World prices could suffer because India increased its subsidy for cotton farmers in a program similar to U.S. marketing assistance loans. A report from Texas Tech University's Cotton Economics Research Institute indicates that prices may drop as much as 6%, as a result.
The subsidy increase comes in India's minimum price support for buying seed cotton from farmers. Last September, India announced an increase of nearly 50% for seed cotton. That equates to a cotton price of 72 cents per pound, the study says, while world cotton price hovers in the mid-50's.
That will push U.S. cotton price downward 5.17% over the next year, says Darren Hudson, CERI director. Over the next five years, the U.S. cotton price will fall 2.48% solely because of India's move, Hudson says. At the same time, he anticipates that India's cotton exports increase 13%.
"The minimum support price program in India, along with other programs in China and Brazil, has contributed to downward pressure on U.S. and world prices, even though U.S. cotton acreage has declined by more than 40% since 2005,” Hudson says.
Texas Tech's report comes as no surprise to Mark Lange, president and chief executive officer of the National Cotton Council. He says that India not only boosted supports to farmers but also bought 12 million bales of cotton from the 2008 crop, which it still holds in warehouses, further depressing prices. That just about equals total U.S. annual cotton production.
"That export subsidy is in violation of India's World Trade Organization (WTO) commitment. They do not have in their 1994 schedule an export subsidy listed for cotton, and if it's not on their 1994 schedule, they are not allowed to have it,” Lange says.
Getting India to abide by its WTO commitments may be tough, however. A panel would have to convene and begin a lengthy review. Brazil, which recently won a subsidy case against U.S. cotton, began the process in 2002. Many countries prefer to not get involved in such cases because of the cost, Lange says.
Plus, as a developing nation, India's WTO commitments are not considered as binding as those of the U.S. and other developed countries.
"What India is doing has a significant price depressing effect on the world market,” Lange says.
"This underscores that U.S. growers need an effective safety net in our farm program when price is suppressed due to a situation like this,” Lange says.
Lange thinks the Chinese are also violating their WTO commitments by carefully controlling the amount of cotton allowed into the country.
"What the Chinese are doing by denying access to the market is also depressing prices,” Lange says.
He'd like to see both India and China forced to adhere to WTO agreements.
"Unfortunately, the world seems so focused on the U.S. cotton program, not much attention is paid to these others. But look at China's production, over 30 million bales while we will have 12 or 13 million. India is right behind them with 25 million bales. The focus is on the U.S. when India produces more cotton, has more stocks on hand and has considerably more impact on the world market,” Lange says.
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