At the 90th session of the ACP Council of Ministers a resolution was adopted on cotton issues ‘deploring the lack of reaction to the proposals of the African cotton-producing countries’ tabled in the WTO ‘with a view to total abolition’ of cotton subsidies provided by OECD producers. The resolution calls on the EU to ‘demonstrate more ambition in their support for the positions of the co-authors of the Cotton Initiative and the ACP Group at the WTO’. The resolution goes on to reaffirm that ACP believe that cotton issues are ‘one of the major indicators of the development component of the ongoing round’.

The EC has produced a review of agricultural commodities outlooks for the period 2009-18. In the case of the cotton sector, the projections of FAPRI and the USDA are reviewed. Both project a decline in world consumption of cotton in 2008/09 as a result of the economic downturn. Consumption and production however are expected to resume growth in 2010, with the USDA making more bullish projections. Production growth is driven by increased yields which are twice the rate of expansion of the area under cotton, since the area devoted to cotton competes with other products used in biofuel production (grains and oilseeds). Towards the end of the projection period, consumption growth is expected to have expanded between 21% and 28%.

The EC review continues, ‘Prices move in line with demand falling sharply in 2008/09’ (-16%), but picking up from 2010/11, reaching US$1,712 in 2018/19 according to FAPRI estimates, some 27% above 2009/10 price levels. From 2010, world trade is expected ‘to grow more vigorously than overall production and consumption’, with FAPRI projecting a 54% increase and USDA a 32% increase. China is expected to consolidate its position as the world’s leading cotton importer, while the US is expected to remain the world main exporter, with ‘one-third of overall world trade’, according to USDA.

Following the publication of Organic Exchange’s 2008 ‘organic’ cotton market report, the IRIN French service reports that ‘organic’ cotton production for 2008 is expected to reach 145,000 tonnes, representing an increase of 150% over 2007, and accounting for 0.55% of total cotton production. West Africa produces 2% of this (compared to 3% of conventionally produced cotton), but with ‘organic’ production doubling in the region between 2007 and 2008, its share is growing.

French radio station RFI, however, has reported in a programme on commodities that it is proving difficult to find an outlet for this additional production. Although end-consumer demand remains steady despite the economic down-turn, small producer countries may experience difficulties in finding a demand for their ‘organic’ cotton exports because of over-strict requirements on the part of the intermediaries, spinners and retail distributors. The textile industry and distributors favour the larger, more reliable producers such as Turkey and India, which makes marketing ‘organic’ cotton challenging for small producer countries. The RFI report notes that ‘[‘organic’ cotton] yields are uncertain and highly dependent on weather and climate factors’, and reports that Syria has had to sell its ‘organic’ cotton as conventionally produced cotton, as it was unable to find a buyer.

Nor is there an incentive for the spinners to use ‘organic’ cotton, as producing an ‘organic’ product incurs additional costs. As RFI reports, ‘they have to pay not only the premium, but also for the certification, which comes to about [US]$100 per tonne.’ The report notes that ‘their clients at present have limited requirements’, as the final product only needs to contain 5% of ‘organic’ cotton in order to be certified ‘organic’.

The USDA reports major purchases of cotton into government stocks in China and India: ‘Industry sources indicate that the Cotton Corporation of India has authorisation to purchase up to 11.7 million bales, half of the 2008 crop’. While this is supporting domestic prices in China and India and easing pressures on world market prices, in the longer term with such stock holdings over-hanging the market, price recovery could be a slow process.

The USDA reports the worst contraction in global consumption of cotton for 65 years, with a consequent depression of prices. Measures adopted by India and China to support their domestic producers are expected to sustain production levels despite the price declines, thereby lengthening the duration of the price slump.

The USDA reports deteriorating cotton prices in the face of dampened consumer demand, with prices falling by around 30% from June to September 2008. This comes on the back of a 6% decline in global consumption and a 14% decline in world trade since June 2008.

Cotton prices have fallen by 20% since their April 2008 peak in response to slower global growth and stagnant demand for cotton. With lower demand and relative declines in prices of competing commodities, concerns over supply availability are weakening. Nevertheless ‘global stocks are still forecast to decline significantly by the end of the 2008/09 marketing year’.

ICTSD reported no movement on cotton issues at the mini-Ministerial, despite the existing agreement on ‘expeditious and ambitious cotton-specific subsidy and tariff cuts. Press reports suggest that the US hard-line position in the discussions around the special safeguard mechanism may well have been designed to keep the USA out of the spotlight on its cotton subsidies in an election year, where any commitments to extended subsidy reductions would carry severe political consequences. The US decision to link progress on its cotton subsidies to market-access concessions from China, was further seen by some commentators as an attempt by the USA to avoid hard decisions on cotton in an election year.

On June 23rd 2008 the EU Council adopted a new programme of cotton-sector reforms following the European Court of Justice decision on September 7th 2006 to annul the earlier measures. These reforms include a commitment to decoupling 65% of current cotton-sector support and the extension of support to national programmes for the restructuring of the EU cotton-ginning industry and the enhancement of quality and marketing of EU cotton.

Meanwhile discussions at the ACP Council on the ‘EU-Africa cotton partnership’ highlighted concerns over the ‘concrete results that have been attained so far’. ACP representatives called for the EC and member states to ‘speed up disbursement of the resources announced to promote the strengthening and development of the cotton sector in Africa’. Concerns were also expressed at the lack of progress in the WTO on cotton issues, although EC support on this issue was welcomed.

In the cotton sector the EC prepared a background paper on market developments and trends as background to the FAO food-crisis summit. This briefing noted that ‘world production has kept pace with the increasing world consumption, thus limiting any sustained price increase’. It noted that while the area under cotton has been stagnant, yields have increased, ‘which has resulted in an acceleration of production growth since 2002’. The note highlights the changing patterns of trade in cotton, with rising US exports in the face of declining domestic usage and declining production. EU imports have also declined reflecting the decline of the textile industry (consumption down by 22.3% between 2005 and 2007). EU production has also been declining, strongly in 2006 (by 35%), and stabilising at this lower level in 2007.

Chinese demand however is surging (doubling since 2001), while production only increased by 41.4% turning it into a major importer. Brazil and India have both expanded production (by 100% and 49% respectively), but with Indian consumption rising by only 44.6%, it has emerged as a net exporter. Similarly Brazilian consumption has increased by only 18.3%. The briefing notes that ‘Africa seems to be missing the opportunities of higher Asian demand’. African production has shown variable trends, but with a substantial decline from the peak of 1.75 million tonnes attained in 1997 (down to 1.3 million tonnes in 2007). African consumption has also fluctuated around a long-term declining trend (from a peak 664 million tonnes in 1995, to a low of 525 million tonnes in 2007, a decline of 21%).

According to the EC ‘the main factor in the variability of cotton prices is the varying gap between the increasing export surplus of the US production and import deficit in China, which affects disproportionately world price developments’.

In a meeting with the ministers responsible for trade from Mali and Burkina Faso on February 6th 2008 the Trade Commissioner reiterated the EU’s support for African positions in the cotton dispute, describing cotton as a development priority in the Doha Round. In an accompanying memorandum the EC noted that the ‘subsidisation of cotton exports by developed countries has a disastrous effect on prices’ for African cotton producers and called for ‘the elimination of all forms of export refunds’ on cotton. The memorandum notes that under EC aid programmes since 2004 ‘more than €260 million has been allocated to cotton programmes and projects’. The EC has argued that as part of the Doha Round the following actions should be taken:

• the elimination of all forms of export subsidy for cotton in all developed countries’;
• the provision of duty-free market access for cotton imports originating in LDCs by all developed and advanced developing countries;
• a substantial reduction of trade-distorting domestic support for cotton producers in developed countries.

Following the successful Spanish challenge in the European Court of Justice to the 2004 EU cotton-sector reforms, the EC has launched a consultation exercise, designed to provide a basis for new EC proposals. The internet consultation document can be accessed via the link below.

A March 2007 policy brief from the Groupe d’Economie Mondiale found that ‘cotton producers in west Africa are relatively unresponsive to changes in world prices’ and that if they are to benefit from multilateral reforms, then ‘comprehensive regulatory reform of cotton marketing structures’ will be required. While recognising country specificities the policy brief suggested some overarching changes which were required, including:

• assuring closer alignment between world and domestic producer prices;
• improving cotton-sector productivity by reinforcing market infrastructure at crucial points in the supply chain and ensuring openness to technological advances including biotechnology;
• investing in physical and informational infrastructures so as to bring farmers closer to markets.

In contrast an Oxfam report on cotton farmers in Mali argued that ‘World Bank-led reforms to privatise the Malian cotton sector, including the adoption of a new price-setting mechanism are further exacerbating the dire conditions in cotton-producing communities’. It argued that by transmitting ‘the down-trend in world cotton prices direct to the cotton farmers’ reforms were undermining income stability in cotton-farming areas, increasing indebtedness and food insecurity. The report called for cotton-sector reform strategies to be reviewed because of the central role of cotton in growth and poverty alleviation in Mali. ‘While reform may create economic opportunities for cotton producers, such as the chance to negotiate a higher share of the world price and participate in the management of the sector, producers cannot manage the risks associated with depressed, volatile and generally declining prices.’ The report argued that ‘at the very least, price risk should be shared between the farmers, the ginning companies and the traders’ and that governments and donors should support this. ‘As privatisation proceeds in the Malian cotton sector, enhanced technical assistance and capacity building for farmer organisations is critical to ensuring their effective participation in the management of the sector in advance of privatisation … otherwise, the fragile, newly formed local cooperatives risk being undermined by indebtedness, falling literacy rates and associated social tensions’.

This World Bank briefing seeks to project the likely impact of a Doha agreement on cotton-sector issues on developing countries. It notes the large concentration of cotton production in a few countries and the heavy dependence of a number of low-income countries on cotton-sector revenues. Using a GTAP model it estimates the impact of the removal of cotton subsidies and import tariffs, projecting a boost to global economic welfare of $283 million per year, with the international cotton price increasing by 13%. It notes benefits of $147 million per year for sub-Saharan African countries, with 40% of these gains going to four west African cotton producers. This reflects increased output and a 50% increase in the real value of exports. In contrast, cotton output in the USA would fall by 25%.

Cotton-sector gains account for 20% of the gains for sub-Saharan Africa from a Doha agreement, explaining the importance attached to cotton-sector issues by African countries. ‘Export-subsidy removal would contribute almost none of the global benefits from reform, and cotton-tariff removal would account for only one-ninth of the global gain, with the other eight-ninths being due to cutting domestic-support programmes’. This contrasts markedly with the situation for all agricultural subsidies and tariffs ‘whereby tariff removal accounts for a huge 93% of the global benefits and domestic support programmes only 5%’.

The briefing estimates that the incomes of cotton farmers in sub-Saharan Africa would increase by 30% (rising to around 40% in west Africa), with three-quarters of this improvement being ‘due to cuts in domestic-support programmes’.

However full reform is not likely to materialise and therefore a number of other scenarios involving partial reform are reported. These partial reforms would also benefit African cotton producers, but would yield only 60% of the estimated welfare gains of full reform and 40% of the export gains.

On September 1st 2006 Brazil formally requested a WTO panel to examine US compliance on its earlier ruling on cotton, a measure the USA moved to block. Brazil will have to repeat the request if it still wishes to proceed.

While the USA insists that it has complied with the WTO ruling and the Brazilian request is ‘without basis’, Brazil claims that the USA has only partially complied. The elimination of ‘step 2’ programme support will only occur 10 months after the deadline for its removal, while the reform of the US export-credit guarantee system is inadequate, since the ‘USA has not altered its marketing loan and cyclical-payment programme enough to prevent them causing serious prejudice to Brazil’s producers’.

Oxfam has spoken out in support of Brazil’s action, claiming ‘the US reforms have affected only a small proportion of US cotton subsidies’.

The article argues that in the cotton sector it appears as if dispute settlement is replacing negotiations as the principal means of elaborating WTO rules.

The USDA FAS reports rising global cotton consumption caused by rising Chinese domestic demand for textiles and increased Chinese exports. Falling cotton prices have also fuelled consumption growth. ‘World cotton exports for 2006/07 are projected to remain stable at 43.5 million bales’, with the USA accounting for nearly 39%.

At the Port Moresby meeting of the ACP Council of Ministers the ministerial committee on cotton ‘expressed consternation at the increasing and persistent delay in releasing the financial resources promised under the European Development Fund to support the implementation of the EU-Africa cotton partnership, especially since the completion of a substantial part of the actions recommended by the cotton-sector stakeholders in November 2005 depend on the actual launch of the support programme’.

The ministerial committee called for vigilance ‘so as to ensure that the expected resources are channelled into financing the actions awaited by the stakeholders in the sector, and not into the constant organisation of seminars and studies that are intended to provide a better understanding of the situation in the sector’. They called for pressure to be brought to bear on the EU to ensure that ‘the resources to be allocated to the programme would be directly attributed to identifiable actions that would benefit stakeholders at the local level’.

The ministerial committee expressed ‘regret that since the announcements made in Hong Kong on export subsidies and market access, there had been no further developments in the negotiations of the WTO cotton subcommittee’. It called for intensified pressure on the EU to ‘ensure that it would resolutely support the ACP countries in their request for the elimination of the internal support that some rich countries grant to their producers’.

On March 27th 2006 a first in-depth discussion took place on proposals from four African cotton producers on effectively disciplining domestic support in the cotton sector. It contains a formula that implies far larger cuts in cotton subsidies than for agriculture as a whole, over a much shorter time-frame (one-third of the standard treatment) and calls for additional disciplines on ‘blue box’ support. While several delegations supported the proposal (including the EU, Brazil, Cuba and the Africa group) the USA objected to dealing with cotton-specific commitments in the absence of a wider agreements, since ‘lower ambition in general would lead to a wider gap between the cuts in agriculture and cotton’. The EU called for the scope of the paper to be broadened to cover market access and export-competition issues and for advanced developing countries to also grant duty-free access for LDC cotton products (and for developed economies to extend duty-free access for cotton products from all developing countries).

With the US House of Representatives enacting legislation to cut cotton-sector support and bring the US programme in line with WTO rulings, four cotton-producing countries in west Africa have worked up a proposal in the WTO to ensure that domestic support to cotton production is truly cut. In the cotton sector they called for ‘reduction in trade-distorting domestic support to be three times higher than cuts agreed for domestic support in general and the implementation period to be one-third as long’. The four welcomed the decision to grant duty- and quota-free access to cotton exports from LDCs but called for better development-assistance support to cotton countries affected by depressed world market prices.

The USDA Foreign Agricultural Service Commodity Intelligence Report on cotton for December 2005 reports west African franc-zone cotton production at ‘4.76 million bales, down 120,000 bales, or 2%, from last year’s record harvest of 4.89 million bales’. The area under cotton is estimated at 2.44 million hectares, down slightly from 2.61 million hectares the previous year. ‘Farmers planted less cotton than last year due largely to low world prices’. Assuming similar inputs of fertiliser and pesticides, yields next year will be higher than the earlier record crop.