AProCA. Pan-African Workshop

Transcription

1 AProCA Pan-African Workshop Proposals for strategies for overcoming the crisis in the African cotton industry due to the fall in international prices Savana Hotel, Saly, Senegal, the 6 th and 7 th May 2005 Forum organised by the African Cotton Association, the Association of African Cotton Producers, Seatini and Enda Prospectives Dialogues Politiques. With the support of Oxfam International and DFID Third Session: Emergency support funds, the search for coherence in the strategies for reforms and negotiation Communication on: What is the future for the issue of support funds for the cotton sector within WTO and development partners? Louis Goreux, Independant Expert

2 1. Cotton subsidies depress the global price. Global prices of cotton were depressed because of subsidies and many other factors. Some, such as weather conditions have a random nature. Others, such as the evolution of the exchange rate, the price of fertilizers compared to the price of cotton and the economic activity, are cyclic. Two other factors are responsible for the decreasing trend of the past ten years. On the one hand, the world demand for cotton has slightly increased because of the expansion of the use of synthetic fibers. On the other hand, the marginal cost of production of cotton fibers has decreased because of the reduction in costs in large farms. The crisis of 2004/05 is more serious than that of 2001/02 because of the fall of the dollar compared to the euro. Although the A Index price increased by 27% in dollars from 2001/02 to 2004/05, it decreased by 11% in FCFA due to the fact that the euro went from 0,91 to 1,3 dollar. 1 If the euro had been with parity with the dollar into 2004/05, the CFA network would have been close to financial balance. For the three CFA countries that strongly depend on cotton (Benign, Burkina Faso and Mali), the CFA franc is today overvalued, but that is not necessarily the case for the eleven other countries of the CFA zone. One should therefore not count on a devaluation to solve the immediate problems of these three countries; moreover it is not very likely that an adjustment of the exchange system will be considered before the resolution of the crisis in the Ivory Coast. The strong fall of A Index price expressed in francs CFA was worsened in 2004/05 by the rise in the prices of oil and fertilizers and, in the case of Burkina Faso and Mali, by the difficulties of taking cotton fibers to the port. It is also true than this fall was also worsened by the subsidies granted by the European Union and the United States to their cotton producers. To measure the effect of subsidies on global prices, it is necessary to isolate the effect of subsidies from the effects of the other factors by comparing the situations with and without subsidies ceteris paribus (i.e., all things remaining equal otherwise). For that, it is necessary to have an econometric model. The figure of 250 million dollars mentioned in the income support Initiative for the LDCs (Least Developed Countries) was based on such a model. The Brazilian complaint to the WTO was based on the estimates drawn from the model used by the US administration and adjusted by Professor D. Summer for the needs of the study. But, even in the absence of models, it is clear that the global price was depressed in 2001/02 and 2004/05 by the American and European cotton subsidies, since those accounted then for 75% of the value of world cotton exports. 2. The elimination of the subsidies would reduce the poverty of ten million Africans The Initiative of the four LDCs submitted in May 2003 to WTO contained a clear message: "Eliminate the cotton subsidies in the United States and the European Union. That will reduce the poverty of ten million Africans living with less than one dollar per day and per person, and that will not cost you anything since the losses of your producers will be more than compensated by the profits of your taxpayers ". Two years later, this message still remains valid. The expansion of cotton planting contributed to reducing poverty in the Sahel area and this cause and effect relation no longer seems to be contested. The fact that the American cotton 1 Using 53 cents per pound for the A Index price and 1.3 dollar per euro in 2004/05. Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 2

3 subsidies contribute to depressing cotton prices on the world market and harm cotton exporters was recognized by the WTO judges following the disagreement that opposed Brazil to the United States. The credibility of the figure of 250 million dollars mentioned in the Initiative was reinforced by the WTO ruling. Indeed, according to the econometric study of D. Summer, the American subsidies would lead to reduction of global prices by 11,6%. When the effect of the European subsidies is added, one would reach 15%, which would result in an income loss of 250 million dollars mentioned in the Initiative. About half of the costs of African cotton (transport, farm inputs, fixed and financial expenses) are not affected by the variations of the A Index price. Also, a 15 % increase of the A Index could result in an increase in the net income of African cotton producers close to 30%. The elimination of cotton subsidies would thus be a particularly effective method to reduce the poverty of 10 million Africans living with less than one dollar per day and per person. The elimination of cotton subsidies would be in conformity with the creed of the WTO and the Bretton Woods Institutions. Moreover, the elimination of cotton subsidies would have not cost anything neither to the European Union nor to the United States. 3. The elimination of the subsidies would be in the interest of the European Union and the United States. 3.1 European Union The problem of cotton subsidies did not exist in Europe of the six, because none of the six countries grew cotton. The problem appeared with the adhesion of Greece where cotton was cultivated in one of the poorest areas of the country. The cotton subsidies were aimed at reducing poverty in an underprivileged area. These subsidies should have induced a reconversion consisting of gradually replacing a non-profitable activity with activities with positive added value, but the opposite happened. The subsidies to cotton producers and for the construction of shelling plants were so generous that the surfaces where cotton was planted tripled in the 13 years following the accession of Greece. The Commission then took measures to prevent that the increase in cotton production from continuing. But the guaranteed price remained the highest in the world, it was fixed in 2001 to 1,063 euros per kilo for seed cotton, that is to say three times and half the price received by African producers for seed cotton that has a fiber transformation rate much lower than African cotton. When Spain joined the Community, the Andalusian producers benefited from the treatment granted to their Greek counterparts. Cotton subsidies cost the European Union nearly a billion dollar in 2001/02 and they will cost it more than one billion dollar in 2004/05. The cotton produced in Greece and Spain could have been imported for the third of the cost. The Commission is conscious of this anomaly and, on the eve of the Cancun Conference, it announced the replacement of the subsidies linked to the production by non-linked subsidies; starting from 2007, 65% of the subsidies will no longer be linked to the current production of cotton. The Commission moved another step forward with the speech of Peter Mandelson in Bamako on April 13, 2005, speech which angered the American Cotton Council. Europe seems today well inclined, but it only accounts for 2% of the world cotton production. The situation is different in the United States. Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 3

4 3.2 The United States Cotton is an integral part of the American folklore and, for two centuries, the United States has been by far the largest cotton exporter. The production level was maintained thanks to the subsidies, but the use of this cotton by the national textile industry fell. In 200/01, local use represented 52% of the production of fibers; in 2004/05, the use by national textile industry had fallen to 27%. With the abolition of import quotas on textile products since last January, the activity of American textile industry will be reduced even more. Subsidizing the production of cotton and ending up exporting most of it at a loss is not in the interest of the United States. It is an anachronism. The American administration is conscious of the problem and the draft budget subjected by the White House aims at substantially reducing subsidies to cotton producers. In particular, the subsidies would be limited to 250 thousand dollars (that is to say 125 million francs CFA) per recipient, whereas they can exceed a million dollars today. The Cotton Council reacted vigorously against the proposal for a topping off of subsidies and asked several Congressmen and Senators to intervene with the administration. Topping off subsidies would reduce the incomes of those who receive more than 250,000 dollars each year, but the United States would remain by far the world s first exporter. Moreover, according to the study conducted by Summers, even if all the cotton subsidies were eliminated, the production of fibers would still considerably exceed the needs of the American textile industry. By opposing the topping off of subsidies, the Cotton Council was put in a vulnerable position. It showed that it protected the privileges of a restricted group of individuals who receive subsidies of which the major part is paid by taxpayers whose incomes are much lower than theirs. The proposal aimed at topping off subsidies per recipient is extremely solid and several Republican Senators (among whom Senator Grassley of Iowa which, is an agricultural state) think of engaging a battle. It is not excluded that this battle could be won before the Hong Kong meeting. Without this step forward, the agricultural law of 2002 has little chance of being amended before its expiry date and the new agricultural law should be approved by Congress six months before the presidential elections of 2008, which is not the convenient period for launching reforms. 4. The implementation of a financial compensation mechanism is not very probable In their Initiative of May 2003, the four LDCs asked for the fast elimination of subsidies causing a prejudice to LDCs net exporters of cotton fiber and, while waiting for the elimination of these subsidies, the granting of financial compensations to harmed LDCs. The granting of financial compensations during a transitory period could seem reasonable, but this proposal was not well welcome by the partners. The 4 LDCs then reformulated their request by replacing compensation mechanism by support funds to the industry, but this formulation does not seem to have had more success than the preceding one. This unfavorable reception is due to all kinds of reasons. First of all, granting a financial compensation to African cotton exporters would be equivalent to giving them subsidies, which would result in stimulating the production at a time when it would have to be reduced. Moreover, this compensation would only account for some 5% of those subsidies, which would be insufficient to have a deterring effect on policy makers. Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 4

5 Then, the calculation of the damage would raise a series of problems, in particular, - the choice of elasticity coefficients for demand and supply the differentiated treatment of subsidies according to their classification in the green, blue and orange boxes. Moreover, as the classification of subsidies in boxes is only known to the WTO, with a two-year deadline, the compensations would be available at such a late period to make it possible to stabilize the incomes of the producers. Finally, the repair of damage would imply the existence of the damage and some partners would not like to recognize officially that they caused damage. The WTO announced that its statutes did not enable it to decide the amount of the financial compensations to be paid and that it was not equipped to manage funds. To express its sympathy towards the cause of LDCs, the WTO organized in Cotonou in March 2004 a workshop on the topic of development. The many invited international organizations intervened to describe, in a rather general way, how they could assist LDCs. The IMF managed a compensatory financing mechanism that was very active between 1976 and 1979; draws were based on the whole of the export income of the country, because this unit constituted a significant component in the balance of payments. In 2004/05, if the income loss of Chad on its cotton exports were compensated by a surplus on its oil exports, Chad could not benefit from the facility from the IMF. More generally, the IMF and the World Bank could provide exceptional assistance to a country in difficulties, but they would be ready to do it on a case-by-case basis and would prefer that this assistance go into the budget and be used in accordance with the priorities adopted in the poverty reduction program. At the Paris forum organized by the European Union in July 2004, the African countries were invited to present their development framework for the cotton sector in order to enable their partners to harmonize their assistance program. This framework was transformed into a plan which should lead to programs and projects that could be financed. This case-by-case approach is the one that the development agencies prefer; it must be pursued and the African countries must lobby to lead quickly to concrete achievements. At the follow-up meeting that was held at the OECD in January 2005, the African countries proposed the creation of a support funds for the cotton industry, but this proposal remained echoless. As the chances to establish the support funds desired by the Africans are very small, it appears wiser to concentrate the efforts on the elimination of subsidies by asking for a special treatment for cotton and allowing the cotton sub-committee to play its role. Mandelson s speech on March 19 in Bamako makes it possible to think that this request could be received favorably by the European Union. The opposition of the American Cotton Council could be overcome as the latter put itself in a vulnerable position by firmly opposing the topping off of subsidies per recipient proposed by the White House. Since the Initiative on cotton had a certain echo on the public opinion, many recommendations were presented. It is necessary to neutralize those which are only diversion measures and build on those which appear promising. 5. Protect oneself against diversion measures 5.1 Process fibers locally African countries would not be penalized if they locally processed their cotton fibers into textile products and exported the finished products instead of fibers: this practice would make Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 5

6 it possible to increase the added value. Textile companies have been established in West Africa for half a century, but the results have been disappointing. Twenty years ago, Benin, Burkina, Ivory Coast and Mali locally processed 22% of their fiber production; today, they do not process more than 5% of the production. The Sahel has a comparative advantage in the production of fiber cotton, because cotton is cultivated manually in an area where the opportunity cost of family labor is very low. But the Sahel does not have a comparative advantage in the transformation of fiber into threads, because this transformation requires little non-specialized labor and a lot of electricity, which is very expensive in the Sahel. In a study presented in June 2003 at Ouagadougou, the authors thought that, in order to attract the investors, it would be necessary to guarantee a subsidy of 30% on their purchases of cotton fiber for a period of at least 15 years. It would not be advisable to go into that direction, in particular today when the American spinning mills have to close following the recent suppression of quotas on the textile import products. This does mean that the Sahel countries should not process a greater part of their cotton in textile products intended for export. But that will take time and one cannot reduce the income of producers for 15 years in order to give subsidies to the spinners, if one wants the sector to survive. 5.2 Liberalize the sector. According to a widespread thesis, in order to reduce poverty, it is necessary to speed up reforms by allowing the free entry at all stages so as to intensify competition and thus increase the share of export earnings allocated to producers. This thesis has not validated by experiment according to a comparative study of six African countries which I conducted two years ago; the French version of the study was published by the MAE in July 2003 and the English version by the World Bank in November In short, the production increased more quickly in the CFA zone where liberalization was less advanced (in particular in Burkina and Mali) than in the rest of Africa (in particular, in Ghana and in Tanzania). The monopoly from which SONAPRA profited was abolished in 1995 with the entry of private shellers in the market, but the production of Benin reached a maximum since 1995/96, whereas that of Burkina has tripled. Reforms need to be introduced reforms with prudence; for the market has to be privatized but it must also be regulated. 6. Make the sector secure and improve its productivity 6.1 Maintain the minimum price The producers of the CFA zone have benefited from a guaranteed minimum price which is often announced on the eve of the sowing period. This is one of the reasons why cotton production increased more quickly in the CFA zone than in the rest of Africa. The producers seem very attached to this minimum price and they have to fight in order to preserve it. By fixing the minimum price to the producer one year before the fiber is delivered to the importer shellers are taking a risk from which they have to be protected. The most widely used method to reduce this risk consists in selling part of harvest by anticipation on the eve of sowings. Selling at least half of the anticipated harvest has another advantage, since the shellers can use their contracts as a guarantee with the banks, which have to start campaign credits as early as October. Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 6

7 There are other techniques of risk management, such as the purchase of put options or contracts on the future market. But, a study led by Gerald Estur over the past 17 years showed that anticipated sales would have been the most profitable technique; the options (insofar as they would have been available at reasonable rates) would have been easier to manage than the contracts on the future market, but they would have constituted the most costly solution. Selling by anticipation 60% of the harvest on the eve of sowings would reduce the risk for the shellers, but it would not reduce the fluctuations in prices to the producer from one year to another. If the A Index price decreased by 22% without any stabilization mechanism, the net income of the producer would decrease by half, which would have serious consequences for a household depending essentially on cotton for its monetary income. 2 Such serious consequences could be avoided with the support funds and such funds worked well in Burkina Faso and Cameroon. These funds should not be eliminated. What has to be done is to improve the way in which they operate and that is possible. 6.2 Improve the productivity of the sector. The increase in the cotton production in the CFA zone was due to the increase in cultivated surfaces; the yields have reached a maximum and in some instances have been decreasing for the past decade. In order to continue the expansion it is necessary that the yields increase; agricultural intensification is what will enable producers to increase their incomes per hectare in spite of the stagnation or the fall in world prices and it will ensure the perenniality of the cotton industry. On this point, the African producers and their foreign partners agree fully. * * * The battle for the elimination of subsidies is a right cause that must be vigorously carried on. It is in conformity with the fundamental principles of the WTO. It is also in the interest of the European Union and the United States. It is vital for the African cotton producers, but the latter will only be able to collect the fruit by improving the productivity of the sector. 2 This estimate is based on the data of SOFITEX in the five past years. As the cost of FOB (Free On Board) to CIF (Cost insurance Freight) is about equal to the product of the sale of seeds, one can limit oneself to the composition of the FOB costs. The price to the producer accounts for 60% of the FOB cost FOB, of which 20% go agricultural inputs; incompressible expenses represent 25% and the partially compressible expenses 15%. When the A Index falls from 100 to 78, the incompressible expenses remain equal to 45; if the partially compressible expenses are reduced from 15 to 13, the net income of the producers without inputs falls from 40 to 20. Pan-African Workshop on Proposals for strategies for overcoming the crisis in the African cotton industry due 7