Subsidy is a fast tool to decrease the cost of productivity which leads to decrease the final price in order to increase the comparative advantage, trying to gain high income with lower profit from exporting high amount of production. The global economy has become reliant upon extensive government intervention in the form of subsidies, both direct and indirect, to support specific economic sectors (
e.g. agriculture) or to support a policy objective (
e.g. food security, self-sufficiency). Subsidies are a form of financial benefit provided by the government (
e.g., cash transfers and tax concessions) conferred on producers and consumers of goods and services, that render the value of the output lower than its full economic cost,
i.e., lower than the market price. Subsidies normally aim to promote activities that governments deem beneficial to the economy and society, such as food security and improving rural livelihoods. Subsidies create spillover effects in other economic sectors and industries. Cotton subsidies have remained a contentious issue in international trade and negotiations at the World Trade Organization (WTO). Farmers of developing and least-developed countries (LDCs) complain that the massive support provided by developed countries, especially the United States, has rendered cotton production uncompetitive in the Global South, leading to a disastrous impact on agricultural growth, export earnings and farmers’ welfare.
In the complex journey from seed to shop floor, cotton goes through several stages. Cotton must be grown, harvested, processedand spun into a yarn that is ready to be woven or knitted into a fabric, before being transformed into a finished product. About 64 per cent of all cotton fibre produced around the world is used in apparel, with the remainder mostly used in home furnishings. In addition to the soft white fibre of the plant, the cotton seeds are also harvested for animal feed, cooking oil and industrial applications. Zooming in on the agricultural stage of this global supply chain, the majority of cotton is grown in the US, China, India and Pakistan, in addition to other countries such as Uzbekistan, Turkey, Israel, Argentina and Australia. India alone produces 25 per cent of the world’s cotton, sustaining the livelihoods of 5.8 million farmers, the majority of whom are small-scale farmers cultivating land less than 2 hectares in size. In India’s textile industry, nearly 60 per cent of all raw materials are made up of cotton. The textile industry also makes up about 7 per cent of the industrial output and contributes about 12 per cent to the country’s export earnings.
Overview of the world cotton market
The supply side: Production and exports
More than 70 countries produce and export cotton, while many developed and developing countries depend on imports of cotton lint for their spinning and textile industries.
From 2003 to 2022, global cotton production increased by 22 per cent; it is now estimated at 26.13 million tons. After being the top cotton producer for many years, China has now been overtaken by India, whose production was to the tune of 5.9 million tons in 2021-22, representing 23 per cent of global production and China’s production has decreased slightly to 22 per cent still making it the second largest global cotton producer at 5.73 million tons (Table 1) followed by The United States with 3.96 million tons (15 per cent of global production). Brazillian cotton production increased from 6 to 10 per cent of the global total during the reference period, making Brazil the fourth largest cotton producer in the world today, as well as a key exporter. Global cotton production is highly concentrated with these four largest producers accounting for 71 per cent of total production. In addition, with the exception of the United States and Australia, cotton production occurs mainly in developing and emerging countries (more than 80 per cent of global production comes from these two groups). However, West African and Central African countries, which are part of the Franc Zone and at the heart of the Cotton Initiative, account for only 4 per cent of global production. Cotton is a minor component of economic activity in industrialised countries, accounting for only 0.12% of total merchandise trade, but its production plays a major role in some least developed countries in West and Central Africa.
Almost 30 to 40 per cent of the cotton produced in the world is exported, totalling 8 to 10 million tons. With the exception of China, the main cotton producers are also the main cotton exporters. The global cotton market is thus concentrated around a few actors: the top five exporters make up 71 per cent of total exports (Table 2). While accounting for 15 per cent of global production, the United States is by far the largest exporter, with 33 per cent of global exports in 2022. Though the market share reduced from 41 per cent in 2003-04 it has been relatively stable (around one-third). The high market share is often highlighted by opponents of US cotton policies, which have been accused of depressing world prices especially the United States-Brazil case regarding government support to the cotton farmers.
Brazil and India are also large cotton exporters, hovering around 20 per cent and 8 per cent of the global market, respectively. Although making up only a marginal share of global production, when it comes to exports, West and Central African countries account for 11 per cent of the total; this makes the region the world’s third largest exporter, falling just behind Brazil and before India which goes mainly to Asia, where they face competition from the United States.
The demand side: Consumption and imports
Global cotton consumption has regularly increased alongside cotton production and global population and is now estimated at 26 million tons.
In general, the largest consumers of cotton are also the main producers because production in these countries goes primarily to the domestic market. From Table 3, it is evident that there is a huge concentration of cotton consumption in Asian countries: the three largest consumers (China, India and Pakistan) account for 63 per cent of global consumption, with China alone accounting for one third. This high concentration is naturally explained by the relocation of textile industries to Asia as a result of rising labor costs in developed countries. Bangladesh turned out to be major importer occupying 6.48 per cent of world exports during 2022 from meagre 1.79 per cent during 2003-04.
A number of East Asian countries have emerged as important cotton buyers accounting for more than 75 per cent of global cotton imports, with one-fifth going to China (Table 4). Interesting turning point is the entry of Vietnam as one of the largest importer of cotton ranking in the third position since 2012 accounting for 16 per cent of the world imports during 2022. Another noteworthy point is that Pakistan has emerged as one of the largest importer to the tune of 12 per cent during 2022 from 5 per cent of world total imports during 2004. Chinese imports have increased since 2000 largely boosted by the liberalization of the country’s textile market. This growth has made China a key player in the international market and a major determinant of global cotton prices.
Global cotton prices
Global cotton prices are usually approximated by the A Index of Cotlook Ltd, based in Liverpool, UK. This index is an average of the five cheapest quotations from a selection of 18 varieties of upland cottons most frequently traded internationally.
Developed countries’ active support prices also play a key role in determining the evolution of world cotton prices.
(
Fousseini, 2015) Zooming in on the agricultural stage of this global supply chain, the majority of cotton is grown in the US, China, India and Pakistan, in addition to other countries such as Uzbekistan, Turkey, Israel, Argentina and Australia. India alone produces 25 per cent of the world’s cotton, sustaining the livelihoods of 5.8 million farmers, the majority of whom are small-scale farmers cultivating land less than 2 hectares in size The declining trend observed between 2003 and 2005 is largely due to the support measures by the government. Cotton prices started rising in 2009 (Fig 1). In addition to the continuing economic recovery, China’s net imports and the low level of both global and Chinese stocks were the main determinants of this price increase. This changed in 2012, however, when global stocks rose and China began accumulating large stocks since that time, global prices have declined which was exacerbated by an increase in global production combined with a decrease in demand due to the East Asia crisis and to China’s placement of an important part of its stocks on the international market as part of its new national pricing policy.
Impact of global subsidies on the world cotton market
Recurrent changes in public policies do not create a conducive economic environment for boosting investment in the sector. This is notably the case in some key producing countries, with, for instance, frequent changes in stockholding policies, border measures, input subsidies and support to the domestic textile industry. Another challenge is the price-cost squeeze that the textiles and manufacturers face because of stagnant retail prices and rising production costs. The result of that, is a race to build economies of scale through consolidation. Cotton farmers have limited alternatives but to adapt to this economic context, characterized by recurrent periods of declining cotton prices and high market volatility.
Cotton trade and production are highly distorted by policy support extended to cotton producers which has been greatest in the US, followed by China and the EU. When the prices of cotton are high, subsidies tend to decline and when the prices are low, subsidies rise. Cotton subsidies encourage over production which is then sold in the world market which has depressed world cotton prices, damaging those developing countries which rely on exports of cotton for a substantial component of their foreign exchange earnings.
Many studies have attempted to measure the impact of cotton subsidies on world cotton prices and production (Table 5). It is difficult to draw direct comparisons because the analyses adopt different methodologies, examine the impacts on a different set of countriesand use different reference years to estimate the effects of subsidy removal.
The results do serve to provide an initial insight into the magnitude of likely impacts. According to several simulation studies, elimination of cotton subsidies in the USA would increase the world cotton price by 3-11per cent, increase African cotton export revenue by $35-$100 million and reduce USA exports by 43 per cent.
The levels of government support to cotton in addition to all agricultural products, tend to fall during the years when prices rise (Fig 2). In cotton, there has been a strong negative correlation between subsidies and cotton prices: in years when prices are high, subsidies tend to decline and in years when prices are low, subsidies tend to rise. Support provided by governments represented approximately one-quarter of the value of world cotton production in 2014/15, but fell to one-tenth of the value of production in 2016/17 and 2017/18.
It should be noted that while the cotton industry in all cotton producing countries benefit from indirect support provided to the agricultural sector, in general, between half and three quarters of the world cotton production receive direct support during most seasons.
The Cot look A Index declined from an average of 88 cents/lb in 2012/13 to an average close to 70 cents/lb in 2014/15 and 2015/16, before rising to 84 cents/lb in 2017/18. Subsidies provided to cotton growers declined in 2016/17 from record levels. However, during 2017/18 average prices rose to 88 cents/lb and subsidies increased as well, while in 2018/19 moderate decline in prices was accompanied with a moderate decline in subsidies (Fig 3). The share of world cotton production receiving direct government assistance, including direct payments and border protection, increased from an average of 55 per cent between 2003-04 and 2007-08, to 83 per cent in 2008-09. From 2009-10 through 2013-14, this share declined and averaged 48 per cent. In 2014-15 and 2015-16, the average per centage of production receiving direct assistance increased to 75 per cent and later averaged at 49 per cent between 2016-17 and 2018-19.
Global domestic support provided to cotton
Policies and programmes affecting cotton production have been implemented in many countries. These include direct payments to producers to support incomes and government purchases of cotton and buffer stocks to stabilize prices and guarantee domestic supplies. Furthermore, subsidized premiums for insurance products to protect farm income during seasons of adversity, barriers to cotton imports to protect domestic industries and input subsidies to raise yields and lower production costs, are among some of the other policy instruments used by governments (Annexure I).
Developed countries are providing huge subsidies to agriculture sector and thereby, create distortions in the international market. Some of the developed countries are enjoying artificial comparative advantage due to a large amount of subsidies and thus, adversely affecting the welfare of millions of farmers in developing countries.
Over years, there is a phenomenal change in the direct assistance to the tune of 3.27 US$ billion to 5.74 US$ billion between 2003-04 and 2018-19 (with a huge increase in between during 2014-15 around 10.4 US $billion), respectively with 76% change. During the same period, the price increase was just to the tune of 15% as seen from Table 6 above. Historically, the United States and the European Union were the chief culprits but China’s agricultural subsidies now vastly exceed those of the traditional subsidisers. China has now surpassed the United States as the world’s biggest cotton subsidiser. Over the past decade, China has provided US$41 billion in cotton subsidies- nearly six times more than the US$7 billion provided by the United States. China alone accounts for nearly three-quarters of all cotton subsidies worldwide. China’s heavy subsidies and import barriers have reduced the incomes of cotton farmers in Africa and around the world, causing significant economic pain for many developing countries. The C4 countries are among the lowest-cost producers of cotton. Despite this comparative advantage, these countries are losing world markets due to artificially depressed prices from the big cotton subsidizers.
Instead of reforming its cotton sector, the US has been challenging domestic support measures in other countries to get market access for its highly subsidised cotton.
India has more than 9 million cotton farmers with an average cotton farm size of 1.2 hectares. On the other hand, the total number of farmers in the US are 8103 with an average cotton farm size of 624 hectares. Over and above, per-farmer cotton-specific Amber box is only US$ 27 in India as compared to US$117494 in the US (Table 7). The US has flexibility to provide support up to 238% of the cotton VoP in 2020 due to AMS entitlement, whereas the developing countries are capped at 10%. Further, as a per centage of VoP, the product-specific support to cotton in India has always remained below the
de minimis limit and despite this the average cost of production of cotton lint and seed cotton in India is less than that in the US. The US cotton farmers receive support through several programs, whereas cotton farmers in developing countries are low-income or resource-poor without any adequate safety nets. These farmers remain extremely vulnerable to price fluctuations caused by the entitlements of the developed members to provide support beyond the
de minimis limit. This clearly shows that millions of poor cotton farmers in developing countries have been facing an unfair and uneven playing field in the international cotton trade.
Recent global developments with government assistance in the cotton value chain
Demand for cotton depends on the demand for textiles. Over the last decade, textiles utilisation has been risen steadily mainly driven by population and income growth mostly in developing countries, particularly in Asia. Moreover, demand for natural fibres has expanded quite markedly in recent years, sustained by a growing trend for sustainability, providing further market opportunities for cotton. It is estimated that 15 per cent of world cotton is produced under some sustainability standards. Despite these positive prospects and opportunities, the cotton share in global textile fibre consumption continues to hover around 27 per cent, after accounting for close to 60 per cent between 1960s and 1970s. Robust demand for man-made fibres, most notably polyester fibres, helped by technological improvements, explains the loss in market share for cotton. The recent global development with goverment assistance in the cotton value chainhas been discussed as given in Table 8.
Future estimates
World cotton production in 2022/23 is projected at 118.1 million bales, 2.5 million bales (2 per cent) higher than 2021/22. Global harvested area is forecast at 32.5 million hectares (80.3 million acres) in 2022/23, slightly higher than last season. The world cotton yield in 2022/23 is projected at 791 kilograms (kg) per hectare (706 pounds per acre), compared with the 3-year average of 770 kg per hectare (687 pounds per acre). China is expected to account for 24 per cent of world production this season. For India, 2022/23 cotton production is projected at 27.5 million bales,12 per cent (3 million bales) above the year before, with increases in both area and yield. Harvested area is forecast about 7 per cent higher, at 13 million hectares and yield is also projected 5 per cent higher than last year at 461 kg per hectare, as more normal weather patterns allowed cotton plantings and production to rebound in key regions. India is expected to account for 23 per cent of world production this season. Projections now show a year-to-year decrease of 800,000 bales (13 per cent) to 5.2 million bales, the second lowest production level in nearly 40 years.
For India, this season’s cotton exports are projected to reach 3.5 million bales, down from 3.7 million bales in 2021/22. On the other hand, cotton exports for Brazil in 2022/23 are expected to increase 670,000 bales (9 per cent) to 8.4 million bales, while Australia’s exports are expected to increase 2.5 million bales (65 per cent) year-to-year to a record 6.2 million bales in 2022/23. With global mill use declining this season, China, Bangladesh and Vietnam are projected as the leading raw cotton importers in 2022/23. With global cotton demand declining and stocks increasing, the 2022/23 Cotlook A-Index average is expected to decrease from 2021/22’s relatively high level of 131.7 cents per pound.
India will continue to be the world’s largest cotton producer with the increase in production resting mostly on relatively higher yields, while area expansion is expected to be limited in line with recent trends. By 2030, India’s cotton production is projected to expand to 7.2 mt (approximately 43 million bales of 170 kg each) compared with current output of 6 mt equivalent to roughly 36 million bales. India will contribute to as much as 40 per cent global increase in cotton production during the outlook period. Cotton yields must increase, agronomic limits be overcome, resource use must decreaseand fibre characteristics need to transform to reach a level of performance that meets the demands of consumers (
FAO,2021).
