TWN Info Service on WTO and Trade Issues (Mar07/11)

30 March 2007


African cotton farmers being hit by subsidies and privatization
Published in SUNS #6212 dated 16 March 2007
By Kanaga Raja (SUNS), Geneva, 15 March 2007
Poor cotton farmers in West Africa are facing new pressures from low commodity prices and from privatization programs being advocated by international donors such as the World Bank, the international aid agency Oxfam warned Thursday.

In a report entitled 'Pricing farmers out of cotton: The costs of World Bank reforms in Mali', Oxfam has analysed how efforts to privatize the Malian cotton sector, including the adoption of a new price-setting mechanism, could leave struggling farmers worse off.

According to Oxfam, the situation in Mali is an example of how the burden of low cotton prices is borne by farmers in Africa while farmers in rich countries are insulated.

The international aid agency called on the wider donor community, especially the World Bank and the IMF, to kick-start a support fund to insulate farmers better and ensure that the risk is shared amongst the various stakeholders.

The Oxfam report comes just as the WTO is holding a two-day high-level meeting (15-16 March) to discuss the trade and development aspects of the cotton issue.

In its report, Oxfam said that a support fund which functions as a price stabilization mechanism can be very successful in helping farmers to manage risk as long as it is well designed and producer-managed, as evidenced in Burkina Faso.

In Burkina Faso, a support fund was created in 1992 that ensured a floor price to producers when actual prices fell below a certain reference price. Producers became active in the management of the fund in 1999. The fund also ensured that cotton companies were reimbursed the difference between the actual sale price and the reference price for the tonnage sold, when actual prices fell below this reference price.

Oxfam said that Mali is one of the world's poorest countries, with over two-thirds of the population - mostly in rural areas - living on less than a dollar a day. Annual per capita income was $242 in 2005 and the country ranked 172 out of 175 on the Human Development Index in 2003.

Mali is also one of the largest cotton producers in sub-Saharan Africa, averaging around 550,000 tonnes over the last five years.

Cotton production is generally heralded as a success story in much of West and Central Africa, providing a critical development strategy for poor African countries such as Mali and enabling both governments and farm households to access income.

However, in recent years, much of this success has been undermined by depressed and volatile cotton prices, partly as the result of unchecked US subsidies, and the downward trend of commodity prices, said the report.

Since 2003, the government of Mali, along with the governments of Benin, Burkina Faso, and Chad (called the C4), has been battling at the WTO to end trade-distorting cotton subsidies in industrialized countries that suppress world prices. These policies caused losses of $400 million to these West African economies in the period 2001-2003 alone.

Against the background of stalled global trade talks, and persistent use of trade-distorting cotton subsidies, the World Bank and the IMF continue to pressure Mali to implement policies started in the late 1990s of promoting cotton-sector reform through privatisation, said the Oxfam report. World Bank and IMF budget support and HIPC debt reduction have been closely tied to conditionalities for cotton-sector reform.

Moreover, said the report, some aspects of World Bank proposed reforms seem to fly in the face of stated poverty-reduction goals. While reform has the potential to create market opportunities for cotton producers, transferring the risks of a highly volatile world market down to the bottom of the chain may benefit the ginning companies and traders, but only at the expense of poor farmers.

Cotton production contributes directly to the incomes and livelihoods of up to three million people in Mali, over a quarter of the total population.

Boosted by devaluation in 1994 that improved export prices and by favourable rainfall, Mali's cotton sector grew on average by more than 10% annually in 1994-1999, with production more than doubling from 250,000 to over 500,000 tonnes.

In general, cotton production has stabilised incomes in rural areas, enabled access to credit and inputs as well as other services, and contributed to poverty reduction. The cotton system in Mali has enabled the development of infrastructure and rural services via state involvement as well as communities' use of cotton incomes to fund local services.

Created in 1974 by the Compagnie Francaise du Developpement des Fibres Textiles (CFDT) and the Malian government to enable greater national participation in the sector, the CMDT (Compagnie Malienne du Developpement des Fibres Textiles) provided all the inputs required to cotton farmers, via financing guaranteed through exclusive marketing rights on all the cotton produced.
According to the report, through their lending operations and associated conditionalities, the World Bank and IMF have played a central role in determining policy in Mali's cotton sector. Since 2003, the CMDT has significantly downsized its staff and functions, and privatised HUICOMA, the oilseed processing and manufacturing company. The break-up of the CMDT into four zones has been agreed and is now planned for 2007, preceding complete privatisation in 2008.

Oxfam said that one of the most significant - and contentious - aspects of the reform undertaken so far is the adoption, in January 2005, of the new price-fixing mechanism for seed cotton. Instead of improving the livelihoods of cotton farmers, this particular measure is destabilising cotton as a source of revenue for millions of farmers.

The new price-setting mechanism essentially transmits the downward trend in world cotton prices direct to the cotton farmer, with a strong likelihood of increasing poverty in rural Mali by up to 5%. With cotton producer prices now 20% lower than in previous years, cotton-growing areas of Mali are increasingly facing rising indebtedness and food insecurity, said the report.

With the application of this new mechanism, prices for seed cotton were set at 160 FCFA (Franc Communaute Financiere Africaine) /kg in April 2005 for the 2005-6 growing season, 24% lower than the previous year's price and 15% lower than the previous three years' average price when accounting for the end-of-season price supplements.

Average costs of production across all types of farmers were estimated at 166 FCFA/kg. At 2004-5 prices, farmers were on average making a net profit of around 40,000 FCFA on their cotton (or approximately $80). The initial price of 160 FCFA/kg fixed for the 2005-6 campaign falls below the average costs of production, such that at this price, on average, farmers are producing at a loss.

Recent reports from farmers in central and western Mali confirm that falling cotton prices are making poverty and food insecurity worse.

The report said that while no data exist to measure this impact at a national level, recent World Bank studies have projected that falls in cotton prices of between 20% and 40% could lead to increases in overall rural poverty of 3.4-4.6%, and even higher increases among cotton-farming households.

Between 1995 and 2000, cotton accounted for 7-8% of Mali's GDP. In a worst case scenario, a combined drop in price to 160 FCFA and a 25% fall in cotton production could potentially lower GDP by nearly 4% and export revenues by up to 53 billion FCFA (more than $100 million).

To avoid further major increases in rural poverty in Mali and the related impacts on the wider economy, Oxfam said that farmers should be guaranteed minimum prices, particularly when facing the uncertainties associated with privatisation. These prices should be set to take into account world market trends, but should also ensure that the returns to agricultural workers do not fall below poverty levels.

A national-level support or insurance fund as proposed recently in Mali and as currently being developed in Burkina Faso, can help farmers better absorb the shocks of volatile world markets over time. Oxfam urged that donors facilitate the establishment of a producer-managed fund to maintain minimum prices through increased contributions.

Oxfam also said that cotton farmers in Africa have yet to benefit from international trade negotiations at the WTO and are still bearing the brunt of American subsidies and dumping.

New analysis by University of California Davis economist Daniel Sumner highlighted in the Brazilian submission to the WTO Dispute Settlement Body's compliance panel shows the link between American commodity subsidies and overproduction of cotton.

Between 2000 and 2005, according to Sumner, American cotton producers would have lost $663 per planted acre, or almost $10 billion in aggregate, if they would not have had payments from marketing loan and counter-cyclical payments. Instead of losses, subsidies provided American cotton farmers with profits of $127 per acre on average, or $1.44 billion in aggregate.

''If US cotton farmers had to farm for the market, they would have reduced cotton production rather than racking up collective losses of more than $12 billion over market revenue,'' said Celine Charveriat, head of Oxfam's Make Trade Fair campaign.

''Reforming the US Farm Bill offers the possibility of reducing export dumping which is so damaging to farmers in developing countries, but it is up to the US Congress to deliver,'' she added.

Against this backdrop, Oxfam said that it is also crucial that core development issues, such as cotton, are not sidelined in the current WTO negotiations.

A deal that will rush into rules that do not allow for development, and that instead consolidate and exacerbate inequalities both between and within countries would be a missed opportunity, considering the grand promises made 5 years ago, Oxfam said.