UNCTAD Secretary-General's
MULTI-STAKEHOLDER MEETING ON COTTON
2 December 2008
Palais des Nations
Introduction
The 12th session of the United Nations Conference on Trade and Development, held in
Accra, Ghana, in April 2008, mandated UNCTAD to continue to play a key role, with
appropriate coordination with other international and regional actors, including relevant
international commodity bodies, in addressing the trade and development problems
associated with the commodity economy, paying due attention to all commodity sectors.
The Conference also stipulated that the UNCTAD secretariat, under the guidance and
leadership of the Secretary-General of UNCTAD, should contribute more effectively to
developing countries’ efforts to formulate strategies and policies to respond to the
challenges and opportunities of commodity markets.
Pursuant to this mandate, and in consultation with various stakeholders, UNCTAD’s
Secretary-General will convene a high-level multi-stakeholder meeting in Geneva at the
Palais des Nations on 2 December 2008. The purpose is twofold: 1) to review the
opportunities and challenges for trade in cotton in the evolving global economic and trade
environment; and 2) to identify ways in which low-income cotton-dependent exporting
countries can be assisted to respond to the challenges and opportunities of commodity
markets, thereby enhancing the sector's contribution to economic growth and
development, and poverty reduction.
Background and context
Market developments
Significant developments have taken place in the global cotton sector over the past
decade. World cotton consumption rose by 40 per cent between 1997 and 2007, and the
period since 2000 saw the largest sustained growth rate in consumption (averaging 5.5
per cent annually) in nearly 50 years. This growth has been driven largely by robust
world economic growth and lower cotton prices relative to synthetic fibre prices. For
example, in recent years cotton has been about 20 per cent cheaper than polyester (the
precursor of synthetic fibres) than it was in the 1990s due to the rising cost of petroleum
feedstock. As a result, the share of cotton in world fibre consumption has held steady
since 2000, after falling sharply in the 1990s – from 50 per cent to 40 per cent. In
addition, consumption has been affected by changes in trade rules. With the phase-out of
the Multi-Fibres Arrangement (MFA) at the end of 2004, the removal of the system of
textile trade quotas on imports from developing countries has encouraged a geographical
redistribution of textile production to countries (particularly in Asia, with China in the
lead) with lower production costs. This has helped lower textile prices and boost retail
consumption.
As Asia’s cotton consumption has surged ahead, in some countries – notably China, with
its double-digit annual consumption growth rates – production has lagged behind.1 This
has given rise to a major increase (44 per cent between 1997 and 2007) in the trade
demand for cotton. As a result, the share of exports in world cotton production has
expanded from 30 per cent in 2000/2001 to a record 38 per cent in 2005/2006. China’s
imports have been the main driver of this expansion, rising from 1 per cent of world
cotton imports in 2000/2001 to 43 per cent in 2005/2006 (see figure 1).
Figure 1
High consumption growth and buoyant export demand have contributed to stronger
cotton prices in recent years. After falling sharply between 1995/1996 and 2001/2002,
from 90 cents per pound to 40 cents per pound, cotton prices have since been on a
relative rebound, rising to 73 cents per pound in 2007/2008.2 In inflation-adjusted real
terms, however, they have been falling since the 1950s.
On the export side, the United States has accounted for the lion’s share of global gains
(see figure 2). Its share of world exports rose from 25 per cent in 2000/2001 to 40 per
cent in 2005/2006. Other major exporters include the “Franc Zone” (10 of the 14 CFA
currency zone countries in sub-Saharan Africa), Uzbekistan, India, Australia and Brazil.
The US and these countries together account for nearly 80 per cent of world exports.
The sub-Saharan African countries in the Franc Zone utilize either the West African CFA
or the Central African CFA, which are both pegged to the Euro. Although there was a
decline of about 50 per cent in real (inflation-adjusted) cotton prices between 1995/1996
1
For example, imports now account for 20-to-40 per cent of China’s cotton consumption.
2
Price quotes are from the Cotlook A Index, an indicator of average prices for lint cotton delivered to Far
Eastern ports.
2
and 2005/2006, these countries nevertheless increased production and exports by about
70 per cent. This was due mainly to the CFA devaluation of 1994, which shifted
domestic cotton prices in the farmers' favour and thus encouraged cotton production.
Figure 2
The medium-term outlook for the global cotton market is uncertain. On the demand side,
consumption growth and import demand are likely to be affected by the economic
downturn and possible recession in major import markets, due inter alia to the global
financial crisis. On the export supply side, the recent run-up in grain and oilseed prices
relative to cotton prices – the result of poor harvest in some exporting regions and
increased demand for biofuel production – is likely to encourage a diversion of area
planted away from cotton and into other crops. This might occur particularly in the US,
which is the dominant exporter. Also, the recent sharp appreciation of the US dollar
against the Euro and other currencies, if maintained, could sustain a rise in domestic
cotton prices for farmers in non-dollar-exporting countries. This could stimulate
production in the countries similarly affected by the CFA devaluation of 1994.
Trade policy issues
There is broad recognition that government policies relating to cotton, such as direct
income, price support and export assistance, distort production and trade. The
International Cotton Advisory Committee (ICAC) estimates that the highest level of
direct government assistance provided to the cotton sector by nine countries through
production programmes amounted to $6.2 billion in 2004/2005.3
The US provides the largest amount of direct support. Changes in government cotton
programmes since the mid-1990s have placed more emphasis on production and exports
3
See ICAC, Government Support to the Cotton Industry, 29 May 2008.
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than on domestic market price stability. US cotton exports have climbed 2.6 times since
the 1990s. The EU also provides substantial support to its cotton sector. However, its
programme has been altered since early 2006 to decouple 65 per cent of payments from
current production. Other producing countries provide smaller levels of trade-distorting
support.
In 2002, Brazil lodged a complaint through the WTO dispute settlement process that
certain US cotton programmes caused “serious prejudice" to Brazil by depressing world
cotton prices. The complaint was largely accepted by a WTO dispute settlement panel
and then upheld by the WTO Appellate Body in 2005.
In the context of the Doha Round of trade negotiations, four West African countries –
Benin, Burkina Faso, Chad and Mali – proposed in 2003 the “Sectoral Initiative in
Favour of Cotton” at the WTO, which called for the elimination of all trade-distorting
cotton subsidies and financial compensation until these subsidies are completely
removed. Since no conclusion was reached that year at the WTO Cancun Ministerial
Conference, a cotton subcommittee was established in 2004 during the Special Session of
the Committee on Agriculture. Its programme involves in-depth work on all tradedistorting policies affecting the sector in all three pillars of market access, domestic
support and export competition; assessing progress in the Agriculture Special Session;
and ensuring coherence between trade and development aspects.
Regarding the development aspect, the most recent compilation of the WTO secretariat
indicates that commitments on cotton specific development assistance now stand at $551
million and actual disbursement at $109 million4. Beneficiaries have in the past
complained about the large gap between commitment and disbursement, and that the
announced programmes were not what they had envisioned.
Regarding the trade aspect, progress has been made on market access and export
subsidies, which had to be eliminated by 2006, but the proponents are concerned about
lack of movement on trade-distorting domestic support. From the start of the cotton
subcommittee's work, movement has been linked by some stakeholders to movement on
the agriculture negotiations. The 2008 draft modalities texts reflect the cotton-specific
reduction formula as proposed by the Cotton Four. The formula ensures that the reduction
of trade-distorting support on cotton is above the general aggregate measurement of
support (AMS) reduction. If the general reduction of AMS support is 70 per cent, the
reduction on cotton is 84 per cent. The implementation period of AMS commitments on
cotton would be one third of the general implementation period, and the blue box cap on
cotton would be one third of the product-specific cap. One element not reflected in the
draft modalities text is that the reduction in the overall trade-distorting support for cotton
should lead to the elimination of such support.
Although a mini-Ministerial in July 2008 reported progress on many elements in
agriculture, cotton was among the few issues not discussed in depth. As a controversial
4
See, WTO Director-General Evolving Table on Cotton Development Assistance, 30 October 2008,
WT/CFM/6/Rev.4
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issue, it was among the elements left to be resolved at the end, but since the talks failed
over a special agricultural safeguard mechanism for developing countries, it was not
discussed by Ministers. It is, however, high on the agenda for the Chair of the agriculture
negotiations, Ambassador Falconer, for the end of 2008. He intends to discuss the issue
with a smaller group of stakeholders, possibly comprising the Cotton Four, the United
States, the EU, plus India and Brazil.
Development Issues
Some of the poorest and least developed countries, especially in Africa, taken together,
are major participants in global cotton trade as exporters. For many of these countries
cotton production and trade is their main engine for growth and poverty reduction. Thus
developments in global cotton markets have significant and immediate impact on their
socio-economic development. For example, the Franc Zone Countries, which are
amongst the least developed and poorest countries, are highly dependent on cotton
production and trade. Cotton is the only cash crop for many of the region’s farmers, and
accounts for 30-to-60 per cent of all exports from Benin, Chad, Mali and Burkina Faso.
Although yields in the Franc Zone are among the world’s lowest, production costs are
also among the lowest. Output growth has thus been achieved mainly by expansion in
area planted to cotton. Development gains from production and trade in cotton has been
limited due to a number of constraints, including low productivity growth arising from
technological and resource constraints, and limited value addition.
Key questions for discussion
What is the medium-term outlook for cotton trade, and what are the likely repercussions
of the global financial crisis on cotton markets?
How have the fuel and food crises affected the cotton market and low-income cotton
producers?
What is the medium-term outlook for exchange rate movements, and what impact are
they likely to have on cotton markets?
What is the current situation and outlook for government measures that distort production
and trade in cotton, and what are the implications of their removal for trading patterns?
Cotton is the lifeblood of many low-income developing countries, especially in Africa.
Recent increases in their production and exports have been largely accomplished by
expanding the area planted, rather than through significant increases in yields. How can
these countries be helped to improve their productivity at various stages of the supply
chain – e.g. growing, harvesting and ginning - as well as quality assurance?
What kinds of incentive systems and support services would encourage sustainable
improvements in smallholder production in low-income cotton-dependent exporting
countries?
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