Cotton : recent world market trends in relation to stabilization problems and policies

f

B/CN.14/STC/CS/2

>AO/Com./Africa 1 Rome, 15 May 1962

COTTOW

Recent World llarket Trends in Relation to Stabilization Problems and Policies

Note prepared by the Pood and Agriculture Organization for the SCA Commodity

Stabilization Hooting, Lagos, 18 - 26 June 1962

21727/]

SUMMARY

Situation, Outlook and Main Problems 1

Cotton Stabilization and-Support Measures

in the African Producing Countries and Territories 2

Market .Integration between Exporting and

Importing Countries 2

International Stabilization Measures 3

Conclusions 4

SITUATION, OUTLOOK AND MAIN PROBLEMS

The Place of Africa in the World Cotton Economy 5 The Importance of Cotton in African Countries 7 Factors affecting the Long- Term Outlook for Cotton 7

The Competitive Position of African Cotton in

World Markets ' 9

COTTON STABILIZATION AND SUPPORT MEASURES IN THE

AFRICAN PRODUCING, COUNTRIES AND TERRITORIES 11

MA&KET INTEGRATION BETWEEN EXPORTING :JJD

IMPORTING COUNTRIES . . X5

INTERNATIONAL STilBILIZATION

Failure of attonpts to introduce an

International Cotton Agreement 20

Recent Intergovernmental consultations on

cotton problems 23

CONCLUSIONS 25

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Annex Tatile

Table

—

1

2

Tables

COTTONs

COTTONs

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

COTTON

COTTON?

COTTON;

Production and Exports in Africa and the

¥orlds ^y Staple Lengtt , 1957/58 through 1959/60

Production in Africa, by Staple Lengthy

Average 1957/58 - 1959/60

Area, Production, Yield and Exports in the

Sudan and United Arab Republic (Egypt)§

1934-38 and 1947/48 through 1961/62

Area, Producti^ns Yield and Exports in Selected African Countries^ 1934-38 and

1947/48 through 1961/62

Value of Exports Expressed as Percentage cf Total Export Value; Selected African Countries^ 1938 and 1953-1960

APPAREL FIBER CONSUMPTION;

for 1970

1938-1959 and Projection

COTTONs Exports from the United Arab Republic and the Sudan by Destination and Staple Lengthy

Average 1957/58 - 1959/60

COTTONs Producer and Other Prices Established for Seed and Lint Cotton in African Countries COTTONs Exports from African Countries at Present or Formerly Associated with a Metropolitan Country in Europe, as a Percentage of their Total Cotton Exports

Table 10 RAW COTTON PRICESs c.i.f. Liverpool! 1951/52 - 1960/61

APP3ETDIX A;

Cot-ton Stabilization and Support Measures in African Producing Countries

APPMDIX B;

Notes on tho Difficulties Encountered by

the International Advisory Committee in its

Study of tho Application of Eifforont Typos of International Agreement to Cotton.

Tho Multilateral Contract Buffer Stocks

International Trado Quotas

COTTON

SUMMARY

Situation^ Outlook and-Main Problems ' ■ ■ •• ...

Africa produces only 9 percent of the world's cotton, and 21 percent of the cotton entering international trade, but it is the chief supplier of extra-long and long staples. African extra-long staples account for 6$ percent cf world production and 90 poTcont of world oxports, and long stapl'os' for 40 percent of the world crop. The loading producers aro '

the U.A.jR.' (CHgypt), the .Sudan- and Uganda; all specialize in longer staples-

In the U.A.R., limited land and water resources have restricted expansion in cotton-growing during recent decades. Average- staple length has in'croascd however, so .that half the total crop now consists of extra-long staples.

In the Sudan? whore production has doubled since the war, 9° percent of the crop is noTj extra-long staple. ' Elsowhoro, cotton production has moro than doubled in the last twenty years.

Cotton dominates the economies of the U.A.R. and the Sudan, .and is most important to Chad, the Central African Republic, Uganda and Mozambique.

After gold, it is the mo.st valuable African export..

On the basis of estimated income elasticities and population changps?

potential world demand for natural and man-made fibers in 197^ k^-s boon estimated at 141 to 15O percent of the 1957-59 level, regional estimates ranging f,rom 124 percent for North America to 162 to 185 percent for Africa and the Noar Bast. Cotton, which at present accounts for 'JO percent of the combined demand for all apparel fibers, has recently lost ground to man-made fibers in high-income countries, and this trend may continue. In low income countries, cotton is more likely to koop its share cf total consumption.

Consumption of the longer staples has fluctuated widely in recent years unfior the influence of changes in government policies and technological progress.

World trade in cotton textiles has shrunk with the growth of textile industries in cotton-growing countries, and this tendency will no doubt continue, stimulating overall demand by raising incomes in 'lew-incomo countries.

The' prospects for African 'extra-long oncl long staples depend on total- world demand rathor than on the competitive position cf African producers;' tho only -important exporters outside Africa aro Peru, and for long staples, the U.S. Short and medium staples grown in Portuguese territories, tho former Belgian Congo, and in countries of tho French Franc Zone, arc oEportod primarily to the respective metropolitan cr former metropolitan countries under various kinds of market integration arrangements and only a relatively small proportion has to find outlets olsowhcro.

. . Since the war, all African producing countries have introduced internal stabilization .measures for export cottons. Except in the Sudan, these involve the establishment of fixed or guaranteed minimum producer prices> implemented either through the operation of a

stabilization fund, as in the Congo (Loopoldville), the Franc zone,

and in "African rnombex ■■oountri.es of the CQm13.om7ea.lth:; through price controls linking producer to mill prices, as in Portuguese ■ ■

territories; or through open market purchases, as in the IT.A.R. The main objective is to limit variations in producer prices - though price support is also aimed at in the Franc zone - and in this the stabilization schemes appear to have .been successful. Fluctuations in the volume of exports hr/ve in fact been greater than- fluctuations in prices. Stabilisation agencies frequently finance technical, assistance and research, as conducive to greater stability in yields and production, and therefore in producer incomes. They also control ginning and marketing profits, and, in the U.-A.R. and the Sudan, use export taxes to promote stability. In countries producing short and medium staples, whose internal policies cannot affect world markets,

"the flow of exports is regulated in such a way as to minimize price fluctuations. In countries producing extra-long and long staples, which could influence world prices, the quantities exported have recently been ill-adjusted to demand, and wide swings in prices have resulted.

Market Integration between Exporting and Importing Countries

Integration "between exporting countries and their markets does not at present affect a high proportion of African cotton exports.

Barter agreements have been used by the U.A.R. and the Sudan in their trade with the Sino-Soviet area, but wore discontinued and replaced by trade and payments agreements in i960. Angola and Mozambique are linked with metropolitan Portugal through a systcn of price controls and import allocations, supplemented by differential export taxes.

Between I94S &^d 1952 the United Kingdom Raw Cotton Commission had bulk purchase agreements with all colonial cotton-growing countries and the Sudan, 'while India operated bulk contracts with Uganda and the Sudan. Such agreements had market stabilization as ."one of their

objects, but all eventually foundered primarily .as -a nesul.± .■a£otiiL£-uiivergenGe between contract and world' market prices for comparable cottons, and

all were abandoned by 1954*

Integration between France and the French Community takes the form of financial assistance to the local Caisses de Stabilisation, paid for through a tax on textile sales, zind of purchases of African cottons by French mills under private arrangements. A similar system of compensatory financing through a levy on cotton imported into the Community has "been proposed by the Commission of European Economic

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Community for overseas countries about to negotiate a now Convention of association, namely, the Congo (Leopoldville), Somalia and members of the French Community. These account for 12 percent of African production.

Should the United Kingdom join the European Economic Community and should the African members of the Commonwealth become associated with it, up to a further 17 percent? produced in Nigeria, Tanganyika, Kenya, Uganda and

Eyasaland might come under this integration scheme.

Internajional Stabilization Measures

Different types cf possible international cotton agreements were studied by the International Cotton Advisory Committee (ICAC) between 1951 and 1954. A group of independent technical experts appointed in 1953 concluded that the only practical type would be one based on quotas on trade but in I954 the ICAC concluded that the situation did not warrant further attempts to reach an agreement and no further studies have been made since. The principal measures studied were a multilateral contract, buffer stocks and quotas on international trade. The special problems of cotton were considered in relation to these measures. Since several of the main exporting countries process a high proportion of their own crops, a large volume cf cotton would iio outside the scope of a multilateral or trade quota agreement,, while an international buffer stock might have to control large stocks and bo accompanied by production controls. Because so much imported cotton re-enters international trade in the form of textiles the competitive position of textile industries in countries importing cotton and exporting textiles could be greatly affected by ■ differences between prices cf raw cotton in national and world markets.

The wide range of growths traded would cause pricing difficulties under a multilateral contract, and complicate the operation cf a buffer stock.

Conflict between national production and price objectives of major

exporters and those negotiated internationally could jeopardize any

agreement. Finally liberalization of trade made countries reluctant

to apply restrictions necessary under a multilateral contract or a quota

type of agreement. During the period of the discussions the situation

changed from shortage to surplus and impoiiing countries lost interest

whilst exporting countries benefited from the support given to world

prices by United States domestic price policies.

Since 1954 inter-governmcntal consultations on cotton have concentrated on the exchange of information and views on the cotton

situation and on measures adopted and planned in producing and consuming

countries. In 1959 a special meeting on extra-long staples stressed the importance of price stability in relation to the maintenance and increase of mill consumption, and the need to "bring production-into

line with demand. The cotton situation is also reviewed annually by the FAO's Coraaittee on Commodity Problems1 along with developments in

other fibers and agricultural commodities.

Conclusions

African cottons are subject to distinct sets of marketing conditions.

Extra-long and long staple cottons find their price level in a competitive world market and price fluctuations have been severe. However, the size of African extra-long and long staple crops is sufficient to influence

world prices, and agreement amon^ the three principal producers - U.A.E.,

Sudan and Uganda - could bring about greater stability, though the

cooperation of importing countries would be essential to an international

stabilization scheme. Price fluctuations in world markets affecting short

and medium staples have been less severe and because of market integration

stabilization for individual African countries appears easier to achieves •

the coordination of national policies may however present greater problems.

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SITUATION. OUTLOOK AND MAIN PROBLEMS The- Place of Africa in the World Cotton Economy . ■

Although Africa accounts for only about-nine percent of world production, it supplies a little more than one fifth of tho total volume, of cotton entering international trade. Cotton, was developed~in Africa as an export crop and 50 t»

90 percent of total production is.still grown for export 5 . the .cotton textile industry has expanded substantially during the last two decades but. is still small, except In the. United Arah Republic.. Cotton textiles come predominantly

from outside the continent and per caput consumption, though rising, remains

relatively low, ■

Though not an important source of cotton supplies generally, Africa is the world's'principal producer of longer staple cottons, the United Arab Republio (Egypt) and the Sudan together accounting for about 65 per cent of world output and 90 percent of world exports l/. (Table l) Extra-long

staple cot-fcon - .almost all of it grown in these two countries 2/ - represents

about 37 percent of total African production and about 43 percent of total exports.

In addition, the United Arab Republic and Uganda 3/produce sizable quantities 'of long.staple.cotton, representing nearly 40 percent of world output. Long and

extra-long staple cottons thus.account for two-thirds of African production.

The remaining third, consisting of medium and.short staples, is grown throughout Africa, mainly for export, but it accounts for only a small part of world

trade. The leading producers of cotton in Africa are the United Aral^ Republic, the Sudan and Uganda, which specialize in the longer staples. The principal producers of short and medium staples are Caaeroun, the Central African

Republic,, the Congo (Leopoldville), Mozambique, Nigeria, Tanganyika and Chad.

Broadly speaking, Africa's specialization on the longer staples is a

specialization on higher quality cottons. Long staple" cottons are characterised

1/ The International Cotton Advisory Committee (ICAC) has defined extra-long-staple as cotton of 1 3/8 inches 35 mm) an* over, long staple as cotton of 1 1/8

inches (28.6 mm) and over but under 1 3/8 inches and short and medium staple

as cotton of less than 1 l/8 inches. ' - • - ■'■

ZJ Extra-long staple cotton is also grown in Morocco and Somalia but the

quantities are negligible (tfable 2). ...

3/ Small quantities of long staple cotton are also grown in some other African

countries.

"by their fineness and hi'gh-fibor strength and normally commend a substantial premium in world markets. They arc used for making high quality cotton textiles, particularly sewing thread, typewriter ribbons, shot) laces .and products where fineness, uniformity and strength arc required* In such uses extra-long staple cotton cannot easily bo displaced by shorter staples or by other materials. Substitution between different staple lengths in spinning has, however, become easier in recent years with tho introduction of n'ew machinery, although it still involves timo and costs for tho mills concerned. Decisions to use cottons of different staple lengths therefore depend largely on

expectations of demand for different qualities of textiles and of long term price relationships. Short term price elasticity of demand for longer staple cottons is low. On the production side, long and extra-long staples are grown mainly under irrigation.in highly specialized areas, and thoir replacement by shorter staple cotton or oth'or crops is not generally practicable or profitable at present price ratios.

The United Arab Republic, whore cotton growing was already very widely established by 1920, is tho loading producer in Africa, and accounts for half of Africa's output. Limited land .and water resources, and tho nood to produce ' fecdj have restricted tho expansion of land under cotton in the last few decades.

Although there have boon yoar to year fluctuations in tho area planted, yields and production have' recently averaged littlo more than boforo the second

World War (Table 3). The TJ.A.R. is tho uorld's largest producer of bftth cxtra-

long and long staples, all its output falling within those two classes.

Average otaplo length has tended to increase and nearly half of the total crop now consists of oxtra-long staples, compared with one third before the second World War. The bulk of production is confined to a few varieties of tho Egyptian typo. Monoufi is now tho major oxtra-long staple varioty instead of Karnak, which has a lower yield, while Ashmouni continues to bo the major long staple varioty. In order to maintain tho purity of tho different strains they arc allocated to specific areas on a continuing basis, with annual adjustments to toko account of relative demand for Ions and extra-long staples, and of now or improved varieties.

Tho socond next largest cottcn producer in Africa is' tho Sudan, whore extra—long staples account for ninety porcont of tho crop. The Suden is therefore second only to thoFiJUR.as a source of this class of cotton. As in tho U,A.R. , production is concentrated on a limited number of varieties, whoso purity is preserved through a rigidly enforced systom of cultivation, Now irrigation projects have mndo largo additions to the area of land suitablo for growing oxtra~long staples', so that area and production havo mere than doubled ' since tho second World War,

31 sowho re in Africa the area planted to cotton, yield's per hectare and production have incrtea'scd sharply in tho past twenty years. The total cotton area outside the U, A.R, end the Sudan now averages about half as much again as just before the Second World War, Sihco tho increase in yields has been littlo

loss, production has more than doubled, (Table 4)- Thus, production in

Mozambique is now six or seven times as largo as before the Socond World War;

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in tho Central African Republic raid in Chad, the combined crop is five times as largo5 Nigerian production has increased four or fivo fold, while that of

Tanganyika has trebled. Only Uganda experienced more modest increases.

In all tho&o countries, exports have generally followed the samo trend as

production.

Tho Importance of Cotten in African Countries

Cotton dominates the entire economies of tho U.A,R. and tho Sudan and is extremely important to Chad, the Central African Republic, Uganda and

.Mozambique. For Africa as a whole cotton constitutes, apart from gold, tho

largest single oxpert.

In the U'.A'.R'. raw cotton has in recent years accounted for about 70 per cent of total exports and cotton yarns and fabrics for a further 8 percent.

In tho Sudan exports of raw cotton have, on average, represented some 55 to 60

percent of total exports, oxports of cottonseed and cottonseed oil accounting

for a further 8 "percent. Cotton is also tho main sources of foreign exchange in Chad,

whero it forms about 80 percent, and in the Central African Republic, whore it represents 50 percent of total exports. In Uganda the importance of cotton has declined in tho last docado as that of coffee has increased^ nevertheless, cotton still accounts for about 40 percent of total exports. In Moz'ambiquo, cotton also accounts for more than a quarter of total export earnings.

Elsewhere in Africa cotton plays a mere modest part in tho economics of producing countries, bringing in between 5 and 15 percent of national export earnings, (Table 5*5

Factors Affecting tho Long Term Outlook for Cotton

. Per caput fiber consumption levels are closely associated with income, wido differences between countries and rogions reflecting mainly differences in income, Tho income elasticity of fiber consumption tends to bo much

higher in low than in high income countries, and this largely accounts for differences in regional rates of growth over the past decade. On tho basis of estimated income elasticities and population changes, tho potential world

demand for natural and man-made fiber in 1970 lias boon estimated at some 141 to 150 percent of tho 1957-59 level. Regional estimates range from 124 percent for North America to 162 to 185 percent for Africa and tho

Hoar East, (Table 6),

Cotton is by far tho most important apparel fiber consumed, accounting for almost 70 pbrcont of tho combined demand for cot'-on, wool and

man-made fibers. The outlock for cotton is, however, loss favorable than that for all apparel fibers, mainly because7 of tho possibilities of substituting man-made fibers for cotton in many ond uses. In high income countries, there has recently been a remarkable increase, both absolute anft relative, in the use

of synthetic fibers , and this may bo expected to cntinue. In low incomo countries, on tho other hand, synthetic fibers have mt yet made serious inroads Into cotton1s position though rayon consumption has expanded.

This trend also may continue, but cotton is racro likely to keop its sharo of

total fiber consumption.

substitution arc high, so that a relatively low level of cotton pricos

.could chock the rate of substitution, but, owing-to their greater

strength and lightor weight, any given quantity of fully synthotic fibexs

tends to displace a larger quantity of cotton. There are also

(as indicated above) important difforonccs between the market for

long .and extra-long staples « of which Africa is the leading supplier - and the market for medium and short staples; one typo of cotton can

therefore be substituted not only by a man-made fibor but also by a different variety of cotton,

Consunpti:n of extra-long and long staples has fluctuated widely in

recent years, in response to political conditions in the Noar Sr.st

(Suez crisis)^ tc United Statea export policy, which resulted in some

substitution of medium for longer staples," and to technical progress in textile finishing and in the development of mixture fabrics. 4/

United States domestic price policies have not directly affected world markets and are unlihely to do so in the future.

United States production and export policies tend, however, to

oxcrciso a considerable influence oh world prices for short and medium staples, and this may well 0'ntinuo. Sales ~>f cotton :>n concessional terms, which have boon a feature of United States programs in recent years, may continuos albeit at a lower rate, thus influencing world prices

to some extent 5 it should bo nctod, howevor, that these moot a nood-Vhich might not otherwise bo expressed as effective demand on world markets.

While tho trend of world cotton consumption has been upward for

a long time and has doubled since the first World War, world trade in raw cotton has remainod at about the same level and world trade in cotton goods has halved. This trend reflects the development of toxtilo

industries in low in'como cotton-growing countrios, which may bo expected to continue. By raising incomes in developing countries, this typo of industrialization' may, as in the past, stimulate overall consumption of cotton textiles.

4/ The resin finishes resulting in 'drip-dry' fabrics are easier to

apply to textiles made from the coarsor typos of cotton, whilo tho

admixture of polyester or acrylic fibers calls for finer staples.

The Compctitivo Position of African Cot-ton in World Mr.rk.ots

While.Africa is tho world!s major producer of long and extra-long staple cotton', it .-rows only a small proportion of tho world's short and medium staples. The prospects for African long and especially extra-long staplo cotton in world markets depend less on its compctitivo position in relation to cottons froto other continents than on tho total world demand for those staple lengths. Tho only important exporter of extra-long staples

outside Africa is Pcru^ tho only other important producers - the Soviet Union and tho United States - are both not importers, although tho

United States docs ozport small quantities of extra-long staples an€. has

occasionally exported this category of cotton on concessional terms.

Long staples from Africa have to racot somewhat greater competition

from fiber grown in tho United States and Peru , and the world market for this category is affected to a greater extent by United States

production and export policies. Nevertheless, long staples from the U.A.R., the Sudan and Uganda have successfully maintained their position in the

world's oxport markets during recent years,j^/

Short and medium stapled grown in Portuguese territories,, tho former Belgian Congo, and in countries of tho French Franc Zone, arc exported primarily to the respective n^tropolitan or former metropolitan countries under various kinds of market integration arrangements and only a relatively small proportion has to find outlets elsewhere.

The principal markets for extra-long staple cotton since 1957 have "been

Western Europe and the Sino-Soviet area,' which have taken about 43 and

35 percent respectively of world imports. Tho only other markets of any importance are India, tho United States and Japan, "widen account for about 12, six and throe percent of tho total, respectively. The United Arab

Republic has been by far tho largest supplier of oxtra-long staples to the Sino-Soviet area and to the United States, while tho Sudan has boon' tho principal source of such cottons imported into Western Uuropo and India,

jjj/ Ibrports of Egyptian Cot-cons were, however, 'adversely affoctod by tho aftermath of the Suez crisis in 1957-59*

African long staples find thoir main market in tho Sino-Soviot

area, and only to a much smaller orient" irTHostorn 'Europe and in

India, whore they compote against United States growths.

Short staples go almost exclusively to Western Eufropo, although small markets for thorn also o:dst in tho F.ar East,

r- 11

GQTTON STABILIZATION An' SJPPORT MEASURES IN THE

AFRICAN PRODUCING COUNTRIES AND 'fiSR

Throughout the post-war period all the main cotton growing countries and territories of Africa have implemented internal stabilization measures with respect to cotton grown for export.

Except'in the Sudan, these include direct measures for the stabilization of producer prices both during any one marketing season and from one season to the next and involve the establishment of either fixed or guaranteed minimum

prices for seed cotton and/or for cotton lint for each crop year. In British and former British territories, in the Franc Zone and in the Congo (Leopoldville),

the price objectives laid down are made effective through the operation of price stabilization funds; in the.Portuguese territories'fixed producer prices are implemented in conjunction with a series of price controls linking the producer

to the mill consumer in Portugal _£A in the U.A.R. guaranteed minimum prices for

cotton lint have been implemented by means of direct purchase operations in the market as occasion demanded. In the Sudan, in contrast, producer prices are not fixed or guaranteed^ however, cotton.marketing proceeds for each.season are . , pooled and.' shared JLn- each of: four, government sponsored .cotton schemes and reserve funds are available for supplementing the producers' share'to some"extent when

their incomes fall below the minimum ncccssaryibr subsistence.

The measures for producer price support are taken, in general, on the ona hand, with a view to promoting cotton production and improving the quality of cotton exports and, on the other, with a view to protecting the interests of producers in selling their cotton and t.o limiting variations in the prices they receive. In most countries, in order to keep their export prices competitive in the world market, the- level of producer .price stabilization aimed at is one which the export market will tear on average. In tho Franc zone, however, support

as well as stabilization is an objective, and is made possible by external financial assistance to the national stabilization funds.

6/ Aspects of integration with importing countries are discussed in Chapter III.

The incomplete data on officially established producer prices shown in

Table 8 givea some indication of the degree and kind of stability imparted by the various"measures applied. In some countries,-e.g. Uganda, the prices established for successive seasons have been flexible, usually within narrow limitsj in others they have been held-rigidly for a few seasons at a time.

The evidence available on the building up of the various stabilization funds in the early fifties and the drawing upon these funds in more recent years implies that producer prices nave, in fact, been more stable during the past decade than they would have been in the absence of these moasures - or, presumably, than they have been in the Sudan. For a number of countries the prices established have been at somewhat similar levels. The data shown are not adequate, however, for comparisons of the relative benefits received by producers in different countries. The prices established or actually

received ^j producers aro affected by a number of factors including the quality and staple length of cotton exported and the corresponding price margins, the efficiency of the cotton marketing.system and the effects of other government measures such as export taxes. The data, moreover, give no indication in

themselves of the degree of stability achieved with respect to producer incomes.

As already noted, variations in the volume of cotton produced and exported have been larger on average during the past decade than those in export prices.

Most of the African countries and territories promote, research on varieties resistent to diseases,, pests and adverse weather conditions, and by distributing approved, seed free of charge and encouraging regular and tira&ly sowing,

inprov&'d .cultivation practices etc., some tines "by special subsidies, attempt to roduoc variability in the crops harvested* 'Xhese measures contribute to the stability of producer incomes and are usually financed by the marketing boards or stabilization funds concerned, often with financial and technical assistance from abroad.

In conjunction with producer price stabilization measures most African countries control the profits or establish the amounts of reimbursement of

the ginneries and various marketing agencies. Export and other taxes on cotton, though imposed mainly for revenue purposes and constituting the main source of government revenue in some countries, are sometimes levied on a sliding

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scale or adjusted from time to time as in tho U.A.R. and the Sudan, so as

to provide an element of stability.

Those measure all modify the impact of variability in export prices and export returns on the internal economies. Countries producing medium staple, oottons, with their small shares, in the world market, are not in a position to influence the level of world prices or, except through market in tegration, to insulate their own export prices from world prices. . They are encouraged, in the longer term, to expand their exports at ^icescompetitive with United States cottons and aim, in the short term, at eificient and orderly

with United States cottons and aim, in th ,

l

marketing. In most such countries - and those producing longer staples -

exports Sf raw cotton are monopolized by government or ^^f^ent bodies «r

government-controlled private organizations which, with adequate financingand

ti ith thi rticular gro

g_

government-controlled private organiz , in a

in the absence of competition with their particular growtn of cotton, ar position to regulate the flow of exports to some extent. The exports of the Marketing Boards of British and former British territories, usually sold at

auction, and of the cotton companies of former French territories, are sold at- world prices. For extra-long staple . cotten, on the otner hand, because of its relatively _i^lastic dem -nd, at least for certain technical uses, and the large

shades of the export market held by the U.A.R. and the Sudan, world market prices

are influenced by their national measures, especially production policies.

Experience does not so far indicate, however, that these can be effective in stabilizing export prices or returns. In spit, of efforts to avoid such occurrences, yields, particularly in the Sudan, remain subjeo to occasional disastrous reductions, deluding these, the quantities of cotton ^ced and exported by thu two countries, taken together, have not ^een well adjusted to market demand in the short term, and wide swings in prices have resulted.

In the longer term the expansion of the irrigated area in the Sudan, the lack

of alternative export crops and competition between the two countries in the

world market appear to be inducing over-expansion in this category ^J\°^n'

The U.A.R., the larger exporter, has sold its cotton through the Alexandria

Cotton Exchange subject to various kinds of interventions including, in recent

years, barter transactions and a form of market discrimination involving

currency discounts. It is not possible to gauge their impact with regard to stability. The Sudan has, on tho whole, followed world market prices, selling its cotton "by auction through the Gezira Board. For some years, however, it operated a system of pre-announcod reserve prices with a view to limiting short-term price fluctuations and later also resorted to some "barter

transactions, jj

For a more detailed description of the stabilisation and support measures applied in the different African countries, see Appendix A,

MARKET INTEGRATION BETffMT EXPORTING IMPORTING COUNTRIES

There ai-e several different forms of integration "between the aotton producing countries and their import markets -which have a "bearing on the stabilization of export prices or export returns. They do not, however, appear ^o affect a large proportion of total African exports at present.

The fcllouing notes are confined to the marketing arrangements "between the Portuguese territories and Metropolitan Portugal; the discontinued "bulk sales arrangements of British and former British territories; the financial stabilization arrangements at present in use in the French Community, and proposals for a similar system "between the EEC and associated African countries. In addition to these, integrated arrangements within the

private sector and barter agreements also havo souie "bearing on the question of stabilization. Barter agreements have been used to a considerable extent by both the UAR and the Sudan in their trade with countries in the Sino- Soviet area, but were discontinued and replaced by trade and payments agreements in i960.

The most closely integrated system of cotton marketing is that linking Angola and Mozambique with metropolitan Portugal which imports the bulk of the production of* these two territories 2J . Portuguese importers are required tc purchase an annual quota ZJ of Angolan and Mozambique cotton, whic'h is free of import duty- expert.- from these territories to other ,

markets are subject to a higher rate of export tax than those to Portugal —I,

The system is coordinated with Portuguese importing and manufacturing activities by the Raw Cotton Trad'3 Regulation Commission, and with production research and marketing by the Junta de Exportacao dc Algodao Colonial, whioh consists of representatives, of the Portuguese government, the spinners and import merchants and tho exporters of the overseas territories.

%] This concerns only about six percent of total African exports.

2/ .Amounting' rto 175,000 bales in 1957/8 and 1956/9, l39?OOO bales in 1959/60 and 217?OOO bales in 1960/61.

10/ 12 percent ad valorem as against one percent for exports to Portugal.

Prices are established for each season at the producer level in terms of seed cotton, at the import level on a c.i.f. "basis metropolitan ports (minimum and maximum prices)? and also for sal^s to industry. Except for

a rise .in the maximum import price in 1960/I; these prices appear to have remained constant during the last few seasons —( Between 1948 and 1952

the United Kingdom Raw Cotton Commission entered into bull"; purchase agreements with all colonial cotton growing countries and the Sudan, while India operated "bulk contracts with Uganda and the Sudan. The Raw

Cotton Commission agreements covered the entire cotton crops of ITigeria, Nyasaland and Tanganyika, the greater part of the Sudan crop, and rather less than one-third of the Uganda crop. In all ca^es prices wore negotiated annually, although for Nigeria and Nyasalr.nd tiie contracts were on a long- term basis. Such agreements had market stabilization as one of their objects, but all eventually foundered ao a result of the divergence between contract and world market prices for comparable cottons. The iJigerian contract, under which an attempt was originally made to lir;.it year-to-year variations in

contract prices, was linked to the TTow York Cotton lixchangr^ while the Sudan contract was linked to the Alexandria Cotton Exchange and the Uganda contract first to Alexandria and later to New York, At first, bulk prices in the Sudan and Uganda compared favorably with prices obtained for the portion of the crop sold by auction, but the system became increasingly unstable when market prices began to fluctuate. Future quotations in the reference period diverged sharply from corresponding spot quotations and made negotiation more ' difficult and risky. By 19545 therefore all bulk contracts had been, abandoned.

Market integration between France and the cotton producing African

members of the French. Community ^±J takes the form of financial assistance

to the local Caisses de Stabilisation for their- cotton stabilization and support operations and their x^c-motion measures. The resources for this assistance are derived from a 30 percent share of the proceeds of a tax of 0.7 percent on the sale of all finished textiles in France and members of

the French Community, administered by the Fonds de 3Outien des Textiles des Pays et lerritoires d'outro-Mcr (Overseas Textile Fibers Support Fund),

11/ See table 8.

12/ This concerns another five percent of total African cotton exports.

- 17 -

The assistance is available, in the form of subsidies, regardless of the destination of the cotton exported from the overseas countries and territories. However, Prance imports much the greater part of the total

cotton exports of these areas (Table 9)« There is no tariff preference in

France for cottons from the Franc aone and no quantitative restriction on imports of cotton from other areas, except insofar as has been necessary in the past for balance of payments reasons.

Each year a guaranteed price ("prix garanti") for cotton, on an f.o.b.

basis, is established for each of the cotton growing countries of the Community. If realized prices fall below this the Support Fund undertakes to reimburse the difference to the local Caisse cle Stabilisation, However if the realized prices exceed the guaranteed price the difference is shared between the Caisse and the Support Fund in tho proportion four to one.

In the event of the Support Fund being depleted the Caisses may obtain interest-bearing loans} but not subsidies, from the Fonds ational de

Regularisation des Gours des- produits d'outre-M^r (Central Fund for the Stabilization of the Prices of Overseas Agricultural Commodities).

There appears however to have been no recourse to this additional source of funds.

The guaranteed export prices for raw cotton grown in African countries belonging to the French Community have been maintained at relatively stable

levels during recent years. This has beun made possible in years when realized priceswere lower by the subsidies received from tho Fonds de Soutien, e.g. in Chad and the Central African Republic, The internal

stabilization operations of the four African Cais::;os de1 Stabilisation for cotton and the financing of their productivity programs have thus been underwritten, while variations in export proceeds have been partly offset, particularly in Chad and the Central African Republic, where cotton is the major export.crop.

Somewhat similar arrangements have been proposed by the Commission of the European Economic Community for overseas countries and territories associated with the Community. Among African'cotton"producing countries, these proposals would be applicable to the members of tho French Community,

the Congo (Leopoldville) and Somalia, all of which have retained their

association with the Community since their independence, and will be concerned in the negotiation of tho new convention of association" at the end of this year. Those countries together account for about 12 percent of African production.

According to the EEC Commission, the new arrangements would assure benefits to the associated states and territories at least equivalent to those already enjoyed in the markets of the metropolitan and former metropolitan countries. The Common Tariff on imports of cotton into the Community is nil, and such imports already enter member countries virtually free of import restrictions. The only provisions affecting cotton in the overseas ,countries would thus "be the measures involving price support for cotton—=y and those for the improvement and possible re-orientation of agriculture designed to achieve greater stability and higher farm incomes.

These would be administered by a Caisse Comnuno do Production, to which all members and associate members of the Community would contribute.

With respect to price support, a reference price (prix indicatif) for cotton would be established each year taking into account the trends in the world market, the results of policies fcr the improvement of productivity and changes in the purchasing power of the farm population. Within the limits of funds available, aid would be distributed to the beneficiary countries in the form of deficiency payments. It would be financed out of the revenue of a levy on all imports of raw cotton into the Community from all sources. It is considered that an annual sum of $4 million would

be sufficient =!U% taking into account the aid wade available for cotton by

member countries during the last five years; thu current world price situations and the quantities at present exported by associated countries in Africa,

Cotton production would also "benefit from the financing by the Caisse of studies for the improvement of agriculture, including those concerning industrialization. These, .insofar.;- as they were not already provided for by the European Development Fund, would be financed by a fund of up to $25 million annually, made up of contributions by member and associated member countries. The Caisse Commune de Production would also administer any funds supplied by members and associate members of the Community for the

international stabilization of tropical agricultural commodities,

13/ Similar arrangements are envisaged also for bananas cind coffee,

14/ Equivalent to the yield of an import levy of about 1 percent.

- 19 -

If the present negotiations with the United Kingdom should result in its membership of the EIlC the enlarged Common Market would account for about one half of all cotton traded internationally. Cotton already enters the United "Kingdom free5 but acceptance 'of the Commission's present proposals for

the Caisse Commune do Production by the enlarged Community would provide a broader base for the suggested system of "compensatory financing" to. supple ment the stabilisation operations of the local funds and for the proposed direct aid to agriculture in associated African countries.

It is perhaps too soon to speculate on the possibilities of the

association of African monitors of the Commonwealth. This could substantially increase"the proportion of African cotton subject to an integrated system such as that proposed by the Commission, The association of, say, Nigeria, Tanganyika, Uganda, Kenya and ITyasaland would brinfj a further 17 percent of African production into consideration,, making 30 percent in total. It is to be noted that a substantial proportion of East African production is exported to markets outside the United ICin^dom and the Community.

INTERNATIONAL STABILIZATION MEASURES

Failure of attempts to introduce an international cotton agreement Between 1951 and 1954 the International Cotton Advisory Committee (ICAC) 15/ gave thorough consideration to the possibilities of -

introducing an international stabilization agreement for cotton.

The discussions were initiated following tho review by the ICAC's Tenth Plenary Meeting in February 1951 of tho disturbing conditions of snortage and high and violently fluctuating prices then current. Pull discussions took place at the annual plenary meetings of the ICAC in 1952 and 1954 and at a special session in 1953. They were conducted on the

"basis of detailed studies of possible techniques. The proceedings aimed at selecting first the type of agreement best applicable to cotton, and medium staple cotton, in particular, before reaching any intergovernmental decision as to whether or not an agreement was desirable. The group of independent technical experts appointed in 1953 thought that the only practical type of agreement would be one based on quotas on trade.

In the event, however, the ICAC concluded in 1954 that the current cotton situation dxa not warrant further attempts to reach an agreement and no further studies have been made since then.

_In the course of the discussions which took place between 1951 and 1954 it was generally recognized that machinery was required which would cope equally with both surpluses and shortages? assure sur.plies to

importers in times of scarcity and markets for exporters in times of surplus?

and prevent excessive price fluctuations. Throe main types of agreement - a multilateral contract (involving obligations on tho part of exporters to sell quantities to importers at a maximum price and on the part of . importers to buy quantities from exporters at a minimum price) buffer stocks and international trade quotas - were examined and also

combinations of buffer stocks with tho other two typos 16/.

15/ The ICAC which was first established in 1939 has since 1946 been open for

membership to all countries substantially interested in cotton that are members of the UN or FAO. It is .the specialized intergovernmental

forum for consultations on cotton and works in close cooperation with PAO.

16/ The particular variants of these types of agreement studies and the

difficulties encountered by the ICAC in the study of their application

to cotton are described in somewhat more detail in Appendix 13.

". ■ Many problems still relevant to the negotiation and operation.: of the

different types of agreement were considered Jj/" A., "brief summary of

some.of those problems and the views expressed about them-is given below.

Several of the main exporting countries themselves'process large proportions of their national production. A large volume of cotton would lie outside the direct scope of a multilateral contract or trade quota type.of agreement and could in certain situations constitute1 a danger to its operations, unless compatible national action were taken. An

international buffer stock system might3 directly or indirectly have to assume control of large 'stocks and might have to be accompanied by regulation of production. Major exporting countries were reluctant to delegate such control; while importing countries were reluctant to help • in financing such stocks. The huge cost of operation was also a problem.

Cotton traded internationally re-enters world trade'in the form of textiles, where these compete with textiles made from domestically

produced raw cotton, relative costs of manufacture in different countrp.es would change as the result of differing prices for cotton in the' world market and in the national markets of cotton producing countries. This was an extremely important fact for countries, especially those exporting textiles,' in .assessing advantages and disadvantages of different types of

agreement, . . .

Raw cotton is traded in a very wide range of growths', qualities and .staple-lengths ~bj many exporting and importing countries. The need to

determine the price equivalents of different grades would' present' great technical difficulties in case of a multilateral contract. {The existence of numerous grades would also complicate the operation of a buffer stock.

Almost all exporting countries, including the- most important, operated and still operate national price support measures, 'This created difficulties

17/ The absence of an organized international cotton market and restrictions

on currency convertibility with accompanying premia for non-dollar cottons also presented problems at that time but this is nc longer the case*

in choosing representative price quotations for use as signal prices for intervention in the operation of buffer stock and quota types of agreement. More important, any conflicts 'between the national

production and price objectives of the major exporters and those negotiated internationally could jeopardize the success of an agreement. High national support prices might prevent prices from entering the lower part of a price range ox make it necessary for exporting countries to apply export subsidies in order tc carry out obligations under a multilateral contract.

Cotton importing countries were in process of liberalizing their

trade and were therefore most reluctant to apply the measures necessary for meeting their obligations at the minimum.price under a multilateral

contract or to apply quantitative restrictions on imports under a

trade agreement. Since 1954 liberalization has proceeded apace so that

these difficulties would be even greater at present.

The cotton situation changed during the discussions from one' of acute shortage early in 1951 to one of surpluses in 1953 and 1954.

With falling prices, importing countries became less interested in an

agreement. Exporting countries, on the other hand, benefited from the support -given tc the international market by United States domestic price

policies. The U.S. internal support price acted as a floor under world

prices, while the existence cf large stocks kept world prices from rising much above it. Since that time the .United States has introduced export

subsidies for cotton and developed its sales on concessional terms, but has generally tailored its production policy to the needs of the world

■market. Other exporting countries however have become increasingly concerned that the two price system should be accepted only as a temporary measure.

Although there was no particular study in tho early fifties of a

possible agreement for extra-long staple, cotton only, some of the

considerations described above are relevant to the application cf

similar types of arrangements to this category alone. It may be

noted, however, that as the main countries exporting extra-long staple

do not as yet process much of this cotton themselves, no serious

problems would arise from differences in prices paid "by textile industries in countries.producing extra-long staple and those in countries dependent on imports of it, The small number of countries producing substantial quantities of extra-long staple _l8/ would give additional importance to the coordination of their national policies with the torns of any agreement.

Recent intergovernmental consultations on cotton problems.

Since 1954 intergovernmental consultations on cotton have

concentrated on the exchange of information and views on the cotton ^ situation and on measures adopted and planned in producing and consuming countries. In recent years the ICAG has been concerned mainly with the problem of the international effects of United States price support, production and export policies. Since June 1959, a study group of

cotton exporting member countries (with one importing member of the ICAC as an observer) has also been meeting occasionally to give attention to

some aspect's of this problem and has reported its findings periodically to the ICAC. The ICAC has also given attention to the longer-torn aspects of stability and has undertaken a study, in cooperation with other interested organisations, including FAO, on the prospects for cotton production and consumption. A document on projections of fiber consumption was presented at the last Plenary Meeting in May 1961 19/.

Since 1959 the ICAC has devoted' particular attention to the problems of extra-long staple cotton. The very severe decline in the prices of this cotton, which had taken place during 'the two preceding years, had caused loss of income and foreign exchange to the major

producing countries. A special meeting on extra-lcng staple cotton which was held in September, 1959j stressed the importance of price stability in relation to the maintenance and increase of mill consumption § the

expansion of programs for the promotion of consumption and consideration of the possibilities of a joint program: and tlio neod to bring production into line with demand, to intensify efforts to diversify into other crops and us'os and to restore traditional free market practices in sales for export. Since 1959 meetings of a Committee on Extra-Long Staple Cotton

18/ Peru, Sudan, United Arab Republic and the United States.

19/ Prospective Trends in Consumption of Textile Fibexs published by the'

Secretariat of the ICAC in final form as Doc.1013 XXI in March, 1962.

year. In i960 this Committee noted a welcome move in the direction of.

freer trade, including the virtual abandonment of barter trading, a reduction of export subsidies and discounts end the removal of export taxes by. some countries. In 1961 the Committee recommended that each of the four main producing countries submit to the Secretariat its ideas on how a joint research program on the utilisation of extrs~long staple

cotton could ,bo implemented.

The cotton situation is also reviewed annually by the FAO Co:nmittee

0:1 Commodity Problems (CCP) along with developments in other fibers and

agricultural commodities. This has the advantage of setting cotton problems within the -wider framework of commodity problems generally. Among these, the problem of surpluses, which has implications for both short term and longer term stability, has received particular attention. The FAO Principles of Surplus Disposal apply, of course, to cotton and the CCP and other organs of FAO have recommended suitable ways of utilizing

agricultural surpluses within both bilateral and multilateral arrangements.

The observance of the FAO Principles is promoted through the CCP Consultative Sub-Cornmitteo on Surplus Disposal (CSD) established in 1954- The CSD has

concentrated on policies, programs and methods of surplus disposal,

but has also discussed specific transactions. Since 1958 advance notice of impending agreements between countries exporting and countries receiving

surpluses and bilateral consultations between exporting countries and

interested third party countries have contributed to the effectiveness of

the work of the CSD,

-25-

COJOLUSIONS

African cottons fall into two distinct categories, eaoh of which is subject to different market conditions.. Extra-long and long staples, whioh are produced mainly in Africa, find their price level in a competitive world market, although Egyptian growers are protected from its fluctuations "by minimum support prices, and the Sudan Gezira Board adjusts its selling policy to market conditions in such a way as to minimize' fluctuations. In recent years the market for extra-long and long staples has been supported through

substantial purchases on the part of countries in the Sino-Soviet area, since demand from other countries would not have boen sufficient to absorb all the fiber produced. Nevertheless, .short-term fluctuations in prices have been severe.1 Such fluctuations reflect the impact of year-to-year changes in supplies on a relatively restricted market where demand is in elastic in the short run; in recent years,, they have been aggravated by the operation of political factors. The size of the African crop, which accounts for the bulk of world production, is sufficient tn influence world prices and agreement among the three principal producers—U.A«R.the Sudan and Uganda - on production policies and methods of marketing would undoubtedly bring about a greater degree of stability. For the successful operation of a long-term stabilization scheme9 however, the cooperation of importing countries,

particularly those in "Western Europej is essential.

Although the acreage planted to these staples is unlikely to expand significantly in the near future,, production may continue to increase with rising yields. Demand, on the other hand, may not keep pace with productions its level will depend not only on national incomes in consuming countries, but also on a number of technological factors which may influence rates of sub stitution between longer staple cottons and man-made fibers, or between longer and medium staple cottons. Hill consumption in the producing countries them selves is at present very small but it may gradually rise.

Short and medium staple cottons, unlike the longer staple varieties, are produced chiefly outside the African continent. African producers therefore have little or no influence on the world market, and attempts at stabilizing prices aro out of their power. Owing to the stabilizing effect of United States supjjort policies, however, and to the greater regularity of demand for such cottons? fluctuations in short and medium staple prices are milder than fluctuations in tiio prices of the longer staples. Also a high proportion of the African crop has practically guaranteed outlets in a

number of Western European markets, either as a result of government measures or through private arrangements "between local exporters and merchants or spinners in importing countries. Stabilization for indi vidual African countries would therefore seem easier to achieve than, in

the case of countries producing extra-long and long staples,, but the co ordination of national policies may present greater problems.

c-

Growers generally receive fixed prices paid through government agencies, and.the production'of this typo of cotton is encouraged in most countries, concerned. The African short and medium staple crop iss there fore, likely to expand at a much faster rate than tho crop of extra-long and long staples. It is also probable that consumption of these cottons in African mills will rise in future. Increasing cash incomes derived from exports of raw cotton and from the development of textile mills are likely to contribute to an increase in the consumption of cotton textiles in Africa, whether locally manufactured or imported, and thus generate the demand for the additional quantities of cotton produced.

— 27 -•

ANlfEX

Table 1: COTTON: Production, and Exports in Africa and the "orldt by Staple

Lengths; 1957/^8 tftyoW 1959/60^

1A11 Lengths j Under 1 3/8"! 1 3/8" ! 1 3/8"and over as

I j i ' percent of all

I i | ! Lengths

i r

PRODUCTION World Afrioa

EXPORTS World Africa

AFRICA AS A PERCENTAGE OF:

rforld Production World Exports EXPORTS Ao A PERCENTAGE OF:

World Production Afrioa Production

9.

3- 0.

9 22

34 84

67

28 71

..million metric tons.

2.94 0.41

6 14

21 76

0.49 0.32

0.34 0.31

65

90

70 97

5 37

10 43

Note: Production and exports of extra long staple cotton from Africa'refer to the United Arab Republic (Egypt) and the Sudan. In the case of exports, certain lower grades of Lambert types are included though they may be Bhorter than 1 3/8 inches. Small quantities of extra long staple produced in or exported from other African countries are included with cotton under 1 3/8" long.

Souroe:Cotton - World Statistics, quarterly Bulletin of the International Cotton Advisory Committee (ICAC) and Cotton Monthly Review of the rtorld Situ&tion published by the ICAC.

Table 2i OQTTOfft _ PRODUCTION IN AFRICA, BY STAPLE LENGTH - AVERAGE 1957/58-1959/60

STAPLE COUNTRY

Algeria Angola Cameroun

Central African Republic Congo (Leopoldville) Ethiopia

Dahomey Ivory Coast Kenya Mali Morocco

Mozambique Niger Nigeria

RhodeBias and Nyasaland Senegal

Somalia South Africa Sudan

Tanganyika To had Togo Uganda

Short and medium^/

0.2 7-4 7.6 14.1 55-9 1.1 1.1 1.1 2.6 2.2

-

37.5 0.2 42.7 2.6 0.4

- -

7.4 30.8 22.3 2.2 23.6 United Arab Republic (Egypt)

Upper Volta Africa

United States Rest of the World

WORLD

0.4 263.6 2,556.9 5,675.0 8,495.5

Long-'

.Thousand

-

-

-

-

1.1

-

-

-

-

-

2.2

-

-

0.2

-

-

6.3 1.1 2.2

-

-

43.6 211.4

-

268.1 101.7 306.1 675-9

Extra-Lone*'

-

-

-

-

-

-

-

-

-

2.2

-

-

-

-

_

1.5

-

92.4

-

-

-

-

224.8

-

320.9 16.7 153.3 490.9

Total

0.2 7-4 7.6 14-1 55.9 2.2 1.1 1.1 2.8 2.2 2.2 39.7 0.2 42.7 2.8 0.4 1.5 6.3 100.9 33.0 22.3 2.2 67.2 436.2 0.4 852.6 2,675.3 6,134.4 9,662.3

Sourcei International Cotton Advisory Committee (ICAC)

1/ Under 1 l/8 " :

2/ 1 1/8" to under 1 3/8"

V 1 3/8".