Late news: U.S. appeals WTO cotton ruling

Sorry this is late, but: the United States government is appealing the World Trade Organizations ruling that upheld a previous ruling claiming it has not done enough to cut farm subsidies to cotton farmers.

The WTO’s second decision was made public December 18, claiming the U.S. government had not complied with a 2004 ruling stating much of the nearly $4 billion subsidy program, including export-credit guarantees and other payments to farmers, exceed spending pledges. The WTO first ruled in July against the United States.

From Bloomberg, via Environmental Working Group:

"We are appealing because the changes made by the United States have
brought its programs into full compliance with the WTO's recommendations and rulings in the original cotton case," Gretchen Hamel, a spokesman for the U.S. Trade Representative's office, said today in an e-mailed statement from Washington.

"We were very disappointed with the compliance panel's findings," she
said. "The appeal challenges the erroneous findings on both U.S. support payments and export credit guarantees. We will continue to consult with members of Congress and private sector stakeholders, including the agricultural community, as we move forward with the appeal."

The lawsuit was originally filed by Brazil, the world’s fifth-largest producer of cotton, claiming U.S. subsidies amounted to unfair trading practices by depressing world cotton prices.

Mark your calendars, the appeal process can last up to 90 days.

More bad news for Africa’s cotton farmers: Plunging dollar

VOA recently reported that cotton production for Sofitex, Burkina Faso’s largest cotton company, is far below expectations. Poor rains are to blame, but Sofitex officials call it a wasted opportunity. With world cotton prices on the rise, the company, which controls 85 percent of Burkina Faso’s cotton industry, will only bring in 380,000 tons of cotton, well below the estimated 600,000 tons.

Cotton executives across the continent have long pointed a finger at U.S. cotton subsidies for depressing world prices. With worldwide cotton demand increasing and supplies decreasing, cotton farmers could expect high prices for the next year. However, the weakening dollar could dampen those predictions, according to Bloomberg News.

Cotton prices have increased 13 percent this year, but the gap between the Euro-pegged CFA and the falling dollar has largely offset those benefits. The CFA is the currency of former French colonies in West Africa, including Senegal, Burkina Faso, Cote d’Ivoire, Mali and Benin, all cotton producing countries. Cotton accounts for 5 to 8 percent of GDP across West Africa.

Cotton from companies like Burkina Faso's Sofitex and Cameroon's Sodecoton is bought and sold on the world market in U.S. dollars. Farmers are paid in CFA francs, the euro-pegged local currency of 14 western and central African countries. Compared with a year ago, the dollars their crops fetch in world markets buy about 9 percent fewer CFA francs for food and shelter.

…

Most of the region's ``cotton producers are now on the verge of operating at a loss and sinking into debt,'' Alby wrote in the October issue of the Paris-based bank's Conjoncture publication. ``Meanwhile, the main ginning and marketing companies have chalked up heavy losses over the last two seasons, of which a large part has been supported by the government.''

…

The CFA franc has followed the euro up about 57 percent against the dollar since U.S. President George W. Bush took office in January 2001 as investors seek better returns outside the U.S.

The dollar's decline has been a boon to U.S. exporters, including Nike Inc. and Colgate-Palmolive Co. and helped narrow the U.S. trade deficit 0.6 percent in September.

For people in the poorest countries, a shift in the exchange rate can eliminate a month's food, says Daniel Sumner, an economist at the University of California, Davis, who wrote a study on cotton subsidies for Oxfam America, a Boston-based aid group.

Fifty dollars can be ``enough to feed a child for a year,'' he said. ``It's enough to pay the school fees for three to four children.''

Payments to farmers from cotton companies in western Africa have fallen an average 15 percent since 2004, International Cotton Advisory Committee data show. Production in western and central Africa may decline 21 percent this year, according to Dagris SA, a Paris-based company owned by the French government that holds stakes in African, Asian and Latin American cotton producers.

U.S. cotton lashes back

They say that your viewpoints on free trade coincide with your career choice. A machinist at a Ford factory may not be a huge supporter of open borders, while a money manager may be 100 percent behind the idea.

That claim seems true with Saxby Chambliss, the ranking Republican on the U.S. Senate Agriculture Committee from the state of Georgia. He lashed out at a recent editorial in the Washington Post claiming U.S. cotton subsidies have increased U.S. cotton acreage, driving down the world price, which negatively affects African farmers.

A recent press release stated:

“I want to set the record straight relative to one particular issue in the editorial that has been talked about over the last several years that is simply wrong,” said Sen. Chambliss. “This editorial takes on the cotton program in the 2002 farm bill and says that this program has a very negative effect on cotton farmers in the West African countries of Benin, Burkina Faso, Chad, and Mali.”

“What has the U.S. actually done from the standpoint of impacting the West African countries? Well, here’s exactly what we’ve done, another fact that’s conveniently left out of this article: the U.S. has engaged in a number of outreach activities with the West African countries since 2004 which are aimed at helping raise their agricultural productivity, spur economic growth, and alleviate hunger and poverty. These efforts have been coordinated by the U.S. cotton industry, with US-AID, the Trade Representative’s office, and the Millennium Challenge. I do not want that to go unnoticed,” Sen. Chambliss said.

Agriculture is big business in Georgia. Between the years 1995 and 2005, the U.S. government doled out $1.4 billion in cotton subsidies to farmers and businesses in the state, according to research by the Environmental Working Group. Total U.S. cotton subsidies for this period amounts to $19.1 billion. In fact, Georgia’s Second Congressional district collected more than $893 million in those ten years, 4.7 percent of total cotton subsidies, making it the fifth highest district in the country. The State’s First Congressional district ranks 13 and the Third Congressional District is 16. Chambliss’s former Congressional district, the Eighth, currently ranks 95^th.

Chambliss also pointed out that cotton subsidies are not only felt by farmers, but are distributed throughout society. Instead of merely benefiting 20,000 farmers – as the Post editorial claimed – those economic impacts are felt by people and businesses throughout the agriculture industry, such as ginners, processors, merchants and those who run warehouses.

Thoughts on cotton

Here are some thoughts on last week’s World Trade Organization ruling against U.S. cotton subsidies. The ruling actually upheld a previous decision stating the U.S. has not done enough to make cotton subsidies legal under world trade agreements. The ruling stems from Brazil’s 2002 complaint to the WTO that U.S. cotton supports depress world prices and creates undue harm to Brazilian cotton farmers. The U.S. government expressed disappointment at last week’s ruling and officials said they would read into the fine print before deciding whether to appeal.

Appeal or not, the U.S. should read the writing on the wall: The era of huge subsidies to cotton farmers is most likely over. And that’s a good thing. The U.S. government could find better ways to spend $30 billion, the cost of cotton subsidies in 2005.

The WTO’s ruling was met with extreme glee in Burkina Faso and other cotton-producing countries in Africa. But hold on. While the long-term prospects are now better for African cotton farmers, African governments should worry about becoming even more dependent on cotton.

First, the Good News
Whenever it happens, the reduction of U.S. subsidies will decrease world prices, perhaps by as much as 14 to 20 percent. What’s interesting is that cotton prices are already predicted to increase, because: 1) cotton production has barely outstripped consumption for the past few years; 2) next year cotton mill use is expected to rise four percent in Asia and two percent in the rest of the world; and, 3) American cotton production is already forecasted to decrease because farmers will most likely grow more corn (and less cotton) because of corn’s financial advantages from the interest in ethanol.

It’s true: Higher cotton prices are better for cotton farmers everywhere. Especially in Africa. In a June 2007 report for Oxfam, a group of economists found that without U.S. subsidies, cotton farmers in the C-4 (Mali, Burkina Faso, Chad and Benin) could see a revenue increase up to 22 CFA per kilo. In Burkina Faso, where the average farm is 2.1 hectares and the average yield is about 1 metric ton per hectare, that means added revenue of between 22,000 and 88,000 CFA. (With the most common exchange rate at about $1 = 500CFA, that’s between $45 and $180 per year. Good money in a country where the individual poverty rate lies around $150 per year.)

The economists, from the University of California at Davis, added the savings up across the two to three million cotton farms in the C-4 and found the added money could feed an extra one million children. Their math looks like this: In Burkina Faso the average farm consists of 11 people, seven adults and four children. The additional income generated from higher prices roughly compares to 40 to 160 percent of the money these families already spend on food. So a family can then feed an extra .4 to 1.6 people per household, which they average out to be roughly one person. If you multiply this to two to three million households spread out over the C-4, the amount rises to about two million adults or one million children.

Of course, the money doesn’t have to be spent on food. “The added revenue received by cotton farmers may be used to meet many demands other than food,” the researchers write. “This might include more access to rural schooling, improved health care or other household expenditures.”

How much benefit?
For me, the question isn’t whether C-4 cotton farmers see price increases; the question remains, how much of a price increase will they see?

If we go from past experience, cotton farmers shouldn’t get their hopes too high.

The cotton sectors of the C-4 are mostly managed by state firms, legally protected monopolies responsible for selling farmers seed and inputs, collecting the cotton, ginning it and delivering large bales to port to be sold on the international market. Before the growing season begins, these cotton firms “announce” a price they will pay for each kilo of cotton. (In Burkina Faso, they pay two prices, dependent on quality.) Anyway, farmers’ cooperatives have trouble bargaining down the prices for inputs and seeds (where they are forced to pay about 20 percent above cost) and cannot negotiate the price paid for cotton. Because the cotton firms are usually the only source of credit in the agricultural zone, farmers are literally at their mercy for their livelihoods.

This paternalistic relationship isn’t uncommon in Africa. Think of these cotton firms as marketing boards, institutions set up during colonial times (and kept after independence) for creating a system to pay farmers who grow commodities: palm oil, cocoa, coffee, rubber, peanuts, etc. Like cotton firms, marketing boards provide equipment to farmers, collect the crops and most importantly, sell the crops on the international market. The well-paid executives set the price early in the season, they say, to protect farmers from the wildly fluctuating international market.

However, two things happened on the way to market. When the marketing boards’ prices was set higher than the world price, the marketing boards lost money, which had to be recouped by another area of the budget or by the World Bank or some such agency. So, the marketing boards learned another trick: Underbid farmers for the price of their commodity and be guaranteed a profit at the end of the season.

According to research completed for the Cato Institute by a World Bank economist, in the 1980s, West African farmers received about 60 to 70 CFA per kilo of cotton when the world price ranged between 200 and 250 CFA.

In their defense, cotton companies must incur expenses for ginning cotton and delivering the bales to port, which in Burkina Faso’s case, lies 600 miles from Ouagadougou. In a region where diesel fuel costs nearly $4 per gallon, those costs add up quickly. Because the pricing system remains opaque, however, no one knows how the cotton companies arrive at their announced price to farmers.

Even when marketing boards were flush with money, problems arose. In countries with little transparency, the extra income had a way of getting lost. In its study of the cocoa sector in Cote d’Ivoire, the group Global Witness illustrates how president Félix Houphouët-Boigny reacted when cocoa prices unexpectedly rose, greatly increasing state expenditures: He treated the extra money as his personal bank for government (and other) expenditures.

Sidenote regarding the Oxfam study: The discrepancy between world prices and prices offered to C-4 farmers lead the economists to calculate the estimated 20 percent increase on the world market from the loss of U.S. subsidies to percent increase between eight and 14 percent to West African farmers.

The Burkina example
After the collapse of world cotton prices near the end of the 1990s (brought on, in part, by U.S. subsidies), the governments of the C-4 were forced to make changes to their cotton industries. Burkina Faso was ahead of the curve by opening up the cotton sector and allowing competition.

Much has been said about this perestroika. The government of Burkina Faso reduced its interest in the state-monopoly Sofitex and allowed “competition” to spread throughout the country. Kind of. What the state allowed was two new cotton firms to begin doing business. However, these firms couldn’t go out and lure farmers away from the much-loathed Sofitex. That’s because the government divided the country into three unequal regions, each firm doing business in its own territory. As you can guess, Sofitex maintained 85 percent of the country’s share of cotton and the other two firms claw for the final 15 percent.

In other news of dependency: The other two firms must defer to Sofitex for resources like trucks to pick up and deliver the cotton. (In a poor country like Burkina Faso, there are a finite number of trucks.) Farmers working in the non-Sofitex zones must wait until all Sofitex cotton is picked up before the trucks can be hired by other firms. The longer cotton waits in the villages, the more likely it will be ruined by weather or eaten by animals.

It is reasons like this that most cotton farmers view Sofitex as their first enemy and U.S. subsidies second.

Wait, there’s more
Cotton already represents 60 percent of the crop revenue in the C-4 and accounts for between 2.5 and 7 percent of its GDP. Both the World Bank and the IMF have desperately attempted to diversify the agriculture base in these countries. Monocrop horticulture is not only dangerous economically, but environmentally. Only ten years ago much of Burkina Faso’s crop was wiped out by white flies. Farmers appear to be increasing their use of pesticides and fertilizers each year, bleaching an already weak soil (and losing more profit to buy the products).

Cotton is also very labor intensive. Years ago, West African cotton was known for its high quality because it was hand-picked and much cleaner than the rest of the world’s machine-picked cotton. As cotton expanded throughout the region, however, its quality has diminished. This could be a factor in ramping up future cotton production if and when prices increase.

There’s another problem with increased production. Today, larger-scale farmers have two choices to harvest cotton. They can reduce their profits by hiring people to help harvest; or, they can get their kids to work for free. (Remember, family size is quite large in rural Africa.) It’s a well-known fact, however, that once kids begin missing school for the harvest, they most likely won’t return. A kid pulled out of school not only cancels any of Oxfam’s stated-gains from higher priced cotton, but further diminishes the long-term wealth of the family.

In the end, the loss of U.S. subsidies will be a good thing for the world. If anything, it should force an awakening in West Africa, where politicians have long pointed a finger and declared U.S. subsidies have crippled their economies. But the political class of these countries has set up a system that pushes cotton and its byproducts on farmers through unfair forms of credit, even though the efficacy of pesticides is falling and the fields are literally being sucked dry by a harsh crop. If the subsidies didn’t get the farmers, monoculture may one day haunt them.

With the fall of subsidies, we can hope for one thing: the Presidents of the C-4 look at themselves in the mirror and ask: Who is screwing whom?