The world cotton market is replete with subsidies across the entire spectrum of producing countries, large or small, developed or developing. Some subsidies are cash payments to producers or ginners while other subsidies are provided by restricting market access with a resulting increase in the internal domestic price. Other subsidies reduce the cost of inputs or increase the availability of production loans.
The current Doha negotiations should address these widespread distortions in a comprehensive manner. Some observers have focused solely on U.S. subsidies. A quick review of the world cotton situation leads to the conclusion that a U.S. focus will fail to provide any change in the economic condition of many of the world’s cotton growers.
The 2008 U.S. farm bill maintained the general support structures present in the previous legislation, but reduced the overall level of support available to U.S. cotton growers. The Counter-Cyclical Target Price was lowered from 72.4 to 71.25 cents per pound. With the base loan rate and direct payment unchanged, this move lowers the effective counter-cyclical payment to eligible U.S. cotton producers by 9.1 percent.
A change in the calculation of the premium and discount schedule for the CCC upland cotton loan reduced the loan value for internationally traded “A” type cotton by 1.15 cents per pound. The average U.S. cotton grower has experienced a decline in support of 2.3 cents per pound. With average yields at 900 pounds per acre this is a $20.70 per acre reduction in support.
This U.S. reduction contrasts sharply with increased support provided to cotton growers in China and India during 2008. With the world cotton price now hovering around 54 cents per pound, China has increased the administered price paid by gins for seed cotton to the equivalent of 80 cents per pound for cotton lint in 2008, up from 78 cents in 2007. In August 2008, India announced a minimum support price (MSP) for cotton lint of 69 cents per pound.
Together, India and China now account for more than 56 percent of world production and have increased cotton production faster than world mill use of cotton over the past five years. World mill use increased 21 million bales while India and China increased their combined cotton production by 26 million bales during the same period.
These two countries have increased their shares of world market at the expense of the remaining cotton producers. Over the same five years, U.S. cotton production has declined more than 4 million bales. West African cotton production has declined 1.7 million bales, and Turkish cotton output is down 1.8 million bales. U.S. producers have responded to market signals shifting from cotton production to grains and oilseeds. Cotton producers in India and China are responding to administered prices with ever larger cotton crops.
Observers watching India and China command growing stakes in the world cotton market while focusing solely on the U.S. cotton program as the only source of market distortion miss the real story. Support mechanisms can range from minimally to extensively distortive in the grower’s planting decision. The pattern of production reveals the underlying relative strength of market forces compared to government programs in the respective countries.