The governments of Brazil and the United States have agreed on a further framework for dealing with the cotton dispute in the context of the pending US Congressional review of the 2008 Farm Bill. This is not a permanent solution, but will avert a further escalation of the dispute (by avoiding the imposition of cross retaliatory sanctions by Brazil on non-cotton products). According to ICTSD, the framework agreement obligates the US to provide some ‘US$147.3 million per year in the form of a “technical assistance fund” to help Brazilian farmers’, while the US has agreed to establish ‘a limit on trade-distorting cotton subsidies’. The new framework builds on the April 2010 deal.

Some Brazilian observers have argued that the new deal ‘does not go far enough to right the wrongs of US cotton subsidies’, since it ‘[lacks] the symbolism of change in US policy that Brazil has sought with its WTO suit’. The absence of ‘forceful steps’ to reform trade-distorting cotton subsidies were regretted by Pedro de Camargo Neto, a former secretary of Brazil’s agriculture ministry, who argued that ‘significant changes will become increasingly difficult to achieve the longer they are delayed.’

Meanwhile, according to the US Department of Agriculture (USDA), ‘world cotton prices have been rising due to lower supplies.’ This, coupled with the depreciation of the West African CFA franc, is improving returns to West African cotton farmers. This is leading to a stabilisation of exports and a slight recovery, after a virtual halving of exports since 2003/04. The USDA attributes this earlier decline to the strength of the euro, which undermined the competitiveness of West African cotton exports on dollar-denominated markets. This saw both yields and the area under cotton decline in the region, and held back successful privatisation of the cotton sector. A weaker euro combined with improved efficiency could, it is argued, see a recovery of West African cotton production.

On 12 May, WTO Director-General Pascal Lamy told delegates that ‘cotton has become a litmus test for the development dimension of the Doha Round.’ This was in response to allegations that ‘no progress has been made since 2005,’ despite the establishment of a sub-committee on cotton, with a remit to review ‘all trade-distorting policies affecting the sector in all three pillars of market access, domestic support and export competition.’ Many of these opinions were aired at a consultative mechanism meeting in Geneva behind closed doors on 7 June.

Brazil has described developed country cotton subsidies as ‘an unfair source of competition’ and suggests that discussions have ‘backtracked’ since 2005, while African representatives have informally complained that the Cotton Sub-Committee meetings are becoming ‘a ritual’ that generates no real outcome. The US continues to insist that cotton issues only be addressed once all other agricultural issues have been resolved.

Director-General Lamy has highlighted the substantial expansion of support to cotton sector adjustment that has been committed despite the economic downturn. Tanzanian representatives however have argued that ‘development assistance without cuts in domestic support would lead nowhere.’

Burkina Faso’s trade minister Léonce Koné observed to the other delegates at the meeting on 7 June that ‘the current pace of the negotiations makes people pessimistic about the imminent conclusion of the Doha Round.’

The latest USDA Foreign Agriculture Service circular dealing with cotton forecasts an 11% increase in cotton production in 2009/10. The area under cotton is forecast to rise by 7%, while yields are expected to rise on average by 2.8%. The biggest forecast increase in production is in the USA.

While globally in 2008/09 the cotton sector faced excess stocks and low prices, the global economic recovery is boosting demand and sustaining prices, with prices recovering from mid 2009. Indeed USDA forecasts world consumption in 2010/11 to ‘exceed production for the fifth year in a row’. The stocks-to-use ratio is expected to fall to the lowest level in 16 years. Given the underlying supply and demand balance and the Indian government restricting exports to ensure domestic supplies, cotton prices are increasing. However these price rises could serve to stifle demand, particularly if the global economic recovery falters.

A report has been posted by ICTSD publishing the findings of a modelling exercise to ascertain the impact of five different scenarios for reforms in the cotton sector:

• scenario A is based on the application of the specific provisions on cotton included in the December 2008 revised draft modalities;
• scenario B is based on the general provisions of the December 2008 revised draft modalities;
• scenario C models the effects of the implementation of the recommendations of the dispute settlement board’s findings in the US upland cotton dispute;
• scenario D models the impact of the actual steps taken by the US in response to the ruling;
• scenario E focuses on the impact of internal reforms in the EU and US, through the 2003-04 CAP reforms and 2008 US Farm Bill.

The model then looks at the impact of these different scenarios, had they been applied over the 1998-2007 period.

The report finds that scenario A would have resulted in an average increase in world cotton prices of 6%, with this ranging from 2 to 10%, and a decline in US and EU cotton production of 9 and 24% respectively. In years of particularly low prices, the decline in US production would have been even more pronounced (-15%). In some years the reductions in US production would have been more than the entire ACP cotton group’s production. Under this scenario, the ACP cotton group’s production would have expanded on average 2%.

Under scenario B, ‘the average world price increase would have been only 2.5%’. The production effects under scenario B would be significantly less than under scenario A (-4% in the US and unchanged in the EU). This suggests that ‘discarding the special cotton provisions from the modalities text would greatly reduce the potential of the Doha Round to deliver lower subsidy levels and higher world prices for cotton’.

Under scenario C, ‘the world price of cotton would have increased on average 3.5%’ in the 1998-2007 period, while US cotton production would have fallen 7% on average.

Under scenarios D and E, the increase in world prices would have averaged only 0.7%, with under scenario E this being attributable entirely to CAP reform measures. The production effects of scenario D would have been negligible, however under scenario E, EU production ‘would have fallen on average 20%’.

Overall, ‘the simultaneous increase in export quantities and world prices would have led to an unambiguous rise in the value of exports for all net exporters except the US’, with the largest effects being felt under scenario A, moderate effects being felt under scenarios B and C, and small or negligible effects being felt under scenarios D and E. Under scenarios A and E, ‘EU import quantities and costs would have increased substantially’.

The author notes that ‘virtually all benefits for cotton in the Doha Round will accrue from the reduction of subsidies … market access will play a marginal role at best’. This arises since duty- free access is already granted by most countries for cotton. Thus, in the cotton sector ‘subsidies should be the heart and soul of the negotiations’.

On 6 April, the US and Brazil negotiated an agreement which may avert retaliatory sanctions from Brazil, authorised by the WTO in its 2009 ruling in the US-Brazil cotton dispute. This agreement has three components:

• an offer to Brazil of US$147.3 million per year in a ‘technical assistance’ fund;
• a commitment to making changes to an export credit programme that supports buyers overseas to purchase US cotton;
• a commitment to begin opening up the US market to imports of Brazilian meat products.

In exchange for these concessions, Brazil has agreed to ‘hold off on retaliation’. However this is simply the first step. The US will now need to deliver on these commitments in order for the dispute to be fully resolved.

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.