The influence of weather and supply and demand on cotton will forever influence cotton marketing. However, policy decisions by cotton growing and consuming countries of the world will have a far greater influence on cotton markets in the future, according to Mechel Paggi.
Paggi, director of the California State University, Fresno Center for Ag Business told the recent risk management workshop that that is exemplified by the current dispute playing out in the World Trade Organization between the U.S. and Brazil over the influence of U.S. farm programs on world cotton prices.
The stakes are very high in the debate, but Paggi said it will be May before the WTO makes a ruling on Brazil's charge. It will be a nervous time between now and then, but he is optimistic the U.S. will prevail.
However, if WTO rules against the U.S. it could have a dramatic impact on not only cotton exports, but exports of many other major commodities as well. Brazil has asked for $600 million in damages in his case. If it wins it could impose tariffs on all major farm commodities moving to Brazil equal to that amount.
“I think it will be very difficult for Brazil to prove the U.S. cotton program is causing problems. However, there are very cleaver advocates on both sides,” Paggi cautioned.
One of those advocates for Brazil is Daniel Sumner, the director of the University of California Agriculture Issues Center, who has made at least two trips to Geneva to testify on Brazil's behalf of against the U.S., inciting the anger of the U.S. cotton industry.
A Brazilian win could also result in changes in the U.S. farm policy, which Paggi said is not likely, or that Brazil would simply do nothing if it won.
China continues to be America's dancing partner in the world cotton market because between the two, they produce about half of the world's cotton each season.
State run policies
China's economy is state run, therefore, policy decisions there have an even great influence on trade with that country.
China is the world cotton/textile market's 800-pound gorilla.
Right now China needs cotton because its production did not meet its demand, and trade policy issues are taking a back seat to a big export market. However, if and when China's production rebounds, a 7-million-bale export market could disappear as fast as it appeared.
Paggi has just returned from China and he said increasingly more land is being devoted to higher value and permanent crops, he believes making it difficult for China to quickly rebound its cotton output and make up that shortfall.
However, he pointed out that Bt cotton is now widely grown in China and that may produce more cotton per acre to cover the shortfall.
Policy decisions affecting Chinese textile imports into the U.S. could have far greater implication than its production.
On Jan. 1, 2005, tariffs on 700 textile items will disappear as a result of trade deals at the close of the Uruguay round of WTO talks.
“This will obviously not help the domestic textile industry,” he said.
When tariffs disappear as they have so far on 50 Chinese textile items, China is not subtle about its exports to the U.S. They often skyrocket by three digit percentage increases overnight. This causes major turmoil in the U.S.
However, the influence of those exports extend far beyond U.S. borders to many other U.S. trading partners like those in NAFTA, Africa and other nations.
“If you take the top 14 textile importers into the U.S., they represent 76 percent of U.S. cotton exports. It is a mirror image of who we sell cotton to,” he said.
“This is political economics…not just economics,” he said.
If China takes U.S. markets away from those nations, it would not only have a major influence on U.S. foreign policy, it would make the U.S. cotton industry even more dependent on China to buy cotton. And China has proven to be an unstable market offering no assurance that the government will abide by any agreements it makes.
The race to embrace globalization and open and free trade may not be such a good idea after all, said Paggi.