Cotton Policies and Prices - NCC Provides Missing Information and Clarification of Misinformation in WSJ Article

On Wednesday, June 26, 2002, the Wall Street Journal ran "In U.S., Cotton Farmers Thrive; In Africa, They Fight to Survive," an article vilifying the U.S. cotton industry. The article is incomplete in its reporting of the world cotton situation, fails to accurately depict the system of marketing for West African cotton growers, implies that U.S. cotton producers single-handedly brought down world cotton prices, and suggests that U.S. agricultural policy could be the cause of greater global terrorism. Because the analysts could not accurately characterize the cotton situation, the implications drawn in the remainder of the article are simply speculative hypotheticals.

Cotton Trade

The recent article in WSJ fails to address the obvious problem for many cotton growers in West Africa. The several cotton growing West African governments of the former French colonies sit astride the marketing system for agricultural commodities and extract the equivalent of extraordinary export taxes from their own growers. Governmental agencies and parastatal organizations control access to seeds, fertilizer, ginning, sales and transportation. If the writers had wanted to check, they would have found that cotton growers in countries that operate in largely open markets such as Brazil, Australia, Argentina, Turkey and the U.S., realized cash prices for their cotton of about 48 cents per pound in 2000 and 32 cents per pound in 2001. These prices stand in stark contrast to those received by farmers across the West African region. Growers in the West African region realized prices averaging about 35 cents per pound in 2000 and 24 cents (or less) in 2001. The West African countries are not the only cotton growing nations practicing this particularly pernicious form of taxation. Cotton growers in Egypt, India, Pakistan and Sudan face similar situations. This situation is actually foreign government revenue management (taxation) that is in no way associated with U.S. farm programs.

The U.S. is the world’s largest importer of cotton. Annual imports of cotton textile and apparel products are the equivalent of 16 million bales, feeding a total U.S. domestic retail market for cotton products of 20 million bale equivalents. Domestic retail promotion of cotton products funded by U.S. cotton growers and operated by Cotton Incorporated has added 10 million bale equivalents to annual U.S. retail demand in the past decade. While U.S. consumers added to their annual cotton purchases, foreign demand for cotton textiles and apparel fell 5 million bales over the same period. Were it not for the tremendous expansion in the U.S. retail market for cotton textile and apparel products, world raw cotton prices would be lower yet.

Commodity Prices

Low prices have burdened world agriculture for several years. On a broader scope, low commodity prices (agriculture, metals, chemicals, energy) have been experienced worldwide since the Asian financial crisis broke in 1997/98. This low price phenomenon is not associated with one country’s foreign and domestic policies. Simple answers are sought to extraordinarily complex questions. Sound bites and short media quips aside, an understanding of the forces at work in world markets cannot be obtained in editorials, info-mercials or other quick tutorials.

The Commodity Research Bureau (CRB) maintains an index of commodity price movements. The commodities included in the index range from traditional U.S. agricultural commodities to heavily traded international agricultural products such as cocoa, coffee and sugar to metals and energy commodities. The CRB sub-component for grains (corn, wheat, and soybeans) declined more than 60% since 1996. The CRB softs index (cocoa, coffee, orange juice and sugar) has generally trended down since 1995 and now stands some 40% below its mid-1990’s value. CRB industrials, which includes copper and cotton, shows a pronounced downward trend since 1997 and now stands some 55% below values just four years ago. These price data indicate that if the focus is cotton price in isolation, important global shifts will be missed.

The rise in the purchasing power of the U.S. dollar corresponds to this broadly based fall in commodity prices. Data from USDA’s Economic Research Service (ERS) show that the U.S. trade-weighted agricultural exchange rate has appreciated by about 30% since 1995, reversing almost 10 years of steady decline. Furthermore, the U.S. dollar has appreciated by over 40% relative to the currencies of our primary competitors in the raw cotton export market. This strengthening of the U.S. dollar has had a devastating impact on the U.S. cotton industry and, indeed, virtually all export dependent and/or import sensitive industries in the U.S. In effect, the 30% appreciation of the U.S. dollar in recent years has had the same impact as a 30% tax on exports. In addition, a strengthening U.S. dollar confers a further advantage to foreign cotton producers because international cotton trade is ‘dollar-denominated.’ Hence, foreign cotton traders receive U.S. dollars for their exports which are then converted into ever-larger quantities of their domestic currency.

Cotton Prices

Addressing low world cotton prices specifically, several other international developments have had substantial impact on world textile fiber trade, in addition to the strength of the U.S. dollar. The production of textile polyester in all of Asia more than tripled in the past decade. Asian textile polyester production has risen from 21.6 million (480-lb.) bale equivalents in 1990 to an estimated 73.4 million bale equivalents in 2002. Countries across the Asian region provided lucrative incentives for the siting of chemical fiber production facilities for past 10 years. Tax waivers, rebates on import duties, elimination of income and sales taxes, and assurances of energy supplies were common incentives. Across Asia, from South Korea to Bangladesh, production of textile polyester soared, but China claimed the lion’s share of the increase. Textile polyester production in the Western Hemisphere and Europe remained largely unchanged over the period.

The exponential increase in Asian polyester production has had a direct and substantial impact on the use of cotton in textiles and subsequently on raw cotton prices. World demand for raw cotton has shown anemic growth as the Asian textile complex uses ever-increasing volumes of polyester. Cotton is an industrial raw product. It flows through the world’s spinning mills and fabric manufacturers headed for the retail shelf as textile and apparel products. World demand for cotton textile products generally reflects the overall economic performance of the major economies. Weak economic performance translates to weak demand and weak prices.

2001 Cotton Production

Lastly, analysts that look at today’s prices and judge last year’s behavior use a hindsight that should be available to everyone. At the time of cotton planting decisions for the 2001 crop in the northern hemisphere, prices were up substantially from cotton prices observed at planting time in 2000. Therefore, it is not surprising that more acres were devoted to cotton. Cotton growing regions in China and the U.S. generally experienced beneficial weather and resulted in above average yields. Unfortunately, cotton prices began to decline as planting for the 2001 crop commenced and prices eventually fell to extraordinary lows. However, applying today’s prices to suggest something about what should have been appropriate grower behavior one year ago is simply poor analytical thinking.

Most readers of the Wall Street Journal look for market insight from the analysts. Maybe readers should look farther afield if the analysts cannot find the entire picture.