Cotton has become a symbol of the inequities and distortions of global trade, demonstrating how agricultural subsidies in developed countries devastate farmers in developing countries
Shrikrishna Gangaram Rahate’s 30 years of experience in farming was worth nothing. He did not realise that larger factors at play accounted for most of his problems.
“He had seen crop failures, floods and droughts, but not to this extent,” says his 26-year-old son Mohan, squatting on the mud floor of his hut in Kavitha village in Amravati district. It is all left to an inexperienced Mohan now -- to farm, tend his family and repay mounting debts. His father committed suicide on July 31, 2006, when agricultural distress grew in alarming proportions. Exactly a month ago, in the same district, the visiting Prime Minister Manmohan Singh shared the “pain” of the cotton farmers and admitted to a far deeper crisis in India’s agriculture sector. During his visit, the prime minister declared a special package for Vidarbha’s six districts.
“For some reason we are not getting the right price for our produce even though our production cost is shooting up every year,” says Mohan. “The PM’s package doesn’t mention better prices or a complete loan waiver; it’s of no use to us.” Mohan and thousands of farmers say that what they need is proper pricing, not packaging of schemes. “Give us price, not packages,” says Kaka Tadas, a veteran farmer from the same village.
Neither Tadas nor Mohan know that a complex spiral of global trade distortions is crushing their hopes of a good price. The prime minister and his entourage knew, of course. “That’s why the packages,” says farm activist Kishor Tiwari. “They know the wounds won’t be cured, but band-aids might salvage some political ground.”
As fresh suicide figures break previous highs every day in the cotton country of Vidarbha, agrarian distress travels much deeper. Says P Sainath, the country’s frontline commentator on the agrarian crisis: “Suicides are the most visible of the symptoms, not the crisis itself.” It is the effect, not the cause, he tells us. The tragedy, though, is that even such a grave symptom has not been enough for the government to act with urgency. Tens of farmers continue to kill themselves -- over 800 farmers committed suicide between July 2005 and the end of August 2006.
“If I were given a choice,” says Vijay Jawandhia, a farmer leader in Wardha, “in my next birth I would like to be born a European cow -- certainly not an Indian farmer”. A cow in Europe gets a subsidy of US$ 2 per day and enjoys all the comforts of life. “And here, in India, a farmer is a debtor all his life. After his death, his son inherits his debt and has to borrow money for his funeral.”
Jawandhia sums up the mood sweeping through the farming community, particularly in crisis-ridden Vidarbha. But his sarcastic remarks underline the great paradox of today’s distorted global trade, touted by many economists as the answer to all woes.
For many who have been singing to the tune of the WTO, the Indian farm crisis remains an ugly fallout of “lack of enough reforms”, although cotton was -- and still is -- the freest of all agricultural commodities. Their argument is that there are too many government strings attached to policies, and that they need to be detached for the growth and prosperity of the poor agrarian masses. A close look at the processes that plague agriculture, especially imports, contradicts these claims.
Long before acute distress set in, in Vidarbha, farmers rejoiced in near self-sufficiency on all fronts -- food, clothes, seeds, fertiliser, festivals, marriages, construction. Pre-1991, nobody had ever heard of farmers taking their own lives. Veteran farmers and farm leaders in the region confirm this almost unequivocally. Farmers were poor, but they ate enough and were not caught in a debt trap.
Today, in this eastern region of Maharashtra, the green fields are transforming into killing fields. Distress is devouring the region at a much faster pace in the wake of the opening of markets. The past four years have seen hundreds of farmers commit suicide in a region rich in cotton, paddy, soybean and oranges. The past year -- the 2005-06 agriculture season -- saw close to 550 suicides. Over the last three months, around 300 farmers ended their lives -- all due to the ruthless policies of the past decade, which pushed them over the edge. Those holding on to life have little hope of lifting themselves out of the crisis unless the state hikes its investments in the agriculture sector and takes corrective steps on the policy front. So far there have been no signs that the situation is improving. The collapse of WTO talks in Doha point to this fact.
According to several experts, cotton has become a symbol of the inequities of global trade. The case of cotton clearly demonstrates how agricultural subsidies in developed countries have had a harmful impact on farmers in developing countries. Subsidies elsewhere skew local production levels and values, undermining the income of cotton farmers in developing countries. Some of the poorest countries in the world are cotton producers, and they stand to gain significantly from reforming trade and agricultural policies. Yet these countries face a depressed cotton market caused, in part, by rich-country subsidies.
Globally, more than 70 countries produce and export cotton. Of these, just eight countries are responsible for almost 80% of global output: China, the United States, India, Pakistan, Uzbekistan, Turkey, Brazil and Australia. World production of cotton has stagnated -- in February 2001 it was 19.1 million tonnes (MT), marginally down from 19.6 MT in 1995-96, when cotton prices were 50% higher. Significantly, though, cotton remains the world’s single most important fibre in textile production, with a share of about 40% in recent years.
Over 25% of global cotton production -- roughly 5.4 MT -- is traded internationally. The world’s cotton market is dominated by the US, the second largest producer after China and the largest exporter. The country exports almost 70% of its cotton. The US is followed by Uzbekistan, Australia, Brazil and Greece, in exports. These top five exporters contributed 70% of all cotton exports in 2001. The major importers are Indonesia, the European Union, China (although it is also the largest producer), Mexico and Thailand.
Across the world, over a quarter of earnings from raw cotton production comes from government support to the sector -- in other words, subsidies. Official support to the cotton sector is greatest in the US, followed by China and the European Union.
World cotton prices have dropped since 1990, mainly because of price distortions created by subsidies given to farmers in rich countries. During the 1960s, cotton prices averaged US$ 2.31 per kilogram. During the 1990s, they dropped drastically, averaging only US$ 1.34 per kg. The price of cotton expressed in current US dollars fell in the 2001-02 crop year to its lowest annual level in 30 years, to less than a dollar per kg. The present price is no better, hovering in the range of US$ 1.15 to US$ 1.20 per kg -- roughly Rs 54 per kg.
World cotton prices have witnessed a sharp and steady decline ever since agriculture was opened up to free global trade in the post-WTO era. This is because, despite promises to cut protection in agriculture, there has been no reduction in the protection given to farmers in rich, industrially developed parts of the world like the US and EU. At the same time, the little protection that farmers in developing nations once enjoyed has been lifted.
For instance, in India, import duty on cotton stands at a meagre 10%, up from 5% in the 1990s. In contrast, China’s import duty is 90%. Since raw cotton is an agricultural commodity, the Indian government can actually increase its tariff (import duty) to 150% -- the bound tariff rate. Ironically, even the current, minimal 10% import duty can be waived if the importer promises to export the yarn in return. Many textile mills take advantage of this leeway.
Globally, governments spend as much as $ 5.7 billion annually on cotton subsidies. The biggest subsidiser is the US. Economists estimate that US subsidies and over-production cause a 10% reduction in global cotton prices, on average. Of the leading cotton producers, only the US provides such massive government support to its farmers. In crop year 2002, the US government provided $ 3.4 billion in total subsidies to its cotton sector. That is more than the combined GDP of Benin, Burkina Faso and Chad -- which, ironically, receive US aid. The EU and China also provide significant subsidies to their cotton producers, though not on the scale of the US, and both these regions are net importers of cotton.
By 1999-2000, eight countries had significant subsidy programmes that distorted prices. The average level of assistance provided across all subsidising countries was US$ 0.58 per kg. At the average productivity of Indian cotton farms, this would mean that each farmer would be paid roughly Rs 13,000 per hectare in subsidy. It is important to note that this subsidy was equivalent to 48% of the world price. Naturally, this caused cotton prices to crash.
With international prices depressed and production costs rising, developed and industrialised nations take the subsidy or tariff route, or a combination of both, to protect their farmers. India, on the other hand, has shunned both options.
The EU support programme began in 1981 when Greece and Spain joined its Common Agriculture Policy (CAP). Together, Spain and Greece accounted for 2.5% of world cotton production, 6% of world exports in 2001, but a whopping 16% of world cotton subsidies. According to a detailed 2005 Oxfam report: “If the EU subsidy is removed, the cotton crop will be wiped out from Greece and Spain.”
China follows a different route. Since it cannot match the gigantic subsidies of the US or the EU, it provides support to farmers through protection against imports. China’s subsidy is close to US$ 0.2 per kg. Translated in terms of productivity in Vidarbha, where 93% of cotton acreage is non-irrigated and soil quality is poor (300 kg per hectare), it would stand at US$ 60 per hectare, or Rs 3,000. With the productivity of Punjab, where irrigation is more widespread (about 700 kg per hectare), it would mean Rs 6,300. It is worth noting that production costs are high in Punjab too, and farmers there are also committing suicide. In China, with yields at over 1,000 kg per hectare, farmers get close to Rs 9,000 per hectare for their cotton crop only in terms of direct subsidy. China also imposes steep tariff on imports -- up to 90%, compared to global tariffs of 5.3%.
In the US too, cotton production has reached historic highs in recent years. However, with domestic demand for cotton having slumped, exports have surged. In crop year 2003-04, the US exported 76% of its cotton production and took a 41% share of world exports. These drastic increases could not have been accomplished without government support. According to the US department of agriculture, without subsidies the average US cotton farmer would have lost $ 871 for each acre planted with cotton over the past six years. All told, between crop years 1998 and 2002, the US spent $ 14.8 billion on cotton subsidies. Harvesting government subsidies is nearly as lucrative as growing cotton there. Without subsidies, most US cotton production would simply not be economical.
From a share of 18.16% in 1998-99, America’s share in world exports jumped to 38.96% in 2002-03 and then reached 41% in the 2003-04 crop year. Indian cotton imports rose sharply in the same period, crushing local cultivators. In 2004-05, global prices stood at around 50 cents per pound, the seventh year in succession that they were below the long-term average of 72 cents per pound. Even the most efficient producers in India are now operating at a loss, unable to cover the costs of production.
Marketing projections by the International Cotton Advisory Committee (ICAC) suggest that prices will remain “chronically depressed in the foreseeable future”. Forecasts point to a modest recovery, but prices look likely to remain at 50-60 cents per pound until 2015, if present conditions continue. Using its world textile demand model, the ICAC indicates that a withdrawal of American cotton subsidies would raise cotton prices by 11 cents per pound, or by 26%. Governments in developing nations cannot pay their farmers a realistic price because US subsidies help its farmers grow surplus cotton, creating a glut in the international market and causing international prices to crash.
The subsidy-based surplus crushes cultivators in a country like India in two ways. Without direct subsidies, Indian farmers cannot compete with the artificially depleted prices prevailing in the international market. To make matters worse, the domestic textile industry opts for cheap imported cotton instead of what is grown by farmers in the country. The crash in international prices thus leads to a crash in local markets. At a time when production costs are spiralling, this is clearly disastrous for local cultivators.
Contrast the subsidy bills of developed countries with the scenario in India. A briefing paper prepared by the Centre for Science and Environment (CSE), New Delhi, for its round table discussion on ‘The fabric of cotton: seeds, farmers and textiles’, on July 10, 2006, points out that the Government of India does not give its cotton farmers any direct subsidy. It buys the crop based on the annually calculated cultivation cost through a minimum support price. If the market price is higher, farmers can sell in the open market (except, until recently, in the case of Maharashtra: till 2002-03, the state had a monopoly cotton procurement scheme in place). At best, it offers a floor price, but not a subsidy. The only subsidy for agriculture -- including cotton -- is the annual fertiliser subsidy that is paid to the manufacturing company and not directly to the farmer (it has the indirect benefit of containing fertiliser prices, to some extent). The per capita subsidy has been calculated by officials in the ministry of commerce as averaging a low Rs 12, mostly because of the trickle-down effect of the fertiliser subsidy provided to manufacturing units.
Taking into account the number of farmers involved in cotton farming in India -- estimates suggest that 60 million farmers depend on cotton for their livelihood -- government support amounts to a measly Rs 5 crore annually. It is often argued that the government also gives farmers free power to energise their wells, and that this must be viewed as a subsidy. But the fact is that the government provides this ‘subsidy’ in the absence of infrastructure needed for irrigation.
The late-1990s witnessed a spurt in cotton farmer suicides, as their indebtedness grew. The suicides can also be linked to the fact that both the state and central governments steadily lifted even the little protection that marginal farmers enjoyed until then: an assured buyer in the form of the government, a guaranteed price higher than the minimum support price, and access to institutional credit.
Traditionally, India has been a net cotton exporter. But, by 1998, the country emerged as a major importer due to several policy changes. Imports were liberalised when the Cotton Corporation of India’s (CCI’s) import monopoly was terminated in 1991. Now, imports are subject to the Open General Licence (OGL), which allows for unrestricted imports even by private traders. To attract imports -- on the ground that cheap raw material will help boost the textiles sector -- the duty was initially brought down to zero. However, at that time, domestic prices were competitive. Imports rose sharply with the decline in world prices. This meant that, in order to compete, Indian cotton farmers had to reduce their prices considerably.
The late-1990s saw precisely that trend -- a steep decline in raw cotton prices. Between 1980 and 1995, says a recent Oxfam report, Indian prices for extra-long staple and short staple cotton lint were, respectively, 40% and 15% below world price levels. A fixed and distorted world price has meant disaster for farmers in Vidarbha. For, even as the Indian government has been lifting subsidies here, European and American farmers continue to receive huge direct subsidies.
While cotton prices have declined by over 60% since 1995, US subsidies to its barely 25,000-strong cotton farmers reached $ 3.9 billion in 2001-02, double the level of subsidies in 1992. Interestingly, the value of subsidies provided by American taxpayers to the cotton barons of Texas and elsewhere, in 2001, exceeded the market value of cotton output by 30%.
To put this figure into perspective, according to an Oxfam report, that subsidy was nearly twice the total US foreign aid to sub-Saharan Africa.
There is another dramatic fallout: subsidies in the developed world deepen poverty in the developing world. An International Food Policy Research Institute (IFPRI) report in 2005, focusing on Benin, indicates that a 40% reduction in farm-level cotton prices leads to a 21% reduction in income for cotton farmers, and results in a 6-7% increase in rural poverty.
It is clear that major policy shifts in domestic pricing and support, together with falling global prices and rising imports, have resulted in huge financial losses for the Indian farmer. Despite fluctuating productivity, farmers like those in Vidarbha are being forced to sell their cotton at prices far lower than their current costs of production. And this does not take into account interest on loans they take from private moneylenders or government institutions. Even in Gujarat, farmers are able to survive and recover their production costs only because of low input costs. But they stand on the brink, with no margin of error.
India’s Minister for Agriculture Sharad Pawar says: “The country’s agriculture sector is suffering in part due to the unequal nature of global trade.” He confirmed in May that between 1993 and 2003, at least 100,000 farmers had killed themselves because of their inability to repay loans. That’s an average of 10,000 deaths every year. These victims of unfair global trade are often more numerous than the victims of war. But they die unseen, unheard and unsung.
(Jaideep Hardikar is a Nagpur-based journalist who has been covering the agricultural crisis for the last several years)
InfoChange News & Features, February 2007