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  • 1.1.12-THE WORLD COTTON MARKET-GOVERNMENT MEASURES

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  • Government measures

    Chapter 1 - The world cotton market - Overview 

     
     

    An important factor explaining the location of cotton production in relatively high-cost countries is government measures that distort production and trade. Direct income and price supports for cotton worldwide ranged from $3.8 billion in 1997/98 to $5.8 billion in 2001/02. For 2005/06, direct income and price support programmes for cotton are estimated at $5 billion (see figure 1.19). Fourteen countries, representing three-quarters of world cotton production, offered direct income and price support programmes to cotton growers in 2001/02, a season of record low prices. This resulted in higher production and forced the burden of adjusting to low cotton prices on to growers in countries that did not provide similar measures of protection.

     

    1.1.12-en 

    Source: ICAC

    In 2005/06, the greatest government assistance per pound of cotton production was provided by the EU to producers in Greece and Spain, with support averaging $0.75 per pound of lint 14 Chapter 1 – The world cotton market Source: ICAC. Source: ICAC. production, or approximately $900 million in total (see figure 1.20). The EU announced in 2004 that 65% of the value of support for cotton would be paid to farmers directly and decoupled from current cotton production beginning in January 2006. This means that, beginning in 2006, cotton farmers in Greece and Spain received 65% of the support they used to receive, whether or not they continued to produce cotton, and only 35% of government support was based on current production. This change, known as decoupling, is leading to lower production. The EU produced 500,000 tons in 2004/05, and cotton production is estimated at 370,000 tons in 2006/07. Part of the decline in production during 2006/07 was due to poor weather, especially in Spain.

     

    1.1.12-en2
    Source: ICAC

    In 2005/06, direct support to cotton farmers in the United States averaged US$ 0.17 per pound of production. The total value of direct support was US$ 1.92 billion. Support in the United States included payments to farmers based on the difference between average farm prices and a target price. United States growers also received a fixed payment based on historical production. Like Europe, the United States does not attempt to restrict cotton imports in an effort to bolster domestic prices. Elements of the United States cotton programme came under specific criticism from the international community during the Doha Round of WTO trade negotiations because of the unique role played by cotton in the economies of many developing countries. During the Doha Round, the United States agreed to lower or eliminate subsidies to cotton, but only within the context of an overall agreement on agriculture. Unfortunately, by May 2007, the Doha Round had not been concluded because of a lack of an international consensus on trade reforms.

    The value of government support for China’s cotton sector is estimated by ICAC at $0.16 per pound in 2005/06, or about $2 billion. In contrast to Europe and the United States, China does not provide direct payments to cotton growers but instead uses a complex system of import quotas and licenses to restrict trade and maintain domestic prices above the world level. The Government of China reports to the WTO that it does not subsidize cotton. The differentials between international prices and equivalent domestic prices in China, adjusted for quality and common location, are documented including by ICAC and others. Government measures that boost cotton production have a negative effect on average international cotton prices in the short run. Estimates vary on the size of the impact, but most economists agree that the elimination of subsidies would raise average cotton prices by 5%–20%, and some estimates are higher.

    Government measures that boost cotton production have a negative effect on average international cotton prices in the short run. Estimates vary on the size of the impact, but most economists agree that the elimination of subsidies would raise average cotton prices by 5%–20%, and some estimates are higher.

    However, if subsidies were eliminated, production would expand in other countries within two to three seasons in response to higher prices, and many researchers feel that the long-run impact of government measures on cotton prices is probably smaller than the short-term impacts. Nevertheless, the distortions to cotton production caused by government measures are significant. In the absence of government support for cotton and other commodities, cotton production in the United States would decline by an estimated one-third over several seasons, and production in China would probably fall by about one-tenth. As a consequence, between two and three million tons of cotton production would shift from Europe, the United States and China toward lower-cost producing countries if government measures were eliminated.