Monday June 24, 2002

The Financial Express

The US Farm Bill, which grants huge subsidies to US Cotton farmers is hurting Australia and India, trade members said. Despite low world prices, US farmers are expected to continue producing large amounts of cotton with the help of higher subsidies, preventing a recovery in prices, they said.

Australia’s cotton export market in India is already gnawed by the increasingly competitive US exporters. And if world textile prices fall as a result of lower cotton prices, India’s export competitiveness in textiles too may take a beating, they added.

In the August-January period of the current marketing year, India’s imports of cotton from the US shot up to 128.065 tonnes, while purchases from Australia stood at 27,280 tonnes. India’s imports from the US were large “due to highly competitive US prices vis-à-vis other regions”, the USDA report stated. A further fall in US cotton prices due to the subsidy is likely and is expected to boost imports of US cotton into India, industry members said, US cotton already accounts for more than half of India’s total cotton imports of 2.2. million bales, the USDA report said. One bale is equal to 170 kgs. Trade members say total cotton imports into India are set to rise if local cotton prices exceed global price levels.

“Indian mills are fond of cotton that’s the cheapest,”said a Bombay-based cotton trader. “If local prices go up, the threat of import is there. That hurts the interests of the farmers here. “ India has a subsidy programme for cotton farmers as well, but its dole-outs to farmers are small compared to the US, trade members said. India gives indirect subsidies to farmers with reduced prices for fertilizers and pesticides, India also annually sets a minimum support price (MSP) and buys cotton from farmers if market prices fall below the MSP.

Lower world prices are driving up subsidy costs to the Indian government, a senior official at India’s textile ministry said. In the cotton year ending September 2002, the government is estimated to spend Rs.80-90 crore on cotton purchases from farmers, he said. In comparison, costs to the government last year were negligible. “Next (cotton) year, if subsidies in the US are given, prices would fall further,” he said, adding the government will have to spend more on buying larger amounts of cotton from farmers.

Industry analysts say the new US legislation violates the spirit of the World Trade Organisation talks held at Doha last year where a removal of farm subsidies was agreed upon by participants. “It’s a slap in the face of the WTO, “said Pradeep Mehta, Secretary General at CUTS Centre for International Trade, Economics & Environment. CUTS stands for Consumer Unity & Trust Society. “Subsidies to farmers amounts to three-and-a-half times the cotton price there (the US).” Falling global prices have already altered India’s trade balance in cotton. Until three years ago, India — the world’s third largest cotton producer – was a net exporter. Now, it’s the world’s third largest importer of cotton.

Earlier this year, India raised the import duty on raw cotton to 10 percent from 5 per cent, ostensibly to curb imports. Under the WTO rules, India can increase the import duty to between 40 per cent to 80 per cent depending on the cotton variety. Industry members say a fall in global cotton prices could drive global textile prices down and hurt India’s export competitiveness. “When international cotton prices decline, international textile prices will also decline and we are not able to match that,” said D.K. Nair, secretary general of the Indian Cotton Mills’ Federation. “The textile industry will have to use cotton produced in India at a disadvantage and then compete in the international market where people are paying less for cotton,” Nair added. India has a 25 percent share of the world’s cotton yarn market and is a large exporter of cotton textiles as well.