Review of Commodities – Rice, cane sugar, and cotton

Pamela Stedman-Edwards

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RICE

Introduction

Developments in rice production and international rice markets are critical for the environment and for the rural and urban poor. Rice is the staple food of the 70% of the world’s poor living in Asia (Gulati and Narayanan 2002); it is also a crop that makes heavy demands on the environment. The international rice market is among the most distorted of commodity markets. It is frequently characterized as thin, volatile and segmented, in addition to severely distorted (Gulati and Narayanan 2002). Many countries, primarily in Asia, have strict limits on rice imports and exports, and prices vary widely across countries as a result. The international rice market has become so distorted because of the immense social and cultural importance attached to rice, both as a staple crop essential for rural and urban food security in Asia, and as a product of subsistence farming that ensures a livelihood for millions of rural poor. One major outcome of these distortions is that very little rice is traded and world prices, as a result, are quite volatile. Market interventions to protect high-cost producers in the developed world, particularly the US and Japan, further distort these markets.

That said, it is important to recognize that substantial changes have already occurred in rice markets, both as a result of changes in demand reflecting economic growth, and as a result of many steps that have already been taken toward liberalization, particularly by developing countries. These changes provide some evidence of the trends that could be expected with further liberalization. The most important determinants of future rice production patterns may well be income levels in producing and importing countries, along with constraints to growth in production, including social and environmental constraints. Whether liberalization will alleviate or aggravate the environmental problems associated with rice production will depend in large part on how liberalization affects the poor in Asia; on the response of small-scale farmers who currently produce most of the world’s rice; and on investments in maintaining yields sustainably. This summary paper first reviews production, consumption, and trade patterns and outlines current patterns of government intervention in the rice sector, along with recent steps toward liberalization. It then considers the probable effects of widespread liberalization in order to improve our understanding of the environmental issues likely to arise with more complete liberalization of this unusually constrained market.

Production, Consumption, and Trade Patterns

Fully 90% of rice is produced and consumed in Asia (Hossain and Narciso 2004). The primary producers include India, China, Bangladesh, Thailand, Indonesia, Vietnam, Myanmar, the Philippines, Brazil, Pakistan, Nigeria, Cambodia, Nepal, the United States, Japan, Madagascar, and Korea. The bulk of exports, about 80%, comes from just six countries—Thailand, Vietnam, India, China, Pakistan, and the United States. Many countries are net rice importers; but just a few countries where rice is the preferred staple account for most imports—Indonesia, the Philippines, Bangladesh, Malaysia, Japan, Korea, and the Middle East.

Two notable changes have occurred in world rice markets in recent decades. First, there has been a dramatic decline in prices. The average world market price as of early 2004 was 77% lower than the average world price from 1950-1981 (Dawe 2004)1. At the same time, global production rose by 2.7% per year from 1970 to 1990, and by 1.4% in the 1990s; average yields increased by 2.2% per year, and then 1.0% per year (Hossain and Narciso 2004). Falling prices and increased production have been driven by the technological introductions of the Green Revolution, including new varieties and irrigation, as well as by falling fertilizer prices that contributed to higher yields and lower input costs. At the same time, the area under rice production increased by 0.5% from 1970 to 1990. The bulk of this expansion was in irrigated rice production,

1 This average is for top quality indica rice, FOB Bangkok. The price change is measured in US dollars. Dawe notes greater currency depreciation in some countries reduces the fall in rice prices; nevertheless even for countries with major depreciations during the period there was still some decrease in rice prices (2004).

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and land was actually taken out of less productive forms of rice cultivation in some countries (Hossain and Narciso 2004).

The second notable change has been a deepening of the international market. The international rice market grew from 4.3% of production between 1961 and 1993 to about 6.3% from 1994 to 2003 (Dawe 2004). In terms of volume, the amount traded internationally nearly doubled (Dawe 2004). Nevertheless, the market remains concentrated. Countries increasing imports have included Asian countries with low yield-growth in rice and high population growth, namely Indonesia and the Philippines, as well as Japan, which was forced to increase imports under the terms of the WTO. Imports also increased in Africa, the Middle East, Latin America, and the Caribbean. Notably the role of Asia in world rice markets has decreased slightly. While the region accounts for about 72% of rice exports (1996 to 2002), its share of imports is now only 32% (Dawe 2004), down from about 64% 30 years ago. The falling share of imports is explained by rising demand in other parts of the world as population growth, urbanization, and rising incomes lead to changes in consumption patterns (Dawe 2004). The thinness of the market means that changes in production or consumption in any of these countries—due to weather, financial crises, or policy change—can cause major changes in international prices.

Table 1: Rice Production and Trade  Production, Paddy Rice ('000 Mt) Trade Balance, Milled Equivalent ('000 Mt)

1990 1995 2000 2003 1990 1995 2000 2001Bangladesh 26,778 26,398 37,628 38,060   (382) (986) (258) (150)Cambodia 2,500 3,448 4,026 3,800   (28) (87) (50) (76)China 191,615 187,298 189,814 167,617   (40) (1,760) 2,456 1,415 India 111,517 115,440 127,531 133,513   360 4,873 1,516 2,192 Indonesia 45,179 49,744 51,898 51,849   (69) (3,236) (1,358) (642)Japan 13,124 13,435 11,863 9,863   (19) (16) (571) (126)Korea, Dem PR 1,800 2,016 1,690 2,284   16 (602) (816) (702)Korea, Republic of 7,722 6,387 7,197 6,068   (1) 2 (145) (79)Myanmar 13,972 17,957 21,324 21,900   216 358 244 936 Nepal 3,502 3,579 4,216 4,155   (12) (42) (207) (42)Pakistan 4,891 5,950 7,204 6,751   740 1,844 2,008 2,401 Philippines 9,885 10,541 12,389 13,171   (608) (270) (662) (842)Thailand 17,193 22,016 25,844 27,000   0 1 2 3 Viet Nam 19,225 24,964 32,530 34,605   1,591 1,939 3,514 3,766

 Brazil 7,421 11,226 11,090 10,219   (401) (835) (583) (622)

 Côte d'Ivoire 660 764 1,231 818   (376) (425) (484) (709)Madagascar 2,420 2,450 2,480 2,868   (59) (60) (210) (159)Nigeria 2,500 2,920 3,298 3,192   (225) (301) (794) (1,762)

 Saudi Arabia   (267) (492) (888) (729)

 United States 7,080 7,887 8,658 9,034   2,185 2,835 2,486 2,218

 Other countries 29,236 32,680 37,205 38,208   (6,120) (7,670) (9,616) (9,290)

 World 518,221 547,099 599,115 584,976  

Source: FAOSTAT 2004

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Table 2: Rice Area Harvested and YieldsPaddy Area Harvested, '000 Ha Paddy Yield, Kg/Ha

1990 1995 2000 2003 1990 1995 2000 2003Bangladesh 10,435 9,952 10,801 11,100   2,566 2,653 3,484 3,429Cambodia 1,855 1,924 1,903 1,990   1,348 1,792 2,116 1,910China 33,519 31,107 30,301 27,398   5,717 6,021 6,264 6,118India 42,687 42,800 44,712 44,000   2,613 2,697 2,852 3,034Indonesia 10,502 11,439 11,793 11,600   4,302 4,349 4,401 4,470Japan 2,074 2,118 1,770 1,680   6,328 6,343 6,702 5,871Korea, Dem PR 600 582 535 593   3,000 3,464 3,159 3,852Korea, Republic of 1,244 1,055 1,072 1,013   6,206 6,052 6,711 5,990Myanmar 4,760 6,033 6,302 5,600   2,935 2,977 3,383 3,911Nepal 1,455 1,497 1,560 1,550   2,407 2,391 2,703 2,681Pakistan 2,113 2,162 2,377 2,210   2,315 2,752 3,031 3,055Philippines 3,319 3,759 4,038 4,095   2,979 2,804 3,068 3,216Thailand 8,792 9,113 9,891 11,000   1,956 2,416 2,613 2,455Viet Nam 6,043 6,766 7,666 7,444   3,182 3,690 4,243 4,649

 Brazil 3,947 4,374 3,655 3,156   1,880 2,567 3,034 3,238

 Côte d'Ivoire 572 650 510 510   1,155 1,175 2,414 1,604Madagascar 1,165 1,150 1,209 1,350   2,077 2,130 2,051 2,124Nigeria 1,208 1,796 2,199 3,116   2,070 1,626 1,500 1,024

 United States 1,142 1,252 1,230 1,213   6,198 6,301 7,037 7,448

 Other countries 9,543 9,966 10,594 10,320   3,779 4,068 3,690 5,893

 World 146,975 149,493 154,121 150,938   3,526 3,660 3,887 3,876

Source: FAOSTAT 2004

Role of Small Farms

For the most part, rice is grown on small family farms. The exceptions are in the US, Australia, Southern Europe, and some parts of South America.

The average size of a rice farm is less than half a hectare in China, Indonesian Java, and the Red River Delta in Vietnam; less than one ha in Bangladesh, eastern India, and the Mekong River Delta in Vietnam; and one to two ha in most other countries in Asia. Only in Thailand, Myanmar, Cambodia, and the Punjab, India is the average farm size over two ha… (Hossain and Narciso 2004, 2-3).

In the low- and middle-income countries of Asia, 64% to 70% of the labor force is in agriculture, and the majority of the poor still live in rural areas (Bale 2000).

Because the largest producers and consumers of rice are very poor rural countries, a high proportion of world rice production never leaves the farm on which it is produced. This rice is often quite insulated from world markets by transaction costs. Perhaps a third is consumed on the farm and another third is consumed in nearby rural or urban population centers within the large nation where it is produced (Sumner and Lee 2000, 2).

Much production is at the subsistence level; only a small surplus enters the market. Variations in the surplus, largely a result of weather conditions, can create major fluctuations in domestic and international prices.

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Table 3: Rice ConsumptionKg/Cap/Yr (paddy equivalent)

1990 1995 2000 2001Bangladesh 236 219 235 233Cambodia 235 248 244 223China 140 137 134 130India 115 122 114 114Indonesia 221 219 223 223Japan 97 94 89 88Korea, Dem PR 136 139 114 114Korea, Republic of 156 143 134 125Myanmar 315 320 309 295Nepal 165 130 149 150Pakistan 18 19 19 19Philippines 150 142 153 153Thailand 163 162 164 163Viet Nam 232 244 250 251

Brazil 62 49 59 55

Côte d'Ivoire 81 94 101 98Madagascar 149 135 147 146Nigeria 35 30 36 42

Saudi Arabia 38 43 59 60

United States 10 13 14 14

World 87 86 86 85Source: FAOSTAT 2004

Production Methods 2

Most of the land planted to rice—about 55%—is irrigated and grown in lowland paddies. Irrigated lowlands produce some 75% of all the world’s rice. Green Revolution improvements—new varieties, use of agrochemicals, improved irrigation systems—dominate irrigated rice production. Because of this technology, the average yields for irrigated lowland rice have risen to 5.5 metric tons per hectare (Khush 2000). Like irrigated rice, the non-irrigated form of lowland rice is grown in paddies, but it depends on rainfall. Yields for this form of cultivation vary from 2 to 2.5 metric tons per hectare. About 25% of the world’s rice is cultivated this way. Upland rice is also rainfed, and there is no standing water in the rice fields. Pesticides, fertilizers, and improved seed varieties may all be used in the production of upland rice, but annual variations in rainfall affect production sufficiently to limit investments in other inputs. Yields average only 1 to 1.5 metric tons per hectare. About 12% of all rice land is cultivated as upland rice (Khush 2000).

Social and Environmental Impacts 3

The Green Revolution in rice successfully solved the problems of feeding a rapidly growing world population over the last decades. Improved rice varieties and technologies dramatically increased potential yields and, with irrigation and other inputs such as fertilizer, it is now possible to produce up to 3 crops per year. Most of the major rice-producing countries became self-sufficient. Moreover, the cost of production fell, which led to a decline in prices that has benefited the urban poor and landless rural workers. In addition, higher labor requirements have benefited landless workers. Increased employment for rice production also has a multiplier effect, leading to increased overall employment in rural areas. Despite the major increases in rice production, there are a few reasons for caution. Rising costs of fertilizers, pesticides, and labor could make these technologies less viable. More importantly, there are fundamental questions regarding the sustainability of modern rice production technology.

2 This section is drawn directly from Clay (2003).3 This section is drawn directly from Clay (2003).

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Rice has major environmental impacts, most notably the large-scale diversion and consumption of water, but also soil degradation, loss of biodiversity, and pesticide contamination. Many of the environmental problems from rice production result specifically from the Green Revolution rice production technology. This technology has caused significant reductions in biodiversity within rice fields, particularly for paddy-grown rice. It also has increased use of fertilizers and pesticides, which has increased pollution of streams, rivers, and groundwater systems through runoff from fields, and has increased human exposure to pesticides. Rice production also generates more greenhouse gases than any other major agricultural crop.

Government Interventions

Both developed and developing countries intervene heavily in rice production and rice markets, often at a high cost to the government, consumers, and/or producers. Differences across countries in the nature of the interventions reflect the state of economic development and competitiveness in rice production. Throughout Asia, rice is considered a strategic food crop. For many years, developing countries have pursued policies to ensure domestic food supplies and to provide low cost food for urban areas. These polices serve several purposes including limiting use of valuable foreign exchange for foodstuffs, indirectly subsidizing industrialization, and preventing urban social unrest. At the same time, rice farming in these countries is an important source of employment and income for the rural poor. Government participation in markets (through purchases, stockpiling and other means) and limits on imports have ensured small farmers a livelihood regardless of international prices. These policies, of course, are not unique to the rice sector, though perhaps they are more pronounced in the rice sector than in many other markets.

Developing countries in South and Southeast Asia have maintained domestic rice prices well below international prices (Gulati and Narayanan 2002), effectively taxing producers through a variety of controls. These have included price support systems (with the price set below the international price), public procurement, and government stocking for foodstocks or market interventions. Controls on private-sector stocks, levies on millers, and movement restrictions have been important too. Even countries that are successful exporters, such as Thailand and India, have limited exports to ensure domestic supplies. To maintain low domestic prices, exports have been strictly controlled through quotas, use of state trading companies, export taxes, and import tariffs (Gulati and Narayanan 2002). This has, in effect, taxed producers and subsidized consumers. Production is generally supported by subsidies, primarily subsidized credit for purchase of inputs, and free or below-cost water. Fertilizer, however, is often taxed (Clay 2003).

In contrast, wealthy rice importers (Japan, Korea, the EU) have protected their rice sectors using bans, high tariffs, and state trading enterprises. At the same time, they have supported their producers with market price interventions and direct payments (Gulati and Narayanan 2002). Other wealthy countries, notably the United States, use market interventions and direct payments along with export subsidies and food aid to support high prices for domestic producers.

Domestic and border controls have affected not only the amount of rice traded, but also the type and quantity of rice produced in various countries. The relatively high barriers to trade in medium- and short-grained rice have meant that very few exporting countries produce this type of rice. The global trade-weighted average rice tariffs in 2000 for medium- and short-grain rice markets were 217%, compared to just 21% for long-grain markets (Wailes 2004). Tariff escalation is also common, especially in the EU and Central and South America, in order to protect rice-milling operations (Wailes 2004).

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Table 4: OECD Producer and Consumer Support Estimates: RiceProducer Support Estimate Consumer Support Estimate

1986-88 2000-02   1986-88 2000-02EU USD million 440 247   USD million (421) (110) Eur million 395 269   Eur million (380) (120)

Percentage PSE 57 31   Percentage CSE (58) (17)Producer NPC 2.53 1.24   Consumer NPC 2.43 1.23Producer NAC 2.34 1.49   Consumer NAC 2.43 1.23

Japan USD million 19,968 16,587   USD million (17,476) (15,441)Eur million 18,196 18,047   Eur million (15,863) (16,807)Percentage PSE 84 86   Percentage CSE (82) (85)Producer NPC 5.81 6.89   Consumer NPC 5.61 6.54Producer NAC 6.20 7.19   Consumer NAC 5.50 6.54

Korea USD million 5,677 7,218   USD million (5,543) (6,710)Eur million 5,104 7,853   Eur million (4,999) (7,295)Percentage PSE 82 82   Percentage CSE (82) (81)Producer NPC 5.59 5.35   Consumer NPC 5.59 5.35Producer NAC 5.62 5.57   Consumer NAC 5.58 5.33

US USD million 868 924   USD million 60 110 Eur million 799 1006   Eur million 53 120

Percentage PSE 52 50   Percentage CSE 15 26Producer NPC 1.45 1.77   Consumer NPC 1.01 1.00Producer NAC 2.21 2.01   Consumer NAC 0.87 0.80

OECD USD million 26,933 25,002   USD million (23,314) (22,161)Eur million 24,477 27,202   Eur million (21,127) (21,774)Percentage PSE 81 81   Percentage CSE (79) (80)Producer NPC 4.91 4.98   Consumer NPC 4.96 4.96Producer NAC 5.22 5.24   Consumer NAC 4.89 4.94

Notes: NPC; Nominal Protection Coefficient. NAC: Nominal Assistance Coefficient.EU-12 for 1986--94, EU-15 from 1995, EU includes ex-GDR from 1990.

Source: OECD, PSE/CSE database 2003.

Steps Toward Liberalization

Liberalization by both importing and exporting countries has been erratic, but with more steps forward than backward. Measures include unilateral reductions in protection and intervention, many driven by structural adjustment programs, as well as bilateral and multilateral trade agreements. These steps have fostered some major changes in rice production and markets, most notably the expansion of trade described above. For example, market-orientation has resulted in a dramatic expansion of rice production in Vietnam, so that it has become the world’s second largest exporter (see box below). In China, market-orientation has induced a shift towards production of higher quality rice, and has promoted a shift into more labor-intensive products. Japan has allowed increased imports, expanding the international market, and the US has decoupled some payments to rice farmers from production. However, the US and Japan have made little change in effective protection. Reflecting liberalization at a global level, government-to-government contracts fell from 19% of world rice trade in 1980 to just 7% in the late 1990s (Slayton 1999). Nevertheless government entities still play critical roles in importing, exporting, and stockpiling rice. Even where most exports and imports are handled by private entities, governments often control quotas and prices.

Exporting countries that have liberalized have faced several problems. First was the price decline that accelerated in 1997 as a result of the East Asian financial crisis and economic problems in Latin America, followed by bumper harvests in 1998 and the entry of China as a major exporter (Childs 2001, Nielsen 2002, Wailes et al 2000). Second were continuing exports from the US supported by counter-cyclical policies. The result was that Asia’s exporters faced low demand and low prices. Vietnam, Thailand, and India all turned to some kind of subsidies for rice exports (Gulati and Narayanan 2002).

While the inclusion of agriculture in the Uruguay Round is widely touted as a major step toward market liberalization, it is generally agreed that the actual market impacts of the agreement have been minimal for rice (Sumner and Lee 2000). This is due both to deliberate efforts to avoid market liberalization (such as high tariff binding) and to a very real reluctance on the part of developed countries to make the concessions

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expected by the developing countries. The continued protection of developed country markets and subsidies to developed country exports has meant that developing country producers have borne much of the burden of falling international prices. Given the regional concentration of rice production and consumption in Asia, APEC may prove to be a stronger force for agricultural liberalization than the WTO (Bale 2000). The ASEAN Free Trade Agreement (AFTA) commits the members to lifting all quantitative restrictions on the rice trade by 2010 (Bale 2000), and APEC has set a goal of regional free trade by 2020.

Liberalization is only one factor that has been reshaping rice markets. In addition to increased opportunities for trade, there have been important changes in demand. Global rice consumption increased 2.4% per year over the last three decades along with population growth. In recent years, however, the growth in global consumption has slowed as per capita rice consumption has leveled off and even declined in wealthier countries with slowing population growth (Hossain and Narciso 2004). As per capita income rises in poor countries, especially in a context of urbanization, rice consumption increases. Not only does overall demand for rice increase, but also demand shifts toward higher quality rice. Beyond a certain point in economic growth, however, rice becomes an inferior good and demand stagnates or even falls as consumption of protein, vegetables, and fruits increases. These changes in demand accompanying economic growth have begun to affect rice markets, reducing demand growth in wealthier Asian countries and increasing demand in Africa and South America.

Box: Outcomes of Trade Liberalization and Market Growth in Vietnam4

One of the most complete examples in the literature on rice trade liberalization is that of Vietnam. Vietnam has transformed its agricultural economy from centrally planned to market-oriented, with dramatic results in production of rice. With about 80% of Vietnam’s population living in rural areas, rice is produced throughout the country. Rice accounts for more than 60% of caloric intake in every region of the country (Minot and Goletti 2000). Farms are small, ranging from an average of 0.25 ha in the Red River Delta to 1.1 ha in the Mekong River Delta, the rice bowl of Vietnam. Vietnamese farmers responded strongly to liberalization, with a rise in production of 80% between 1990 and 2003, and an increase in yields of 46% over the same period (FAOSTAT 2004). This rapid growth in part reflects the late introduction of Green Revolution technologies into Vietnam; nevertheless, rice yields in Vietnam exceed the global average. There is little scope for further expansion or increase in yields. Given Vietnam’s growing population, exports can be expected to fall in the future (Hossain and Narciso 2004). Moreover, high yields are in part dependent on labor-intensive methods that may not be sustainable in the face of rising wage rates (Minot and Goletti 2000).

Liberalization, and the increase in rice exports in particular, has increased agricultural income and GDP and has reduced poverty in Vietnam. Because so much of Vietnam’s large rural population produces rice, the positive impacts of increased exports were widely dispersed. Tuyen (2003) reports that 70% of Vietnamese households grow rice, including 95% of rural households. About half of those produce a surplus for sale. Since rice is the main source of income for rural households, the benefits of increased prices and sales for rural areas is clear5. Poverty is much less common in urban areas, making the urban areas better prepared to cope with the rise in rice prices. Overall, poverty has decreased measurably in the country following liberalization (Minot and Gulotti 2000).

While the overall impacts of liberalization in the rice sector have been positive, there have been some negative environmental impacts in the use of land, agrochemicals, and modern varieties. Since 1989, the land area planted to rice has increased by about 2.4% per year (Tuyen 2003). Increased yields are the result of increasing the number of crops per year, improved irrigation, and heavy fertilizer and pesticide use, as well as the use of modern rice varieties. Problems include soil degradation, water pollution, loss of habitat and wetlands in one of the countries with the greatest biodiversity in the world; and loss of traditional rice varieties. Following liberalization, fertilizer use rose from about 57 kg/ha in 1983 to 280 kg/ha in recent years (Tuyen 2003). Pesticide use has also increased. This agrochemical use is causing some human health problems. Interestingly at least one study (Tuyen 2003) has shown that use of agrochemicals exceeds the economic optimum. Nevertheless a further fall in fertilizer prices, which would accompany additional liberalization, would probably increase fertilizer use.

4 This section is drawn largely from Tuyen (2003) and Minot and Goletti (2000).5 Liberalization of domestic trade reduced domestic price differences between the rice bowl of the south and the poorer north.

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What to Expect with Liberalization

Complete liberalization of rice markets would spark further changes in production, trade, and consumption patterns, most probably accelerating current market trends. A great variety of factors need to be considered to predict the likely shifts in production under extensive liberalization. These factors are, of course, already shaping rice markets but their impact is obscured to some extent by government interventions. This section will begin with a review of the economic outcomes, followed by a summary of the environmental, technical, and socioeconomic variables that will shape those outcomes. Going beyond these results to determine the environmental impacts of the predicted changes entails considering a great variety of environmental, economic, and socio-political variables including: demand for different varieties of rice and their adaptation to different growing conditions; availability of water and infrastructure for irrigation; changing demands with rising incomes; continuing concerns about food security and poverty; and the role of small and subsistence farmers.

Production, Consumption, and Trade Predictions

Economic theory tells us that, with global liberalization of markets, prices will fall in countries that are protecting the rice sector, and rise in countries that are “dis-protecting” or taxing the sector. The lowest-cost producers will benefit from liberalization, alongside consumers in countries that have protected the sector. Several economic models predict a rise in international prices of as much as 33% in the case of liberalization of rice markets (Wailes 2004b), which would promote investments and increased production in competitive countries that are currently under-producing. Economic models, including the Arkansas Global Rice Model (AGRM) and IFPRI’s IMPACT models6, have been used to estimate the impact of various liberalization measures. Some of these results are discussed here.

Wailes (2004a) and Gulati and Naryanan (2002) look at rice liberalization using the AGRM. Wailes estimates that global policy reform7—including the removal of import tariffs, export subsidies, and domestic support—would increase total rice trade by 10- 15%. Prices paid to exporters would increase by 25-35%, while prices paid by importers would fall by 10-40% depending on the type of rice. Policy reform would have the greatest impact on medium-grain rice markets, since they are by far the most protected. Japan would be the major beneficiary of reforms through lower prices. Exporters, including the US, Australia, and the EU, would also benefit. Interestingly, while US and EU policies are often accused of reducing opportunities for developing country exports, Wailes (2004a) concludes that, in the context of global policy liberalization, reform of domestic support in the US and EU will reduce their exports by only 5% in the first years, and have little long-term impact. The major net importers continue to be Indonesia, the Philippines, Malaysia, the Middle East, South America, and the EU (Gulati and Narayanan 2002).

Liberalization would open up new markets for medium- and short-grain imports, particularly in Japan, South Korea, and Taiwan. Since currently traded varieties are adapted to temperate zones, in the short run new demand would be met by exports from temperate zone countries. China would probably supply this rice since it benefits from low production costs and low transport costs to these countries, in comparison with the other major producers, namely the US, Australia, and Egypt, and (Wailes 2004). Argentina and Uruguay could probably adapt these varieties quickly. However, for more tropical countries to become competitive in the medium- and short-grain market would probably take a decade or more (Wailes 2004).

The predicted expansion of the international rice market may not have a stabilizing impact on prices, since it will remain quite thin, rising from about 6.5% of production to 8.4% (Wailes 2004)8. This combined with the fact that global rice stocks have declined over the last three years means that there is little possibility of buffering price shocks. Low-income rice-importing countries will become more vulnerable to political and food security problems if rice prices rise (Wailes 2004), problems which inevitably have environmental consequences.6 The Arkansas Global Rice Model (AGRM) is a non-spatial dynamic econometric model of the global rice economy. IFPRI’s IMPACT model considers 16 commodities (Rosegrant et al. 2001). The two yield different results in some instances (Gulati and Narayanan 2002).7 Wailes (2004a) uses the AGRM and RICEFLOW, a static spatial equilibrium model. The two models yield similar results.8 Compare this with 18.1% for wheat and 11.6% for course grains, currently traded (Hossain and Narciso 2004).

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IFPRI’s IMPACT model allows us to look at an across-the-board liberalization of 16 commonly trade commodities. Recent projections (Hossain and Narciso 2004) using the IMPACT model predict an average increase in rice consumption of only 1.1% per year over the next three decades; this is a considerable slow-down from the average growth of 2.4% over the last three decades. Demand is expected to increase by only 0.4% annually in East Asia, but more substantially in the low-income countries of South Asia (1.6%) and Sub-Saharan Africa (2.0%) (Hossain and Narciso 2004). However, even meeting this slowed growth in demand will require an increase of about 200 million tons over current production over the next three decades, an annual increase of 1.1% (Hossain and Narciso 2004). Knowing where this expansion in production is likely to occur will be a key tool for predicting environmental impacts of trade liberalization.

Environmental and Technical Constraints

Prices will obviously be a key determinant of production decisions; but environmental limitations, technological issues, and social constraints will all play a role. Growth in global rice production is slowing. Growth averaged 2.7% from 1968 to 1990, but only 1.6% per year from 1990 to 2002. While most growth in recent decades has come from improvements in yields, yield growth has slowed even faster than production growth, falling from 2.2% to 1.1% per year. Production growth has failed to keep pace with population growth in several Asian countries that rely predominately on irrigated systems (Hossain and Narciso 2004). The main cause of production decline appears to be environmental degradation, including increased populations of pests and diseases as well as depletion of soil micronutrients and changes in soil chemistry due to intensive cropping, low-quality irrigation water, and dependence of Green Revolution varieties on pesticides (Clay 2003).

An increase in production can come from improved yields or from an expansion of the area under cultivation. Irrigated rice systems, which now account for 75% of production, have the highest yields and are approaching the potential attainable yields of modern varieties (Hossain 1997). Rice yields for irrigated systems have already stagnated in Japan, South Korea, China, and Taiwan. Maintaining current high yields will require more sustainable production techniques, including integrated nutrient and pest management and better soil and water management. This may prove difficult given that some of the best rice lands are being lost, water is being divested to non-farm uses, and labor is moving to cities (Khush 2000). Some technologies are in the pipeline that may increase yields in irrigated systems, though a new “super rice” has not yet been adapted to particular local growing conditions, and fears of genetically modified crops may slow diffusion of these technologies (Hossain and Narciso 2004).

If the price is right, a few Asian countries have potential for expanding the area in rice cultivation, namely Thailand, Myanmar, Cambodia, and several states in eastern India (Hossain and Narciso 2004). Other Asian countries are facing serious population pressures on the land, and have little or no room for expansion. In fact, rice lands are being lost to urbanization and more profitable crops. There is also room for expansion in the river valleys of southern and western Africa, and in Brazil, Argentina, Uruguay, and Guyana, but relatively high production costs in those countries will probably limit expansion (Hossain and Narciso 2004).

Although water is not generally regarded as a constraining factor in humid Asia, it is increasingly becoming a scarce commodity (Fredreriksen et al. 1993). Agriculture accounts for 86% of total annual water withdrawals in Asia (Hossain and Narciso 2004). Water has been treated as an abundant resource in Asia, but per capita availability of water has fallen by 40-60% in most Asian countries from 1955 to 1990 (Gershon 1994). As water resources are increasingly diverted away from agriculture, existing irrigation systems (including both the physical system and the institutional aspects, such as pricing) may become less viable (Hossain and Narciso 2004). Most of the “easy” options for irrigation have already been exploited. Many Asian countries are already seeing a decline in development and maintenance of large-scale irrigation projects, and potential for further conversion of rainfed rice systems to irrigation is limited (Rosegrant and Svendsen 1992). Environmental concerns about the impacts of these irrigation systems—water logging, salinity, effects on fish production, and quality of groundwater—are growing. In some places, reduced investment in irrigation systems has been compensated by private sector investment in shallow tube wells. This approach, however, “raises environmental concerns of depleting groundwater…and contamination of drinking water with harmful chemicals” (Hossain and Narciso 2004). Likewise in Australia, the US, and, to a lesser extent, China, production capacity for medium-grain rice is increasingly constrained by lack of irrigation water (Wailes 2004).

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In contrast to irrigated rice systems, there is still great potential for increasing yields in rainfed systems, which are predominant in the low-income countries of South and Southeast Asia, West Africa, and Central America (IRRI 1995). Traditional rice varieties, which withstand climatic and soil-related stresses well, have low yields. Incorporation of these traits into high-yielding cultivars could greatly increase output but, to date, scientists have had little success in this endeavor9.

Social and Economic Constraints

Traditional rice farming is highly labor intensive. In many Asian countries, as noted, production is on small family plots. As the economies of these countries grow, wage rates are rising and the relative returns to farming are falling. Technological improvements have increased the competitiveness of farming, but farmers’ incomes still do not match urban wages. Protection and subsidies have maintained production levels in the less competitive countries. But the removal of government support for the sector may lead to major transfers of labor out of farming to non-farm rural activities and to urban activities. This will mean a fall in the area devoted to rice cultivation (Hossain and Narciso 2004). Couple this with the fact that the most successful exporters, such as Thailand, have larger size farms; this suggests that the future will see the wealthier countries either withdrawing from rice farming and increasing imports and/or allowing land accumulation to facilitate mechanization. Hossain and Narciso (2004) conclude that it is unlikely that middle- and high-income Asian countries will produce an exportable surplus of rice under greater liberalization.

Social and Environmental Impacts

Many countries have begun to liberalize trade, including rice markets, under the aegis of structural adjustment programs, international trade agreements, and other measures. Studies to date confirm that there are substantial economic benefits to liberalization. However, the social and environmental outcomes of this liberalization have not been extensively examined. Only a few studies relevant to the rice sector give an inkling of the range of outcomes that liberalization can entail for poverty and the environment.

Gulati and Narayanan (2002) predict that liberalization of the rice trade will increase exports by the poorer Asian countries, notably Thailand, Vietnam, and India, with beneficial effects for poverty. Initial price increases for producers and second-round effects including increased wages, employment and investment in these countries will contribute to poverty alleviation. At the same time, poor importing countries will benefit from increased short-term food security.

The immediate impact of rice trade liberalization on poverty will be through prices. Producers in poor countries will benefit from a price increase. While consumers will face higher prices, given the large rural populations in many poor Asian countries and the high percentage of that population involved in rice production, the poverty alleviation benefits will be widespread. Studies in Vietnam (Minot and Golleti 2000) and Thailand (Deaton 1989) have confirmed this positive impact. Both producers and net buyers in these countries can benefit substantially from second-round (or lagged) effects on agricultural wages and employment as production is increased. This link was confirmed in Thailand (Warr 2001), Bangledesh (Rashid 2002, Ravallion 1990), and India (Gulati and Narayanan 2002). Rising prices also sparked an increase in private investment in the agricultural sector, compensating for the fall in public investment. Strong linkages between the farm and nonfarm sectors have also been found in most countries, creating a more dynamic rural economy as rice prices rise (Gulati and Narayanan 2002).

Poor importing countries also will see some benefits from liberalization, namely through an increase in food security. Access to the international rice market would allow these countries to increase domestic supplies and stabilize prices. Dorosh (2001) reports that trade liberalization measures for rice in both Bangladesh and India proved crucial when Bangladesh faced two consecutive years of poor harvests (1997-1998). Private traders were able to import rice from India to address the short-term shortages.

9 The West Africa Rice Development Association (WARDA) has developed a cross between Asian and African varieties, the “New Rice for Africa” (NERICA), which shows substantial promise for increasing production in Africa (Hossain and Narciso 2004).

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A critical fact to keep in mind when evaluating the role of liberalization is that many rice producers are largely outside the market—domestic or international. Subsistence rice production is more likely to be affected by government policies on inputs and land tenure than by export possibilities. In these cases, local transaction costs, agricultural extension, and local markets for rice will be limiting factors. The contribution of rice trade liberalization to poverty alleviation will be effective, according to Gulati and Narayanan (2002), only if it is accompanied by an end to distortionary policies in the developed countries, and if there are appropriate domestic (or “behind-the border”) reforms in the developing countries. Among these they name:

…reducing transaction costs for farmers, ensuring access to risk management institutions and safety nets, improving access to food, and combating adverse environmental conditions [and] …In the long run….initiatives to enhance agricultural productivity and rural economic growth (Gulati and Narayanan 2002, iii).

There are major shifts in income implied by liberalization, with the overall gains small in comparison with the structural shifts. While Wailes (2004a) estimates that the net welfare gain of global rice trade liberalization for importing countries is US$ 5.4 billion, this reflects a much bigger redistribution of benefits between producers and consumers. Consumers will pay lower prices, but rice producers will lose revenue and perhaps become uncompetitive. Consumers in importing countries are expected to gain US$ 32.8 billion, while producers will lose US$ 27.2 billion (Wailes 2004). The redistribution will be in the opposite direction in exporting countries, as consumers face higher prices at home and exporters enjoy greater export opportunities. Wailes estimates that producers in exporting countries will gain US$ 70.2 billion and consumers lose US$ 68.8 billion, for a net gain of US$ 5.4 billion. Such large redistribution will often have heavy political and social costs, with associated environmental damage, even when the long-run results may be socially and environmentally desirable.

Important to note is the fact that, although there will be an initial one-off increase in price following liberalization, there is no reason to expect the long-term secular decline in rice prices to end. In the short term therefore, attention needs to be given to the problems of the urban and landless poor, who will be facing higher food prices. In the longer run the role of the subsistence farmer producing a small surplus, who will be facing a long-term decline in prices must be considered. For example, China has experienced a shift into more labor-intensive crops; countries with a smaller rural labor force may see a shift away from labor-intensive rice cultivation techniques and towards land consolidation. Both environmental and social changes will stem from these shifts.

Some Preliminary Conclusions

Rice will remain a critical food crop for food security and poverty alleviation throughout Asia, and to a lesser extent in Africa and South America. Trade liberalization is unlikely to lead to dramatic changes in current consumption, price, or production trends for developing countries. However, changes in domestic and trade policies that (re)allocate the benefits of rice production seem more likely to cause changes with substantial environmental and socioeconomic impacts. The enduring problems that these policies sought to address in developing countries—including food security, price volatility, scarcity of foreign exchange, and urban poverty—have not all been solved by economic growth, nor will liberalization of the rice sector necessarily solve these problems.

Although growth in rice consumption is slowing, a gradual increase in production is still needed to keep up with population growth and increased demand created by economic growth (Hossain and Narciso 2004). The heavy concentration of the export market is not expected to change substantially even with complete liberalization of markets. Increases in production are expected to come from just a few countries; many of the primary producers may not increase production for export. Area expansion and productivity growth are already running up against some technical and environmental limitations. In many producing countries, there simply is not more land or water available for rice production, and resources are needed for other activities. Techniques used to increase productivity may bring their own environmental problems. As with many crops, the Green Revolution technologies that ensured increases in rice productivity are generating their own range of environmental problems—contamination by fertilizers and pesticides, loss of biodiversity, disappearance of traditional varieties, and falling resistance to disease.

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The primary direct effect of trade liberalization will be changes in prices that will shape production choices—location of production, investment in technologies, irrigation systems, use of labor, and investments in sustainability. These will determine the environmental impact of the expanded production. Falling prices in some countries may lead to the withdrawal of agricultural land, with positive environmental impacts, or may lead to lower investments in sustainability. Rising prices may lead to expansion of the area in rice, with negative environmental impacts, or may lead to development of hardier, more productive varieties with positive impacts. Some better management techniques already exist, such as IPM, that have potential to reduce the impact of rice production. Obviously incorporation of new areas into agricultural production should be avoided where possible, as should the loss of productive rice lands to urbanization. Overall environmental impacts will depend on land reallocation and continued subsidies to inputs such as water and irrigation investments.

The indirect impacts are only hinted at by most economic models, and there have been too few rigorous political-economy studies to make detailed predictions of the social or environmental impact of liberalization. In fact, one conclusion to be drawn from these studies is that each case is surprisingly idiosyncratic. The following points may improve our understanding:

Rice markets will remain very thin and segmented, with price volatility an important result. The withdrawal of governments from markets and trade liberalization in a number of developing countries, as well as some reforms in the developed world, have led to an expansion of the market and reduced some problems of price volatility and food shortages. Nevertheless, the predicted expansion in the market following a broader liberalization is probably not sufficient to solve the problems of price volatility. With the bulk of exports still originating in just a few countries, weather or financial problems could cause sharp changes in price. Linked with this is the problem of food security. Although liberalization of imports can clearly facilitate rapid response to food shortages, it does not address the long-term concern of many countries with ensuring food supplies or reducing use of foreign exchange on food purchases. Several authors have pointed to the need to address safety-net issues, through government or market mechanisms such as futures, for rice-dependent countries (Bale 2000, Gulati and Narayanan 2002). Failure to address these issues could lead to social and economic problems with serious environmental ramifications.

Rice remains a strategic crop in many Asian countries both as a cheap food source and as a source of income and employment. Even in wealthier countries, most notably Japan, the rice sector is endowed with substantial political importance. A large share of rice is still produced by small (often very small) family farms in Asia. Liberalization will have important ramifications in terms of the redistribution of the benefits from rice production within countries. The social upheaval associated with major redistributions of benefits should not be underestimated. Adjustment would probably need to focus on the sustainability of production methods and protection of habitat.

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Bibliography

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Gershon, F. 1994. “Increasing Competition for Land and Water Resources: A Global Perspective.” Paper presented at the workshop on “Social Science Methods in Agricultural Systems: Coping with Increasing Resource Competition in Asia.” Chiang Mai. Thailand, Nov. 2-4. Cited in Hossain and Narciso (2004).

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Hossain, Mahabub and Josephine Narciso. 2004. “Long-Term Prospects for the Global Rice Economy.” Paper presented at the FAO Rice Conference, Rome 12-13 Feb 2004. www.fao.org/rice2004/

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IRRI (International Rice Research Institute). 1995. World Rice Statistics, 1993-94 ed. Los Baños, Philippines: IRRI. Cited in Hossain and Narciso (2004).

Khush, G.S. 2000. “Rice: How Much It takes to Feed Half the World’s Population.” Paper presented at the 2000 meeting of the American Association for the Advancement of Science (AAAS). San Francisco, CA.

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Minot, Nicholas and Francesco Goletti. 2000. “Rice Market Liberalization and Poverty in Viet Nam.” Research Report 114.Washington, DC: IFPRI.

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Ravallion, M. 1990. “Rural Welfare Effects of Food Price Changes Under Induced Wage Responses: Theory and Evidence from Bangledesh,” Oxford Economic Papers 42: 574-585. Cited in Gulati and Narayanan (2002).

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Rosegrant, Mark, et al. 2002. World Water and Food to 2025: Dealing with Scarcity. Washington: IFPRI.

Rosegrant, Mark and M. Svendsen. 1992. “Irrigation Investment and Management in Asia.” Paper presented in Planning Workshop on Projections and Policy Implications of Medium- and Long-Term Rice Supply and Demand. Los Baños, Philippines: IRRI. Cited in Hossain and Narciso (2004).

Slayton, T. 1999. “The Outlook for the Rice Trade in the New Millenium.” Paper presented at the World Rice Commerce Committee. Discussed by Dawe (2004).

Sumner, Daniel A. and Hyunok Lee. 2000. “Assessing the Effects of the WTO Agreement on Rice Markets: What Can We Learn from the First Five Years?” American Journal of Agricultural Economics 82 no.3 (Aug.): 709-717.

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Web Sites

www.fao.org

www.fao.org/rice 2004/

www.fas.usda.gov

www.gtap.agecon.purdue.edu

www.ifpri.org

www.irri.org

www.panda.org/livingwaters/

www.uark.edu/campus-resources/ricersch

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SUGAR

Introduction

Sugar is one of the principal traded tropical commodities, and has been an important source of foreign exchange and employment in many developing countries. Sugarcane plantations and processing have also caused extensive, irreversible environmental damage. Sugar is heavily traded today, but sugar markets are largely shaped by developed country trade policies. A number of preferential trading arrangements allocate sugar exports among tropical countries, and high levels of protection in the US, Europe, and Japan have depressed prices and limited sugar trade. These high levels of protection have supported development of the sugar beet and high fructose corn syrup (HFCS) industries that compete directly with sugarcane. Global sugar markets have contracted in value terms in the last few decades because of this protectionism and the related growth of substitute sweeteners. Developing countries also intervene heavily in domestic sugar markets for food security reasons and to maintain foreign exchange earnings, protecting producers and export markets at the cost of higher consumer prices.

The Uruguay Round has done little to liberalize sugar markets to date, but some further liberalization is expected to occur as a result of US and EU commitments under this and other multilateral agreements. Many developing countries have already moved to increase the role of the market, although important subsidies and trade barriers remain in place. Politically, liberalization will be difficult in both the developing and the developed countries, given the long history of protectionism that has structured the market. Full liberalization could be expected to lead to a global rise in sugar prices by about 40%, though a price decline would occur in protected developed and developing countries. Cane sugar production would increase to meet export opportunities. Markets for competing sweeteners, largely produced in the temperate countries, would contract. While this shift of sugar production back to tropical countries may prove to be a boon for foreign exchange earnings and employment, the environmental toll needs to be factored in and the developmental benefits need to be realistically examined.

This paper briefly reviews production, consumption, and trade patterns and outlines current patterns of government intervention in the sugar sector, along with steps already taken toward liberalization. It then address the probable impacts of widespread liberalization in order to improve our understanding of the opportunities and challenges that will arise with liberalization of this highly distorted market.

Production, Consumption, and Trade Patterns

Sugar is consumed all around the world, accounting for about 7% of the world’s caloric supplies (Mitchell 2004). Sugar is produced in over 130 countries, of which 105 grow sugarcane, and 55 grow sugar beets (FAO 2003). Global sugar production reached almost 143 million tones in 2002, of which about 72% was from cane (FAO 1999). However, a few large countries produce and consume most of the world’s sugar. The principal producers of sugar, from both cane and beets, are: India (16%); EU (13%); US (12%); Brazil (9%); China (5%); Cuba, Mexico, Australia, and Thailand (each 3-4%)10. Since sugarcane is grown primarily in tropical areas and sugar beets are grown in temperate areas, only a few countries, including the US, produce significant quantities of both. This paper focuses on sugarcane, and will discuss sugar beets and other sweeteners only insofar as they are directly relevant to cane production. The principal producers of sugarcane are: Brazil (29%); India (21%); China (7%); Thailand (5%); Pakistan, the Caribbean, and Mexico (each about 3-4%) (FAO 2004).

Overall, world sugar consumption is increasing, reflecting rising incomes and changing food consumption patterns. Global consumption rose by 1.9% annually in the 1990s, and developing country consumption by 2.6% (FAOSTAT). Changing diets in the developed countries, however, have led to an annual decrease in consumption of 0.1% annually in the 1990s (FAOSTAT). The principal consumers are India, with 15% of

10 These figures are for 1994-1998 (Larson and Borrell 2001 citing FAO data).

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world consumption, the EU with 10%, and Brazil with 7%. Developing countries now account for over 60% of consumption (FAO 2003). Russia is the principal importer, with 14% of world net imports, followed at less than 2% each by Indonesia, Japan, the US, Korea, Canada, Iran, and Malaysia (Mitchell 2004, based on USDA data).

The principal exporters of sugar (including both raw and refined) are Brazil, the EU, Australia, Thailand, Cuba, Guatemala, India, South Africa, Turkey, and Columbia (FAO 2003). Of these, Brazil now accounts for about 25% of world net exports; the EU, Australia, Thailand, and Cuba each export 8-10% of world net exports (Mitchell 2004). Perhaps of more importance in terms of sustainable development is the fact that a number of low-income countries are heavily dependent on sugar exports. These include Reunion, which derived 63% of its export earnings from sugar from 1995-2000; Cuba at 41%; St. Kitts and Nevis at 37%, Fiji at 25%; Belize at 25%; Guyana at 24%; Mauritius at 21%; Swaziland at 17%; the Dominican Republic at 14%; Guadeloupe at 12%; and Barbados at 11% (Mitchell 2004).

Although sugar markets are heavily distorted, about 28% of world production is traded (Mitchell 2004)n. Liquid financial markets—forward, future, and derivatives—facilitate that trade (Larson and Borrell 2001). However, the market has been characterized by oversupply and volatile and falling prices, as well as a contraction of trade in recent decades (FAO 2003). Policies in the US, EU, and Japan have dramatically changed the shape of the international market (see Government Intervention below). In the 1970s, these three countries’ imports accounted for half the world’s exports; now these countries are, on balance, self-sufficient (Mitchell 2004). The loss of this market, along with the addition of EU exports to the world market, have depressed prices and generated a surplus. Prices have fallen by 46% since 1961 (FAO 2002). Macroeconomic problems in Russia and Asia in recent years have also contributed to falling prices and oversupply of world markets.

Table 1: Sugar Production and Trade Production, Trade Balance,

Sugar Cane '000 Mt Total (Raw Equiv.), '000 Mt1990 1995 2000 2003   1990 1995 2000 2002

Australia 24,370 34,943 38,165 36,012   2,842 4,024 4,168 122 China 63,451 70,279 69,299 93,900   (517) (2,546) (557) (1,202)India 225,569 275,540 299,230 290,000   14 225 318 1,745 Indonesia 27,980 28,999 23,900 25,600   (303) (573) (1,652) (1,028)Japan 1,983 1,622 1,395 1,400   (1,696) (1,744) (1,563) (1,475)Korea, Republic of   (778) (1,059) (1,133) (1,195)Malaysia 1,300 1,601 1,600 1,600   (586) (932) (901) (1,053)Pakistan 35,494 47,168 46,333 52,056   (226) 338 (845) (77)Thailand 33,561 54,323 49,563 74,072   2,426 3,843 4,241 3,335

 Brazil 262,674 303,699 327,705 386,232   1,591 6,336 6,692 13,852 Caribbean* 96,014 45,467 47,241 46,418   7,715 2,806 3,402 2,556 Cuba 81,800 33,600 36,400 34,700   7,172 2,600 3,237 2,574 Colombia 27,791 32,000 32,750 36,600   423 474 1,048 1,095 Mexico 39,919 44,453 44,100 45,127   (1,919) 433 273 361

 South Africa 18,083 16,714 23,876 20,601   938 365 1,465 1,146

 Fiji 4,016 4,110 3,216 3,300   395 443 311 282 Mauritius 5,548 5,159 4,874 4,874   578 504 386 543

 EU (15) 174 105 104 104   3,325 4,232 4,956 2,664

 United States 25,524 27,938 32,762 31,178   (1,344) (1,238) (1,312) (1,290)

 Other countries 349,690 181,213 197,029 201,219  

 World 1,243,141 1,175,334 1,243,141 1,350,293  

* Carribean includes Cuba but not Central America.Source: FAOSTAT 2004

The market contraction combined with falling prices has had significant impacts. Production volumes have increased by 181% since 1961, but trade volumes have increased by only 70%. Despite this increase in the volume of exports, export values fell from US$ 9.8 billion in 1980 to US$ 6.4 billion in 2001 (FAO 2003).

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Related to this contraction is the concentration of production. The impact was severest for the low-income food-deficit countries, which saw their share in world exports fall from 42% in 1980 to 15% in 2001 (FAO 2003). High-cost producers among these countries, including many Caribbean countries11, were forced to reduce production. In 1980, the top 10 sugar producing countries accounted for 56% of production; by 2001 they accounted for 70% (FAO 2003). Notably, Brazil dramatically increased its exports during this period as a result of changing sugar policies, currency devaluation, and very low production costs.

At the same time, the dependence of many developing countries on sugar exports has declined. In the early 1980s, according to Mitchell (2004), “Ten countries received 20 per cent or more of total exports from sugar, and 9 additional countries received from 5 to 20 per cent of total export earnings from sugar.” By the late 1990s, only “12 countries received 10 per cent or more of their total export earnings from sugar…and an additional 5 received 5-10 per cent of total export earnings from sugar.” This declining dependence on sugar reflects not only falling sugar export earnings but also increases in other exports.

Production Methods 12

Sugar can be produced efficiently in tropical lowland climates with a variety of technologies, from low-input labor intensive to high-input fully mechanized technologies (Mitchell 2004). Unlike many other agricultural crops, field and processing activities are closely interdependent, since cane is highly perishable and must be processed as soon as possible after harvest to obtain the most sugar. After initial processing, raw sugar can be stored easily.

Sugarcane is grown primarily on islands and coastal areas, but also in former tropical forest areas. It requires intense sunlight and large amounts of water—at least 1,650 mm of rainfall, distributed throughout the year. Without this rainfall, sugarcane requires considerable irrigation. Because water is generally subsidized, sugar producers benefit substantially from irrigation systems (Larson and Borrell 2001). Sugarcane is mostly grown in large monocrop plantations. The first planting of cane matures in 14 to 18 months. Productivity declines after each harvest, so the useful life of a plant does not exceed four to five harvests.

Table 2: Sugarcane Area Harvested and YieldsArea Harvested, '000 Ha Yields, Kg/Ha

1990 1995 2000 2003 1990 1995 2000 2003Australia 332 365 419 423   73,403 95,734 91,085 85,135 China 1,077 1,186 1,189 1,328   58,889 59,279 58,303 70,708 India 3,439 3,870 4,220 4,300   65,592 71,199 70,913 67,442 Indonesia 345 412 366 350   81,100 70,387 65,307 73,143 Japan 33 24 23 23   60,457 67,303 60,390 60,870 Pakistan 854 1,009 1,010 1,086   41,547 46,748 45,883 47,934 Thailand 686 923 922 970   48,894 58,874 53,761 76,363

 Brazil 4,273 4,559 4,846 5,304   61,479 66,615 67,624 72,825 Caribbean* 1,782 1,535 1,278 1,294   53,879 29,622 36,951 35,867 Cuba 1,420 1,177 1,041 1,041   57,594 28,538 34,970 33,327 Colombia 318 378 430 435   87,301 84,687 83,256 84,138 Mexico 571 573 618 639   69,870 77,573 71,327 70,614

 South Africa 265 273 322 325   68,320 61,197 74,170 63,389

 Fiji 70 74 65 66   57,371 55,603 49,477 500,000 Mauritius 76 72 72 72   72,714 71,656 67,446 67,446

 United States 321 377 418 403   79,415 74,047 78,423 77,290

 Other countries 2,658 3,019 3,288 3,387  

 World 17,101 18,649 19,485 20,405   61,591 63,024 63,800 66,174

* Carribean includes Cuba but not Central America.Source: FAOSTAT 2004

Throughout the world, most of the activities associated with planting, cultivating, and harvesting sugarcane are done by hand. Fields need to be weeded during the first year and after subsequent cuttings. Nitrogen-

11 Including Cuba, Jamaica, and St. Kitts-Nevis (FAO 2003).12 This entire section is drawn directly from Clay (2003) except where noted otherwise.

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based fertilizers are applied to increase production, especially after the first year. In most parts of the world, sugar plantations are burned to eliminate the dead lower leaves of the plant and to remove snakes before harvesting by hand. Machines have been developed to do many of the tasks associated with sugarcane cultivation. However, in many areas where sugarcane is grown, labor is cheaper and more efficient than machinery. Furthermore, the most efficient machinery is too large to negotiate many of the hilly areas or the soft wet soils that are ideal for sugarcane cultivation. Mechanical harvesters are used in parts of the US and southern Brazil, but they tend to pull up much of the cane, and produce more waste than traditional harvesting.

After cutting, the cane must be transported quickly to the sugar mills, since the sugar in the stalk quickly converts to starch. At the mill the cane is crushed to yield the sugar juice that is subsequently refined into sugar. Sugar represents a mere 17% of the biomass of the sugarcane plant; the remaining 83% is discarded as “bagasse”—the generic term for everything that is left after the sugar has been extracted.

Sugar Growers and Processors

Sugar is unusual in the degree of cooperation required between growers and processors for production and revenue-sharing. Because cane is perishable and bulky to transport, producers are reliant on the nearest sugar mill. Yet despite the close links needed between field and factory, in many parts of the world, with the exception of sub-Saharan Africa, fully integrated sugar companies are rare (Larson and Borrell 2001). Instead, local monopolies and monopsonies are common, as are conflicts between producers and processors over pricing and scheduling of harvests (Larson and Borrell 2001).

Sugar processing requires large fixed investments, as well as working capital to cover the period between the harvest and eventual sales of processed sugar. Only a small proportion of all sugar is sold directly to the consumer (Clay 2003). Most sugar goes into confections, whose manufacturers want just-in-time delivery. While many will forward-contract product to ensure delivery and to lock in prices, they do not want their capital tied up in stored product (Clay 2003). For this reason, traders, wholesalers, and distributors tend to hold most of the product until required by others.

Ownership arrangements in the industry vary. In some cases a single company owns the factory and the producing lands; in others, independent growers make contractual arrangements with the mill (Mitchell 2004). The shape of these arrangements—how profits are distributed—can significantly affect the incentives for production and efficiency on the part of both growers and millers (Larson and Borrell 2001)13. While some growers have formed cooperatives and operate their own mill, state ownership of mills and even lands are still common in developing countries. Land policies are closely linked with sugar policies in the major producing countries. First, value of land depends on proximity to a sugar mill, and depends on the continued functioning of the mill and markets for its product. For this reason, governments have often intervened to rescue failing sugar mills (Larson and Borrell 2001). Second, policies on land ownership can influence the organization of the industry, “usually by limiting the scope for integrating production and processing” (Larson and Borrell 2001, 143).

Sugar production is an important source of employment in many developing countries. Mitchell (2004) makes some estimates of employment for low-cost and high-cost producers for the 1999-2000 production year. For the low-cost producers in his study, he estimates that total direct employment is 1.1 million in Brazil, 18,000 in Guyana, and 130,000 in South Africa (Mitchell 2004). This means that between 16.3 and 19.9 tons of raw sugar are produced for each employee. For the high-cost producers, total direct employment is estimated at 40,5000 in Fiji, 69,000 in Kenya, and 65,000 in Mauritius. This means that between 7.0 and 8.3 tons are produced per employee. Mitchell calculates that each 1 million tons of production in a low-cost country creates about 55,500 direct employment jobs; each 1 million tons in a high-cost country generates 128,000 direct employment jobs (Mitchell 2004). Indirect employment jobs are also created in transportation and related industries.

Wages in the sugar industry are low and, in some cases, do not even cover the calories a worker burns on the job (Clay 2003). Working conditions in both production and processing are among the most hazardous of any in agriculture. For example, in Northeast Brazil—the largest and most populous impoverished area in the 13 Larson and Borrell (2001) provide a lengthy discussion of the pros and cons of various pricing arrangements for efficiency.

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Western hemisphere and one of the longest standing sugar producing regions of the world—sugarcane workers have the lowest life expectancy of any group and their children have the highest infant mortality rates (Clay 2003).

Environmental Impacts 14

As of 2003, 20.4 million ha around the world were planted in sugarcane. This is more area than most cash crops produced in the tropics. Of this, 5.3 million ha were in Brazil and 4.3 million ha in India. Cuba, Pakistan, China, and Thailand each have about 1 million ha (FAO 2004). Despite this concentration of production, it is a number of smaller countries that have large shares of their agricultural land devoted to sugarcane. As of 1994, 22 countries devoted more than 10% of their agricultural land to sugarcane, including 7 that devoted more than half their agricultural land to cane15. For these countries, the future of sugar production is of overwhelming economic and environmental significance.

Historically, sugar has caused dramatic environmental damage. The wholesale conversion of tropical island and coastal habitats to sugarcane production undoubtedly caused an extensive loss of biodiversity in these regions, including considerable flora and fauna endemic to the many thousands of islands on which cane was planted. It is quite likely that, but for sugarcane, any map of globally significant biodiverse ecoregions would look quite different.

Sugarcane cultivation has also caused considerable soil erosion and degradation as well as contamination from the use of chemical inputs to correct the resulting problems. As a consequence, sugar has changed coastal hydrology. Siltation from erosion has clogged coastal ecosystems, especially coral reefs and sea grass beds, which are important to a wide range of species. Runoff from sugar cultivation has led to nutrient loading and eutrophication of freshwater and marine systems. Fertilizer use contaminates water supplies, and pesticides enter the environment either by drift from spraying or by percolation. Periodic flushing of sugar mills releases a tremendous amount of organic matter, which is usually dumped straight into streams where its decomposition can result in fish kills. Sugar processing also harms the soil. The continual removal of cane from the fields gradually reduces fertility and forces growers to rely increasingly on fertilizers. This removal of plant matter makes the production of sugarcane unsustainable as it is currently practiced. Bagasse, the organic matter left after crushing the liquid from the cane, is used as fuel, sold as animal feed, or returned to the fields as ash, which is of little benefit to soil microorganisms. Moreover, incineration of bagasse can contribute to global warming.

Sugarcane growers in a number of different countries have been attempting to reduce the impacts of sugarcane production. Most of the better management practices for sugar production involve the reduction of soil erosion and the rebuilding of soil to ensure long-term production with the use of fewer inputs. Building up levels of organic matter in the soil can also reduce the need for other key inputs such as pesticides, fertilizers, and water. There are also a number of ways to reduce wastes and effluents from processing.

14 This entire section is drawn directly from Clay (2003) except where noted otherwise.15 The 7 countries that devoted more than 50% were Antigua, Bahamas, Barbados, Belize, Guadeloupe, Mauritius, and Réunion. Another 8 devoted between 25% and 50% to sugarcane: Cuba, Fiji, Jamaica, Martinique, Puerto Rico, St.Kitts/Nevis, St. Vincent, and Trinidad/Tobago. Several more devoted more than 10% to sugarcane: Congo, Costa Rica, Dominican Republic, Haiti, Liberia, Papua New Guinea, and Swaziland (FAO 2002).

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Government Interventions

In most countries, intervention in the sugar industry has a long history16. Developed countries have traditionally protected domestic sugar producers at the expense of consumers. Special trading arrangements are made with particular developing countries to allow them market access, usually reflecting historical relationships with these countries. Developing countries’ sugar policies reflect a more diverse set of objectives. Many interventions are a response to the policies of the few large countries that shape world markets and world prices—namely the US, EU, Japan, China, India, and Brazil. Most commonly, developing countries have used protectionism to pursue self-sufficiency, since sugar is considered a dietary staple.

About 80% of world production and 60% of world trade is at subsidized or protected prices (Mitchell 2004). Only three major producers—Australia, Brazil, and Cuba—now operate at world market prices (Mitchell 2004). The compounded effect of these protectionist policies is a lower international price for sugar, and greater price volatility (Larson and Borrell 2001). Perhaps even more important is the fact that many investments, including investments in land, capital, and human resources, have been made based on long-standing distortions and on access to preferential markets. The result of many decades of intervention has been the creation of well-defined groups that depend on these interventions, including entire communities and their local sugar mills in the developing world (Larson and Borrell 2001). In the EU, US, and Japan, policies have created the beet-sugar and HFCS markets which, in the absence of protection, would not have been competitive. This section will review the policies of the EU and US, the impacts on the low-income sugar-producing countries, and their responses.

Huge distortions in the world’s sugar markets have been created by developed country policies that include domestic support, high tariffs, and a system of preferential trade agreements that allot quotas to sugar exporters. These policies bear much of the responsibility for the contraction of the market, the development of sugar-beet and corn-syrup substitutes, and inefficiencies in many exporting countries. The FAO states that OECD expenditure on producer support is well over half the total value of the world sugar trade (FAO 2003). The EU, the US, and Japan, which together account for 20% of world production, have average producer prices that are more than double the world market price (Mitchell 2004).

The EU has moved from being a net importer of sugar in the early 1970s to being a major sugar exporter as a result of domestic support policies for its sugar-beet industry. It uses production quotas, import controls, and export subsidies to support high producer prices. For most of the last 20 years, EU sugar intervention prices have been more than double world prices (Mitchell 2004). Import duties and export subsidies (or refunds) are used to maintain this differential. Production quotas limit the amount of sugar production that is eligible for these supports. The end result of a complicated program is that about half of the EU’s sugar exports are directly subsidized (Mitchell 2004).

The EU grants preferential access to its sugar markets to 16 countries from Africa, the Caribbean, and the Pacific (ACP). The Sugar Protocol of the Lomé Convention allows for 1.3 million tons of white-sugar equivalent imports at guaranteed prices (Preference Sugar), allocated among the participating ACP countries. These countries can sell a specified quota without any import duty; above that quota they can sell at a reduced duty (about 85% of the EC reference price) (Wohlgenant 1999). Two countries, Fiji and Mauritius, hold about half the annual quota (Larson and Borrell 2001). As a group, the ACP quota-holders generate 20% of their GDP from sugar production; and 30% of the workforce is employed by the sugar industry. Additional imports of 200,000 to 350,000 from developing countries were added in 1995 under a similar program (Special Preference Sugar), and the EU has also taken on the WTO import commitments of its new members (Mitchell 2004).

The US produces sugar beets and sugarcane as well as HFCS. High domestic sugar prices are supported by a non-recourse loan program for both cane and beet sugar that, in essence, provides a minimum price well above the world price (Mitchell 2004). Imports are controlled through a tariff-rate quota (TRQ) based on domestic output. These policies helped the US decrease its sugar imports from 5 million tons per year in the early 1970s to just over 1 million tons per year recently (Mitchell 2004). Like the EU, the US grants preferential access to quota-holding countries. These include some 40 developing countries in Latin America,

16 Mitchell (2004) points out that protection of sugar markets has a long history, dating back at least to the 1800s, and provides evidence of a long cycle of protection, subsidies and more protection.

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the Caribbean, Africa, and Asia17. However, the lion’s share of the quota allocation goes to the Dominican Republic, Brazil, and the Philippines. The small size of some of the participating countries in this program, and likewise the EU program, means that even a small share in the overall allocation has major impacts on their domestic sugar industries, and often on their entire economies. As of 1994-1996, 10 countries depended on sugar exports for more than 10% of their export earnings (FAOSTAT). All had special trading arrangements with the EU or US (Larson and Borrell 2001).

Japan, which produces both cane and beet sugar, has very high domestic price support, including controls on imports, guaranteed minimum prices, and prohibitive tariffs on imports, as well as quotas, tariffs, and other controls for sugar substitutes. Japan’s sugar imports have decreased by more than 1 million tons over the last decade (Mitchell 2004), contributing further to market contraction and depressed prices.

Table 3: Dependence on Sugar ExportsSugar Exports as a % of Sugarcane Production asTotal Merchandise Exports 1/ a % of Agricultural Land 2/

Average Average1995-200 1980-1985   1994

Reunion 63 75   >50Cuba 41 76   >25St.Kitts and Nevis 37 54   >25Fiji 25 47   >25Belize 25 36   >50Guyana 24 33  Mauritius 21 55   >50Swaziland 17 38   >10Dominican Rep. 14 36   >10Guadeloupe 12 22   >50Barbados 11 10   >50Guatemala 10 6  Jamaica 7 7   >25Mozambique 6 7  Malawi 5 13  

1/ Source: FAOSTAT cited in Mitchell 20042/ Source: FAO 1996 cited in Clay 2003.

Low-income sugar producing countries tend to have few tariff barriers. However, producers often demand support based on the effects of other countries’ policies, given that the international market is so largely shaped by policy interventions (Larson and Borrell 2001). Brazil has recently removed many trade barriers, to become a major exporter (see below). Mexico, on the other hand, raised tariffs after NAFTA was signed (see box). Two major sugar producers and consumers, India and China18, both have followed self-sufficiency policies. Both countries have both used highly protected markets that keep domestic prices above world prices (Mitchell 2004). At the same time, these countries have also used input subsidies to keep prices down for consumers (Larson and Borrell 2001). Thailand, a large exporter and low-cost producer, has used high domestic prices, tax incentives and subsidized credit to boost exports19 (Mitchell 2004). Russia, the largest importer, retains tariff barriers in order to protect the domestic sugar-beet industry. Subsidies to sugar exports have been common. Among developing countries, they have been used in Colombia, Mexico, Poland, and South Africa. Under the terms of the Uruguay Round subsidized exports will be reduced slightly (Larson and Borrell 2001). Many of the remaining producers—including Fiji, Mauritius, Philippines—receive higher than world market prices through preferential markets (Mitchell 2004).

The policies of the major players in the sugar market affect the smaller players in at least two ways (Larson and Borrell 2001). First, the pervasiveness of market interventions using trade tools provokes protectionist

17 Access is also granted to Australia and Canada (Larson and Borrell 2001).18 Ninety per cent of China’s sugar production is from cane (Mitchell 2004).19 Exports from Thailand expanded rapidly, tripling over the last two decades. Thailand has very low production costs, in part because of the efficiency of its smallholder farms. About 60% of its sugar is produced for world markets (Mitchell 2004).

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policies. Protective tariffs compensate domestic producers for the price effects (i.e. the low international price of sugar) attributable to the large-country policies20. Second, special access agreements, especially for smaller countries, create sugar industries that are dependent on maintaining that access. Preferential access to the to high-priced EU and US markets can provide substantial economic benefits—especially for those countries receiving large shares of the quota allocation. For example, US sugar policies transferred an estimated US $120 million to the Dominican Republic in 1984 (Sturgis, Field, and Young 1990); EU sugar policies transferred more than $200 million to Mauritius in 1985 (Wong, Sturgis, and Borrell 1989). These countries also benefit from reduced price risks. The income gives rise to complex domestic policies for allocating those rents, and often leads governments to provide substantial supports to the industry to ensure fulfillment of their quota.

Table 4: OECD Producer and Consumer Support Estimates,Refined Sugar

Consumer Support Estimate Producer Support Estimate  1986-88 2000-2002     1986-88 2000-2002

Australia USD million (11) 0   USD million 64 62 Eur million (10) 0   Eur million 58 67 Percentage CSE (10) 0   Percentage PSE 14 12Consumer NPC 1.12 1.00   Producer NPC 1.12 1.00Consumer NAC 1.12 1.00   Producer NAC 1.16 1.13

 EU USD million (3,382) (1,780)   USD million 3,179 2,172

Eur million (3,060) (1,931)   Eur million 2,883 2,357 Percentage CSE (72) (53)   Percentage PSE 60 48Consumer NPC 3.32 2.24   Producer NPC 3.32 2.24Consumer NAC 3.63 2.15   Producer NAC 2.53 1.91

 Japan USD million (1,826) (925)   USD million 584 346

Eur million (1,656) (1,006)   Eur million 530 376 Percentage CSE (67) (39)   Percentage PSE 66 42Consumer NPC 2.68 1.65   Producer NPC 2.88 1.63Consumer NAC 3.01 1.65   Producer NAC 2.99 1.71

 Mexico USD million (12) (1,145)   USD million 106 740

Eur million (15) (1,244)   Eur million 99 804 Percentage CSE (4) (64)   Percentage PSE 17 52Consumer NPC 1.07 2.79   Producer NPC 1.07 1.99Consumer NAC 1.07 2.79   Producer NAC 1.25 2.10

 US USD million (1,803) (1,638)   USD million 1,153 1,223

Eur million (1,645) (1,781)   Eur million 1,050 1,331 Percentage CSE (65) (58)   Percentage PSE 58 55Consumer NPC 3.18 2.73   Producer NPC 2.31 2.07Consumer NAC 2.96 2.39   Producer NAC 2.46 2.24             

OECD USD million (7,455) (6,004)   USD million 5,760 5,226 Eur million (6,778) (6,523)   Eur million 5,241 5,676 Percentage CSE (62) (52)   Percentage PSE 54 47Consumer NPC 2.60 2.17   Producer NPC 2.33 1.95Consumer NAC 2.67 2.07   Producer NAC 2.18 1.91

Notes: NPC: Nominal Protection Coefficient. NAC: Nominal Assitance Coefficient.EU-12 for 1986-94, EU-15 from 1995, EU includes ex-GDR from 1990.

Source: OECD, PSE/CSE database 2003.

20 Under the URAA, the EU and US exempted their sugar policies through special annex provisions. In response, sugar exporters bound their tariffs for 1995, on average, at 92%; sugar importers bound their tariffs, on average, at 117%. By 2004 these fell only to 79% and 98% (Larson and Borrell 2001).

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A Note on Sugar Beets and HFCS

Sugar beets produce a perfect substitute for cane sugar—the two products are indistinguishable. However, production of beet sugar is estimated to be twice the cost of cane sugar production21, and few producers would survive without protection (Mitchell 2004). The sweetener made from corn (HFCS) is very good substitute in soft drinks and some confections (Mitchell 2004). The initial startup costs of the HFCS industry were high, but once those investments have been made it becomes more competitive with sugarcane. HFCS costs are now close to cane-sugar costs, perhaps a bit lower, given economies of scale and large installed production capacity. HFCS and similar products now account for 40% of caloric sweeteners used in Japan and more than 50% in the US (Mitchell 2004). Markets for artificial sweeteners have also been growing, largely as a result of changing diets in the OECD countries but also, notably in China, as part of an effort by importers to increase self-sufficiency in sweeteners.

Steps Toward Liberalization

While the international sugar market is primarily shaped by the policies of the large developed countries, along with a couple of other major producers, a process of liberalization has begun. Many countries began to reform domestic sugar policies in the 1990s, including privatization of mills and sugar estates in a number of developing countries and changes in Brazil’s ethanol policies (Larson and Borrell 2001). Trade agreements now in place commit the US and EU to liberalization down the road.

The URAA has so far produced only small changes in the world’s sugar markets. One estimate places the sugar price increase to be expected from the URAA at about 7% (Wohlgenant 1999). Under the agreement, the US and the EU are subject to a market access provision, which reached 5% in 2000. The US meets this requirement through its quota allocations to specific countries. The EU likewise meets it through special preferences, especially for the ACP countries (Wohlgenant 1999). The EU has committed to reducing subsidized exports, but this commitment affects only a small share of its exports (Mitchell 2004). The decline in special access, while not large in volume terms, has affected some small countries severely already. The FAO (2003) reports that Cuba, Jamaica, and St. Kitts and Nevis, among the Caribbean countries, have suffered significant economic damage.

The EU’s 2001 Everything But Arms initiative (EBA) increases the EU’s commitments to duty-free access. Under the terms of the EBA agreement, the 48 least-developed countries (which include 39 ACP countries) will be allowed full duty-free access by 2009, which could result in an addition 2.4 million tons of sugar imports (Mitchell 2004). This agreement, along with plans to extend similar terms to all 77 ACP countries could increase imports substantially and force major changes in the EU sugar program (Mitchell 2004). As yet, these changes have not been seen.

Under the terms of NAFTA, Mexico will be able to export sugar to the US duty-free by 2009, presumably benefiting from high US domestic prices, which could undermine the US program. Until NAFTA is fully phased in, however, Mexico still faces limits on its exports (Mitchell 2004). Also under the terms of the Uruguay Round, the US needs to increase market access. The combined impact of these commitments is expected to be a change in the US sugar program (Mitchell 2004). It is worth noting that the program benefits just 9,000 sugar-beet producers and 1,000 sugarcane producers (Orden 2003).

In the 1990s, a number of developing-country governments began dismantling their intervention policies and freeing domestic markets in the face of economic crisis and political change. The breakup of the Soviet Union greatly altered trading patterns in that part of the world. Although still protected by tariff barriers, private domestic markets for sugar developed. In Indonesia, the East Asian financial crisis forced trade liberalization, including for sugar, although the government still owns mills and plantations (Larson and Borrell 2001). In Africa, the sugar industry is undergoing a slow process of privatization. In Latin America, domestic reforms were implemented in Brazil, Mexico, and Peru as part of broad policy changes (Larson and Borrell 2001). Australia removed import barriers and tariffs and made some institutional changes that brought new investments to the industry and sparked increases in production and milling capacity (Larson and Borrell 2001).21 Mitchell (2004) discusses the price differential. He estimates that the average cost of production of refined cane sugar in the 1990s was about 14.25 cents/pound, compared with 25.31 cents/pound for refined beet sugar. HFCS production costs average 13.68 cents/pound.

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Some of the most dramatic changes in world sugar markets in recent years have occurred as a result of changing policies in Brazil. Beginning in the 1970s Brazil implemented an ethanol program, replacing petroleum imports with ethanol produced from sugarcane. Sugarcane and ethanol production were supported through tax incentives, price controls, export restrictions, and direct subsidies to ethanol production and use. Sugarcane production expanded rapidly and, in the heyday of the program, two-thirds of sugar production was used for ethanol fuel (Larson and Borrell 2001). According to one estimate (Borrell, Bianco, and Bale 1994), these policies cost Brazil about US$2.5 billion annually. As petroleum prices fell, Brazil responded by removing sugar export and price controls in 1990, followed by a relaxation of other controls in the 1990s. Currently about half of Brazil’s sugarcane is used to produce ethanol (Mitchell 2004). While some subsidies for ethanol production remain, Brazil has become the world’s largest sugar exporter. Devaluation of the currency in the late 1990s boosted Brazil’s competitiveness. Exports rose from 1.5 million tons in 1990/91 to 11.3 million tons in 2000/01 (Mitchell 2004). Since this change occurred while other countries’ policies were forcing a contraction of the market, clearly other exporters lost out.

In Latin America, Africa, and Central and Eastern Europe, privatization of sugar mills has been a common part of domestic sugar reforms. Governments have proven to be very ill-suited to running sugar mills (Larson and Borrell 2001). But, because of the need to maintain mills near production areas, governments are always under pressure to prevent sugar mill closures (Larson and Borrell 2001). Trade protection has been one of the primary tools used to protect newly privatized mills (Larson and Borrell 2001).

For developing countries, many of the factors that led to government intervention in the sugar sector are still in place. Most notably, special trading preferences still dictate the export opportunities of many countries, particularly the less efficient producers. Second, the problematic characteristics of the close links between production and processing remain unavoidable. Third, conflicts over how to manage and price land and water resources have not been resolved (Larson and Borrell 2001). The case of Fiji provides an example of these three issues. The sugar industry in Fiji is dependent on special access to EU and US markets. The sector is critical to the economy, contributing 22% of GDP, 40% of agricultural GDP, and 40% of export earnings. Special access has brought marginal lands into sugar production, and “some benefits are vested in potentially higher land prices” (Larson and Borrell 2001, 142-42). Since many 30-year leases are now expiring, the fight over how these benefits will be reflected in land rents is particularly bitter because the economic questions have raised some ethnic issues (Larson and Borrell 2001).

What to Expect with Liberalization

Several studies have examined the probable impacts of trade liberalization in the sugar sector. While the results vary given different assumptions, methodologies, and liberalization scenarios, similar conclusions are drawn (Mitchell 2004)22. Reduced support to developed country sugar producers would lower domestic sugar prices, and so reduce production, increase consumption, and increase net imports. Since EU and US policies are currently depressing international prices, removal of support would increase the world price of sugar and spark increased exports from developing countries and from some efficient developed country exporters. Results from some of the studies are summarized here:

Sheales et al. (1999) estimate that full liberalization of sugar markets would cause a 41% increase in world sugar prices23. The US would increase sugar imports by 44%, and the EU would reduce exports by 34%. Low-cost producers would increase exports—including Australia (16%), Brazil (23%), and Thailand (22%). Lower prices in the EU, US, and Japan would save consumers about US$ 4.8 billion per year (Sheales et al. 1999).

Borrell and Pearce (1999) look at the global sweetener market as a whole under various liberalization scenarios. They find that, under a fully liberalized scenario, world prices increase by 38%. However,

22 Mitchell cites Borrell and Pearce (1999); Elbehri et al. (2000); GAO (1993 and 2000); Sheales et al. (1999); USITC (2002); van der Mensbrugghe, Beghin, and Mitchell (2003); and Wolgenant (1999), of which Sheales et al. and Borrell and Pearce are the most comprehensive.23 Other authors put the price increase in the same range. Wohlgenant (1999) estimates the increase at 44%; Borrell and Pearce (1999) put it at 38%.

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developed country consumers will benefit from a fall in prices—65% in Japan, 40% in Western Europe, and 25% in the US. Developing countries that have protected their domestic markets will also see falling prices (by 25% in Mexico, Indonesia, and Eastern Europe; 10% in China, Ukraine, and the Philippines). Rising world prices would induce an increase in production and exports from lower-cost producers, but they would also decrease domestic consumption. Borrell and Pearce (1999) estimate that Australia and Thailand would increase exports by 25%, and Brazil, Cuba, and the rest of Latin America24 would increase production by about 15%. The countries with the highest levels of protection (Japan, Western Europe, US, Indonesia, Eastern Europe) would increase imports and decrease production. Borrell and Pearce (1999) estimate that net imports by these countries would increase by 15 million tons per year. Production would fall by 44% in Japan; by 32% in the US; and by 21% in Western Europe. While beet sugar will become uncompetitive, HFCS might well remain competitive, especially if cane-sugar prices rise with liberalization (Mitchell 2004).

Global welfare gains from liberalization of the sweetener market are estimated at between US$ 4.7 billion and US $6.3 billion per year, depending on the supply response (Borrell and Pearce 1999). Brazil will benefit the most, with a net gain of US$ 1.6 billion25. Western Europe would experience a net gain of US$ 1.5 billion26. Japan would see a net gain of US$ 0.4 billion as a result of lower consumer prices. The US would see a small loss, US$ 0.2 billion, since producer loss would slightly outweigh consumer gains. Another study (van der Mensbrugghe, Beghin, and Mitchell 2003) uses a CGE model incorporating 22 sectors to look at multilateral reform. It finds that full multilateral liberalization will generate US$ 3 billion in global welfare gains27.

From an environmental standpoint it is probably more important to consider the impact of liberalization on the small developing countries. The study by Borrell and Pearce concludes that, as a group, the countries that benefit from preferential access to EU and US markets currently gain about US$ 0.8 billion per year from this access, given that they receive prices well above the current world price for their exports. While these countries stand to lose with removal of the special preference system and with falling prices in the US and EU, this loss would be offset in part by the rising world price. Borrell and Pearce estimate the net loss at US$ 0.45 billion for these countries. However, since some are high-cost producers, they would reduce production in the face of a lower export price and would suffer a decline in export earnings.

The studies on liberalization mentioned above do not look closely at the fate of the small economies. However, the experience of Cuba28 may provide some useful insights. Prior to the 1959 revolution, Cuba was a major producer of sugar, with about half of its production entering the protected US market and half entering the world market. Following the revolution and the imposition of the US embargo, sugar production declined drastically from about 7 million tons annually to about 4 million tons. Structural change took place in the whole economy, including the sugar industry, and over the next 3 decades Cuba became dependent on the Soviet-bloc countries for a sugar market. It also became dependent on these countries as trading partners, particularly for fuel. When the Soviet Union collapsed, a new crisis was precipitated in the sugar sector. Production dropped from 8.2 million tons to 7 million tons from 1990 to 1992, and then down to 2.6 million tons by 1995, where it has remained (FAOSTAT 2004). The loss of high Soviet sugar prices and Soviet credit facilities greatly exacerbated the effect of the drop in volume. Import capacity fell from 8.1 billion pesos in 1989 to 2.2 billion pesos in 1992 (Larson and Borrell 2001).

The impact of liberalization on sugar-sector employment in the developing countries would be significant. As noted above, each 1 million tons of production from a low-cost producing developing country supports about 55,500 direct employment jobs; in a high-cost producing developing country each 1 million tons of production adds 128,000 direct employment jobs (Mitchell 2004). If these ratios continue to hold, liberalization of the most highly protected markets would increase employment in the developing countries’ sugar industries by between 832,500 and 1,920,000 jobs. The net global employment effect would be slightly less because of

24 Excluding Mexico.25 This is a gain of US$2.6 billion for producers, and a loss of US$ 1 billion for consumers who will pay higher prices (Borrell and Pearce 1999).26 This reflects a loss of US$3.3 billion for producers and a gain of US$ 4.8 billion for consumers.27 A less extensive reform—entailing a 33% reduction in tariffs globally along with a 33% increase in TRQs and a 33% reduction in out-of-quota tariffs in the EU, US, and Japan would generate US$ 1.3 billion in global welfare gains (van der Mensbrugghe, Beghin, and Mitchell 2003).28 This summary of events in Cuba is drawn from Larson and Borrell (2001).

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the loss of jobs in the protected markets. Job loss may be low, however given, for example, that in the US there are only about 9,000 sugar-beet producers (Mitchell 2004).

Box: Changes in Market Rules and the Role of Smallholders in Mexico29

As a result of the Mexican Revolution, large landholdings were broken up and, for most of the 20 th century, sugarcane production in Mexico was based on a system of smallholder cane producers. Sugar mills, however, remained in private hands. Ownership of the mills was concentrated and a miller-owned organization, Azúcar, held a marketing monopoly for sugar. However, strict laws on land ownership, implemented as a result of the Revolution, prevented vertical integration of the industry. Beginning in the 1930s, conflicts between the smallholder cane producers and Azúcar led to increasing government involvement in the sector. By the mid-1980s, the government owned 75% of the country’s sugar mills. The government also supported the growers through subsidies, payment of agricultural insurance premiums, and special social security payments. Prices were strictly regulated, without regard to wholesale prices or cane quality. Mills were run inefficiently, and Azúcar began to run deficits despite its monopoly.

Because of this failure, the Mexican government re-privatized most mills by 1990. The sugar industry was protected by tariffs of 10% on raw sugar and 15% on refined sugar. This level proved insufficient. Sugar imports rose and prices fell. In response, the government set a reference price in 1991, defended by a variable tariff. This variable tariff was in place as Mexico negotiated the terms of NAFTA. Negotiations over sweeteners were complicated. While the agreement calls for a 15-year phased-in reduction of tariffs that began in 1994, Mexico initially raised tariffs to US levels. This benefited the Mexican sugar industry and investments in sugar increased. Production rose by 50%. However, high sugar prices made alternative sweeteners competitive, particularly HFCS. This temporary advantage allowed for the high-cost investments needed for the HFCS industry. Mexican negotiators had expected that smallholder cane producers and the newly privatized mills would capture the benefits of the tariffs. Instead, the HFCS industry captured much of this benefit, and the government eventually expropriated a number of failing mills again.

Concurrent with NAFTA, major changes were introduced in the laws governing land ownership in Mexico. Most notably, smallholders and community organizations are now allowed to lease and sell their land. This change can be expected to have major impacts on the sugar sector, and on the role of smallholders. At the same time, a new payment system was introduced that establishes a system of revenue sharing between cane growers and millers that should reward both sugarcane quality and mill efficiency. Whether the smallholder and communally-held lands will continue to play a role in sugar production remains to be seen. The environmental impacts will depend not only on the technologies used for sugar production, but also on whether these smallholders can develop sustainable livelihoods in the new context.

Some Preliminary Conclusions

Without discussing the difficulty of reforming a market with such a long history of intervention, this section touches on some of the direct and indirect environmental impacts that need to be considered if the world continues its progress toward liberalization. In large part, liberalization will benefit the low-cost producers which, apart from Australia, are primarily developing countries. Given the critical role of high US and EU protection levels in depressing international prices and limiting export possibilities, sugar liberalization can clearly be seen as a case of transferring benefits to the developing countries.

The FAO predicts that developing countries “will account for nearly all future production growth through 2010, thus raising their share [in global production] from 67 percent in 1998-2000 to 72 percent by the year 2010” (FAO 2003). Liberalization, as we have seen, will sharply increase this trend toward greater production in the developing countries. Brazil, Thailand, and Cuba, along with Australia, are expected to see the greatest increases in production. Reallocation of benefits among developing countries, however, from the current beneficiaries of import quotas to the lower-cost producers, can be expected to create some economic losers. The major role of sugar exports in the economies of some of these countries—Fiji, Kenya, Belize, Dominican Republic, Cape Verde, Mauritius, and many more—means that these structural shifts may be devastating.

29 This summary of the Mexican experience is drawn from Larson and Borrell (2001) and Mitchell (2004).

28

Direct environmental impacts of liberalization will depend on the shape and location of sugarcane expansion, and on the fate of lands taken out of sugarcane and sugar-beet production. To what extent the shifts in production would entail conversion of current agricultural lands or uncultivated lands to sugarcane, and to what extent production increases could be obtained on current lands, is unclear. However, the similarity of sugar production yields around the globe suggests that currently there are few opportunities for disbursing more productive technologies. Continuing oversupply in world markets would mean heavy competition based on production costs. The possibilities for implementing environmental measures that do not have immediate productivity returns would be limited in such a competitive market.

The economic models of liberalization in the sugar sector skirt the political-economy issues that should be raised. First, the indirect environmental impacts of liberalization will depend on the fate of the economies that lose markets for their sugar exports. In considering the impact on the smallest producers, which often rely heavily on the foreign exchange earnings and employment generated by sugar, it is instructive to look at Cuba’s experience following the US embargo and then the breakup of the Soviet Union. Economic collapse and political turmoil need to be addressed as real possibilities for the countries that have relied on special market access provisions, and have structured their economies to take advantage of those provisions. Increased poverty and struggles over natural resources needed for subsistence can only lead to environmental damage.

Second, the indirect environmental impacts will depend on the ability of those countries gaining market share to capture the development benefits of expanding sugar exports. While sugar clearly provides foreign exchange earnings and employment for many tropical developing countries, the development benefits of the sector are not obvious. According to a study by the European Commission (1996):

The impact of trade preferences has been disappointing by and large. Preferential arrangements, especially the protocols on specific products, have contributed significantly to the commercial success of some countries that managed to respond with appropriate diversification policies. But the bulk of ACP countries have lacked the economic policies and the domestic conditions need for developing trade.

The economic literature on the sugar sector is remarkably silent on the people who will be affected by changes in the market. Substantial political-economy analysis of the relationship between sugar growers (i.e. estate owners) and sugar mills, is not complemented by a similar analysis of the relationship with the labor force. Sugar is a cash crop and in many places relies heavily on low-cost hired labor. In terms of poverty, surely it will be this population that is most affected as price-based competition increases. Notably, production is expected to shift from those countries that are more labor-intensive to those with lower labor requirements. The possibilities for improving wages or workers’ standards of living under these conditions are poor. Also, at least in some places, the poor spend a large portion of their income on sugar. While sugar cannot be considered a staple in the same class as grains or oils, it nevertheless plays an important role in many diets and a price increase on the order of 40% will affect poor consumers substantially.

Sugar-producing countries should look carefully at the environmental implications of sugar production, and consider the social ramifications of producing an export crop that will face stiff international competition and probably low prices for many years to come, as they prepare their countries for liberalization of the sector.

29

Bibliography

Borrell, Brent, Jose Bianco and Malcolm Bale 1994. Brazil’s Sugarcane Sector: A Case of Lost Opportunity Policy Research Working Paper 1363. Washington: World Bank. Cited in Larson and Borrell (2001).

Borrell, Brent and David Pearce. 1999. “Sugar: The Taste Test of Trade Liberalization,” Canberra and Sydney, Australia: Centre for International Economics. Cited in Mitchell (2004).

Clay, Jason. 2003. Agriculture and the Environment Volume I: Introduction and Commodities. A WWF Handbook on Agricultural Impacts and Better Practices. WWF/USAID.

Devadoss, Stephen and Jurgen Kropf. 1996. “Impact of Trade Liberalization under the Uruguay Round on World Sugar Market,” Agricultural Economics 15: 83-96.

Elbehri, Aziz, et al. 2000. “Partial Liberalization of the World Sugar Market: A General Equilibrium Analysis of Tariff-Rate Quota Regimes,” USDA ERS, Mimeo Aug. 25. Cited in Mitchell (2004).

European Commission. 1996. “Green Paper on Relations between the European Union and the ACP Countries on the Eve of the 21st Century: Challenges and Options for a New Partnership.” Brussels: European Commission. Cited in Larson and Borrell (2001).

FAO. 2003. “Important Commodities in Agricultural Trade: Sugar.” www.fao.org/DOCREP.

FAO. 2004, 2002. FAOSTAT database. Rome: FAO.

FAO. 1999. “Advisory Consultation on ACP Sugar Policy and Trade.” www.fao.org/DOCREP.

Hannah, A.C.2000. “Key Factors Affecting World Sugar Markets in the 21st Century.” Outlook 2000. Australia: ABARE. www.sugaronline.com/iso

Larson, Donald and Brent Borrell. 2001.“Sugar Policy and Reform.” In Takamasa Akiyama et al, eds. Commodity Market Reforms: Lessons of Two Decades. Washington: World Bank. See also Larson and Borrell. Sugar Policy and Reform. Working Paper Series 2622. Washington: World Bank.

Martinez, Samuel. 1999. “From Hidden Hand to Heavy Hand: Sugar, the State and Migrant Labor in Haiti and the DR.” Latin American Research Review 34, no.1: 57-84.

Mitchell, Donald. 2004. Sugar Policies: Opportunity for Change. World Bank Policy Research Working Paper 3222. Washington: World Bank. See also Donald Mitchell. Draft 2004. “Sugar Policies: Opportunity for Change,” In M. Ataman Aksoy and John Beghin, eds. Global Agricultural Trade and Developing Countries. Forthcoming.

Mitchell, Donald. 2004. “Trade Note 14: Sugar Policies: Opportunity for Change.” Washington: World Bank.

Orden, David. 2003. “Sugar Policies and Implications: Integration Into an FTAA,” Paper presented at the Conference on Agricultural Competitiveness and World Trade Liberalization: Implications of the WTO and FTAA, Fargo, N.D. May 29. Cited in Mitchell (2004).

Sheales, Terry et al. 1999. “Sugar: International Policies Affecting Market Expansion.” ABARE Research Report 99.14 (Nov.). Cited in Mitchell (2004).

Sturgis, Robert, Heather Field and Linda Young. 1990. “1990 and U.S. Sugar Policy Reform.” ABARE Discussion Paper 90.4. Canberra: Australian Government Publishing Service. Cited in Larson and Borrell (2001).

United States International Trade Commission (USITC). 2002. “The Economic Effects of Significant U.S. Import Restraints,” 3rd update. Publication 3519. Cited in Mitchell (2004).

30

Van der Mensbrugghe, John Beghin and Donald Mitchell. 2003. “Modeling Tariff Rate Quotas in a Global Context: The Case of Sugar Markets in OECD Countries,” Aug. 28 mimeo. World Bank. Cited in Mitchell (2004).

Wohlgenant, Michael K. 1999. “Effects of Trade Liberalization on the World Sugar Market,” Rome: FAO. www.fao.org

Wong, Gordon, Robert Sturgis, and Brent Borrell. 1989. “The Economic Consequences of International Sugar Trade Reform.” ABARE Discussion Paper. Canberra: Australian Government Printing Service. Cited in Larson and Borrell (2001).

31

COTTON

Introduction

Cotton is the world’s largest non-food cash crop, produced in at least 82 countries. Cotton is often grown in arid regions, but requires substantial amounts of water. Production also involves heavy use of pesticides, since cotton is very susceptible to a number of pests. While the bulk of production occurs in developing countries, the largest share of cotton exports comes from the developed countries. In the developing world, cotton production is very important economically because it is a major source of cash for small farmers, a source of employment, a contributor to foreign exchange earnings, and an important input for industrial development. As with many commodities, cotton production is becoming increasingly concentrated. Today, 77% of cotton production and 73% of cotton acreage are accounted for by China, the US, India, Pakistan, and the Central Asian Republics (Banuri 1999). Close links with the textile industry mean that governments have managed cotton production not only as a critical source of rural income and foreign exchange, but also as an industrial input, leading to major distortions in domestic and international cotton markets.

About one-third of raw cotton is traded, despite these major distortions in the market for raw cotton and in the markets for textiles and clothing. Cotton prices have been volatile, but generally falling over time. Some developing countries, including China and several African producers, have implemented major changes in their domestic policies for cotton production. Reforms in current developed country policies, already agreed upon but not yet implemented, would promote rising cotton prices and new export opportunities for developing countries. These would prompt large-scale changes in cotton production patterns and trade. Several serious challenges to developed country subsidies have been initiated, notably the Brazilian case in the WTO and the West African Cotton Initiative.

This summary paper first reviews production, consumption, and trade patterns and outlines current patterns of government intervention in the cotton sector, along with the impacts of recent steps toward liberalization in the developing world. It then considers the probable impacts of liberalization, particularly the removal of US subsidies, in order to gain an indication of the environmental issues likely to arise directly and indirectly from liberalization. Liberalization is expected to offer important export opportunities for a number of poor countries, but achieving positive economic and the environmental outcomes will depend on a careful balancing of the needs of the international market and the needs of small farmers.

Production, Consumption, and Trade Patterns

Cotton is produced predominately in the northern hemisphere, and more than two-thirds is produced by developing countries (Baffes 2004). About 32.3 million ha are in cotton production, producing over 57 million tons of seed cotton. This translates into almost 20 million tons of cotton lint (FAOSTAT 2004)30. Since 1960, cotton production has expanded at an average rate of 1.8% per year, increasing overall cotton lint production from 10.2 million tons to 19.7 million tons in 2003. Most of the increase in production came from China, which tripled its production, and India, which doubled production over this period (Baffes 2004). Turkey, Greece, and Pakistan also significantly increased their production, and Australia entered the market. Perhaps most notably, for its development significance, is the fact that Francophone Africa increased production from less than 100,000 tons in the 1960s to almost 1 million tons (Baffes 2004). The US and the Central Asian Republics, which were the two primary cotton producers in the 1960s, maintained production levels but saw their shares in world production halved. Several Central American countries saw their production collapse. Through the 1990s there were no significant increases in production. The major producers are now China (25%), the US (20%), India (12%), Pakistan (8%), and Uzbekistan (5%). The other large producers are Francophone Africa, Turkey, Brazil, Australia, and Greece, which all together account for 18% of world production (Baffes 2004).

30 Cotton production spiked to 21.5 million tons in 2001/02, but fell back to its previous level of about 20 million tons the following year (FAO 2004).

32

Cotton consumption depends on the size of a country’s textile industry. China is the world’s leading textile producer, and consumes 25% of the world’s cotton. India, the US, and Turkey are the other leading textile producers, and together account for 50% of textile production. Some East Asian countries—namely Indonesia, Thailand, Korea, and Taiwan—have recently emerged as major textile producers too. Growth of demand for cotton has been slow, running about even with population growth at 1.8% per year (Baffes 2004). If cotton consumption continues to increase at the same rate as the global population, it can be expected to reach 23 million tons by 2010 (Baffes 2004).

Raw cotton trade was US$ 6.3 billion in 2001 and 2002, representing about 6.4 million tons (FAO 2004). The main exporters are the US (36%), Central Asia (18%), Australia (10%), Mali (2.5%), and Benin (2.4%). Some large producers—China, India, Pakistan, and Turkey—are also large textile producers, so they are occasional importers of cotton rather than exporters. Because the textile industry is less concentrated than cotton production, importers are also less concentrated than exports. Recently the largest importers have been Indonesia, India, Mexico, Thailand, Turkey, Russia, Italy, and Korea (Baffes 2004).

Although their export market share is relatively small, a number of developing countries depend heavily on cotton as a cash crop, both at the farm and the national level. As of 1990/91, cotton was the leading export in Benin, Burkina Faso, Chad, Mali, Pakistan (including yarn, cotton, and fabric), and Uzbekistan. It was also a critical export for Sudan, Togo, Zambia, Zimbabwe, Central African Republic, Egypt, Madagascar, Paraguay, Syria, and Tajikistan (UNCTAD 1994). For 5 West African countries—Burkina Faso, Benin, Chad, Mali, Togo—cotton accounts for between 30% and 44% of total merchandize exports. The Central Asian Republics also rely on cotton exports, though to a lesser degree31 (Baffes 2004). In all of these countries, cotton also constitutes a significant share of GDP.

Like many primary commodities, the price of cotton has been declining for years. From 1961 to 2000 raw cotton prices fell by almost 59% (FAO 2002). Within this declining trend, cotton prices have been volatile, though that volatility appears to have been reduced slightly by a change in US policy on stockholding in the mid-1980s (Baffes 2004). The long-term price decline is attributable to improved technologies, slow demand growth, and strong competition from chemical fibers (Baffes 2004). Overall fiber consumption—including cotton, flax, wool, and fibers derived from wood and oil—is increasing, but cotton competes directly with a number of chemical or synthetic fibers. Most of these have traded at about the same price as cotton since the 1970s. Cotton now holds a 40% share of total fiber consumption, down from 68% in 1960 (Baffes 2004).

The financial crises of the 1990s in Southeast Asia, Russia, and Brazil all served to depress the world cotton market. Where demand did not fall, it shifted to lower quality, cheaper cotton. At the end of this period, in 1998, China’s decision to sell its large cotton stocks drove prices down rapidly (see below) (Clay 2003). However, once these stocks have worked their way through international markets there may be some price recovery. The New York Cotton Exchange (NYCE) is the primary cotton exchange, offering futures and options contracts of up to two years. However, the lack of a hedging instrument useful outside the United States is a complicating factor in international cotton markets (Baffes 2001).

Most cotton-producing countries are increasingly undertaking value-added processing. The ten largest cotton-producing countries consumed 50% of global cotton output in 1986, and 77% of an even larger volume of cotton in 1996 (IISD/WWF 1997). This increase in domestic processing industries is also reflected in the fact that, while global cotton production doubled between 1961 and 2000, trade increased by only 33% (FAO 2002). Value-added trade in apparel was US$ 19.5 billion in 2001 (FAO 2002), well above the value of the raw cotton market.

Developing countries are increasingly exporting clothing and textiles to developed countries as their textile industries expand (FAO 2002). Traditionally, textiles have been one of the first industrial products in many developing countries (Banuri 1999). However, although developing countries clearly have a comparative advantage in this labor-intensive industry32, escalating tariffs and quotas in the developed world have slowed its expansion.

31 Uzbekistan: 32% of merchandise exports; Tajikistan: 15%; Turkmenistan: 12%.32 It is important to note that, although this industry has traditionally been labor-intensive, in recent years it has become increasingly capital intensive.

33

Not all textile producers can supply their own industries. Imports of raw cotton for textile production are increasing in the developing countries, particularly in the industrializing Asian countries (FAO 2002). Developing countries in Asia account for 55% of global imports. Europe and Mexico accounting for much of the remainder (FAO 2002). While most of the trade in raw cotton is still from the developed countries (US, Australia) to the developing countries, trade among developing countries is growing (FAO 2002). Egypt, Sudan, Zimbabwe, Tanzania, and the West African countries are all increasing their raw cotton exports.

Table 1: Cotton Lint Production and TradeProduction '000 Mt Trade Balance '000 Mt

1990 1995 2000 2003 1990 1995 2000 2001  Australia 433 421 806 260   301 300 711 842   China 4,508 4,768 4,417 5,200   (685) (1,125) (137) (360)  India 1,673 2,186 1,641 2,100   339 (43) (198) (378)  Indonesia 7 8 9 10   (332) (456) (556) (754)  Pakistan 1,638 1,802 1,825 1,818   291 (124) 102 (72)  Thailand 30 25 11 15   (284) (327) (380) (395)

   Benin 59 130 152 170   41 99 134 144   Burkina Faso 77 64 109 207   59 0 74 66   Chad 60 61 58 60   57 62 63 47   Egypt 303 242 225 280   (21) 37 85 59   Mali 115 169 101 250   93 105 164 82   Sudan 130 85 50 107   126 96 41 71   Togo 34 42 49 76   96 (16) 28 30   Zambia 11 6 22 22   3 (2) 0 1   Zimbabwe 67 37 128 80   54 24 140 69

  EU (15) 290 466 535 452    Greece 210 433 443 363   33 207 273 288   Turkey 655 851 880 946   20 (180) (539) (424)  Uzbekistan 0 1,265 1,000 914   0 1,024 739 760

  Brazil 634 479 663 726    Mexico 201 219 78 65   20 (21) (410) (397)

  United States 3,375 3,897 3,742 3,968   1,696 2,040 656 1,876

 Other countries 4,338 2,442 2,138 1,989  

  World 18,638 19,665 18,640 19,715  

Note: Cotton lint means fibers from ginning seed cotton that have not been carded or combed.Trade data also include fibres that have been cleaned, bleached, dyed or rendered absorbent.

Source: FAOSTAT 2004

Production Methods 33

Cotton is grown on about 2.5% of the world’s arable land (Banuri 1999). It requires 180 frost-free days per crop; as a result it is produced between 36 degrees south latitude and 46 degrees north latitude in tropical and subtropical climates. Cotton is grown on 8.4 million ha in India, 4.8 million ha in the US, 4.5 million ha in China, 3.0 million ha in Pakistan, and 1.4 million ha in Uzbekistan (FAOSTAT 2004). The value of cotton lint depends on the length and fineness of the fiber—the longer and finer the staple, the better the quality. Most cotton produced is medium long staple34. Production of longer staples is almost entirely confined to the US, Peru, Egypt, Sudan, and the Central Asian Republics (Banuri 1999). Long-staple varieties require more water and a longer growing period, making them more susceptible to insects and disease (de Vries 1995).

During the past century, cotton has shifted from a labor-intensive industry to a capital-intensive one in many countries. Machinery and chemical inputs have been substituted for labor even in developing countries.

33 Most of this section is drawn directly from Clay (2003).34 In the past, several annual and perennial varieties of cotton were grown. Each was adapted to different growing conditions and produced cotton of different length fibers and natural colors. Over time the trend has been to breed whiter cotton with more and longer fiber; most perennial species of cotton have been abandoned because they cannot be produced or picked by machine, even though their long fiber is highly sought after (Clay 2003).

34

Planting, weeding, and harvesting are increasingly undertaken by machine. Fertilizers are applied regularly, and a number of different pesticides are used as preventive measures and to treat specific pest infestations. Africa is perhaps the only exception to this trend toward capital-intensification. The cotton fibers can be picked by hand or by machine, and are then passed through a ginning machine to eliminate seeds. They are then spun into yarn and dyed before weaving.

A tripling of production since the 1930s has been achieved primarily through increases in yields. Most of this increase35 is a result of improved cotton varieties, expansion of irrigation, use of agrochemicals, and mechanization. Although overall acreage has not increased much, significant shifts have occurred in where production takes place (Soth 1999). The highest yields today are achieved in Israel, Syria, Mexico, and Spain. Selective breeding programs have enhanced cotton fiber strength and length, and permitted a broader geographic range of production. Genetic work on cotton has also focused on producing insect and disease resistant varieties. Recently, breeders have introduced insect-repellent genes into cotton plants to improve yields and lower costs. Known as Bt cotton, such varieties are now grown extensively in the US, and use is expanding in China and several other countries36. Genetically modified cotton now accounts for about 22% of cotton production by area (Baffes 2004).

Cotton requires a substantial amount of water during the growing cycle. However, it is also very sensitive to excessive rain, particularly as the cotton bolls are maturing. Consequently, more arid lands are preferred for cotton production, where water can be provided as needed through irrigation. Cotton is irrigated on 53% of the land where it is grown. More significantly, 73% of all cotton is produced on irrigated land (Clay 2003). Irrigation is of major importance for cotton production in China, Egypt, India, Mexico, Pakistan, and Uzbekistan. Water is traditionally provided free in many countries, including Egypt and Uzbekistan. In India and Pakistan it is provided for a minimal charge. On the other hand, Sub-Saharan Africa, Central and South America, and Southeast Asia rely primarily on rainfall for cotton production (Gillham et al. 1995).

35 Cotton lint yields have increased considerably, from about 300 kg/ha in the early 1960s to 600 kg/ha in the late 1990s (Clay 2003).

36 Genetically modified cotton has also been introduced in India, Mexico, Argentina, Australia, and South Africa. It has not been approved for use in the EU, Central Asia, or Francophone Africa. Approval is being considered in Israel, Pakistan, Turkey, Brazil, Burkina Faso, and Indonesia (Baffes 2004).

35

Table 2: Seed Cotton Area Harvested and YieldArea Harvested, '000 Ha Yield, Kg/Ha

1990 1995 2000 2003 1990 1995 2000 2003  Australia 279 304 527 145   4,011 3,342 3,691 4,331   China 5,588 5,422 4,041 4,500   2,420 2,638 3,279 3,467   India 7,440 9,035 8,577 8,390   675 726 574 751   Indonesia 20 21 22 22   1,082 1,209 1,273 1,409   Pakistan 2,662 2,997 2,928 3,000   1,845 1,804 1,871 1,818   Thailand 71 55 26 33   1,360 1,470 1,424 1,390

   Benin 123 247 319 415   1,192 1,330 1,065 1,181   Burkina Faso 166 145 209 350   1,140 1,035 1,016 1,429   Chad 206 208 280 280   774 759 643 607   Egypt 417 298 217 290   2,008 2,144 2,543 2,759   Mali 194 336 228 533   1,420 1,207 1,066 1,149   Sudan 295 184 171 210   1,384 1,408 858 1,500   Togo 80 96 141 160   1,245 1,059 831 994   Zambia 64 35 55 55   479 471 1,129 1,127   Zimbabwe 228 219 370 406   823 460 884 493

  EU (15) 343 451 504 457   2,710 3,164 3,083 3,453   Greece 259 420 414 365   2,587 3,157 3,046 3,562   Turkey 641 741 654 711   2,654 2,999 3,456 3,501   Uzbekistan 1,493 1,445 1,393   2,636 2,078 2,050

  Brazil 1,904 1,191 813 717   1,009 1,218 2,473 3,068   Mexico 220 275 77 64 2,518 2,277 2,898 2,923

  United States 4,748 6,478 5,285 4,880   1,851 1,561 1,813 2,070

 Other countries 7,439 5,318 5,051 5,363  

  World 33,128 35,549 31,940 32,374   1,640 1,594 1,660 1,760

Source: FAOSTAT 2004

Pesticides are applied frequently, since cotton is particularly susceptible to damaging insect infestations37. The value of pesticide use in cotton is estimated at US$ 2-3 billion annually, which is about 10% of the annual value of the crop (Murray 1994). Globally, cotton now accounts for 11% of all pesticides38 used each year, much larger than its relative share of arable land. With regard to the subset of insecticides, cotton production accounts for 25% of all insecticide use each year (Soth 1999).

Environmental Impacts 39

Cotton production relies on extensive use of water in arid zones and heavy use of agrochemicals, especially insecticides, with major environmental consequences. Soil and water degradation and habitat conversion, and associated impacts on biodiversity, are also of concern.

Cotton is possibly the largest user of water among all agricultural commodities. Production requires 550-950 liters of water per square meter planted; put another way, 7,000-29,000 liters of water are required to produce a kilogram of cotton (Soth 1999). In many cotton-producing areas, surface waters are diverted for irrigation, usually using traditional flooding techniques. In these systems substantial amounts of fresh water, on average 60%, are lost through evaporation, seepage, and inefficient management. In other places, groundwater is pumped to irrigate cotton, leading to depletion of groundwater supplies.

37 Cotton’s main insect pests are bollworms, budworms, leaf worms, and weevils.38 Some 46 insecticides and acaricides (compounds used to control mites and ticks) comprise 90% of the total volume of all pesticides used on cotton. Five of these are classified as extremely hazardous, eight as highly hazardous, and 20 are moderately hazardous (Soth 1999).39 This section is drawn directly from Clay (2003).

36

Traditional pest control methods were labor-intensive and included hand-picking pests, intercropping, crop rotation, and burning infected residues. However, these methods have largely been abandoned in favor of chemical pesticides (Banuri 1999), surging in the US in after WWII. In the developing countries it is an even more recent phenomena, but cotton already accounts for half of all pesticide use in developing countries, according to some estimates. This heavy use of pesticides for cotton production poses risks to organisms in the soil; to migratory species such as insects, birds, and mammals; and to downstream freshwater species. Major human health risks are also posed by pesticide use, both for farm workers and for nearby and downstream populations. Perhaps as many as 20,000 people are killed and another 3 million poisoned every year by pesticides used on cotton (IISD/WWF 1997).

Cotton producers are already encountering the treadmill effect—ever-higher doses are required to control pest populations because of the development of resistance and elimination of natural pest predators. Pesticide-resistant pests have already caused major damage to some cotton crops. Moreover, the result of farmers’ efforts to eliminate pests has been a loss of soil microorganisms and, consequently, a loss of soil quality and fertility. Bt cotton offers some hope of reducing the use of pesticides; however, the environmental impacts of Bt cotton are not yet well understood. Since Bt cotton produces low levels of pesticides, it may create a resistance in the pests it is designed to eliminate.

Soil depletion and degradation are the leading cause of the globally moving cotton production frontier. However, as with many crops, there are no global estimates of the extent of land degradation and abandonment that have resulted from cotton production. Along with overuse of pesticides, salinization from irrigation has contributed to degradation and land abandonment. One estimate indicates that in six leading cotton-producing countries between 12% and 36% of the currently irrigated area is already damaged by salinization (Dinar 1998). Half of the irrigated land in Uzbekistan has lost productivity due to salinization; Pakistan and Brazil report similar problems (Gillham 1995). The high levels of salt contamination in these soils may preclude re-colonization by native local plant communities, even if cotton production were abandoned.

Although most land used for cotton cultivation has been in production for generations, for example in China, the US, Egypt, Pakistan, India, and Brazil, in other places habitat conversion occurred quite recently. These areas include the Pacific coastal plain of Mexico, which was converted to permanent agriculture only after 1950, and millions of acres of hardwood forests, coastal savannas, evergreen forests, and coastal mangrove swamps in Central America. Much of this area has now been converted to pasture, in part because of declining cotton yields.

Cotton has one of the greatest impacts of all agricultural commodities during its processing40, in large part because of the high water and energy requirements. It can take up to 200 liters of water to produce, dye, and finish one kilogram of textiles (Center for Design 2001). Wastewater from textile production is often difficult to treat as it contains high concentrations of color, BOD, total organic carbon, dissolved solids, and toxic metal. Cotton processing also produces substantial solid waste.

Better management practices have been identified for cotton, but it will be difficult to reduce overall water and toxic chemical use. Organic cotton production has enjoyed only limited success, and fails to address water use and some other sustainability issues (Clay 2003). A study of the impact of Bt cotton production in China found that, in addition to lowering costs for farmers, the introduction of Bt cotton also reduced not only pesticide application but also the number of pesticide poisonings (Pray and Ma 2001). Unfortunately, although genetically modified cotton offers potential to reduce agrochemical use, it may raise other environmental issues.

40 Discuss use of seeds, oil etc.

37

Cotton Producers and Market Chains

Cotton is the largest money-making non-food crop produced in the world. Its production and processing provide some or all of the cash income of over 250 million people worldwide, and employ 7% of all labor in developing countries (Banuri 1999). In India alone, over 60 million people derive income from the cotton and textile sector (Gillham et al.1995). In China, over 50 million households grow cotton, and the textile industry employs another 9 million workers (Gillham et al 1995).

Cotton is a major smallholder crop in many developing countries. While large-scale producers enjoy advantages in both production and marketing, production by smallholders has important economic and social implications. As many as 100 million rural households may be involved in cotton production worldwide (Baffes 2004). At the country-level, this translates into 45 million households in China, 10 million households in India, 7 million households in Pakistan, and 6 million households in the major cotton-producing countries in Africa (Baffes 2004). For many of these households, and particularly so in Africa, rainfed cotton is the main cash crop. It is produced with minimal use of purchased inputs (Baffes 2004). Cotton is hand-picked in many of these countries, often by women and children. In some places, cooperatives have allowed smallholders to enjoy some of the advantages of larger-scale production, including mechanization of field operations (Gillham et al. 1995).

The cotton market chain can be divided into three areas of activity: production, processing, and marketing. Production tends to be controlled by government, though to a declining degree. In many countries, the government still controls research, extension, input supply, and credit (Clay 2003). Cotton has important advantages as a smallholder cash crop, since it can be stored and transported relatively easily. Nevertheless, in some places ginning operations are natural monopsonies because of poor transportation networks and/or because of high initial investments required (Baffes 2001). This market structure has led to contract farming in some cases, with the ginner financing cotton production and then buying the cotton at a prearranged price (Baffes 2001). In terms of international trade, it appears that 15 major trading companies control between 85% and 90% of traded cotton (Clay 2003). Without cooperatives or government institutions, sales of small lots of cotton would be difficult. Because of the predominance of smallholders and their need to market access, notably in Africa, governments have often stepped in to ensure markets.

In the middle of the chain, however, thread, yarn, and cloth manufacture are undertaken by a wide range of players that neither well organized nor controlled by the government or private sector41 (Clay 2003). On the other end of the market chain, large retail chains control the apparel market (Clay 2003). These buyers have gained increasing importance in the market, and the number of players has declined. According to Banuri (1999), nearly all activities associated with cotton production, processing, and manufacturing are becoming more concentrated in the hands of fewer companies and fewer countries.

Government Interventions

Government interventions in both cotton production and the cotton textile sector have dramatically shaped production and export opportunities. Cotton is generally subsidized in the developed countries and has traditionally been taxed in the developing countries, although some policy reforms have occurred in recent years. Both trade and domestic marketing interventions are used, including taxation, tariffs, and income supports. Distortions are also common in credit, fertilizer, irrigation, and other input markets (Baffes 2001). Wealthy countries tend to use domestic subsidies, rather than quotas or tariffs, to support cotton producers. The US and the EU spend the most on cotton sector interventions, but China, Turkey, Brazil, Mexico, Egypt, and India also provide direct support to cotton producers in order to bolster their textile industries. A number of countries use import quotas and import tariffs, including Argentina, Brazil, China, Egypt, India, US, Uzbekistan, and Zimbabwe. The few countries with little or no government intervention in cotton marketing or trade include: Australia, El Salvador, Guatemala, Israel, Nicaragua, Nigeria, Paraguay, Peru, and Venezuela (Baffes 2001). A brief description of US and EU policies, which are probably the most important in shaping global markets, follows.41 Banuri (1999) provides a very useful study of the market chain in Pakistan, which includes a great variety of large and small players. Gillham et al. (1995) diagram the market chain for cotton in a number of key countries.

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US subsidies to domestic producers are believed to have a substantial depressing impact on world cotton prices. The US accounts for an estimated 63% of world cotton subsidies (Goreux 2004). Financial support, which totaled over US$ 3 billion during the last four seasons, includes loan deficiency payments, marketing loan gains, production flexibility contracts, marketing loss assistance (so-called emergency payments to offset falling prices), insurance, and subsidies designed to maintain the competitiveness of domestic mills (called the step-2 export subsidy). The combined impact of these payments was a US cotton price that was 91% above the world price in 2001/02 (Baffes 2004). Under current US policy, if world cotton prices remain at the 2001/02 level, support to the cotton sector is expected to be between US$ 3.5 billion and US$ 4.0 billion for the next six years, and the US price will remain at about double the world price. There are 25,000 cotton producers in the US. However, subsidies go disproportionately to the largest and wealthiest producers (Baffes 2004). Domestic consumption has been falling since 1997/98, and as of 2002/03 the US exported 69% of its production (Goreux 2004).

The EU supports cotton producers, found almost exclusively in Greece and Spain, with guarantee prices. The EU accounts for less than 3% of world production but about 18% of world cotton subsidies (Goreux 2004). As a result, for the 2001/02 season, prices in Greece and Spain were 144% and 184% above the world price. The EU currently consumes about twice as much cotton as it produces. It has proposed some reforms to its cotton sector policy, namely a decoupling of about 60% of subsidies. This change may lower production levels, though probably not dramatically (Goreux 2004).

Subsidies play an important role in keeping levels of cotton production up, even when prices are falling. Following a decline in world prices, the area in cotton production in countries that do not provide direct subsidies to producers declined from 21.7 million ha to 20.2 million ha between the 1998/99 season and the 2000/01 season. However, in countries that do provide direct subsidies to producers, the area increased from 11.1 million ha to 11.6 million ha (ICAC 2002).

Many developing countries have reacted to these high levels of support by instituting their own “off-setting” supports. These countries include Turkey, Brazil, Mexico, Egypt, and India. Support in these countries totaled US$ 0.6 billion during 2000/01 (Baffes 2004). Other important steps have been taken by developing countries, including the well-known Cotton Initiative. Benin, Burkina Faso, Chad, and Mali have requested removal of support to cotton, and requested financial compensation to offset the injury to their countries caused by the support, as long as it continues (Baffes 2004). Brazil has initiated a WTO consultation process on the grounds that US subsidies have harmed its cotton exports. Although the decision will not be announced until June 2004, it appears that Brazil has won its case on cotton and opened the door to further challenges to developed country subsidies.

Understanding raw cotton markets is complicated by the fact that cotton markets are shaped not only by cotton production policies but also by government efforts to protect textile industries. Of course, demand for cotton is driven by the demand for textiles. The Multifibre Arrangement (MFA), created under the GATT in the 1970s, allows industrial countries to restrict textile imports, effectively protecting their own textile industries and thereby limiting the growth of developing country textile industries and exports. One study found that the MFA imposes an implicit tax on cotton products of 20% (Martin 1996). This agreement is being phased out under the Agreement on Textiles and Clothing (ATC), and all import quotas are supposed to be eliminated by 2005. Since little progress has been made yet in ending these quotas, it is uncertain what the impact of the end-of-year deadline will be.

Countries have intervened in the cotton sector and textile markets for a variety of reasons. Gillham et al. (1995) provide a long list of goals of government interventions in the cotton sector:

Many countries considered that their policies promoted the development of the industrial sector, increased government revenue, supported the income of farmers, employed surplus labor, increased export earnings, helped reach economies of scale, provided quality control, provided a supportive infrastructure and arrested environmental concerns (107).

In the developing countries, providing raw material for the nascent textile industries was often the primary goal. Cotton policies in these cases are a form of import-substitution policy, intended to foster the textile industries. However, for the poorer developing countries, including the African producers, the primary goal has been to support production to ensure a cash crop for foreign exchange earnings. In the developed countries, cotton policies have served both to support the farmer and to protect the textile industries from

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foreign competition. The links with the cotton-textile industry have shaped patterns of reform to date (Baffes 2001), and will shape the impacts of agricultural liberalization if and when it occurs.

Table 3: Direct Government Assistance to Cotton ProducersTotal Production Assistance, US $ millions

1997/98 1998/99 1999/2000 2000/01 2001/02 2002/03Brazil 29 52 44 44 10 naChina 2,013 2,648 1,534 1,900 1,196 750Egypt 290 na 20 14 23 33Greece 659 660 596 537 735 718Mexico 13 15 28 23 18 7Spain 211 204 199 179 245 239Turkey na 220 199 106 59 57United States 597 1,480 2,056 1,020 3,001 1,996

Assistance as a percent of Cotlook A IndexChina 27% 45% 35% 34% 24% 13%United States 9% 38% 48% 22% 75% 44%

Source: ICAC 2002, 2003 cited in Baffes 2004

Steps Toward Liberalization

While the policies of the US and several other countries remain highly distortionary, reforms have been undertaken in some developing countries. Over the past 40 years there has been a consistent trend toward lowering of tariff barriers on cotton lint by both importing and exporting countries (ICAC 2002). Export subsidies were discontinued in many countries under the aegis of the Uruguay Round in the 1990s, with the notable exceptions of the US and China. Production subsidies remained fairly stable until the early 1990s, but subsidy levels rose with falling prices (ICAC 2002).

Reforms in Chinese policies have affected world markets. While agricultural policies in China are too complicated to evaluate with any certainty, it appears that China protects its cotton sector through support prices, import tariffs, export subsidies, and public stockholding (Baffes 2004). China’s WTO accession has forced a reduction in its tariff, but a quota system will be implemented to manage imports (Baffes 2004). A number of other reforms have been implemented starting in 1999. These included the opening of internal markets, the creation of a domestic cotton exchange, a reduction in the prices paid to producers, and a shift toward more commercial operations (Baffes 2004). These reforms achieved a large reduction in the cotton stocks held by China; the release of this cotton onto the market depressed world prices (Goreux 2004). China has now become a major importer of cotton, feeding a rapidly expanding textile industry (FAO 2004).

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Box: Expanding Production and Exposure to International Prices in Benin

Cotton-growing in West Africa has increased more than four-fold over the past 25 years (Baffes 2004). Initially, national companies held a legal monopsony in seed cotton, and often held a monopoly in ginning, marketing, and provision of inputs. These companies set cotton prices while village-level producers’ associations handled credits and seed payments (Baffes 2004). Strong research led to high yields and consistent quality that allowed the region to become a major cotton exporter. Smallholders, however, received only limited benefits from the expansion of cotton production. Producer prices were very low in comparison with other regions of the world, reflecting the high tax collected by the government. The system did not respond well to changes in world market conditions (Baffes 2003); low world prices combined with overvalued currencies in the late 1980s and early 1990s severely weakened the sector, and bankrupted some national companies. Reforms followed.

In Benin, reforms included opening the sector to private ginners and eliminating the monopoly held by the national cotton company, thus transferring some responsibilities to the private sector (Baffes 2001). The national company (SONARA) was reorganized between 1989 and 1991, and private companies began supplying inputs and transport to SONARA. Several private gins were established in the mid-1990s. Following devaluation of the CFA franc and the other market reforms, cotton production expanded in the1990s from 52,000 pounds of cotton lint to 152,000 pounds. Export earnings peaked at US$ 178 million in 1998 (FAOSTAT 2004), up from US$ 67 million in 1990. Cotton accounts for 90% of agricultural exports and for 22% of gross value of crop production (Minot and Daniels 2002).

In a rare study of the impacts of agricultural liberalization on rural poverty, Minot and Daniels (2002) look at the impact of falling cotton prices in Benin. Benin is among the poorest countries in the world, with GDP per capita of around US $400 (Baffes 2003). In Benin, as throughout Africa, cotton is produced largely by smallholders. It is grown by one third of farmers. The cotton expansion had very positive impacts on rural living conditions and poverty levels, perhaps particularly because cotton is grown in the arid regions where there is little opportunity for off-farm employment. An analysis of the impact of expanding cotton production in Burkina Faso likewise found a significant decrease in poverty (INSD 1999). Cotton production in West Africa did not expand at the expense of food crops (Goreux 2004). In fact, the expansion of cotton production led to an increase in the production of corn, since growing the two in rotation provides higher returns than cultivation of cereals alone. The World Health Organization reported that expansion of cotton production in West Africa led, indirectly, to improved diets (WHO cited in Goreux 2004). However, from an environmental perspective it is important that the expansion of the 1990s was entirely due to an expansion in the area devoted to cotton. While yields remained stable, the area harvested increased from 122,793 ha to 415,000 ha (FAOSTAT 2004).

These cotton-producing economies will see a reversal of the gains, however, with falling international prices. Benin’s cotton exports fell to US$ 127 million in 2002. Minot and Daniels (2002) found that the 40% fall in world cotton prices experienced from 2000 to 2002 can be expected to lead to an increase in Benin’s rural poverty rate from 40% to 48% in the short run and to 46-47% in the long run. Moreover, the severity of poverty will increase, as those already below the poverty line experience worsening living conditions. For the cotton farmers, the increase in the incidence of poverty is from 37% to 59% in the short run, remaining at 57-58% over the long run (Minot and Daniels 2002). In addition to these direct impacts, the authors point to two indirect impacts central to the rural economy. First, spending declines. They find that for every dollar change in spending by cotton farmers, there is a total change in spending of 3.3 dollars. Second, demand for rural labor will fall as farmers scale back production. However, the drop in demand will probably be small since other substitute crops will also require hired labor. Identifying the environmental implications of these findings will require a much better understanding of the relationship between natural resource use and poverty in this part of Africa. This understanding will be necessary to adjust to either an increase or a decrease in the price of cotton.

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During the 1990s, most African cotton-producing countries undertook major domestic reforms42. In Uganda, Tanzania, and Zimbabwe cotton had been taxed to support domestic textile industries. The state enterprises that controlled the cotton sector went bankrupt in all of these countries, forcing reform. The aims of these reforms—largely characterized by the withdrawal of the government from the sector—included increasing production and improving producer prices. The responsibilities of government enterprises, particularly in cotton marketing and trading, were transferred, at least in part, to the private sector (Baffes 2001). Outcomes in these countries have varied. In Uganda, reforms increased production substantially. Farmers have received a larger share of the world price, and new traders and exporters entered the market. In Zimbabwe, cotton production also increased following reforms. Farmers have received a larger share of the world price, and Zimbabwe has retained its premium in the world market. Tanzania’s reforms have been less successful. Producer price share has risen, though it is still small, and quality has been maintained. However, production has fallen and the government still plays a major role in the sector (Baffes 2004). Moreover, the domestic textile industry collapsed (Baffes 2001).

West African countries have also taken some steps toward domestic liberalization, though in response to low producer prices rather than government inefficiencies (Baffes 2001). Benin, Côte d’Ivoire, and Togo now allow private ginners, and Benin and Côte d’Ivoire have eliminated the monopoly held by national companies and shifted responsibilities to the private sector (Baffes 2004). (See box on Benin).

Another detailed examination of African cotton markets reveals some of the difficulties associated with government withdrawal from the sector (Poulton et al. 2003)43. Looking at the differences across the cotton sectors in 6 countries, the study finds that unchecked competition in cotton markets is not a recipe for success. The countries which have been most successful in capturing benefits from liberalization are those which have managed to balance competition and cooperation in the sector.

What to Expect with Liberalization

Recent events suggest that some liberalization of the international cotton market may be in the offing. How will liberalization affect current trends in cotton production and cotton markets? Consumption trends reflect not only population growth but also the relative prices of cotton and man-made fibers. An end to domestic subsidies for cotton would lower production levels and lead to higher prices in the short term. Moreover, any significant rise in cotton prices will lead to a decline in consumption. Cotton production would shift to the most competitive countries over the medium- to long-term, which would offset the price increase and probably restore production levels (ICAC 2002).

An ICAC study44 (2002) looking at the removal of US subsidies alone finds that the resulting decline in US production would lead to an international price increase of between 6 and 22 cents. The ICAC model predicts that a 20% increase in cotton prices would lead to a 1% decline in world demand, which would decrease the impact of the price increase somewhere between 1 and 6 cents (2002). At the same time, non-subsidizing countries would increase production, which would cut the price increase by about half (ICAC 2002). The study estimates that, if production in other subsidizing countries responds in the same way as US production, then removal of direct subsidies worldwide would increase world prices between 17 and 31 cents. While the authors suggest that price volatility would decline, over the long term shifts in production would bring prices back to their current levels (ICAC 2002). Another study (Quirke 2002) simulates the impact of removing US and EU subsidies to cotton production and exports. It finds that this liberalization would raise the world cotton price by 6 cents or 11%. US cotton production would fall by 20%, and exports by 50%. Reductions in the EU would be even higher.42 The African reforms and their outcomes have been studied extensively. Baffes (2004) mentions Kahkonen and Leathers (1997) on Zambia and Tanzania; Sabue (1996) and Lundbaek (2002) on Uganda; Larsen (2002) on Zimbabwe; Baffes (2000), Badiane et al. (2002), and Goreux and Macrae (2003) for Francophone Africa; Baffes (2002) on Uganda, Zimbabwe and Tanzania; Baffes (2002) and Gibbon (1998) on Tanzania; Poulton et al. (2003) and Shepherd and Farolfi (1999) on a number of African countries.43 The study looks at the Anglophone and Lusophone countries: Ghana, Mozambique, Tanzania, Uganda, Zambia, and Zimbabwe.44 This study uses short-run partial equilibrium analysis, and is based on some known elasticities for US production.

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Successful phase-out of the MFA, which would end quotas on textiles and clothing, will affect not only textile production but also cotton production. It can be expected to lead to relocation of processing industries to developing countries, and increased demand for cotton. Cotton lint production would shift to the textile-producing countries when possible. The FAO predicts that, given the advent of biotech cotton and new low-cost producers entering the market, cotton trade will increase by 1.5% annually, reaching 6.5 million tons by 2010 (FAO 2002). Another study (Quirke 2002) finds that the world price of cotton would increase by 4% with MFA phase-out. Going beyond the ATC, proposals to remove tariff barriers as well as quotas for clothing and textiles would significantly change cotton trading patterns. Many high-cost cotton textile producers in both developed and developing countries would be forced out of business. Low-cost textile producers—China, Indonesia, India, Pakistan—might become major importers of raw cotton (FAO 2002).

Full liberalization of cotton markets, including implementation of the ATC, is predicted to lead to an increase in cotton prices. Production would decline in those countries with high levels of support, and would increase in those countries with low production costs (Baffes 200). A partial equilibrium model of multilateral trade liberalization in all agricultural markets (Tokarick 2003) predicts a 2.8% increase in the price of cotton, with a global welfare gain of US $95 million per year. Another simulation (FAPRI 2002) of full liberalization, including removal of production support and trade barriers for all commodity sectors, predicts that cotton prices would increase by an average of 12.7% in the next ten years over the price without reforms. Cotton trade would increase by 5.8% overall, reflecting a increase in African exports by 12.6%, in Australian exports by 2.7%, and Uzbeki exports by 6%. US exports, according to this model, are expected to decline by only 3.5%, and production by 6.7%. However EU output would decline by 70%. Production would increase by 4% in Uzbekistan and by 6% in Africa.

Environmental and Social Impacts

Full or partial liberalization of the cotton sector will lead to decreased production in the US and EU, where production is heavily mechanized and relies on irrigation and heavy use of agrochemicals. Cotton production will probably increase in Africa and Central Asia, which are the lowest-cost producers. There will undoubtedly be major direct environmental impacts from this increase in production, which will include expansion in area and expansion in water and agrochemical use. Production increases achieved to date through cotton liberalization in Africa are largely a result of expansion of area and an increase in the number of producers, rather than improved yields (Poulton et al. 2003). Uzbekistan relies heavily on irrigation for its cotton crop. Higher world cotton prices may allow farmers in these countries to increase inputs to production, particularly agrochemicals, which will have the immediate benefit of improving yields but may have major environmental and health consequences, as described above.

Liberalization of cotton, particularly a full liberalization that addresses distortions in the textile sectors, will have major impacts on rural and urban poverty. These changes will have indirect impacts on the environment through changes in resource use. Because cotton is a cash crop, and often produced by smallholders in developing countries, it can play a major role in reducing rural poverty. While production volumes may be small, cotton contributes a significant share of cash income in many households and in many countries. Moreover, its close links with the textile industry mean that cotton production will affect employment opportunities in urban areas as well. Because of these strong links with poverty, a number of studies have looked at the impact of developed country cotton subsidies on the poor. A World Bank study reported that removing US cotton subsidies would generate US$ 250 million per year in additional revenue for West African cotton farmers (Badiane et al 2002). Likewise, an OXFAM report found that US subsidies cost three West African countries 1-2% of GDP, and points out that these revenue losses exceed US development assistance. A later World Bank study comes to the same conclusion (Baffes 2003). A case study of Benin (Minot and Daniels 2002), described in the box, clearly reveals the role of cotton in alleviating rural poverty in that country.

Opening of textile markets will have major impacts on the world supply and market for cotton that have not been addressed in any detail here. Nevertheless, these issues must be factored into an evaluation of the environmental challenges and opportunities afforded by liberalization. While textile industries provide employment and may be a useful step toward other forms of industrial development, the environmental

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impacts include heavy use of water and energy, and generation of pollutants that can be difficult to deal with in the developing world.

Some Preliminary Conclusions

Cotton is the world’s primary fiber crop, and the primary input to one of the developing world’s most important industries. Attention has been repeatedly drawn to the damage that US and EU subsidies do to poor cotton-producing countries. Liberalization of these markets, particularly the elimination of US subsidies, will undoubtedly benefit the rural poor of Africa and other regions. The direct links with the textile industry mean that liberalization in that sector could also bring new employment and export opportunities to the developing countries. Reduction in rural and urban poverty can certainly bring environmental benefits. However, the nature of cotton production means that there are some serious challenges raised by shifts in production. Water use and pesticide use will need to be carefully monitored and, where necessary, controlled to ensure that cotton production does not cause more harm than good. Where textile industries expand, similar precautions will need to be taken with water use and pollutants.

While liberalization will bring an immediate price increase on world markets, over the longer term competition can be expected to bring that price back to current levels. Moreover, the factors that have driven the long-term fall in prices and price volatility will not disappear. Developing countries will need to find ways to address these issues. For the countries that are already heavily dependent on cotton exports, such as the Francophone countries of Africa, the increase in prices and export opportunities will bring immediate benefits. However, the problem of over-dependence of regions and whole countries on a single cash crop—particularly a crop that is highly susceptible to pests and water damage—remains to be addressed in the interests of sustainability.

Increases in yields to date have largely been derived from irrigation and pesticide use. These pose direct problems for the environment. Increases in yields and lower costs are also achieved through mechanization and consolidation of production lands. The attractiveness of land consolidation in a strong cotton market will pose a risk to smallholders, in Africa and elsewhere. The study by Poulton et al. (2003) points to the importance of cooperation in the sector to ensure the capture of benefits for smallholders, either through government or private institutions. Public goods—such as quality control and research—need to be provided to ensure that liberalization does not harm the long-term prospects for cotton production. A careful balance must be achieved between cooperation and consolidation if cotton liberalization is to contribute to poverty reduction in the poorest countries, an essential first step for environmental sustainability. Achieving this balance will allow countries to obtain the best price for their cotton on international markets, while ensuring that the benefits are returned to the smallholders.

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Web Sites

www.icac.org

www.cotton.org

www.fao.org

www.usda.org

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