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The United States 2014 Farm Bill and Its Implications for Cotton Producers in Low-income Developing Countries

Report by Townsend, Terry /y UNCTAD's Special Unit on Commodities, 2014

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The report seeks to examine whether the subsidies paid to United States cotton growers are likely to lead to increased or decreased United States cotton production by 2018 based on findings from the 2014 Farm Bill and the Stacked Income Protection Plan (STAX).

U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


THE 2014 US FARM BILL AND ITS
IMPLICATIONS FOR COTTON PRODUCERS


IN LOW-INCOME DEVELOPING COUNTRIES




UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT


The United States Farm Bill of 2014
and its Implications for Cotton Producers


in Low-income Developing Countries*


*The official name of this bill is the United States Agricultural Act of 2014.


UNITED NATIONS
New York and Geneva, 2014




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


ii


NOTE


The designations employed and the presentation of the material in this publication do not imply the expression of any
opinion on the part of the United Nations concerning the legal status of any country, territory, city or area, or of its
authorities, or concerning the delimitation of its frontiers or boundaries.


Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a
copy of the publication containing the quotation or reprint, to be sent to the UNCTAD secretariat at: Palais des
Nations, CH-1211 Geneva, Switzerland.


This publication has been edited externally. Due diligence was exercised in preparing it, but UNCTAD may not be held
liable for any factual errors or misrepresentation of data, or otherwise, which may be contained in the report.


Acknowledgements


This report was commissioned by UNCTAD's Special Unit on Commodities. It was written by Dr. Terry Townsend, an
independent consultant and a former Executive Director of the International Cotton Advisory Committee (ICAC). It was
prepared under the general direction and supervision of Samuel Gayi, Head, Special Unit on Commodities, UNCTAD.
Comments on an earlier draft were provided by the following persons from the Special Unit on Commodities,
UNCTAD: Janvier Nkurunziza, Chief, Commodity Research and Analysis Section, and Kris Terauds and Yan Zhang,
Economic Affairs Officers.


Disclaimer


The views expressed are those of the author and do not necessarily reflect those of the United Nations. The author of
the report also wishes to exonerate those who have commented on it from responsibility for any outstanding errors or
omissions.


UNCTAD/SUC/2014/3




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


iii


Table of contents


Introduction .............................................................................................................................................. 1


1. Trends in United States cotton production and exports .................................................................... 2


United States cotton exports............................................................................................................ 4


2. The United States 2014 Farm Bill...................................................................................................... 5


Stacked Income Protection Plan (STAX) ........................................................................................... 5


Other provisions of the 2014 Farm Bill .............................................................................................. 6


Continued use of marketing loans .................................................................................................... 6


Short-Term Export Credit Guarantee Program (GSM)....................................................................... 6


Subsidies to textile mills.................................................................................................................... 7


Treating cotton differently ................................................................................................................. 7


3. Subsidies paid to United States cotton farmers ................................................................................ 7


Support to cotton provided by other countries ............................................................................... 10


4. Long-run trends in the world cotton market .................................................................................... 10


World production stagnant ............................................................................................................. 12


Regional production trends ............................................................................................................ 13


China .................................................................................................................................... 13


India...................................................................................................................................... 14


Pakistan................................................................................................................................ 14


Brazil and South America...................................................................................................... 15


Uzbekistan and Central Asia ................................................................................................. 15


Turkey................................................................................................................................... 15


Australia................................................................................................................................ 15


Africa .................................................................................................................................... 16


5. Opportunities for African cotton producers ..................................................................................... 17


Input availability .............................................................................................................................. 17


Regulation ...................................................................................................................................... 19


Other priorities................................................................................................................................ 20


6. Concluding remarks........................................................................................................................ 21






The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


1


The United States Farm Bill of
2014 and its Implications for
Cotton Producers in
Low-income Developing
Countries*
*The official name of this bill is the United States Agricultural Act of
2014


Introduction
Cotton is produced on a commercial scale by about 45
million households in about 80 countries, and provides
annual incomes to an estimated 250 million people. For
many households, cotton is the sole source of cash
income and provides finance for inputs for food
production, while also being used as a rotation crop.
Because cotton is a storable commodity, and because it
can be grown in arid regions, it connects people in
interior locations within countries and continents to
markets, thus serving as an engine of economic growth.


Accordingly, cotton has always been a commodity of
interest to policymakers. From the invention of the
cotton gin in the 1790s to the present, the United States
has always played a leading role in the world cotton
industry because of trade relations with the United
Kingdom, the major textile producer from the 1700s to
the 1950s, and favourable agronomic conditions. With
the exception of disruptions caused by war or
extraordinary weather conditions, the United States has
almost always been the world’s largest cotton exporter,
and therefore its policies and programmes have
implications for producers in all countries.


United States farm policies have changed substantially
since the 1920s. During the Great Depression, the
United States Government began trying to boost the
incomes of domestic cotton producers by restricting the
amount of cotton produced each year and by limiting
imports so as to increase cotton prices. It continued to
restrict production during the 1970s, and also began to
make direct payments to farmers when prices fell below
certain thresholds. In the 1980s, realizing that policies to
restrict domestic cotton production were resulting in the
United States’ loss of world market share, the
Government abandoned efforts to raise prices by
restricting production, and instead began to support
farm incomes with direct payments. It also implemented
policies to encourage increased mill use and exports.
During the 1990s and 2000s, it adjusted the formulas
used to determine payments to individual cotton growers
to meet budget targets, and some payments were
“decoupled” from current production decisions to
reduce distortions. Nevertheless, those payments
remained significant, accounting for about one third of
gross receipts from cotton production, on average.


There is widespread agreement that subsidies distort
production and trade. Brazil was able to successfully
challenge the United States cotton subsidies programme
within the dispute settlement mechanism of the World
Trade Organization (WTO) by showing that United States
cotton exports was causing “serious prejudice” to
Brazilian cotton exports. In addition, four African cotton-
exporting countries, Benin, Burkina Faso, Chad and Mali
(collectively known as the “Cotton 4” or simply, C4),
raised the issue of subsidies paid to cotton growers in
developed countries at the WTO’s Doha Round of
negotiations. During the Hong Kong Ministerial in
December 2005, members of the WTO agreed to treat
cotton expeditiously, ambitiously and specifically within
the talks on agriculture. Accordingly, there is much
interest worldwide about the evolution of United States
cotton policies, which could affect global production,
consumption and trade.


Legislation setting the broad parameters of United
States agricultural policies covering subsidies, food
safety, soil and water conservation measures, and other
issues is renewed approximately every five years. The
most recent “farm bill”, the Agricultural Act of 2014,
(H.R. 2642), which was passed by the United States
Congress and signed by President Obama in February
2014,will affect the basic structure of agricultural
programmes in the United States until 2018. The bill
authorizes $956 billion in spending over the 2014 to
2023 period,1 including $756 billion on food and nutrition
programmes, $89.8 billion on crop insurance, $56 billion
on conservation programmes, $44.4 billion on
commodity programmes, including for cotton, and $9.8
billion on other miscellaneous provisions.


This report aims to provide an analysis of the United
States Agricultural Act of 2014 (hereinafter referred to by
the commonly used term, the 2014 Farm Bill), focusing
on its potential implications for cotton prices worldwide
and especially its impacts on cotton producers in low-
income developing countries and least developed
countries (LDCs). It does not attempt to determine
whether the cotton provisions of this Act are compliant
with WTO rules or explain the findings of the Brazil
cotton case; rather, it seeks to examine whether the
subsidies paid to United States cotton growers are likely
to lead to increased or decreased United States cotton
production by 2018.


The report is divided into six sections. Section 1
discusses the trends in United States cotton production
and exports. Section 2 describes the 2014 Farm Bill and
Stacked Income Protection Plan (STAX). Section 3
focuses on the outlook for subsidies paid to United
States cotton farmers. Section 4 examines long-term
trends in the world cotton market and trends in cotton
production by major region. Section 5 discusses the
opportunities for African cotton producers and highlights
some policy recommendations to enhance income from
cotton production in Africa. Section 6 concludes.




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


2


Figure 1: Major cotton exporters, 2012/13


0


500


1,000


1,500


2,000


2,500


3,000


3,500


United
States


India Australia Brazil CFA Zone* Uzbekistan SSA-CFA
Zone**


00
0


To
ns


Note: * Cotton producing countries of Francophone Africa, including Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Cote
d'Ivoire, Guinea, Madagascar, Mali, Niger, Senegal and Togo. ** Cotton producing countries of Sub-Saharan Africa other than those in the
CFA Zone.


1. Trends in United States cotton
production and exports2


The breakup of the Soviet Union in the early 1990s
resulted in a fundamental demarcation in the structure of
world commodity industries, including cotton. Therefore,
it is appropriate to use 1990 as the first year in an
analysis of the structure of the cotton market.


Over the past 25 years, the United States has produced
an annual average of 3.8 million tons of cotton. It has
always ranked among the top five producers globally,
and has been the largest exporter each season
(figure 1).


United States cotton production rose in an impressively
strong trend, from 2.4 million tons in 1980/81 to a
record 5.2 million tons in 2005/06, but declined steadily
thereafter, to 3.8 million tons in 2012/13 and 2.9 million
tons in 2013/14 (figure 2). This was partly due to


competition from grains and soybeans as a result of
mandates to grow crops for biofuel production. With
competition from biofuels boosting grain prices, and with
cotton yields rising slowly, United States cotton
production may continue its downward trend until about
2020


Cotton production in the United States is gradually
consolidating in the south-east (Georgia, North Carolina,
Alabama and South Carolina) and Texas. Production in
what is referred to as the mid-south (Missouri, Arkansas,
Mississippi, Tennessee and Louisiana) is declining, while
in the so-called Far West (California and Arizona) it has
been about 8 per cent of the country’s total for a
decade. Higher prices for grain and soybeans in the mid-
south, linked to biofuel mandates, have encouraged a
shift away from cotton, while water constraints and
various alternative crops, ranging from almonds to
tomatoes, are gradually exerting greater pressure cotton
production in the west (figure 3).


Figure 2: Cotton production, consumption and exports in the United States,
1990/91−2010/2011


0


1,000


2,000


3,000


4,000


5,000


6,000


1990/91 1995/96 2000/01 2005/06 2010/11


00
0


To
ns


Production Exports Consumption




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


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Figure 3: United States cotton production by region,
1990/91−2010/2011


0


10


20


30


40


50


1990/91 2000/01 2010/11


P
er


ce
nt


South-east Delta South-west Far West


Figure 4: Share of cotton in total area for corn, soybeans and cotton
in the United States, 1990/91−2010/2011


0.00


2.00


4.00


6.00


8.00


10.00


12.00


1990/91 1995/96 2000/01 2005/06 2010/11


P
er


ce
nt


The cotton harvested area in the United States fell
relative to the harvested area for corn and soybeans
between 2005/06 and 2012/13.3 Between 1990 and
2013, the total area devoted to cotton, corn and
soybeans together increased from 55 million hectares to
70 million, but the area under cotton fell during that
period. During the 1990s, the share of cotton in the total
area devoted to cotton, corn and soybeans ranged
between 8 per cent and 10 per cent in most years, and
was still only 8.6 per cent in 2005/06. However, between
2005/06 and 2013/14, that share fell by almost half, to
4.5 per cent (figure 4).


The data on harvested area indicate that, from farmers’
perspectives, cotton is becoming less attractive than
corn and soybeans. Cotton-to-corn and cotton-to-
soybean price ratios are declining: between 1990/91
and 2005/06, the ratio of the Cotlook A Index to United


States export prices for corn at Gulf Coast ports
averaged 13.5:1, and between 2005/06 and 2012/13,
that ratio averaged 8.9:1. Likewise for soybeans, the
ratio of the Cotlook A Index to export prices for
soybeans at United States ports averaged 5.8:1
between 1990/91 through 2005/06, and has fallen to
4.1:1 in the seven seasons since 2005/06.


There are many factors affecting commodity prices, such
as population and income growth, macroeconomic
variables, consumer tastes and preferences, and
changes in technology. However, a major factor causing
a sustained increase in prices of corn and soybeans
relative to prices of cotton in the United States and on
world markets is the increasing use of ethanol for biofuel.
The rise in oil prices since 2005 and provisions of the
United States Energy Independence and Security Act of
2007 are providing economic incentives for an




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


4


expansion of biofuel production in the United States.4 In
2006, ethanol accounted for less than 4 per cent (by
volume) of motor vehicle gasoline supplies in the
country, but it grew to 10.6 per cent in 2011. Corn,
which is the primary feedstock used to produce ethanol
in the United States, is likely to remain so in the coming
years. Indeed, it is estimated that 43 per cent of
2013/14 United States corn was used in ethanol
production.


The increased demand for corn for use in biofuel
production has driven up corn prices, as well as prices
of soybeans and other crops that compete with corn as
livestock feed. Cottonseed oil is not used to make
biofuels because its sugar content is relatively low.
Further, cottonseed is a byproduct of cotton production,
accounting for just one fifth of the value of seed cotton
production.


Therefore, the increase in demand for feed grains
resulting from increased biofuel production in the United
States is not resulting in a proportionate increase in
demand for cotton. Hence, prices of feed grains and
oilseeds have been rising relative to the price of cotton
since the mid-2000s (figure 5). As long as the United
States Government mandates that ethanol be blended
into domestic liquid fuel supply, this situation is not likely
to change. Consequently, the shift in the relative
competitiveness of cotton versus corn and soybeans for
land in the United States is likely to persist.


United States cotton exports


During the past 25 years, United States mill use
(consumption of cotton lint by textile mills) has declined
from an average of 2.3 million tons during the 1990s to
an average of 773,000 tons during the period 2010/11-
2012/13. It rose slightly to 784,000 tons in 2013/14, and
there could be further moderate increases towards
800,000 tons over the next few years. Nevertheless,
cotton production is likely to exceed domestic
consumption during the life of the 2014 Farm Bill.
Consequently, most of United States cotton production
will be exported.


For the past 25 years, the United States has exported,
on average, 2.2 million tons of cotton per year,
maintaining its role as the largest exporter of this
commodity. Cotton exports were 1.5 million tons per
year from 1990/91 to 1999/00, 2.8 million tons per year
from 2000/01 to 2009/10 and 2.9 million tons from
2010/11 to 2012/13. Exports rose slightly, as production
remained high relative to consumption and stock levels
fell below 1 million tons. China, Turkey and Mexico were
the top three destinations for those exports during this
period (table 1). As would be expected, owing to record
production in 2005/06, United States cotton exports
reached a peak that year, at more than 3.8 million tons.
The lowest point for exports, at only 938,000 tons, was
in 1998/99, when production declined dramatically due
to a severe drought in the United States, while domestic
consumption remained relatively high. Indeed, with the
fall in exportable surplus, the United States imported a
record 96,000 tons.


Table 1: Destinations of United States cotton
exports, 2010/11 to 2012/13


(annual average)
Thousands of Tons


China 1216


Turkey 373


Mexico 231


Indonesia 127


Thailand 97


Rep. of Korea 87


Taiwan Prov. of China 76


Pakistan 65


Japan 29


Hong Kong (China) 14


Rest of the world 559


Total 2874


Figure 5: Price indices of cotton, corn and soybeans,
2001−2013


0


50


100


150


200


250


300


350


400


450


500


2001 2004 2007 2010 2013


(P
ric


es
in


20
01


=
10


0)


Cotton Corn Soybeans




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


5


While changes in stock levels can affect export volumes
in any given year, over several years United States
cotton exports will equal production minus domestic mill
use. If mill use is assumed to be 800,000 tons per year,
and production is between 3 million tons and 3.5 million
tons, United States exports will probably be between 2.2
and 2.7 million tons per year. Thus, United States cotton
exports during the second half of this decade will likely
be about one-fifth lower than they were during the first
half of the decade.


2. The United States 2014 Farm Bill
Under previous farm acts going back to the 1970s,
1980s and 1990s, cotton farmers and farmers of other
“covered commodities” (wheat, feed grains, rice,
oilseeds, peanuts and pulses) received three kinds of
support from the USDA: (i) marketing loans, (ii)
countercyclical payments, and (iii) direct payments. Of
these, the countercyclical payments and the direct
payments are being eliminated under the new act, but
the marketing loan programme will continue. Across all
the covered commodities, growers are facing significant
programme changes, but in a unique development,
cotton is being treated differently. This is most probably
in response to the successful challenge of Brazil at the
WTO to the treatment of cotton under the previous
United States farm acts.


Stacked Income Protection Plan (STAX)


The innovative portion of the new Farm Bill is its
increased emphasis on revenue insurance through the
Stacked Income Protection Plan (STAX). This Plan will
provide revenue insurance to producers of upland
cotton.5 Because of the administrative complexity of the
new provisions, and because the bill was enacted after
the deadline for implementation of the new provisions for
2014, STAX will not be available until 2015. To provide
support in the meantime,, upland cotton producers will
receive transition payments for crop year 2014 and also
for crop year 2015 in any areas where STAX protection
is not yet available. STAX can supplement insurance
coverage available through the Federal Crop Insurance
programme, or be purchased as stand-alone


protection. Federal Government subsidies will cover 80
per cent of producers’ premiums. STAX, like traditional
crop insurance, is not subject to payment limitations or
to adjusted gross income eligibility limits.


STAX is a “shallow loss” insurance programme in which
farmers will pay premiums for same-season revenue
insurance and will receive indemnities (i.e. payments to
compensate for losses covered under insurance policies)
when revenue in their county falls below 90 per cent of
the “expected revenue” for the current crop year.
However, under STAX, indemnities may be no more than
20 per cent of the expected revenue in each county;
farmers will have to purchase traditional crop insurance
policies to cover greater losses in yields or revenue.


Indemnities will be based on projected prices at planting
time and historical yields versus actual prices at harvest
and actual yields, as is the case for traditional crop
insurance. The projected price will be the ICE
(Intercontinental Exchange) cotton futures contract for
December delivery during a period defined for each state
based on state planting dates; for example, the period
for Texas, the largest cotton-producing state, will be
from January 15 to February 14 of each year beginning
in 2015, and other states will have other periods for
determination of expected prices based on their usual
and customary planting dates. Actual prices at harvest
will also be determined based on the December ICE
cotton futures during October in most states.


The revenue estimates are based on countywide
calculations. 6 Therefore, under STAX, if revenue in a
county falls below 90 per cent of the estimated revenue
at planting time, upland cotton farmers in that county
who had paid the premiums to buy STAX insurance will
receive indemnity payments equal to the difference but
no more than 20 per cent of expected revenue. STAX
will be available for purchase on all acres planted with
upland cotton (see table 2 for examples of how
indemnities are calculated under STAX).


Table 2: Example of STAX calculations


Example A Example B Example C Example D


Price falls Price falls Price rises Price rises


Yield falls Yield rises Yield falls Yield rises


Projected price at planting (ICE Futures in January) ($/acre) $0.80 $0.80 $0.80 $0.80


5-year average yield for the county (lbs/acre) 800 800 800 800


Expected county revenue ($/acre) $640.00 $640.00 $640.00 $640.00


- 90 per cent of expected revenue ($/acre) $576.00 $576.00 $576.00 $576.00


- 70 per cent of expected revenue ($/acre) $448.00 $448.00 $448.00 $448.00


Maximum indemnity in county ($/acre) $128.00 $128.00 $128.00 $128.00


Harvest price (ICE Futures in October) ($/lbs) $0.70 $0.70 $0.90 $0.90


Actual county yield (lbs/acre) 600 850 600 850


Actual county revenue ($/acre) $420.00 $595.00 $540.00 $765.00


Indemnity in county ($/acre) $128.00 $0.00 $36.00 $0.00


Actual revenue plus indemnity ($/acre) $548.00 $595.00 $576.00 $765.00




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


6


Crucially, STAX will not provide insurance or support
against declines in cotton prices from one season to the
next. It is essentially a government-operated and
subsidized programme to assist cotton producers in
hedging their crops for five or six months between
planting and harvesting each season. STAX will assist
cotton farmers in obtaining finance from commercial
banks at planting time. Farmers participating in this
programme will be able to pledge to a bank any resulting
indemnities as collateral against production loans, and
therefore banks will more readily make such loans for
cotton production.


The premiums for STAX will be calculated on an
actuarially sound basis, which means that over several
seasons indemnities will equal premiums. However, the
Government will pay 80 per cent of the premiums and
will also cover all administrative costs, which will be
substantial, given that there are about 15,000 upland
cotton farmers in the United States operating about
250,000 separate cotton farms in hundreds of counties,
and separate calculations must be made in each county.


Other provisions of the 2014 Farm Bill


In addition to STAX, there are numerous other provisions
of the 2014 farm bill that will affect cotton production.


The Risk Management Agency (RMA) of USDA provides
a number of crop insurance products that United States
farmers may choose, and these insurance programmes
will continue under the 2014 Farm Bill. The following is a
partial list of traditional crop insurance policies:7


x Actual Production History (APH) insures producers
against yield losses due to natural causes such as
drought, excessive moisture, hail, wind, frost,
insects and disease.


x Actual Revenue History (ARH) insurance covers
historical revenue instead of historical yields.


x Adjusted Gross Revenue (AGR) and AGR-Lite
policies insure revenue of the entire farm, rather than
an individual crop, by guaranteeing a percentage of
average gross farm revenue, including a small
amount of livestock revenue.


x Area Risk Protection Insurance (ARPI) provides
coverage based on the experience of an entire area,
generally a county.


x Group Risk Income Protection (GRIP) is designed as
a risk management tool to insure against
widespread loss of revenue from the insured crop in
a county.


x Group Risk Income Protection - Harvest Revenue
Option (GRIP-HRO) is a supplemental endorsement
to the GRIP Basic Provisions.


x Rainfall Index (RI) is based on weather data
collected and maintained by the National Oceanic
and Atmospheric Administration's Climate
Prediction Center.


x Catastrophic Risk Protection Endorsement (CAT
Coverage) pays 55 per cent of the price of the
commodity established by RMA on crop losses in
excess of 50 per cent.


Continued use of marketing loans


All cotton farmers in the United States are eligible to
harvest their cotton, store the bales in warehouses, and
transfer the electronic warehouse receipts to a local
office of the United States Department of Agriculture
(USDA). The Government then extends loans to farmers
equal to the number of pounds (lbs) of cotton noted in
the warehouse receipts multiplied by the loan rate 52
cents/lb) (in May 2014), plus or minus quality premiums
and discounts. The warehouse receipts serve as
collateral for the loans. Under the new Farm Bill, the
national average loan rate can range between 45 cents
and 52 cents, depending on a simple two-year moving
average of the adjusted world price (AWP).8 At 2014
price levels, the loan rate will remain at 52 cents.


If market prices are below 52 cents/lb, farmers can keep
the 52 cents and forfeit the cotton to the Government,
which then auctions the bales used as collateral.
Farmers also have the option of repaying the loan at the
AWP and capturing the differential as a marketing loan
gain. However, if market prices are above the loan rate,
farmers have nine months in which to repay the loan -
including interest and storage charges - recover control
of their cotton and market the cotton through normal
commercial channels. Therefore, as long as the average
market price for upland cotton received by farmers each
season remains above 52 cents/lb, there is no subsidy in
the marketing loan programme other than a loan for nine
months at what is probably a preferential interest rate,
calculated as the cost of borrowing from the United
States Treasury plus 1 percentage point. If market prices
fall to or below the loan rate, the Government pays
interest and storage costs as well as the price
differential.


The existence of a loan rate encourages increased
cotton production because farmers know with certainty
that, even during an economic collapse, they can still
“sell” their cotton to the United States Government for
52 cents/lb, falling to 45 cents/lb if the price collapse is
sustained. Thus, a range of 45 to 52 cents/lb of lint is an
effective floor for prices received by farmers for the base
quality of cotton at average location. However, it should
be noted that a market price of 45 cents/lb would be
well below the cost of production for most farmers, and
production in the United States would probably decline
substantially if prices fell to such a level.


Short-Term Export Credit Guarantee
Program (GSM)


Another programme that will continue under the new
Act, but with modifications, is the Short-Term Export
Credit Guarantee Program (GSM-1029 ). Under GSM-
102, the United States Government does not provide
loans, but it guarantees payments by non-United States
banks on loans extended by United States exporters
(more commonly United States banks) for the financing
of domestic agricultural commodity exports to selected
destinations.


The duration, or maximum term of the credit guarantees
has been reduced from 36 to 24 months, and the new
Farm Bill continues the requirement that the fees cover
the Program’s operating costs and losses over the long




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


7


term. Federal budget estimates indicate that this
requirement is being met.


The GSM-102 Program is limited to $5.5 billion per year
for all commodities. During the four most recent
complete fiscal years, 2010-2013, the USDA guaranteed
loans for imports of cotton amounting to an average of
$275 million per year in exported value, or 7.5 per cent
of total GSM-102 activity. At average prices, the GSM-
102 guarantees would have covered exports of between
100,000 and 200,000 tons of cotton per year, or about
5 per cent of total United States cotton exports. The
largest recipients of GSM-102 guarantees for cotton
were Turkey and the Republic of Korea. During the
cotton seasons 2010/11 to 2012/13, China was the
biggest market for United States cotton exports,
averaging 1.2 million tons per season, Turkey was a
distant second, averaging 373,000 tons, and Mexico
was the third at 231,000 tons per year on average. The
Republic of Korea was among the top 10, averaging
87,000 tons per year. Turkey and the Republic of Korea
make the greatest use of the GSM-102 Program
because banks in each of these countries meet the
Program’s criteria.


Subsidies to textile mills


The new Farm Bill also maintains the Economic
Adjustment Assistance Program for textile mills in the
United States using upland cotton. This is a subsidy of 3
cents/lb to those mills on each pound of upland cotton
they consume. Assuming annual cotton consumption by
textile mills in the United States of 800,000 tons, the
annual cost to the Government will be around $50
million.


Treating cotton differently


According to the USDA,10 STAX is designed to meet
United States obligations under the WTO Brazil cotton
case. The United States Government argues that STAX
will reflect market conditions more rapidly than both
previous cotton programmes and the programmes for
other United States commodities under the new Farm
Bill, because insurance indemnities will be based on
current market prices at planting time, instead of a fixed
target price of 71 cents/lb as existed under previous
farm acts.


For the covered commodities other than cotton, two
new programmes have been created: Price Loss
Coverage (PLC) and Agriculture Risk Coverage (ARC).
Under PLC, producers who have previously grown the
covered commodities will receive payments on 85 per
cent of their base acres on a commodity-by-commodity
basis when market prices fall below a reference price for
each crop. This is essentially the same as the
countercyclical payments in the previous farm acts. ARC
is a revenue insurance programme, under which
payments will be provided to producers of covered
commodities on a commodity-by-commodity basis on
85 per cent of base acres when county crop revenue
(actual average county yield multiplied by the national
average farm price) drops below 86 per cent of the
county benchmark revenue. Producers may make a


one-time choice to enroll in one of these two
programmes for the life of the new Act. Upland cotton
producers are not eligible for PLC or ARC, as they are
covered by STAX.


In addition to STAX, producers of all covered
commodities, including upland cotton, will have a
second revenue insurance option, the Supplemental
Coverage Option (SCO). SCO will supplement traditional
crop insurance and will provide coverage based on
county average yields or revenue. The United States
Government will subsidize 65 per cent of the premiums.
Like traditional crop insurance, SCO will not be subject
to payment limitations or adjusted gross income eligibility
limits. SCO coverage will not be available to producers
who elect to participate in STAX. Since the subsidy
offered under STAX will be greater than 65 per cent,
most analysts assume that upland cotton producers will
elect to participate in STAX instead of SCO. However,
although SCO is not receiving much attention, it
deserves to be mentioned because it is an option that
will be available.


3. Subsidies paid to United States
cotton farmers
The impacts of STAX on cotton production in the United
States can be anticipated, but they are hard for
economists to quantify, because the programme is a
drastic change from previous programmes and because
STAX will not even be operational until 2015, so that
there is no set of historical data to study. Nevertheless,
even with the 80-percent subsidy of the premiums
offered under STAX, government outlays for upland
cotton, as estimated by the Congressional Budget Office
(CBO), will be lower than levels under the repealed Direct
Payments and Counter-cyclical Payments (DCPs). This
suggests that the incentives to produce cotton in the
United States will be weaker than they were during
previous decades. Accordingly, competing cotton-
exporting countries, including developing countries and
LDCs, will have greater opportunities, other things being
equal, than they would have had if the 2014 Farm Bill
had continued providing support as before.


During the eight fiscal years from end-September 2003
through September 2008, corresponding to the 2002
Farm Bill, average expenditures on direct and
countercyclical payments to upland cotton were $2.8
billion per year. During the six fiscal years from end-
September 2009 through September 2014,
corresponding to the provisions of the 2008 farm bill,
expenditures on upland cotton are estimated to have
averaged $1.1 billion per year. Based on USDA
estimates of average farm prices and production during
the life of the 2014 Farm Bill, the Congressional Budget
Office estimates that outlays under STAX for upland
cotton will average about $360 million per year. Thus,
expenditures under STAX are estimated at about one
eighth of the cotton subsidies paid under the 2002 Farm
Bill and about one third of the subsidies paid under the
2008 Farm Bill. However, STAX subsidies will be of the
same magnitude as subsidies paid in the early 1990s
(figure 6).




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


8


Figure 6: United States Government expenditures on upland cotton (millions of dollars)


-500
0


500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500


1990 1995 2000 2005 2010 2015
Forcast


The “baseline” of United States cotton production
estimated by the USDA that was used by the
Congressional Budget Office for the projections above,
assumes a harvested area of 3.4 million hectares per
year and production of 3.1 million tons per year.
Accordingly, the premium subsidies under STAX in the
2014 Farm Bill will amount to about $100 per hectare, or
about 5 cents/lb of production. To put this in
perspective, a farmer could achieve the same degree of
price protection (but not yield protection) by purchasing
a put on the December cotton contract at a strike price
10 per cent out of the money11. In mid-April 2014 (many
farmers plant in April), the December futures contract
was trading at about 82 cents, and a 74-cent put (the
right to sell at 74 cents) cost a little less than 2 cents/lb.


In comparison, United States Government outlays for
upland cotton averaged $525 per hectare or 28 cents/lb.
of production during fiscal years 2001-2008, and outlays
are estimated to be an average of $325 per hectare and
16 cents/lb of production between fiscal years 2009 and
2014. Therefore, upland cotton will be receiving much
less under the 2014 Farm Bill than was received under
the two previous farm bills. This suggests that United
States cotton production is more likely to remain
constant or decline in the years ahead, rather than
increase, and therefore its share of world cotton exports
is likely to follow a downward trend as well.


A major difference between STAX and the previous
cotton subsidy programme is that there is no fixed price
level guaranteed by the Government under STAX, other
than the loan rate. Under the old cotton subsidy
programme, farmers knew that the Government would
always make up the difference if prices fell below the
target price of 71 cents/lb. However, under STAX, if
market prices trend lower, the expected revenue in each
county on which STAX indemnities will be calculated will
also decline, and could fall as low as the loan rate. This
suggests that, over time, STAX will provide insurance
against within-year declines in revenue between planting
and harvest times, but it will not arrest a downward
trend. Thus, under the 2014 Farm Bill, the marketing
loan rate will be the only price floor for cotton farmers,
and even that rate could decline to 45 cents/lb if market
prices move low enough. If market prices decline even


lower than 45 cents/lb of lint equivalent at average
location in the United States, analogous to a Cotlook A
Index of approximately 57cents/lb, United States cotton
farmers would again benefit from the price support
provided by the Government, which would place farmers
in other countries at a disadvantage.


Since 1990, the season average Cotlook A Index has
been below 57 cents/lb. three times: in 1999/00, it was
53 cents, in 2001/02, 42 cents, and in 2004/05, 52
cents.12 As detailed elsewhere, market prices have been
supported by purchases by the Government of China for
the State Reserve since 2011/12, and if the Reserve’s
buying activity stops abruptly, a decline in market prices
to less than 57 cents is highly likely. Thus, while the
2014 Farm Bill provides less support to cotton than did
previous farm bills, it nevertheless still provides support.
In years of very low market prices, such as those in
which the A Index is below 57 cents/lb., United States
farmers will still produce cotton as if the A Index were 57
cents. However, since the countercyclical payments that
were contained in previous farm bills have been
eliminated in the 2014 Farm Bill, domestic cotton
production would likely fall sharply at these price levels,
since costs of production for most farmers are
substantially higher.


A second major difference between the 2014 Farm Bill
and all previous ones is that cotton is now being treated
“differently.” Under this latest Act, each of the other
programme commodities has a “reference price” set by
statute. If average farm prices fall below those reference
prices, farmers electing to participate in the Price Loss
Coverage (PLC) Program will receive payments to make
up the difference on 85 per cent of their base acres.
Farmers participating in the Agricultural Risk Coverage
(ARC) Program will receive payments on 85 per cent of
their base acres if revenue falls below the ARC
guarantee, which is 86 per cent of the benchmark
revenue. The prices used to calculate benchmark
revenue may be no lower than the reference prices.
Therefore, 73 per cent of the reference prices (85 per
cent of base acres times 86 per cent of benchmark
revenue) will effectively be the floors for prices received
by farmers for the covered commodities other than
upland cotton (table 3).




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


9


Table 3: Effective floor prices under the 2014 and 2008 Farm Bills


Target Price Effective Price
Floor


Reference Price Effective Price
Floor


Loan Rate Effective Price
Floor


2008
Farm Bill


2008 Farm Bill 2014
Farm Bill


2014 Farm Bill 2014
Farm Bill


Ratio of
2014 over 2008


farm bills
85% of


base acres
85% of


base acres
86% of ARC
Guarantee


Wheat $/bushel $4,17 $3,54 $5.50 $4.02 1.13


Corn $/bushel $2,63 $2,23 $3.70 $2.70 1.21


Soybeans$/bushel $6,00 $5,10 $8.40 $6.14 1.20


Cotton $/bushel $0,71 $0,60 $0,5200 0.86


Table 4: Cotton/corn and cotton/soybean price ratios
Corn Soybean Ratio Ratio Ctlk A* Index Ctlk A* Index


Cotton/
corn


Cotton/
beans


Needed for
parity with


corn


Needed for
parity with
soybeans


Reference price ($/ton) 146 309


Payments on 85 per cent of base acres
($/ton)


124 262


Export-farm price basis ($/ton) 29 72


Reference prices at port ($/ton) 153 334 10.9 4.6 0.75 0.70


ARC guarantee (per cent) 0.86 0.86


Equivalent A Index ($/lb)


Export-farm price basis for cotton
(Cents/lb.)


0.12 0.12


Equivalent farm price ($/lb) 0.53 0.48


* Ctlk A refers to Cotlook A.


For cotton in the United States, the most important
competing crops are corn and soybeans; the reference
price for corn is set at $146 per metric ton (market year
average farm price of $3.70 per bushel) and for
soybeans at $309 per ton (market year average farm
price of $8.40 per bushel).


During the decade of the 2000s, the ratio of the Cotlook
A index to export prices for corn at Gulf Coast ports in
the United States averaged 10.9:1, and the ratio of the
Cotlook A Index to soybean prices positioned for export
at United States ports averaged 4.6:1. The usual basis
between the Cotlook A Index (an indicator of the average
price of cotton delivered to East Asian ports) and the
United States market year average farm price is about
12 cents/lb; the average basis between export prices
and farm prices is $29 per ton for corn and $72 per ton
for soybeans (table 4).


Therefore, to maintain the historic relationships between
prices of cotton and those of corn and soybeans in the
United States, given reference prices of $146 per ton for
corn and $309 per ton for soybeans, the Cotlook A
Index will have to be between 60 and 65 cents/lb, which
converts closely to the national average loan rate for
cotton of 45 to 52 cents/lb.


Accordingly, even though cotton is being treated
“differently” in the 2014 Farm Bill through a different
programme called STAX, rather than PLC or ARC, the


level of support given to cotton prices will be similar to
that given to prices of other covered commodities, as
long as the cotton loan rate remains at 52 cents; if the
cotton loan rates drops to 45 cents, the support given to
cotton will be less than that given to other commodities.
What these calculations indicate is that support for all
the covered crops in the United States is being
substantially reduced under the Farm Bill of 2014.


Cotton production in the United States showed an
upward trend between 1990/91 and 2005/06, climbing
from 3.4 million tons to 5.2 million tons, but it declined to
2.8 million tons between 2005/06 and 2013/14. During
2009/10 to 2012/13, after the market disturbances
caused by the Great Recession, it has averaged 3.5
million tons, about the same as in 1990/91. However,
that level has been sustained by above-average prices.
During the sixteen seasons from 1990/91 to 2005/06,
when production was rising, the Cotlook A Index
averaged 65 cents/lb, whereas during the most recent
four seasons when production averaged 3.5 million tons,
the Cotlook A Index will have averaged approximately
$1.10/lb. If, and when, the Cotlook A Index returns to
the long-running average of 73 cents/lb, and with
indemnities to United States farmers under STAX
hedging against only within-season declines in prices but
not supporting prices received from one season to the
next, United States cotton production may decline
towards 3 million tons per year or less.




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


10


Support to cotton provided by other
countries


According to the ICAC,13 the Governments of Burkina
Faso, China, Colombia, Côte d’Ivoire, Greece, Mali,
Senegal, Spain and Turkey all provided about the same
or more support per pound of production in 2012/13 as
United States farmers will receive under STAX (table 5).


Table 5: Subsidies paid to cotton producers by
selected countries, 2012/13


Production
(Thousands


of tons)


Average
support


(Cents/lb)


Total
Support


($ million)


China 7 300 36 5 813


United States 3 770 7 562


Turkey 550 26 312


Greece 251 47 262


Spain 57 70 87


Burkina Faso 260 14 80


Mali 189 12 50


Colombia 21 49 22


Côte d'Ivoire 140 5 14


Senegal 13 4 6


It is clear that the level of support provided by China to
its cotton sector dwarfs the levels provided by other
countries, although the assistance provided per pound
of cotton production in 2012/13 was greater in Spain,
Colombia and Greece than in China. China provides
support to its cotton sector by maintaining a minimum


price for procurement of seed cotton from farmers that is
substantially above market levels. As a consequence,
China has been accumulating a surplus for three
seasons, and has been supporting market prices to the
advantage of all exporting countries during these
seasons. Other countries, including Brazil and India, also
operate price or income support programmes for cotton
in some years, but market prices were above the
programme thresholds for intervention during 2012/13 in
these other countries.


Even though the levels of assistance to cotton
production may have been lower than in previous
seasons in all countries except China, and even though
the levels of assistance may have been compliant with
WTO obligations for most countries, it is still worth
emphasizing that all subsidies distort production and
trade to the disadvantage of countries that do not
provide such subsidies.


4. Long-run trends in the world
cotton market
Despite prices well above the long-term average, world
cotton production fell during both 2012/13 and 2013/14,
and production in 2013/14 at 25.7 million tons is no
higher than it was eight seasons earlier (figure 7). The
world cotton industry is going through an era of
stagnation in production, similar to the situation that
prevailed from the mid-1980s to the end of the 1990s.
As was the case from the mid-1980s to about 1999/00,
and as has been occurring again since 2007/08, world
cotton yields are not rising because no new fundamental
breakthroughs in production technology have been
commercialized since biotechnology-induced
improvements in 1996.


Figure 7: World cotton production and consumption, 1990/91−2010/11
(millions of tons)


15


20


25


30


1990/91 2000/01 2010/11


Production Consumption




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


11


Figure 8: World cotton, ending stocks, 1990/91−2010/11 (thousands of tons)


0


5,000


10,000


15,000


20,000


25,000


1990/91 2000/01 2010/11


China has supported the world cotton market for the
past three seasons by purchasing cotton for a state
reserve. These purchases have kept cotton prices well
above the long-term average and 20 to 30 cents/lb
above the price of polyester.


China began its current program of building a state
reserve of cotton in March 2011, after the highly
damaging experience of extreme price volatility during
2010/11. During the 2011/12, 2012/13 and 2013/14
seasons, China has built a reserve that is estimated to
total about 12 million tons, and this reserve represents
more than half of all world cotton stocks (figure 8).
Because this reserve is being kept away from the
market, there is no way for textile mills to use it.
Consequently, prices of cotton outside the reserve have
been maintained at levels well above the long run
average of 73 cents/lb. The Cotlook A Index is estimated
to average 91 cents/lb during 2013/14 by ICAC.


When China ceases its cotton purchases for the State
Reserve, cotton prices will decline. Whether the decline
is precipitous and steep or gradual and shallow will
depend on the timing and nature of changes in China’s
stock-holding policy. In January 2014, the Government
of China announced that it would begin to experiment
with direct payments to farmers in Xinjiang in order to
support incomes without distorting market prices. The
procurement system is still being used in the eastern
part of the country during 2014, and the Government
has not yet indicated whether the system of direct
payments will be extended to all of China in 2015.


History indicates that world stocks equal to six months
of world use at the end of the international cotton
season on 31 July result in stable prices. Six months of
use of stock at the end of July each season provides
enough inventory for textile mills to wait during August,
September and October for a new crop of cotton from
the northern hemisphere to begin moving from farms to
gins and warehouses, one to two months more for
arrival at mills and another month of working inventory. If
stocks represent less than six months of use, prices
tend to rise as mills and merchants scramble to cover


needs, and if stocks represent more than six months of
use, prices tend to decline as producers try to shift the
costs of insurance, storage and interest (approximately
0.60 cents/lb per month at current interest rates) in
carrying the excess.


World ending stocks are estimated at 10 months of use
for the 2013/14 and 2014/15 seasons (figure 9), and
mill-delivered polyester prices in China are just 65
cents/lb as of May 2014, suggesting that the Cotlook A
Index could fall well below the long-term average of 73
cents/lb when support from China ceases. As of mid-
May 2014, the July 2014 ICE cotton contract was
approximately 90 cents per pound, while the December
2014 contract was about 82 cents/lb, indicating that
market participants anticipate changes in China’s cotton
buying policies during 2014/15.


Figure 9: World cotton: Ratio of ending
stocks/use, 1990/91−2010/11


0.00


0.25


0.50


0.75


1.00


1990/91 2000/01 2010/11


Ratio


Accordingly, it must be acknowledged that any
opportunity for expanded production and exports by
developing countries and LDCs during the next several
years will be in an environment of softening prices
compared with recent years.




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


12


World production stagnant


World cotton production essentially quadrupled from
7 million tons in 1950/51 to 27 million tons in 2004/05,
and then amidst much price volatility, it climbed to a
record high of 28 million tons in 2011/12. The average
annual rate of growth in world production over the last
six decades has been 2.5 per cent, or about 290,000
tons. However, during 2012/13 and 2013/14, world
production declined because of lower cotton prices,
both in absolute terms and relative to the prices of
competing crops. The world cotton-growing area fell
from 36 million hectares in 2011/12 to 33.8 million in
2012/13, and then to 33.1 million in 2013/14 (figure 10).


Figure 10: World cotton-growing area,
1990/91−2010/11 (millions of hectares)


20


40


60


80


1990/91 2000/01 2010/11


The total area in the world dedicated to growing cotton
has fluctuated between 28 million hectares and 36
million hectares since the 1950s, with an average of 33
million hectares. While there have been dramatic
reductions in cotton-growing areas in some regions
since the 1950s, particularly in the United States, Central
Asia, northern Brazil and North Africa, there have been
offsetting increases in francophone Africa, China, India
and Pakistan. Therefore, at 33.1 million hectares in
2013/14, the total world area for cotton was exactly
equal to the long-run average. The troubling aspect for
the cotton industry is that the Cotlook A Index averaged
$1/lb in 2011/12 and was still 88 cents/lb in 2012/13,
well above the 40-year average of 73 cents/lb, and still
the world area for cotton fell to just the average level in
2013/14. This suggests that if, or when, cotton prices
regress to their historic mean, the world area for cotton
will trend below the average level maintained since the
1950s.


Since the 1950s, all the growth in world cotton
production was due to improved yields. World cotton
yield has trended higher since the 1950s, with periods of
slow growth alternating with periods of rapid growth. In
the early 1950s yields were around 230 kilograms of lint
per hectare, rising steadily at an average annual rate of
more than 2 per cent during the 1950s and 1960s, and
then more slowly from the mid-1970s until the mid-
1980s. During the 1980s, world cotton yield rose
dramatically, reaching a record high of nearly 600
kilograms per hectare in 1991/92. However, yields
stagnated during the 1990s due to problems associated


with diseases, resistance to insecticides and disruption
of production in Central Asia. They then began rising
again in the late 1990s with improvements in seed
varieties and the use of biotech (genetically engineered)
varieties, attaining a record 795 kilograms per hectare in
2007/08, and a similar level in 2012/13. However, yields
are estimated to have declined to about 780 kilograms
per hectare in 2013/14, the sixth consecutive year in
which world cotton yields have not risen (figure 11).


Figure 11: World cotton yields,
1990/91−2010/11


(kilograms of lint per hectare)


200


400


600


800


1990/91 2000/01 2010/11


The reason world cotton yields are not increasing is
because there has been no further technological
breakthrough in recent years to fundamentally boost
yields to a new level. Beginning with Mendelian breeding
in the early 1900s, mechanization after the Second
World War, the development of synthetic fertilizers in the
1960s, pesticides in the 1970s and 1980s, and then
biotechnology in the 1990s and 2000s, agricultural
productivity has risen in a stair step fashion with the
development of each new technology. There are many
new technologies under development that will boost
cotton productivity later this decade and during the
2020s, including biotechnology applications that will
provide increased efficiency of nitrogen use, drought
tolerance, salt tolerance, and resistance to a wider
spectrum of insects, but those technologies are five to
ten years away from commercial release.


With yields flat, at least for the rest of this decade, and
with the world area for cotton under growing pressure
from competition with grains and oilseeds, world cotton
production is not likely to rise substantially from its
current level of between 25 and 30 million tons per year.
As a consequence, almost all the gain in world fibre use
is accruing to polyester, not cotton.


Population and income growth are the primary drivers of
world fibre use, and the relative price of cotton to
polyester is the biggest determinant of changes in
cotton’s share of fibre use. According to the International
Monetary Fund (IMF), world economic output is
expected to increase by 3.7 per cent in 2014 and by 4.1
per cent annually by 2018.14 Similarly, the Organization
for Economic Co-operation and Development (OECD),
forecasts that world economic output will grow, but at a
slower pace, with annual growth averaging 3.1 per cent
in the period 2014-2019 and 2.4 per cent during 2020-




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


13


2025.15 Additionally, the United Nations Department of
Economic and Social Affairs (UN DESA) forecasts that
the world’s population will grow to 8.08 billion by 2025
from 7.16 billion in 2013.16 Given that both population
and economic activity are increasing, the average annual
world fibre consumption is expected to increase at
around 6 per cent during the rest of the current decade.


Unfortunately for the cotton industry and for the millions
of families engaged in cotton production, the prices of
polyester in major consumer markets are much lower
than the prices of cotton. By mid-May 2014, in round
numbers the Cotlook A Index was more than 90
cents/lb, while mill-delivered prices of polyester in major
Asian markets were about 65 cents/lb. It is the fourth
consecutive year that cotton prices have been higher
than polyester prices, and the result is a predictable loss
of market share. Consequently, even though fibre use is
rising, world cotton use has fallen every season since its
peak of 27 million tons in 2007/08. World trade in cotton
is estimated at 8 million tons in 2014/15, compared with
8.6 million tons in 2013/14 and 9.7 million in 2012/13.
Imports by China are expected to fall from approximately
3 million tons this season to 2 million tons in 2014/15,
and are expected to be even lower in 2015/16 as
purchases for the State Reserve are reduced and more
domestic cotton is used in Chinese mills.


Regional production trends
China


After rocketing to 6.3 million tons in 1984/85, cotton
production in China fluctuated to between 3.5 million
tons and 5.7 million tons for nearly two decades; and
production in 2003/04 was still just 5.5 million tons. It
then soared, just as it had in the early 1980s, as the area


under cotton expanded significantly in the Xinjiang
Autonomous Region. Production in 2004/05 was 7.1
million tons, rising to 8.1 million tons in 2007/08.
However, just as suddenly as production had risen, it
again declined, to 7.3 million tons in 2012/13 and 6.7
million tons in 2013/14. Thus, Chinese production in
2013/14 was only 6 per cent higher than it had been 30
years earlier (figure 12).


There has been an extraordinary shift in the location of
cotton production within China. In 1984/85, when
national production exceeded 6 million tons for the first
time, the provinces of Hebei, Shandong, Hubei and
Henan along the Yellow River and Yangtze River
accounted for 4.25 million tons, and Xinjiang produced
just 190,000 tons.


However, by 2012/13, the same four eastern provinces
accounted for just 2 million tons of the total, while
Xinjiang produced 3.5 million tons. 17 Production in
Xinjiang reached 4.4 million tons on 2.3 million hectares
in 2012/13, and for 2013/14 it is estimated at 4.3 million
tons on 2.2 million hectares.18 Yields there are much
higher than the world average and the United States
average because of good irrigation, low pest pressure,
and ideal temperature and soil types. Indeed, Xinjiang
accounted for more than half of total Chinese cotton
production for the first time in 2012/13. Moreover, due
to competition with food crops and urbanization leading
to reduced area for cotton in the east of the country, the
long-run tendency will be for cotton production in China
to be consolidated in Xinjiang (figure 13). However,
because of water constraints, production in Xinjiang is
expected to remain at about its current level.
Consequently, by 2020, total production in China may
be down to about 5 million tons.


Figure 12: China: Cotton production, 1990/91−2010/11 (millions of tons)


0


2


4


6


8


10


12


14


1990/91 2000/01 2010/11


Production Imports Consumption Ending stocks




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


14


Figure 13: Share of Xinjiang in China’s total
cotton production, 1990−2010 (per cent)


0


10


20


30


40


50


60


1990 2000 2010


India


Cotton production in India rose from 1.3 million tons in
1980/81 to 2.3 million tons in 2002/03, and again
increased nearly threefold to a record 6.4 million tons in
2011/12, but it fell slightly to 6.1 million tons in 2012/13
and is estimated at 6.3 million tons in 2013/14
(figure 14).


The increases in Indian production have been relatively
uniform across the three major cotton-producing regions
of the country. In 2002/03, when national production
was just 2.3 million tons, the northern states (Punjab,
Haryana and Rajasthan) accounted for 16 per cent of
the total, and by 2012/13 when the national total was


6.1 million tons, the north still accounted for 15 per cent.
The central states (Gujarat, Madhya Pradesh and
Maharashtra) accounted for 55 per cent of production in
2002/03 and 58 per cent more recently. The southern
states (Andhra Pradesh, Karnataka and Tamil Nadu)
produced 20 per cent of the Indian total in 2002/03 and
27 per cent in 2012/13. The more uniform increase in
production across regions in India compared with China
reflects more uniform agronomic characteristics across
India without the development of millions of hectares of
irrigated area, as in Xinjiang.


Both China and India represent triumphs for
biotechnology in developing countries. Since their
adoption in China in the late 1990s and in India in 2002,
biotech cotton varieties contributed significantly to higher
yields and production, increases in farmers’ incomes
and reduced insecticide use. However, as in other
countries, the benefits of biotechnology have now been
incorporated into Chinese and India production
practices, and there is little further scope for immediate
yield gains. Indian production is expected to grow slowly
this decade, reaching about 7 million tons by 2020.


Pakistan


Cotton production in Pakistan expanded from 700,000
tons in 1980/81 to 2.2 million tons in 1991/92, but has
not grown since, and is estimated at 2.1 million tons in
2013/14. Production is limited by temperatures as high
as 50º C, the leaf curl virus and, in some years, water
shortages. The temperature and virus-related stresses
limit the range of varieties that may be grown in the
country, and breeders have not been able to produce
higher yielding varieties in more than 20 years.


Figure 14: India: Cotton production, 1990/91−2010/11 (millions of tons)


0


1


2


3


4


5


6


7


1990/91 2000/01 2010/11


Production Imports Consumption Ending Stocks




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


15


Brazil and South America


While the potential for cotton production in Brazil is
almost limitless, in reality it may have reached its peak.
Production rose from 300,000 tons in the mid-1990s to
2 million tons by 2010/11, but since then it has declined,
to 1.3 million tons in 2012/13 and an estimated 1.6
million tons in 2013/14. As in many parts of the United
States, grain and soybean prices dictate the extent of
area to be devoted to cotton production in Brazil. Given
that there is no water constraint in the states where
cotton is grown, Brazilian producers use cotton as a
rotation crop to boost soybean yields; cotton is not the
primary crop for most producers.


In Brazilian cotton history, 2013/14 is already infamous
as the year a new bollworm species, Helicoverpa
armigera, was detected. The Brazilian cotton
association, ABRAPA, estimates that the yield losses
and insecticide applications associated with this pest
alone amounted to $1 billion in costs to producers that
year. The new pest is only controlled by extensive
applications of insecticides: up to 10 kilograms of active
ingredient per hectare compared with a world norm of 1
kilogram. If effective means of biological control of all
forms of bollworm are not developed, cotton production
in Brazil will decline.


Production in the rest of South America was 240,000
tons in 2012/13 and 380,000 tons in 2013/14, with
Argentina accounting for more than half of this total.
Difficulties in developing regional strategies to control the
boll weevil, a pest found only in the Western
Hemisphere, are limiting growth potential among
smallholders throughout South America. Only in
Argentina and Brazil, where large capital-intensive
agricultural operations are able to manage the boll weevil
on a large scale, are there opportunities for expanded
cotton production.


Uzbekistan and Central Asia


Production in Uzbekistan dropped from 1.5 million tons
in the early 1990s to 1 million tons by 2000, and it has
remained at about that level ever since. With a managed
economy in which the area devoted to cotton is
determined nationally and all area is irrigated, production
varies little from year-to-year based mostly on
fluctuations in temperatures. Production estimates were
1 million tons for 2012/13 and 920,000 tons for
2013/14. Figure 15 compares world cotton yields to the
yields in Uzbekistan.


The most notable aspect of the 2012/13 and 2013/14
seasons in Uzbekistan was the elimination of both
children’s work and child labour in cotton harvesting,
following the Government’s steps to ensure that only
adults were involved in the entire cotton harvests.19


Central Asian cotton production is trending downwards
because of an emphasis on food production and
declines in yields. In the 1980s, yields in Central Asia
were double the world average at about 800 kilograms
per hectare. Today, cotton yields across Central Asia are
about 100 kilograms per hectare less than the world
average, and no change in that trend is likely. Yields are
stagnant or falling in this region because there have
been few improvements in varieties since the break-up


of the Soviet Union, and degradation of soil is continuing
because of wasteful water use.


Figure 15: Cotton yields: World and
Uzbekistan, 1990/91−2010/11


(kilograms per hectare)


500


550


600


650


700


750


800


850


900


1990/91 2000/01 2010/11


World Uzbekistan


Production in Turkmenistan was 335,000 tons in
2012/13 and 330,000 in 2013/14, and production in
Tajikistan was 130,000 tons and 120,000 tons in those
two years.


Turkey


Production in Turkey has been more volatile than in any
of the other major cotton-producing countries in recent
years. It climbed from 500,000 tons in the early 1980s to
about 900,000 tons in the early 2000s, and then
plummeted to less than 500,000 tons in 2009/10. The
following year it doubled to 950,000 tons, but has once
again been sinking, to 860,000 tons in 2012/13 and
840,000 in 2013/14. Competing crop prices and
changes in subsidies provided to the cotton sector
underlie this volatility.


Australia


In Australia, the pattern is the same as in Turkey, but for
different reasons. Australian production rose from
100,000 tons to 800,000 during the 1980s and 1990s,
but has been on a roller coaster since, depending on
water availability. Australian production dropped to
130,000 tons in 2007/08 because of drought, and then
leapt to a record 1.2 million tons in 2011/12. Since then,
it has been falling steadily, to 1 million tons in 2012/13
and 930,000 tons in 2013/14. With Australian yields per
hectare already the highest in the world, at 2.2 tons per
hectare, and area limited by water availability, there is
little scope for increased cotton production. Likewise in
Turkey, with yields already above 1.5 tons per hectare,
and the land devoted to cotton limited by pressure from
competing crops, prospects for an increase in
production are weak .


The high yields in Australia are noteworthy because they
are partly the result of government policies. Besides the
fact that almost all cotton is irrigated, agronomic
conditions are excellent and Australian production
technology is the best in the world, Australian farmers
receive no subsidies. In the United States and other
countries where subsidies are provided, the value of
subsidies is capitalized into land values, thus driving up




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


16


costs and discouraging other capital investments. In
addition, subsidies keep marginal farmers in operation
on their farms longer than would otherwise be the case,
thus slowing technology adoption and undermining
production efficiency. Moreover, subsidies provide
incentives to farmers and their representatives to spend
time and effort in rent-seeking activities (lobbying
government for more subsidies) instead of focusing on
productivity enhancement.


During the first five seasons of the 1990s, yields in
Australia averaged 1,546 kgs/ha compared with 740
kgs/ha in the United States (i.e. a difference of 806
kilograms). During 2008/09 through 2012/13, yields in
Australia rose to 1,991 kilograms, on average, compared
with United States yields, which rose to 913 kilograms,
on average (i.e. a difference of 1,078 kilograms). Thus,
not only are Australian yields higher than those of the
United States, they are also rising faster (figure 16).


Figure 16: Cotton yields: Australia and the
United States, 1990/91−2010/11


(kilograms per hectare)


500


1,000


1,500


2,000


2,500


1990/91 2000/01 2010/11


Australia United States


Africa


Like South America, Africa could be an area where
cotton production could increase this decade, and yet,
like South America, huge potential is not a guarantee of
huge achievement. Africa has abundant unused arable
land, and because cotton is a relatively high-value crop,
drought tolerant and storable, expansion in cultivation of
various crops may include cotton.


Cotton production in North Africa shrank from 670,000
tons in the early 1980s to 120,000 tons in 2013/14.


Production in Egypt was fully controlled by the State until
the mid-1990s, and as liberalization has proceeded and
farmers have been allowed to choose their cropping
patterns based on prices and resource availability,
production has fallen. Similarly in the Sudan, the
Government has progressively relaxed controls over
farmers’ choices, and cotton production has declined
against competition from food crops. North African
production was 120,000 tons in both 2012/13 and
2013/14.


Production in West Africa, including the Franc Zone,
reached 1 million tons in 2004/05, dropped to less than
500,000 tons in 2010/11, and partially recovered to
850,000 tons in 2011/12 and 825,000 in 2012/13.
Political uncertainty in Mali and Côte d’Ivoire, difficulties
controlling side-selling or pirate buying, and ineffective
systems to supply inputs to growers in some countries
have undermined long-term efforts to expand
production. On the other hand, the agronomic
characteristics of the region are highly favourable for
cotton, and, with improvements in input supply,
production could expand.


Production in Eastern and Southern Africa is estimated
at 390,000 tons in 2012/13 and 530,000 tons in
2013/14. The incentives and constraints governing
cotton production in these subregions are similar to
those in West Africa.. Low yields, but abundant land and
adequate rain, and difficulties providing inputs and
controlling side-selling/pirate-buying remain the main
factors influencing the levels of production in these
subregions.


For many African countries, cotton is strategically
important for generating export revenue, creating
employment and reducing poverty. As shown in figure
17, cotton producers in many African countries are more
competitive than their counterparts in developed
countries. However, because of price-distorting
subsidies, they are disadvantaged in the international
market. The C4 (i.e. Benin, Burkina Faso, Chad and Mali)
raised the issue of cotton subsidies in the WTO, and
called for the complete phase-out of support measures
in developed countries’ cotton production and exports.


The next section explores the main opportunities for
African cotton producers to increase cotton production
and improve value addition.




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


17


Figure 17: Cost of cotton production in selected countries, 2013 (dollars per kilogram of lint)


0.00


0.50


1.00


1.50


2.00


2.50


Note: Cotton in Australia is either dry land or irrigated. In other countries, production varies by geographic region, not water source.


5. Opportunities for African cotton
producers
Over the 40 years between 1973/74 and 2012/13, the
Cotlook A Index averaged 73 cents/lb. The average
Index during the current season will be about 92
cents/lb, and any realistic appraisal of market
opportunities must acknowledge that the current level of
cotton prices cannot be maintained. As the State
Reserve in China is gradually reduced over the next
several years, there is a strong likelihood that
international cotton prices will decline. Nevertheless,
prices lower than the current above-average levels can
still be remunerative if the costs of production are below
the level of prices received. The costs of production per
kilogram of lint in many African countries are below the
world average, and they are below average costs in the
United States and China (figure 17). This indicates that
even if the Cotlook A Index declines towards the long-
run average over the next several years, African
producers will still earn positive margins from cotton
production.


In addition, biofuel mandates in developed countries,
combined with world income and population growth and
the resulting pressures on food prices, will probably
keep prices of grains and oilseeds above the average
levels that prevailed prior to the mid-2000s.
Consequently, the area devoted to cotton in Brazil,
China, Turkey, the United States and other countries is
more likely to fall rather than rise during the remainder of
this decade. Accordingly, there will be competitive space
in the world cotton market for expanded production and
exports from developing countries and LDCs. Because
sub-Saharan Africa accounts for just 6 per cent of world
cotton production, expanded production in Africa will not


exert significant downward pressure on world cotton
prices to levels lower than they would be anyway.


Further, agricultural technology is in a phase of
consolidation so that no major breakthrough is likely
during the rest of this decade. This will give African
producers an opportunity to close the gap between the
world and African yields. Meanwhile across Africa,
incomes are rising, better governance is apparent, and
countries are welcoming private sector initiatives. To
take advantage of these opportunities to increase cotton
production African governments need to design and
implement reforms in two key areas: increasing supplies
of and access to inputs, and improving regulation of the
sector.


Input availability


The African cotton value chain has many objectives for
growth and development within its three segments:
production, marketing, and value added in the form of
textile and apparel production. The Pan-African Cotton
Road Map, approved in May 2012, was developed
under the auspices of UNCTAD through a collaborative
and inclusive process that involved all major actors in the
cotton value chain. This road map builds on existing
regional cotton development strategies and provides a
comprehensive set of recommendations for industry
improvement, and efforts towards its full implementation
should continue.


While all three segments of the cotton value chain -
production, marketing and value added - are important
and can contribute to employment creation, income
generation and export earnings, it is self-evident that
production is the foundation on which the other
segments are based. Agriculture employs millions, while
the marketing and value added sectors employ




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


18


thousands. Accordingly, a near-term emphasis on
increased cotton production will facilitate more growth in
the African cotton sector than an emphasis on either
marketing or textile production. This is not to suggest
that the cotton marketing and the value added sectors
should be ignored, but simply that enhanced production
is the shortest route to increased incomes for the largest
number of people.


The biggest constraint on increased cotton production is
the failure to provide inputs to farmers. Accordingly, in
order to take advantage of the market opportunities
available in the next five years, African governments
need to improve systems of input delivery to farmers.


Between 1990/91 and 2013/14, the world cotton lint
yield rose by an average of 12 kilograms per hectare per
year, increasing from roughly 575 kilograms to 775
kilograms. During the same time, the yield in Southern
and Eastern Africa showed no trend growth, rising and
falling around an average of 250 kilograms per hectare,
and the yield in the CFA zone actually fell by an average
of 4 kilograms per hectare per year, from 450 kilograms
to 375 kilograms (figure 18 ).


Agriculture is complex, and there are many reasons for
poor performance. The major factors that affect yields
are technology, technology extension to growers,
logistics covering the purchase, transportation and
ginning of seed cotton, and input use.


: African countries have been producing
cotton commercially for nearly a century, and many
African scientists are highly trained and meet
international levels of competence. African research
facilities are underfunded, as they are everywhere, but
facilities have been receiving support for a decade from
Australia, Brazil, China, the European Union, India,
Pakistan, the United States and other countries under
the WTO’s Cotton Initiative. Other countries that have
been supporting agricultural research in Africa for
decades are France, Germany and the United Kingdom.
African countries have been active participants in
regional technical meetings on cotton, including those
organized under the auspices of the Southern and
Eastern African Cotton Federation (SEACF), the African


Cotton Producers’ Association (Association des
Producteurs de Coton Africains - AproCA), and the
World Cotton Research Conferences (WCRC). African
farmers have access to the latest technology
developments, and Africa’s scientists have the expertise
to adapt and apply these developments within
appropriate packages for adoption, in particular
because, as mentioned earlier, African technology
development is receiving support. This support should
continue.


: The extension of technology to
farmers is a challenge everywhere, including in Africa
where there are an estimated 3.5 million cotton-
producing households, many of whom are illiterate. In
addition, they are physically isolated in rural areas
without good roads or electricity, and sometimes gender
roles inhibit interaction with researchers and extension
agents. Nevertheless, African farmers have been
producing cotton for decades, and there are substantial
cumulative impacts of multiple training initiatives, both
public and private sector, funded at national, bilateral
and multinational levels, with NGO contributions and
farmer participation through village associations,
subnational regional organizations and national
organizations of farmers. Ongoing efforts in Africa to
provide more and better training, with new training
techniques that are also gender-appropriate, should also
continue.


: Once seed cotton is harvested and
transported to a procurement centre, it has to be
weighed and loaded, transported to a gin, ginned, baled
and warehoused. The cotton seed must be stored and
transported to users, and the lint moved to a port or mill
and delivered to customers, and farmers need to be
paid. Often, African roads are bad, railroads do not
function, ports are congested, and gins often have to
provide their own electricity, which means importing
diesel to power the generators that power the gins.
Farmers have to be paid in cash in most countries
because rural banks are non-existent. Seed cotton
grading systems are simplistic, and do not provide
incentives matched to market preferences for lint quality.


Figure 18: Cotton yields: World, Southern and Eastern Africa and CFA, 1990/91−2010/11
(kilograms of lint per hectare)


0


100


200


300


400


500


600


700


800


900


1990/91 2000/01 2010/11


World Southern & Eastern Africa CFA




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


19


Any observer can cite a litany of shortcomings, but for all
the inefficiencies, high costs and other shortcomings,
companies in Africa can procure, gin, transport and
store cotton and pay farmers. Companies have been
producing and handling cotton and cotton seed for
decades, and every bale of cotton produced eventually
moves to market. Poor logistics contribute to lower
prices paid to farmers than would be the case in more
highly developed economies, but improving logistics
requires decades of economic development, not years,
whereas the incomes of African farmers could be
increased more, and more quickly, if there was a greater
emphasis on input availability.


: The primary reason that yields are low
across Africa is because input availability is suboptimal.
Many inputs are used in cotton production, including
seeds, soil, water, sunlight, fertilizer, pesticides and
labour. Nitrogen use per hectare is a barometer of
overall input utilization. The agronomic requirements of
cotton vary with soil type, temperature and rainfall, but,
on average, one hectare of cotton requires about
125 kgs of nitrogen.


The ICAC has been surveying cotton production
practices at three-year intervals for several decades. The
most recent report was completed in 2012 based on
data from 2011. 20 Of the major countries reporting,
average nitrogen use per hectare was 200 kilograms in
Australia, 180 kilograms in Brazil, 150 kilograms in
Egypt, the Islamic Republic of Iran and Pakistan, 125
kilograms in Kazakhstan and 115 kilograms in the United
States. In contrast, average nitrogen use was between
30 and 50 kilograms per hectare in Burkina Faso,
Cameroon, Mali, the United Republic of Tanzania,
Zambia and Zimbabwe (figure 19). Clearly, nitrogen
applications and, by implication, all purchased input


applications are suboptimal across sub-Saharan Africa.
And, while technology, extension and logistics could all
be improved, it is input availability that is the prime
constraint on increasing yields and production in Africa.


Regulation


Beginning in the 1980s and continuing through the
1990s and 2000s, single-channel monopoly commodity
production and marketing boards have been disbanded
across Africa. Some of the cotton boards were
notoriously inefficient and corrupt, and were wisely
disbanded; others were efficient and well managed, and
should have been kept. Regardless, there is a need to
move forward. A lesson of the past two decades, which
even the most ardent advocate of deregulation would
have to acknowledge, is that a highly regulated cotton
sector in which input supply to farmers is linked with
seed cotton procurement results in better outcomes
than an unregulated sector.


Cameroon is an example. Producing an average of more
than 500 kilograms per hectare, it has the highest
national yield in sub-Saharan Africa, other than South
Africa (which has produced only 10,000 tons of cotton in
recent years). Cameroon has maintained its single-
channel national cotton company, Société de
Développement du Coton du Cameroun (SODECOTON),
and has been able to continue to supply inputs to
growers at recommended rates in order to maintain
production levels. In comparison, in neighbouring Chad
and Nigeria, where agronomic conditions are identical to
those in Cameroon but where the national cotton
sectors are less well regulated and supported, national
cotton yields are about 200 kilograms per hectare - less
than half the yield in Cameroon (figure 20).


Figure 19: Nitrogen use in cotton production (kilograms per hectare)


0


50


100


150


200


250


A
us


tra
lia


B
ra


zi
l


B
ur


ki
na


Fa
so


C
am


er
oo


n


E
gy


pt


Ira
n


(Is
la


m
ic


R
ep


.o
f)


K
az


ak
st


an


M
al


i


P
ak


is
ta


n


Ta
nz


an
ia


(U
ni


te
d


R
ep


.o
f)


Tu
rk


ey


U
ni


te
d


S
ta


te
s


Za
m


bi
a


Zi
m


ba
bw


e




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


20


Figure 20: Cotton yields in Cameroon, Chad
and Nigeria, 1990/91−2010/11


(kg of lint/hectare)


0


200


400


600


800


1,000


1990/91 2000/01 2010/11


Cameroon Nigeria
Chad


During the three most recent cotton seasons, 2011/12
to 2013/14, the harvested area in the CFA zone
averaged 2.3 million hectares and production averaged
860,000 tons, with an average yield of 375 kilograms of
lint per hectare. If the yield across the region had risen to
the level of Cameroon at 535 kilograms per hectare, total
production on the same area could have been 1.2 million
tons.


Likewise, Uganda and Zimbabwe serve as examples in
Southern and Eastern Africa. While the cotton zones of
these two countries are separated by about 3,000
kilometers, the agronomic conditions in each region are
similar. However, their regulatory histories and
governance situations are very different. Yields in
Uganda were the lowest in the world in the 1980s, but
have been trending upwards and are now among the
highest in the region. In contrast, yields in Zimbabwe
have been trending downwards since the mid-1990s
(figure 21).


Figure 21: Cotton yields in Zimbabwe, Zambia
and Uganda, 1990/91−2010/11


(kg of lint/hectare)


0


200


400


600


800


1,000


1990/91 2000/01 2010/11


Zimbabwe Zambia
Uganda


Uganda created the Cotton Development Organization
(CDO) in the 1990s to regulate the sector, gather
statistics and ensure quality standards. Zimbabwe has
moved in the opposite direction, disbanding its Lint
Marketing Board and relying on the private sector to self-
regulate.


The cotton industry formed the Cotton Ginners
Association of Zimbabwe in an effort to maintain quality
standards, and it required that all ginners contribute to
the provision of input packages to growers, but not all
ginners have joined or agreed to conform to industry
standards.


During the three most recent cotton seasons, the
harvested area in Southern and Eastern Africa averaged
2.1 million hectares, and production averaged 520,000
tons with an average yield of 245 kilograms of lint per
hectare. If the yield across the region had risen to the
level of Uganda at 380 kilograms, production on the
same area could have been 800,000 tons.


If yields across sub-Saharan Africa had risen to the levels
achieved in Cameroon and Uganda - yields already
being achieved by other farmers on the continent using
African technology packages under African conditions -
the increases in production would be worth about
$1 billion, or about $300 per year per cotton-growing
household.


Governance structures in the cotton sector of Africa
have been studied in great depth.21 Different countries
have different cultural, historical and political
experiences, and any solutions must be tailored to local
situations. Nevertheless, there is now overwhelming
empirical evidence that a successful cotton sector
requires extensive regulation. Whether that regulation is
accomplished through national associations with the
approval of the government, or through government
regulatory bodies or national monopolies, could be
determined in each country. But, the evidence is clear:
regulation is needed to ensure the provision of inputs to
growers and the procurement of seed cotton by ginners.
Accordingly, in order to take advantage of the
competitive opportunities that will be available to
producers in developing countries over the next five
years, it is recommended that African governments
establish and enforce the regulatory frameworks used in
countries with the highest yields, namely Cameroon and
Uganda.


Within the context of the Pan-African Cotton Road Map,
Productivity, Actions II (Agricultural inputs and seeds)
and III (Soil protection/conservation and fertility of
agricultural lands) offer the greatest opportunities for
near-term gains in productivity, production and
income.22


Other priorities


While production is the foundation on which the cotton
value chain is based, African governments can also
enhance incomes and wealth creation through
improvements in the marketing of cotton and value
addition processing.


Utilization of the Regional High Volume Instrument (HVI)
Technical Centers in Ségou and Dar es Salaam,
combined with bale-by-bale testing of all cotton and the
use of such information in marketing, could add 3-10
cents/lb to the value of cotton sales across Africa (see
Pan-African Cotton Road Map: Marketing, Actions
II.b.).23


Almost all exporters in Africa sell to merchants at ports
rather than selling to textile mills at destination. This is a




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


21


strategy of risk minimization, as reputable international
merchants rarely default on contracts, and can arrange
forward sales to provide credit for the purchase of
inputs. However, some companies, including the Cotton
Company of Zimbabwe, are engaged in direct sales to
textile mills in Asia and elsewhere, and such companies
are able to internalize more of the margin between gin
and textile mill. Cotton Chad famously operated a sales
office out of Paris for about 15 years until the mid-2000s,
proving that African companies can compete
successfully in international markets. African cotton
companies would be well advised to begin building
human capital in marketing functions by gradually
diversifying sales with a view to expanding direct sales
by mills over time (see Pan-African Cotton Road Map:
Marketing, Actions I.d and e.).


Sub-Saharan Africa accounts for 6 per cent of world
cotton production, an activity that supports millions of
farming households. Moreover, cotton exports are a
major source of foreign exchange. However, this
subregion accounts for just 1.5 per cent of world cotton
mill use. Problems with electricity supply, a lack of
trained workers, poor logistics and communications, and
distance from fashion centres and textile markets pose
difficulties for the development of the textile industry.
Probably the most harmful single policy that
governments have utilized in efforts to foster value
added production has been to reduce prices paid for
cotton to producers in order to provide cotton to textile
mills at below-market prices. Such policies harm millions
of farmers while providing benefits to companies that
employ only a few thousand workers, resulting in large
inefficiencies.


Despite difficulties, there are some textile companies that
operate successfully in Africa, and their examples
deserve emulation and encouragement. Relatively large
and growing industries exist in Ethiopia, Mauritius and
the United Republic of Tanzania. In each of these
countries, the governments have ensured the availability
of utilities and infrastructure, and have facilitated worker
training, while private investment has provided capital
and management. Africa has numerous advantages as a
location for textile production, including the availability of
cotton. It also benefits from trade preferences in the
European Union and the United States. African
governments could study the success stories, where
they exist, for ideas on how best to facilitate private
sector expansion of the textile industry (see Pan-African
Cotton Road Map: Value Addition, Actions II.c and c.).


6. Concluding remarks
The Farm Bill of 2014, also referred to as the United
States “farm bill,” will provide substantially less support
to the cotton sector in the United States than has been
provided under previous farm bills. Given that the United
States Government is mandating the use of biofuels in
the country’s fuel supply, prices for corn and soybeans
will probably remain higher, on average, than they were
in the past. Accordingly, domestic cotton production is
likely to trend downwards toward 3 million tons of lint per
year over the next five years as harvested area in regions
where cotton competes with corn and soybeans moves
towards the production of biofuel crops. The increases in
prices of corn and soybeans will also affect planting
decisions in other major cotton-producing countries.
Accordingly, there is likely to be a reduced supply of
cotton from competing exporting countries, especially
the United States, in the future.


China supported prices in the world cotton market
during 2011/12 through 2013/14 through purchases for
the State Reserve, and these purchases are likely to be
reduced. The Government of China will probably pursue
a slow and managed liquidation of the Reserve over
many years, allowing prices to gradually move lower
towards the long-run average of the Cotlook A Index of
73 cents/lb. While no farmer would like to see prices
decline, cotton must compete with polyester in the world
fibre market, and lower cotton prices will enhance the
quantity of cotton being used in textile mills.


With competitive pressures from other exporters
weakening over the next five years, and the quantity of
cotton being used in the textile industry rising as prices
gradually decline, there will be opportunities for
increased production and exports of cotton from Africa.
Starting from a small base, there will also be
opportunities for expanding textile industry activity in
Africa. There is now convincing empirical evidence that
the cotton sector requires strong regulation of private
sector activity in order to ensure adequate delivery of
inputs to growers and the procurement of seed cotton.
African governments can emulate the best practices
already being implemented in several African countries in
order to facilitate and foster increases in cotton yields
and production.




The United States 2014 Farm Bill and its Implications for Cotton Producers in Low-income Developing Countries


22


Footnotes
1 While the provisions of the farm bill are effective until 2018, it is standard practice in the United States for the Congressional
Budget Office to estimate the budgetary requirements over a 10-year period.
2 Unless otherwise indicated, all data used in this report are from various reports of the International Cotton Advisory
Committee (ICAC).
3 Some area is planted with crops every year which are not harvested for a number of reasons. For instance, farmers might
become ill, or prices could decline, or labour for harvesting may not be available, or weather might be poor resulting in such
low yields that the crop is not worth harvesting. Yields are reported in terms of harvested area, not planted area, and harvested
area is assumed to be a better reflection of farmers’ interests in a particular crop.
4 United States Department of Agriculture (USDA), Economic Research Service, various publications.
5 About 95 per cent of all cotton in the world is classified as “upland”, an archaic term from the United States colonial period.
The first cotton grown in the colonies that would become the United States was planted on islands off the coast of Florida,
Georgia and the Carolinas. This was known as Sea Island cotton, and small amounts are still produced. As colonists moved
onto the mainland, they needed different varieties for the different agronomic conditions. The new varieties were called
“upland”, a name that persists even today.
6 Counties are subsets of state governments in the United States; a typical state might be subdivided into 100 counties for
administrative purposes. The State of Texas, for example, has 254 counties.
7 See: http://www.rma.usda.gov/policies/.
8 The AWP is calculated by USDA from the Cotlook A Index “adjusted” to average location and quality in the United States. It
is a proxy for the average farm price in the United States.
9 GSM stands for General Sales Manager.
10 See: http://www.ers.usda.gov/agricultural-act-of-2014-highlights-and-implications/crop-insurance.aspx#.U0_hol54X1o.
11 “Out of the money” is a technical term in options trading, meaning that the price at which the option would be exercised is
10 per cent lower than the price that prevailed in the market at the time the option to sell was purchased.
12 Season averages of the Cotlook A Index were near or within a few cents of 57 cents per pound several other times, but the
Index itself is an estimate of market levels, and differences of a few cents are not statistically significant when evaluating
programme impacts.
13 See: https://www.icac.org/cotton_info/publications/statistics/stats_wtd/gm-e_2013.pdf.
14 IMF, World Economic Outlook: Transitions and Tensions (October 2013) and WEO Update (January 2014).
15 OECD, Global Economic Outlook 2014, February 2014 update; available at: https://www.conference-
board.org/data/globaloutlook.cfm.
16 UN DESA, Population Division, World Population Prospects: The 2012 Revision - Highlights and Advance Tables, Working
Paper No. ESA/P/WP.228, table S.2, Total Population by Country, 1950, 2013, 2025, 2050 and 2100 (medium variant).
17 This is Chinese official statistics; estimates of production in China vary by source.
18 Institute of Cash Crops, Xinjiang Academy of Agricultural Sciences, Xinjiang cotton production: Status and its problems.
Presentation at the 32nd International Cotton Conference, Bremen, March 2014.
19 According to an ILO high-level mission report on the monitoring of child labour during the 2013 cotton harvest in Uzbekistan,
“Some child labour still takes place during the cotton harvest but to a limited extent. It appears to the Mission that forced child
labour has not been used on a systematic basis in Uzbekistan to harvest cotton in 2013.”
20 See: https://www.icac.org/cotton_info/research/productionpractices/tisdocs/prod_prac2011.pdf.
21 See, for example, World Bank, Organization and performance of cotton sectors in Africa: Learning from reform experience,
2009; Tschirley DL, Poulton C, Gergely N, Labaste P, Baffes J, Boughton and Estur G, Institutional diversity and performance
in African cotton sectors. Development Policy Review, 28 (3): 295-323, 2010; Tschirley D, Poulton C and Boughton D, The
many paths of cotton sector reform in Southern and Eastern Africa: Lessons from a decade of experience. In: Moseley WG
and. Gray LC, eds. Cotton, Natural Resources and Society in sub-Saharan Africa. Ohio University Press, 2008. Please provide
the page numbers for this chapter. I am referring to the entire publications, not just one chapter or section in each.
22 See UNCTAD/SUC/2014/6, Pan-African Cotton Road Map (http://unctad.org/en/Pages/SUC/Commodities-Special-
Unit.aspx).
23 Ibid.






Printed at United Nations, Geneva – 1422718 (E) – December 2014 – 832 – UNCTAD/SUC/2014/3




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