International trade is the skeleton of Brazillian prosperity rests. Free trade system have created a high competition in today's open market. It is marred with continuous innovation and leads to better products, well paid jobs, fresh markets, and increased profits and investment. Free trade lets the cotton growers produce more products to reach international consumers at lower prices, thereby hugely increasing their standard of living.
Moreover, the benefits of FTA extend well beyond borders. Free trade helps to spread the value of freedom, reinforce the rule of law, and foster economic development in poor countries. The national debate over trade-related issues too often ignores these important benefits.
The Brazil-American Cotton Dispute
The Cotton dispute is a very long dispute brought by Brazil against the US. In 2005 and 2008, the World Trade Organization (WTO) found that some U.S. subsidies were inconsistent with the WTO standards:
(1) The remunerations paid to cotton producers under various programs; and
(2) The Export credit guarantees under the GSM-102 Program
In 2009, WTO had issued arbitration awards for the dispute. These grants provided the level of countermeasures that Brazil could obtain against U.S. trade. The annual amount of countermeasures has two parts:
1) Constant value of $147.3 million for the cotton payments and
2) A payment for the GSM-102 program that varies based upon program usage. The current total sum of authorized countermeasurements is more than $800 million.
The arbitrators had also ruled that Brazil had the freedom to impose cross-sectoral countermeasures, including countermeasures in intellectual property and services. It could impose the countermeasures to the level that it applies the total countermeasures in excess of a threshold. The threshold was made to vary annually, but is approximately $560 million. Therefore, total $820 million of countermeasures Brazil could impose, out of which $260 million in cross-sectoral levels.
The United States and the Government of Brazil had agreed to continue engagement, with a view to agreeing on a process that will allow us to reach a mutually agreed solution to the Cotton dispute.
In a continuation of the trend evident since 2010/11, global cotton production will again exceed consumption in 2012/13, ending slightly below 2011/12 levels at 26.39 million tonnes. After 2 years of decline, consumption recovered sharply in 2012/13, increasing by 7% to 27.78 million tonnes, with growth in India, Bangladesh, Turkey and Pakistan partially compensating for a fall in the world's leading consumer, China. Global cotton stocks grew for the third year in a row, with almost 60% held by China, and the same trend is already apparent for 2013/14, with China's share projected to rise to 64%. According to the International Cotton Advisory Committee’s (ICAC’s) estimates, global production will fall by just over 5% to 24.95 million tonnes. It will decline in the United States (a year-on-year reduction of 17% in the planted area), China, Brazil and Australia, while remaining steady in India, Pakistan and Uzbekistan. Consumption is expected to grow by just over 2% to 24.33 million tonnes.
Cotton prices were extremely volatile during 2010 and 2011, jumping in the space of 6 months from 85 US cents/lb to a record high of 243 cents/lb before falling back sharply. In contrast, prices since early 2012/13 have been relatively stable. The Cotlook A index opened in August at 81.65 cents/lb and fluctuated between 80 and 85 cents until February. It then began to rise, reaching a high of 99 cents/lb in March 2013, before dropping to 90 US cent/lb in April–May and recovering in mid June to 96 cents/lb. Prices overall have ranged from 80 to 99 cents/lb during 2012/13, at an estimated average of 88 cents/lb (ICAC), 12 cents/lb below their 2011/12 level. Less volatility has led to fewer breaches of contract: only 52 contracts were subject to International Cotton Association (ICA) arbitration, compared with 135 in the first quarter of 2013 (and 247 for the full year, breaking the previous record of 242 set in 2011). Prices are relatively high given the current market fundamentals of substantial stocks and supply exceeding demand. This is largely as a result of Chinese policy, which will continue to determine trends in 2013 and 2014. With over 60% of cotton stocks held in China (USDA), stock-to-use ratios elsewhere are relatively tight.
China maintained its policy of producer support in 2012/13, by guaranteeing a minimum purchase price above global levels and rebuilding its national reserve stocks. China's opening stocks had almost tripled to over 6 million tonnes and have since experienced further growth, with higher than anticipated levels of imports pushing stocks to 10 million tonnes by the beginning of 2013/14 (USDA June 2013 estimates). The actual level of imports is projected to fall from 5.2 million tonnes in 2011/12 to 4.3 million tonnes in 2012/13, and China has also been selling off part of its reserve stocks since January 2013, with sales expected to close at the end of July.
Over recent weeks China’s Middle Kingdom has made no secret of the fact that it is contemplating policy changes (see Agritrade article ‘ Changes in Chinese cotton policy imminent?’, 15 July 2013). The priority for China's policy makers until now has been to support its producers and stabilise the market. But the price has perhaps been too high, particularly for China's textile industries.
Outlook for cotton in 2022
What will the cotton market look like in 10 years’ time? In their 'Agricultural Outlook 2013-2022’, the FAO and the OECD have for the first time included projections for cotton. While China and the United States are expected to maintain their status as leading consumer and producer respectively, the decade is likely to see significant changes. Consumption is projected to increase at an annual rate of 1.7%, below the long-term average, with a rate of 7% expected in India. It is not expected to reach the 2004 record of 26.7 million tonnes until 2022. Production is forecast to grow more slowly than demand, with a significant fall in China and growth in India and Pakistan. Trade is expected to fall. However the LDCs of sub-Saharan Africa are projected to increase their share of the global export market, overtaking India to become the world's second largest exporter behind the United States. Meanwhile China's share of the global import market will fall by half, with countries like Bangladesh and Vietnam taking up the slack. Finally, prices are projected to increase by 47% relative to the period 2000/09, reaching an average of some US$1395/t. However, they will not be as attractive as those offered by wheat and maize.
The cotton issue at the WTO: 2012–13 developments
The most recent consultations at the WTO over development assistance to the cotton sector are not subject to appeal: “The ‘Cotton-4' and other sub-Saharan producers stated on 21 June 2013 that they regret the lack of movement in the negotiations to cut cotton subsidies and to open markets.” The next opportunity will occur at the forthcoming WTO Ministerial Conference in Bali in December, where the C4 countries are expected to table a new proposal.
The stalemate over cotton is one aspect of the deadlocked negotiations over the wider Doha Round.
Cotton sector subsidies in western countries are also under scrutiny, with discussions currently in progress over CAP reform and the new US Farm Bill (see section ‘Developments in the European cotton sector, 2012–13’ below).
In the United States, the two houses of Congress failed to agree a new Farm Bill for 2013/18. In response, the 2008/12 Farm Bill, with a budget in excess of US$288 billion, was extended until 30 September 2013, the deadline for the approval of its successor. Some elements of the new Farm Bill appear to be settled: the budget, at around US$939 billion over 10 years, substantial cuts to subsidies and an increase in crop insurance. However, as of early July, the Senate and the House were still divided, especially over the issue of food stamps. The Republicans in the House of Representatives suggested splitting the Farm Bill as a way forward, and on 11 July the House passed the Bill, shorn of its food stamp clauses. Will this be sufficient to gain a yes vote in the Senate and ultimately White House approval?
As far as cotton is concerned, the reform marks a change from direct payments to crop insurance programmes. Crop insurance will be complemented by the Stacked Income Protection Plan for Producers of Upland Cotton (STAX), proposed by the National Cotton Council (NCC) to cover smaller losses, and uncontested on 11 July. The NCC argues that STAX will benefit cotton growers while also providing a basis “for a definitive resolution of the dispute with Brazil and the WTO”. In an interim agreement until the new Farm Bill comes into force, the US is making annual compensation payments of US$147.3 million to Brazil, which is still contemplating retaliatory measures if the new bill fails to meet its expectations. Studies conducted by the International Centre for Trade and Sustainable Development (ICTSD) show that in certain circumstances a crop insurance system combined with STAX could increase American spending on cotton when prices are low.
While the steady increase in Chinese support for the domestic cotton sector has worked to keep the market stable and prices relatively high, especially during 2012/13, the past decade has also seen a negative correlation between levels of subsidy and the Cotlook A Index, particularly for the US and Europe. However, an ICAC/ICTSD Information Note suggests that by including cotton in its duty-free, quota-free access to markets programme for LDCs, China could increase the competitiveness of African cotton relative to other regions by making it duty free. Apart from the annual quota of 894,000 tonnes set as part of its WTO obligations, China's duties on imported cotton currently range from 5 to 40%.
Despite the continuing stalemate at the WTO over the cotton issue, there has been an increase in the amount of aid received by African countries. In May 2013 the total disbursements directly linked to the cotton sector reached US$453 million – US$321.3 million to completed projects and US$131.7 million to current projects – a rise of US$64 million over December 2012. Despite the increase in disbursements, the Africans still consider the figure too low (a 36% disbursement-to-commitment ratio for the US$365.6 million committed). In terms of development aid to agriculture and associated infrastructure, the total value of commitments has risen to US$6.9 billion, an increase of US$1.9 billion over December 2012.
The Africans have highlighted the importance of South–South cooperation, giving particular thanks to China (Chinese assistance is not included in the figures above). Brazil signed a US$20 million partnership agreement with the WTO in 2012 to transfer knowledge and expertise in cotton cultivation and trading to producers in developing countries by providing technical assistance and best practice training. Similarly, India has allocated a budget of US$5 million for the period 2012–14 to the Cotton Technical Assistance Programme for Africa, based in Ouagadougou.
