Why Talk About Cotton in the WTO?
Cotton is grown commercially in around 80 countries, while grain and oilseeds are grown in virtually every country. Cotton area accounts for only about 2.5% of the world’s arable land.The value of world cotton production in the current season (August 2017 to July 2018), will be about US$50 billion. In comparison, the value of world production of soybeans, maize, wheat or rice are each around $130 billion to $160 billion. Therefore, cotton is neither the largest crop in terms of land area, nor the most valuable in terms of production value.Additionally, cotton is primarily a fiber crop, not a food crop, which means it is not usually associated with food security, a traditional focus of government concern.
So why is cotton the focus of the Talks on Agriculture at the WTO?
Put simply, cotton is a uniquely appropriate focus of WTO attention because it connects people to markets. Cotton is a driver of economic development and is of critical importance to the economies of developing and least developed countries, including most countries in Africa. In addition, production and trade in cotton are distorted by a plethora of government measures.
Cotton can be stored for years without loss of value. It does not require refrigeration, and when baled and stored properly, it does not degrade in quality and is not vulnerable to mold, bacteria, insects or vermin. A bale of cotton packed to international standards is sufficiently dense that oxygen is squeezed from the interior, preventing the establishment of fire or the survival of diseases or insects. A bale will not absorb water, and if the bale ties are not broken will float indefinitely.
Cotton can be transported over rough roads for thousands of kilometers without damage. If a bale falls out of the back of a truck or off the side of a rail car, you just brush off the dust, put it back and continue on.
Cotton has a high ratio of value to weight and density, so it can be economically shipped from interior locations. For a bale of cotton shipped from an average location in the United States to an average destination in East Asia, freight represents one-sixth of the landed value. For wheat, corn and soybeans, freight alone represents one-half the landed value of a shipment between the United States and East Asia.
These are the reasons why cotton is grown in landlocked regions like Mali, Burkina Faso and Chad, Zambia and Zimbabwe, Uzbekistan and Xinjiang, Northern Texas and Central Maharashtra, thousands of kilometers from ports and weeks from shipping destinations. Cotton is grown on the frontiers of global trade, and in many regions, cotton is the only viable economic activity available, providing incomes to millions.
Further, cotton is central to economic development and poverty alleviation, and cotton contributes to food security. Grain crops are in the grass family and have horizontal roots, good for stabilizing soil but leaving crops vulnerable to water and heat stress. Cotton is a woody perennial with vertical roots that typically descend 1.5 meters, allowing it to provide an economic yield in semi-arid and arid regions where food crops would fail. Cotton is grown in rotation with food crops, and its vertical roots breakup the hardpan and draw nutrients from below the surface into the top soil. As a cash crop, cotton often serves as collateral against input loans to farmers in developing countries, allowing farmers access to fertilizer, insecticides and seeds for food crops that would otherwise be unavailable. Consequently, production of food rises in areas where cotton is grown.
Cotton also provides cash incomes that enable farmers to purchase food, as well as paying for school fees, clothes and health care. For many small holder households in Africa and elsewhere, basic sustenance is provided by food crop production and animal husbandry, but cotton is the only source of cash income for the family. The governments of some developing countries, including the C4, provide cotton inputs to low income families as a form of social support, as an alternative to direct cash assistance.
These are the reasons why it is appropriate to talk about cotton in the WTO.
World cotton production and consumption have risen from 7 million metric tons in 1950/51 to 26 million tons today; the average annual increase has been nearly 300,000 tons. When looked at in the long run, and especially with a trend line imposed, world cotton production seems to be climbing steadily. However, there have been distinct periods of plateaus and jumps to new levels.
World production climbed at a relatively steady rate during the 1950s, 1960s, 1970s and into the early 1980s, reaching 16 million tons. Then in a single season in 1984/85, the world total jumped by a statistically unprecedented one-third to 21 million tons, and then saw-toothed around that level for another 20 years. Then, there was another one-year phase change in 2004/05, and world production jumped to a new plateau of more than 25 million tons, where it remains today.
The first two-decade plateau of about 20 million tons coincided with economic policy changes in China under Premier Deng Xiaoping in the late 1970s and early 1980s that led to a six-foldincrease in production in China, boosting the world total. That was followed by the breakup of the Soviet Union in the early 1990s, which led to a halving of production in Central Asia, offsetting increases elsewhere, and leaving the world total just shy of 20 million tons.
The ongoing plateau began in 2004/05 when the cumulative impacts of the adoption of biotechnology in agriculture, incremental advances in traditional varietal breeding and the application of information technology to crop management led to a jump in the average level of world production to 25 million tons.
Analysts did not anticipate either of the first two phase changes in the levels of world production, and we will surely miss the next structural shift. However, cotton scientists, the people who really understand the implications of new technologies in the pipeline, believe that the current plateau will continue into the next decade.
World cotton production rose to 26 million tons in the current season ending in July, and production is expected to remain about as high in the season that will start in August 2018. World cotton use is forecast to climb to nearly 27 million tons in 2018/19, which will finally mark a full recovery to the level achieved prior to the recession a decade ago. World trade in cotton is forecast to climb to 9 million tons, the highest in several seasons.
India, China, and the United States account for two-thirds of world cotton production, while China, India and Pakistan account for a similar percentage of world cotton consumption.
As noted earlier, world cotton use reached 27 million tons in 2007/08 and is forecast to finally reach that level again in the coming season. Economic factors obviously account for the decline in cotton use during and just after the recession in 2008, but the growth of polyester production and inaccurate criticisms of the environmental impacts of cotton production have contributed to weak demand growth for cotton during the past decade.
World production of synthetic fibers, of which polyester is by far the most important, rose from less than 1 million tons in 1960 to more than 60 million tons today. Polyester alone accounted for about 55 million tons of world fiber use in 2017, more than double the amount of cotton used. Cotton’s share of world fiber use has fallen from about 80% in the 1960s to 50% during the 1980s and to about 25% today. It is self-evident that competition with polyester is having a huge negative impact on the quantity of cotton used each year.
Another factor affecting cotton consumption with potentially far-reaching ramifications for all of agriculture, not just cotton, is the rejection of modern tools of agricultural production by opinion leaders in developed countries.
For thousands of years, starvation was common to the human experience, and only in the last 70 years with the widespread adoption of mechanization, synthetic fertilizers and pesticides, and in the last 20 years, biotechnology, has the human condition fundamentally changed to a world of relative abundance. Today, famine is associated with war and ethnic cleansing, but otherwise, we live in a world of such abundance that consumers in rich countries can afford to indulge almost any preference. Agricultural science, along with medicine and sanitation, can take credit for the greatest gains in human lifestyle in history since the 1950s.
But, memories are short, and most urban consumers today are far, far removed from the realities of agricultural production. Instead of celebrating the success of agriculture, many environmental groups and retailers seeking brand differentiation are conducting campaigns of demonization of agricultural technology. Since cotton is a highly technical crop, those campaigns fall directly on the cotton industry.
There are many examples of negative information about the world cotton industry being disseminated by various interest groups. The most common claims are that pesticides and fertilizers are harmful and that cotton requires excessive amounts of these, that agricultural chemicals are used indiscriminately, resulting in damage to the health of cotton farmers, farm workers and neighbors, that because water is scarce its use on cotton is wasteful, that biotechnology is dangerous and therefore cotton is dangerous, and that in some countries the cotton industry contributes to political repression and poverty.
All of these allegations are either gross exaggerations, distortions, or flat out falsehoods.Nevertheless, many of these concepts have entered mainstream acceptance, especially in Europe and Japan, and cotton consumption is being affected. In response, the cotton industry is joining with other commodity groups to provide fact-based information about the efficacy and safety of agricultural technologies, but once negative perceptions become embedded, they are hard to offset.
Despite the growth of polyester and negative allegations, in testimony to the resilience of the industry, cotton consumption and trade are climbing, stocks are falling, and prices are above average.The Cotlook A Index, an indicator of prices of cotton of average quality delivered to locations in East Asia, rose from 70 cents per pound in 2015/16 to 83 in 2016/17 and 85 in 2017/18. Since 1973/74, the A Index has averaged 73 cents per pound. Therefore, the current price level looks attractive in nominal terms.
However, in real terms, cotton prices have been falling for decades. Using a world GDP deflator from the IMF, the 1973/74 Cotlook A Index was more than $3 per pound in 2017 dollars. In real terms, the Cotlook A Index in 2015/16 of 70 cents per pound was the lowest in the post-World War Two era, and the rise to 83 cents in 2016/17 and 85 in 2017/18 were still among the lowest levels in real terms in eight decades.
The decline in the deflated value of world cotton production is an indicator of the cost pressures faced by farmers. Cotton is not alone among commodities in seeing declines in the terms of trade as the world economy diversifies and consumers spend a greater proportion of disposable income on electronics, entertainment, travel, health care, housing and other items, and less on traditional commodity goods such as clothing.
Between 35 and 60 million family units are engaged directly in cotton production worldwide, including 3 million to 4 million households in Sub-Sharan Africa. When family labor, hired-on farm labor and workers in ancillary services such as transportation, ginning, baling and storage are considered, total involvement in the cotton production sector each year is estimated at between 150 million and 190 million people around the world, or 2-3% of the world’s population. In Sub-Saharan Africa alone, employment in the cotton sector is between 40 million and 50 million people, or 4%-5% of the one billion population total.
World average gross revenue per household from cotton production is about $1,000 a year. However, the range around that average is enormous, with a small holder in a developing country growing cotton on one-half a hectare receiving about $400 in gross revenue. In contrast, a large mechanized operation in Australia, Brazil or the United States might gross more than $2 million, and really large operations might gross more than $50 million a year. The mode, or most common experience, including a representative family unit in Sub-Saharan Africa, would be a household receiving between $400 and $1,000 a year in gross revenue from cotton production, and net revenue would be between $125 and $300 per year. Such a household would earn additional non-cash income from food production.
Sub-Saharan African Cotton Production: Rebound to Pre-Recession Levels
Sub-Saharan African production reached 1.6 million tons in 2017/18, representing 6% of the world total, and production is forecast at 1.6 million tons again in 2018/19. Sub-Saharan cotton area was 5.4 million hectares in 2017/18 (16% of the world total), and the yield was about 290 kilograms per hectare (representing less than 40% of the world average yield). Of the 1.6 million tons of production in 2017/18, 1.1 million tons were grown in the CFA Zone, and the balance of 450,000 tons came from other Sub-Sharan countries.
Cotton area in Sub-Saharan Africa trended upward from about 3 million hectares in the early 1990s to more than 5 million currently. The cotton yield for Sub-Saharan Africa varied between 275 kilograms of lint per hectare and 375 kilograms, and the yield in 2017/18 is not significantly different from its level of 30 years earlier. With the increase in area planted, production climbed from a little below one million tons to the current level.
Among Sub-Sharan African producing countries, Mali (304,000 tons), Burkina Faso (258,000 tons), Benin (183,000 tons), Cote d’Ivoire (170,000 tons) and Cameroon (116,000 tons) are the largest in 2017/18. The levels of production in 2017/18 were either record or nearly record high in each of the five countries and represented a return to production levels recorded in the mid-2000s.
However, the rise in production since 1990 represented increased area devoted to cotton, not an improvement in yields. Yields in Sub-Saharan Africa fell from 375 kilograms per hectare in 2004/05 to about 300 kilograms currently. Of the five largest producers in Africa, only Cameroon maintained yields in the pre-recession and post-recession eras; the yield in Cameroon was about 500 kilograms per hectare in both periods.
Yields are a function of the quantity, quality and correct application of fertilizer and other inputs such as insecticides and planting seeds. In a natural setting, such as a forest or pasture where nothing is harvested by humans, the environment will reach a natural balance. But in any commercial setting where humans are harvesting produce from crops, a natural balance is impossible, and soil nutrients must be replaced. Therefore, even with the best agronomic practices, commercial production of agricultural crops will deplete soils of nutrients, and steps must be taken to maintain soil health by rotating crops and adding nutrients through the application of fertilizer. Crop rotation is a universal practice, and common rotations in Africa include cotton, maize and cassava or a legume such as beans.
Cameroon is the only large Sub-Saharan African producer that has been able to supply farmers with adequate amounts of fertilizer in a timely manner each season so as to be able to preserve soil fertility and maintain cotton yields.In other countries, soil fertility is declining as input availability to farmers has diminished.
Sub-Saharan Africa received approximately $900 million in cotton-specific development aid between 2004 and 2016 under initiatives catalogued by the World Trade Organization, in Annex 1 to the Director General’s Evolving Table on Cotton Development Assistance (WT/CFMC/6/Rev.24).
Nevertheless, the average yield across Sub-Saharan Africa of 290 kilograms of lint per hectare in 2017/18 was no greater than it had been two decades earlier. While the development aid was helpful in achieving specific objectives such as training scientists and farmers, supporting research, and encouraging sustainable production practices, the aid could not supplant the diminished availability of inputs.
World cotton production is increasingly dis-aggregated by the marketing program or initiative under which it is produced. There are many programs to collect data, encourage improvements in production practices or assure consumers of responsible production practices; some of the programs are organized by producers in a particular country, some are sponsored by input suppliers, and some are multinational initiatives facilitated by the private sector and governments. Because cotton is increasingly identified in marketing channels by the program under which it was produced, these are called “identity cottons.”
World production of the four major identity cottons (Organic, Cotton made in Africa (CmiA), Better Cotton Initiative (BCI) and Fairtrade) is estimated at 3.2 million tons in 2016/17 (14% of the world total), up from 2.6 million tons in 2015/16 and 2.1 million in 2014/15.(There is a lag in reporting by each identity program, and data for the current season have not yet been reported.) The proportion of world cotton production under various identity programs is likely to increase, and BCI has an objective of accounting for 30% of world production by 2020.
World production of organic cotton grew from very small amounts in the early 1990s to a peak of 175,000 tons in 2008/09. Production dropped sharply after the recession as retailers and brands withdrew from sponsorship of organic cotton programs. Production in 2015/16, the most recent year for which statistics have been published,was 108,000 tons. The most recent data reported by Fairtrade is for 2014, when about 7,000 tons of lint were produced.
Organic and Fairtrade cotton production are falling because they require about twice as much work and yields are lower than conventional cotton. One hectare of organic cotton typically requires around 170 days of labor per year, compared with 90 days per year for conventional cotton.Excellent growers with sound agronomic knowledge require premiums of about 20%, but average growers experience greater yield losses compared with conventional production, and they require correspondingly greater premiums. However, premiums paid for organic cotton have fallen from 15% to 5% over the last decade.
The Director General’s Evolving Table on Cotton Development Assistance (WT/CFMC/6/Rev.23) from November 2017 includes nine projects involving organic and/or Fairtrade cotton in Africa totaling about $27 million. One of the projects with a value of $3 million is in the project formulation stage.
Production of certified organic cotton in Sub-Saharan Africa totaled 4,542 tons in 2015/16, down from 8,922 tons five seasons earlier. Projects involving organic and/or Fairtrade cotton do not seem to be having discernable positive impacts.
Production under CmiA totaled 346,000 tons in 2014/15, the most recent season for which country-by-country data are available,and production in Sub-Saharan Africa under BCI accounted for an additional 46,000 tons. Production under the two identity programs combined was 392,000 tons, or one-fourth of production in Sub-Saharan Africa in 2014/15. Governments have spent nearly $9 million on projects involving CmiA and BCI in Sub-Saharan Africa since 2006. There are no impacts on Sub-Saharan African yields or production of either program that are apparent in national statistics, but the programs may have positive impacts on participating households.
Cotton made in Africa and BCI are growing, while organic and Fairtrade cotton are shrinking. The major difference is that CmiA and BCI allow the use of modern agricultural technologies (CmiA does not accept biotechnology), while organic and Fairtrade require the use of labor intensive technologies from the early 20th Century. CmiA and BCI are initiatives that help farmers improve by providing training in the use of Best Management Practices, and farmers find such help useful. Organic and Fairtrade are only produced if premiums of at least 20% are paid, and few retailers are willing to guarantee such premiums.
Government Measures in Support of Cotton Production
The International Cotton Advisory Committee (ICAC) estimates that cotton-specific support provided by governments will total nearly $6 billion in 2017/18, the current season. The ICAC includes direct support to production, border protection, crop insurance subsidies, and minimum support price mechanisms in its calculations. The ICAC does not include fixed payments, or area payments, subsidies for research or construction of infrastructure, because these are not cotton specific. About three-fourths of all support is provided by China, with the USA, Turkey and the EU accounting for essentially all the rest.Small amounts of support are provided by several other countries.
Support per pound of production this season ranges from about 50 cents in Spain and Greece to approximately 30 cents in China, 20 cents in Turkey, 10 cents in the USA and about 5 cents in a few other countries.
The Government of China provides support to the cotton industry with three major interventions and two smaller programs. The major interventions include import quotas and tariffs, the operation of a buffer stock, and direct payments to producers. Subsides for using high-quality planting seeds, and a subsidy for transportation of cotton from Xinjiang to mills in eastern and southern China, are the two smaller programs.
Cotton mill use in China is about 2 million tons greater than production, and imports bridge the difference. Consequently, domestic prices are highly influenced by the cost of imported cotton.
China is obliged to establish a calendar year tariff-rate-quota (TRQ) under the terms of its WTO accession agreement. The in-quota tariff is 1% for the first 894,000 tons of imports each year. Additional import quotas are released based on the requirements of domestic spinning mills. The additional quotas can carry a tariff of 1%, or quotas can be based on a sliding scale of tariffs ranging from 5% to 40%.
China also maintains a strategic reserve, or national cotton buffer stock. China releases cotton to the market from the reserve through a system of auctions when there is a shortage, and replenishes the reserve in times of abundance, thus supporting prices. Since 2014/15, there have been no purchases by the government into the reserve. Since 2015/16, China issued only the TRQ import quotas of 894,000 tons per calendar year. As a result of government interventions and quotas, domestic cotton prices in China have exceeded international prices during the past three seasons, to the benefit of domestic farmers.
In addition to quotas, tariffs and a buffer stock, China provides direct payments to cotton producers. Payments to producers in Xinjiang, the far-western region, are based on the difference between a target price and an average market price each season. Xinjiang accounts for about three-fourths of total production. In the Eastern Provinces, a flat rate per ton is paid to farmers, regardless of the level of market prices.
The Government of the United States provides direct support to cotton farmers through four basic mechanisms: insurance against declines in revenue, insurance against declines in yield, a price floor and subsidies given to farmers to offset the cost of ginning. These mechanisms are mind-numbingly complicated, with formulas used to calculate the benefits received by each farmer on each farm while respecting WTO commitments and also balancing the interests of each region within the United States and each program crop. The premiums for the insurance programs are calculated on an actuarilly sound basis, but the government subsidizes more than half the premiums.
The revenue insurance program is called STAX, for Stacked Income Protection. Under STAX farmers who choose to purchase the insurance receive an indemnity if gross revenue (price times quantity) falls below a threshold selected by each farmer. Less than half of cotton farmers choose to buy this insurance, and those who do generally choose low thresholds which provide protection only in cases of bankrupting revenue declines. STAX, which was implemented in 2015/16, has not been popular and will not continue after 2018/19.
Yield insurance, or crop insurance, is available in many different versions, ranging from insurance against drought to insurance against pest attack resulting in yield loss, and even insurance against damage from fire. The insurance is sold to farmers through private companies, but the government subsidizes the premiums. About 90% of all cotton produced each year in the United States is covered by some form of yield insurance.
The U.S. government provides a guaranteed purchase price for cotton under a program called the Marketing Loan. The floor price varies by region of production and by quality of cotton, and the average is about 50 cents per pound of lint. Market prices have been far above the price floor for several seasons, and so this provision has not been effective for some time.
Finally, the government has given farmers a payment based on their acres harvested during the last two seasons under a program called Cotton Ginning Cost Share. Like STAX, this program will not be available beginning in 2019.
Support provided by the European Union, Turkey, and Colombia is simply a premium paid to farmers per acre harvested or per kilogram of seed cotton production. Of course, there are formulas and regulations to guard against fraud and ensure accurate payments to each farmer, but the basic concept is simply a payment to augment incomes.
Cotton producers in the European Union receive 65% of total support in the form of a single decoupled payment (income aid) and the remaining 35% in the form of an area payment (coupled, or production aid calculated by multiplying area harvested by a fixed payment amount). Only the production aid is included in the support calculations made by the ICAC because the income aid is decoupled from production volumes. If total aid to cotton farmers is considered, support per pound in Spain and Greece would be approximately $1.50. Payments in Turkey and Colombia are based on kilograms harvested.
India has a system of minimum support prices (MSPs) for each variety of cotton in each state, but market prices have been above the MSPs in recent years. The Government of India also provides fertilizer subsidies and debt forgiveness for small holders. Several other countries also subsidize cotton inputs, including fertilizer and planting seeds.
Cotton is not the largest, nor is it the most valuable crop in the world. However, cotton connects people to markets and provides economic opportunities on the frontiers of the world economy. World production and consumption are just now returning to the levels of a decade ago prior to the 2008 recession, and cotton growers in Africa and elsewhere are benefiting. Nevertheless, much greater benefits could be captured if African economies did a better job of providing inputs to growers to result in greater yields.
Cotton-specific development aid and identity production initiatives such as BCI and Cotton made in Africa, have numerous specific positive impacts, but the foundational objectives of raising cotton yields and incomes from cotton farming will only be fully realized when the problems of logistics and input supply are solved.Statistics make clear that organic and Fairtrade cotton are charities, not vehicles of economic development, and support for such practices are best left to charitable organizations, not governments.
World cotton production and trade remain distorted by government measures which provide advantages to farmers receiving benefits, and those distortions are likely to continue.