EU cotton production could decline with decoupling

Cotton acreage could decline by as much as 30 percent in two of the most highly subsidized countries in the world — Spain and Greece — with a plan to decouple payments from production.

Beginning in 2006-07, an estimated $875 million will fund two support measures, with 65 percent of the total coming in the form of a single farm payment decoupled from production decisions and the remaining 35 percent in the form of a payment coupled to cotton area.

According to Armelle Gruère, International Cotton Advisory Committee, Washington, D.C., the EU has declared the decoupled payment as a non-trade-distorting (green box) support, while the area payment is declared to be a less trade-distorting (blue box) support.

Eligibility for the 65 percent decoupled payment will be limited to growers who produced cotton during the three-year reference period from 2000-01 to 2002-03. This represents about 222,000 acres in Spain and 940,000 acres in Greece.

To receive decoupled payments, cotton growers must keep the land in good agricultural use, but they do not have to plant cotton. The 35 percent coupled payment will be given for a maximum area of 914,000 acres in Greece and 173,000 acres in Spain and will be proportionately reduced if claims exceed the maximum area allocated to each country.

To receive area payments, producers must plant cotton and grow the crop until the stage of boll opening in normal agricultural conditions, but they are not forced to harvest the cotton.

In the years following 2006-07, the ICAC estimates that cotton area in the EU will decrease as the least efficient cotton producers will stop growing cotton. A gradual concentration of cotton production in the largest farms and a decrease in the number of gins are also expected.

However, as long as EU cotton subsidies are only partially decoupled and not removed, cotton area in Greece and Spain is expected to remain relatively significant.

Still, the ICAC forecasts EU cotton production to be down about a third by 2010 from the current level.

The European Union currently produces only about 2 percent of world cotton production. However, EU cotton producers receive the highest subsidies per pound of cotton in the world, under the form of direct payments based on the difference between the world market price and a target price for unginned cotton.

Gruère noted that the income support is considered a form of economic assistance to Greece and Spain cotton-growing regions, which are among the lowest-income regions in the EU.

Traditionally, EU subsidies were directly linked to cotton area and were given to cotton producers through ginners. Ginners received aid from the EU and transferred the payments to cotton producers by paying them a minimum price.

The level of aid given to ginners was fixed periodically on the basis of the difference between a “guide” price, fixed by the EU, and the world market price for seedcotton.

The calculated world price for seedcotton was based on the world price for cotton fiber and a given ginning ratio. The minimum price is equivalent to about $1.65 per pound of lint (assuming an exchange rate of 1.188 dollars to the euro and a ginning ratio of 33 percent), Gruère said.

Cotton producers in Greece and Spain received the highest subsidies per pound of cotton in the world, equivalent to around a dollar per pound of cotton lint in 2003-04 and 2004-05. This is at least five times more than the amount of subsidies per pound received in other countries that support cotton producers, and 1.5 to 1.8 times the average annual world cotton price during these years.

The new subsidy regime was implemented in part to discourage over-production. In addition, some analysts say that EU cotton subsidies have “hampered the development of cotton production in West and Central Africa.

Prior to the new subsidy regime, EU producers were penalized by having per pound payments reduced when overall production exceeded the budgeted amount. But during times of high prices when the budget for subsidies was not reached, “premiums” were paid to EU producers, partially offsetting the effect of penalties on seedcotton prices.

Cotton production is very concentrated within Greece and Spain. Most of the land dedicated to cotton production in Greece is located in three regions: Thessaly, Macedonia-Thrace and Sterea Ellada.

In Spain, production is concentrated in the Andalucía region, mainly in the provinces of Seville and Cordoba. Cotton farms in Greece and Spain are characterized by their large number (71,600 in Greece and 7,600 in Spain) and small average size (12 acres in Greece and 30 acres in Spain).

Cotton is a minor crop in the EU, where it contributes to only 0.5 percent of the final agricultural product. However cotton has a strong importance in Greece, where it contributes 9 percent of the national agricultural product (vs. 1.5 percent in Spain).

Cotton has even stronger economic importance in the low-income and high-unemployment rural regions that produce cotton in Greece and Spain. The cotton sector is a source of employment for many people throughout the cotton chain who produce inputs (seeds, pesticides, fertilizers, equipment, machinery and services), farm, harvest, and gin.

For example, in Spain it is estimated that the cotton sector requires 1.1 million days of labor on farms and provides 2,000 seasonal jobs in ginning factories. The alternatives to cotton production in these areas (sunflower and durum wheat in Spain and corn in Greece) are not as profitable as cotton for farmers.

EU cotton exports are estimated at about 440,000 tons in 2005-06, accounting for 5 percent of world exports.

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