Cotton: governments step in

Agricultural , China , Commodities , Cotton , India , USA Dec 10, 2014 No Comments

Cotton: governments step inFaced with falling cotton prices, governments triggered mechanisms to support their farmers. This is the case in India, which has a record production for the second consecutive year – it should even become the world’s largest producer, overtaking China

Plentiful global supplies, thanks to favorable weather and market distortions caused by a large-scale Chinese support program for its growers, have driven prices below 60 cents a pound this year — the lowest levels since 2009 — hitting farmers around the world. And with China, the world’s largest importer, dictating the market to farmers in rich and poor countries alike, “we are more or less price takers”, says Evelyn Nguleka, head of South Africa farmers union.

The USDA report sees China’s excess stocks staying for a while. This means prices will continue to be under pressure until there is some sharp spike in consumption or a sharp fall in production in one of the largest producing nations.

According to the report, China’s price support and import policies have resulted in its inventories rising to 45 million US bales (of 218 kg each) or 57.78 million Indian bales (of 170 kg each). This is equivalent to what India produces for almost close to a year-and-a-half. For the US, it is two-and-half-year production.

According to the International Cotton Advisory Committee (ICAC), an intergovernmental organisation, China imported around 5.4 million tonnes of cotton in 2011-12 (about 50% of total global imports), but the country’s cotton imports are expected to decline to 2 million tonnes in 2014-15, resulting in a 20% decline in global cotton trade.

Meanwhile, global ending stocks of cotton are expected to reach a record high of around 21.6 million tonnes in 2014-15, compared to around 8.6 million tonnes of stocks in 2009-10, and the projected total global exports of around 7.9 million tonnes in 2014-15.

America’s 18,000 cotton farms are covered by crop insurance programs based on prices prevailing in futures markets. Next year, US farm legislation will end “direct payments” for cotton and other growers, which aroused resentment because farmers received them whether they planted a crop or not.

Cotton growers are among the most heavily supported of the world’s farmers, “along with the rice pudding commodities of rice, milk and sugar”, says William Martin, research manager, agriculture and rural development at the World Bank. As a result the commodity has frequently been at the center of trade disputes between producing countries.

Including direct production support, border protection, crop insurance and minimum price support, government subsidies totaled $6.5bn in 2013-14 according to the International Cotton Advisory Committee.

Analysts fear that falling prices, which have triggered price support programs in other producing countries such as Pakistan and India, could further increase global inventories.

For prices to recover, global production needs to be cut and the massive stockpile run down, industry experts warn. “We have to expect a period of low prices until we work through this stock situation,” says Mr Sette, executive director at the ICAC.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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