cotton. The volume of land given over to the cultivation of Bt cotton is increasing at an impressive rate. Bt cotton was introduced onto the American market for the first time in 1996 and by 2007 it was grown on 47% of crop areas in the world. After South Africa and Egypt, Burkina Faso is the continent’s third country to have officially authorised the cultivation of Bt cotton and Burkina Faso intends to sow 100,000 ha of Bt cotton in the 2009-2010 season. The large-scale expansion of this cultivation, as is now the case in India, could well transform the African cotton sector with the arrival of new operators, in particular seed companies.

2.1.2 Consumption

The main cotton-consuming countries are textile-producing advanced developing countries. China is by far the leading cotton-consuming country. Its consumption more than doubled between 2000 and 2008 because the country has been authorised, since the end of the Multifibre Arrangement, to export textile products without restriction to the USA and the EU. It is followed by India, Pakistan, and Turkey. On the other hand, the USA’s consumption has fallen by two-thirds in fifteen years.

Between 2008 and 2009, world consumption fell by more than 12%. The world economic crisis of 2008/2009 has had a strong impact on the textile industry. Demand has fallen in all the major cotton-consuming countries, even in China (- 17% in one year) which has supported world consumption since 2000.

Table 4: Main cotton-consuming countries(in thousands of tonnes)

Sources: USDA, ICAC

Within the ACP group of countries as a whole, cotton-producing and cotton-consuming countries are not the same. In total, the ACP countries consume less than a quarter of their production. The seven main cotton-consuming countries are, in increasing order of consumption, Côte d’Ivoire, Kenya, Ethiopia, Mauritius, Zambia, Zimbabwe and Nigeria. Together they represent three-quarters of the cotton-fibre consumption of the ACP countries. Only two of them, Nigeria and Côte d’Ivoire appear among the leading ACP cotton producers. For several of these countries, the end of the Multifibre Arrangement resulted in the end of import quotas in Europe in particular. The most competitive Asian countries have rapidly increased their market share and textile industries in ACP countries, which already had problems as a result of successive crises and economic-restructuring operations, are today in serious difficulties. In Nigeria, 80% of textile companies have gone out of business over the last seven years whereas previously the sector was one of the drivers of the national economy.

2.1.3 Import – export trade flows

The main cotton importing countries are advanced developing countries that have an important textile industry. In 2005, China, Indonesia, Pakistan and Turkey accounted for more than one-half of world imports. Chinese imports can vary considerably from one year to the next, depending on the country’s needs and production. This makes China a key operator on the world cotton market. Although Chinese demand fell sharply between the end of 2008 and 2009 as a result of the effects of the crisis, it started to increase again at the end of 2009.

Table 5: Main cotton-importing countries(in thousands of tonnes)

Sources: USDA, ICAC, FAPRI

The USA is by a very long way the world’s main exporter (more than one-third of world exports in 2009), followed by India and Uzbekistan. In line with the fall in production in the USA, the ICAC expects that country’s exports to decline by 17% in 2010. Western and Central African countries have been major participants in international trade in cotton since the 1990s, but the region’s position is under threat from new countries.

According to some analysts, India will become the main competitor of African cotton. The proactive agricultural policy in favour of cotton and the proximity of the Chinese and south-east Asian markets are two major advantages for Indian cotton. The tripling of its cotton exports between 2005 and 2008 illustrates India’s capacity to conquer new markets. However, the fall in exports in 2009 also shows the instability of this production (exports fell by 1million tonnes between 2008 and 2009). Another emerging competitor, Brazil, is investing massively in cotton, and in 2009 its exports exceeded those of West and Central Africa for the first time.

Table 6: Main world cotton exporters (in thousands of tonnes)

Source USDA, ICAC

2.1.4 Price trends

As for the prices of many agricultural raw materials, world cotton prices were unstable while trending generally downwards up to 2007 before increasing in 2008 (see previous section). In the context of a world economic crisis, international prices quoted in US dollars fell by more than 20% between September and November 2008, following a strong fall in Chinese imports. During the first half of 2009, prices remained at a level below US$0.60/lb.

From autumn 2009, prices started to climb again. As world production was expected to be below consumption, analysts anticipated a reduction in stocks which resulted in higher prices. China thus had to sell part of its public stocks at the end of 2009. In addition, the prospects of a recovery in world growth in 2010 suggest that demand for cotton will increase. At the end of 2009, the price of cotton was close to US$0.80/lb. However, the ICAC’s analysts remain cautious and expect an average price of US$0.70/lb for the 2009/2010 season, i.e. an increase of 14% compared with the average for the 2008/2009 season.

Over and above the price of cotton in dollars, West African countries are affected by the level of the dollar against the euro, and therefore the CFA franc. High international prices do not necessarily affect the price in CFA francs if the dollar remains weak. Because of these relatively low prices, West African producers and cotton companies are in a particularly fragile situation and the outcome remains uncertain. In some West African countries, such as Togo and Mali, producers have not been paid for one or two years because of the state of near bankruptcy of the cotton companies.

Another issue related directly to the level of prices, namely the quality of the fibre remains an important aspect. The quality criteria of cotton fibres are in general based on the criteria used in the USA (the Cotlook index). African cotton tends to be regularly classified as good quality cotton (Cotlook A index), in particular thanks to the length of its fibre. Its quality is in particular recognised on the Chinese market which is the leading world importer. However, Michel Fok of the CIRAD considers that African countries are not obtaining a price in line with the quality of their cotton production, even though it is classified in the Cotlook A index, since the criteria do not take sufficient account to the specific quality aspects of African cotton (in particular as regards the length of the fibre). According to the researcher, African countries compete with each other on the international market whereas if they were to promote collectively the quality of African cotton and harmonise their controls and criteria, they could obtain a better export price.

2.2 Challenges for ACP cotton: towards fairer world trade

2.2.1 The cotton problem a the WTO

The ACP cotton-producing countries have launched several initiatives in the framework of the WTO to limit the subsidies granted to producers in developed countries accused of artificially repressing international prices. Some progress has been achieved recently.

Brazil’s complaint: a relative success for African countries

Brazil filed a complaint in 2002 with the Dispute Settlement Body (DSB) of the WTO against subsidies granted by the USA to its producers (see the executive brief on cotton, 2008). Finally, in August 2009, a ruling of the DSB determined the amount of Brazil’s prejudice and the forms of sanctions against the USA (which can no longer appeal against the ruling). Thus, in application of its calculations, Brazil will be able to impose a surcharge of US$561 million on its imports of American industrial products. In addition to this amount, and up to the authorised amount of US$830 million, thanks to the principle of cross retaliation, Brazil will able to impose sanctions in other areas, such as intellectual property rights and services.

The C4 group of countries (Benin, Burkina Faso, Mali and Chad), which were a third party to the complaint, will not be able to profit directly from this positive outcome to the complaint filed against American subsidies, because they do not have the possibility of implementing sanctions. This ruling however sends outs a strong signal in support of the urgent need to make US aids compliant (IDEAS Information Memo n° 84). Nevertheless, the C4 countries are concerned about Brazil’s increasing lack of interest in continuing the fight against American subsidies.

African cotton and the cotton initiative

In May 2003, Benin, Burkina Faso, Mali and Chad (the so-called C4 countries) submitted to the WTO Secretariat a ‘Sectoral initiative in favour of cotton’ (WTO, 2003). Noting the losses suffered by their producers following the fall in world prices, they called for the elimination of support granted by developed countries to their cotton production (see Agritrade executive brief of 2008).

In 2004, the WTO members therefore promised to ensure that domestic supports are reduced more substantially and more rapidly for cotton than for other products. On 17 July 2007, the Chair of the (WTO) Committee on Agriculture put forward a new proposal for implementing rules for the Hong Kong Ministerial Declaration, containing notable progress as regards cotton.

The current deadlock in the Doha Round places a major question mark over the capacity and determination of the member countries to conclude the negotiations. Some observers consider that this situation is due in particular to the question of cotton. The USA has negotiated a 70% reduction in its overall domestic supports and would therefore have to make an additional effort for cotton, that is to say a significant reduction in its subsidies.

Consequently, since 2007 the cotton negotiations have been put on the back-burner, so much so that the cotton sub-committee has not met since July 2007. At the end of 2009, the C4 Trade Ministers threatened to block the Doha Round negotiations if cotton was not put back on the agenda of the negotiations. This C4 demand was included in the declaration of the ACP countries on the eve of the ministerial conference in Geneva in December 2009. Nevertheless, cotton was not addressed at that conference which also failed to restart the Doha Round.

2.2.2 African cotton in search of outlets

Alongside the WTO negotiations, African countries are having to contend with increased competition from other developing countries, such as India and Brazil. This situation is encouraging African cotton-exporting countries to try and find new outlets and invest in new market segments. Fair-trade cotton and organic cotton offer a way out.

The promotion of fair-trade cotton

The African cotton sector is based on small, essentially family farms, practising mixed faming/stock farming, with production methods based on limited use of inputs and economical levels of water and energy consumption (therefore consuming less carbon than American or Chinese producers). In addition, the organisation of the sector around state or semi-state bodies makes it easier to monitor farmers and compliance with standards. The development of fair trade could make it easier to capitalise on these advantages among groups sensitive to fair-trade principles.

West and Central Africa could participate widely in fair-trade cotton. As for all fair-trade products, the price paid to the producer is determined in advance, and is sufficient to cover the production costs and remunerate the producer’s work. For the 2007/2008 season, the price paid to producers in West Africa (FCFA234/kg of seed cotton) was particularly attractive in a context of contractually low cotton prices (FCFA160/kg in Mali and FCFA145/kg in Burkina Faso) (AFD-FARM, 2008).

However, there are delays in developing outlets and world demand remains fairly low. At the beginning of 2010, campaigns are planned in countries of the North to encourage clothing brands to switch to fair-trade cotton.

The promotion of organic cotton

India is the leading producer of organic cotton, but some African countries are starting to play an important role on this market, especially Burkina Faso, the world’s 10th largest producer. As a result of the strong demand for organic cotton at world level, the purchase price is interesting for producers (around 30% higher than that of traditional cotton). This situation has boosted the production of organic cotton in West Africa; it doubled between 2007 and 2008.

Because the use of chemical additives is not authorised, the productivity of organic cotton is lower than that of traditional cotton. When converting to organic cotton cultivation, initially the higher purchase price of organic cotton is not enough to offset the drop in production. However, university research carried out in Mali has demonstrated that over the medium term the savings achieved and the improvement in soil from which the other crops benefit help to improve the profitability of organic cotton. In addition organic cotton means that producers do not have to contract loans to acquire inputs, the costs of which can vary widely, at the beginning of the season. Organic cotton is also a credible alternative to the rapid development of genetically modified cotton which also bases its arguments on the reduction in the use of chemical inputs but which creates a situation of dependency at the level of seeds.

Nevertheless, the penetration of organic cotton remains very limited. According to the IRIN, organic producers represent 0.1% of cotton producers in Benin and Burkina Faso which are however the two most advanced countries in this segment in West Africa. In recent years, several NGOs, including Helvetas, have launched projects to support the development of an organic cotton sector in West Africa.

Another challenge facing African organic cotton is access to consumer markets. The dispersion of production between several small countries is a disadvantage in comparison with large producer countries such as India and Turkey with which purchasers prefer to deal. It seems necessary to reinforce aid for trade to support this sector in the ACP countries

Unlike fair-trade cotton, organic cotton does not guarantee a level of remuneration for producers, even if prices remain in general higher than for traditional cotton. The absence of chemical inputs increases the irregularity of output. It is therefore necessary to include organic cotton in diversified cultivation systems that make it possible to limit the risks and benefit from the income drawn from this culture.

It is indispensable for both fair-trade cotton and organic cotton to reinforce the sectors and support marketing in order to enable the ACP countries to capitalise on their strengths and take advantage of these markets which, although they are for the time being niche markets, are growing rapidly.

2.2.3 Sectoral support: the cotton component of the AAACP programme

In 2007, the EC and the ACP Group Secretariat launched the All-ACP Agricultural Commodities Programme (AAACP). A budget of €45 million was put in place for the programme and one-third of the budget is allocated to strengthening the cotton sector in the ACP countries.

The AAACP, programme which was set up in order to improve and stabilise the income and living conditions of producers of agricultural commodities, mobilises five international organisations (the World Bank, the International Trade Centre, UNCTAD, the Common Fund for Commodities and the FAO). They are implementing a series of projects intended to develop the ACP cotton sector.

The projects concerning cotton cover not only production techniques but also support for the sector. The objective of one major project in West Africa is to reduce the contamination of harvests by seeds as such contamination strongly influences the quality of the cotton and therefore the selling price. In general, the main objective is to improve the trade strategy at regional level through the standardisation of tools for testing quality. An evaluation of this component was launched in the first half of 2010 and the results will be published towards the middle of the year.

A mid-term review of the AAACP programme was carried out in January-March 2009, 18 months after its launch. Some adjustments have been recommended, in particular at the level of the general management of the programme, which is complex because of the large number of participants and the diversity of the programmed actions in a vast geographical region.

Moreover, concerning African cotton, the AAACP programme falls within the scope of the major guidelines decided at the EU-Africa Forum on cotton held in July 2004. A steering and monitoring committee for the EU-Africa partnership on cotton had been put in place for monitoring purposes. Following a mid-term review of the EU-Africa partnership on cotton, a diagnosis workshop was organised on 19 March 2009 in Brussels. Some 60 participants attended including numerous representatives of the profession in Africa, including among others leaders of the African Cotton Association (ACA), the African Cotton Producers Association (APROCA) and the African Cotton and Textiles Industries Federation (ACTIF). The discussions focused in particular on the reorganisation of the steering and monitoring committee. This reorganisation is intended to facilitate far greater ownership of the partnership by field operators and to develop more strongly the regional dimension of activities.