1. Subsidies stimulate higher US production, which depresses global prices.

If
subsidies removed, cotton prices would go up, and textile products would be more
expensive. As a US taxpayer, and a textile consumer, do you recommend that
subsidies a] be increased, b] maintained at current levels, or c] be eliminated?

As a US taxpayer and a textile consumer, I am of the opinion that the subsidies given to the
cotton growers must first be gradually decreased and then completely eliminated over a
period of time. Removing subsidies should not add to inflation for clothes and cotton goods,
The actual cost of cotton as a proportion of the garment consumers buy isn't huge, so a
significant rise in the price of cotton would be a few pence extra on the end product. This
opinion is seconded by Harriet Lamb, the Fairtrade Foundation's executive director, which is
an organization based in the U.K. established to look after the welfare of developing nations
with respect to trade relations.
A report, The Great Cotton Stitch Up, complained the US subsidies were "distorting" the
world market for the most used natural fibre in the world. While cotton should be the "white
gold" that lifted 10 million farmers in West Africa out of poverty, they were engaged in a
daily battle to survive, the report said, quoting Oxfam's calculation that the payments cost the
four "C4" states of Benin, Burkina Faso, Chad and Mali over £155m a year.
Global cotton prices have almost doubled since last summer to a 15 year high of $1.39 a
pound last week, because of floods in China and Pakistan, two big producers, bad weather in
the US and an export ban in India. The increase has prompted British retailers Next, New
Look and Primark to warn that the cost of clothing in the shops will increase.

Despite the rise, West African farmers are unlikely to raise production because they have
been badly stung by the collapse in world prices over the past 30 years, according to the
report. It said subsidies had worsened their situation. Since 2001, the US has spent the most
on subsidy, $24.4 billion – 51 per cent of the global total – paying 3,500 farmers in southern
states such as Arizona, Georgia, Mississippi, and Texas. According to the report, a powerful
US cotton lobby funds US politicians who have maintained the payments. The political lobby
for cotton is one of the strongest in US agriculture, as witnessed by the 2002 Farm Act. Led
by the National Cotton Council of America, cotton barons have helped to foster an image of a
sector dominated by farmers operating in a harsh environment, but displaying an
entrepreneurial drive that benefits the entire nation. The pre-eminence of the US in world
markets is a common theme. As in other aspects of farm policy, good public relations and
political influence has helped to obscure some hard truths. The US is an inefficient producer
of cotton at current levels relative to many other countries, while the sector represents a huge
drain on taxpayers. Viability depends on huge infusions of capital from the general public on
an annualized basis.

One of the great myths of US agricultural policy, promoted in grand style by the Bush
Administration, is that government subsidies support small family farmers and vulnerable
communities. Nowhere is the myth further removed from reality than on the cotton belt.
According to USDA figures, the richest 10 per cent of American farmers receive two-thirds
of total payments to agriculture. Subsidy payments are most concentrated among cotton
producers, where the top 10 per cent receive 73 per cent of total payments. The top one
percent alone collected one-quarter of total payments. At the other end of the spectrum, more
than half of America’s farms get no subsidies at all.
Subsidies are weapons which must be used only in desperate times and that too only on a
temporary basis. The US cotton subsidies seem to have a more permanent nature. Thus, I
believe that gradual reduction along with long term goal of complete elimination is the best
way forward.

2. Agricultural subsidies have been blamed for having caused the collapse of the
Doha Round of the WTO. If you were a] a US cotton farmer, b] West African cotton
farmer, do you think this criticism is fair?

Supposed to be a ―Development‖ round of trade talks, the almost ten year-long Doha round
collapsed at the end of July, 2006. The US found itself on the defensive as around the world
blame was directed at the US, in particular by the EU. However, the EU has also been part of
the reason for failure throughout the five years.

A] As a US Cotton Farmer

Technically, the US was blamed for causing the collapse in July 2006, because it felt that
developing countries would not open markets in the same way that it was being asked to open
its and so it saw no point in continuing the talks. It wanted what would seem like a fair deal:
rich countries open their market, and poor countries do the same in return. Without
understanding context or history, this sounds just and equal.

B] As a West African Cotton Farmer

However, global trade has always been unequal, in favour of, dominated by, and influenced
by, the rich countries. Hence, the ―tit for tat‖ reciprocation suggested by the US would
continue the unequal global trade—under the guise of equality.

The Doha ―Development‖ Round, as it has been known, was nicknamed that way to show
that this round of trade negotiations were to favour poor countries’ ability to develop and
prosper from global trade, while acknowledging the unequal nature of global trade,
dominated by industrialized countries, at the direct expense of the developing world.
According to Kamal Nath, India’s then Commerce Minister, “This is a Development Round,
completing it is extremely important but equally important is the content of the Round. The
content has to demonstrate new opportunities for developing countries, primarily market
access of developing countries into markets of developed countries. This Round is not for
perpetuating the flaws in global trade especially in agriculture, it’s not to open markets in
developing countries in order for developed countries to have access for their subsidized
products to developing countries. We say the Round should correct the structural flaws and
distortions in the system, and there should be fair trade, not only free trade. They [US] say
we want market access and only if we get it the way we want it can we correct the structural
flaws. There is no equity in that argument.”
C] Other issues

Another problem was the lack of sufficient media attention. If you lived in places such as the
US or UK, you would be forgiven for not knowing that one of the most important meetings
that would affect almost the whole had planet failed. There was hardly a mention in many
western mainstream media, certainly not on prime time television news broadcasts, that such
an important meeting was taking place. Only as the meetings ended with dramatic collapse
did the media appear to turn attention to this. Yet the headlines were more about the
sensational bickering between the EU and US as to who was to blame for the collapse.

Maybe the media could be excused because of the conflict in Lebanon at that time, so that the
media was not watching proceedings at the WTO talks. But those talks affect almost all of
humanity. Do we really believe that the large mainstream media companies do not have
resources to cover multiple major issues around the world at least?

Some may ask whether it matters if the media in the western mainstream cover this or not?
Democracies are supposed to be accountable by an informed citizenry. The mainstream
media is supposed to provide a window into issues to do with humanity and more, and with
their vast resources, they are vital for a functioning and accountable democracy. Furthermore,
many of the industrialized nations have dominated global talks to ensure global trade is
unequal in their favour.
In India for example, IPS News reported that ―India’s federal agriculture minister Sharad
Pawar confirmed in May that between 1993 and 2003, at least 100,000 farmers had killed
themselves because of their inability to repay loans‖, because the country’s agriculture sector
was suffering in part due to the unequal nature of global trade. That is an average of 10,000
deaths each year. Just like bombs in a war or conflict, trade related issues also kill. Except the
victims, sometimes far more numerous than a given conflict, die silently. In contrast, the
media will report the more sensational deaths and suffering caused by natural disasters and
conflict, however. In the same report, IPS News also noted that in India, there was rare unity
amongst diverse groups that the decision for India to quit the Doha round was a good one,
implying that if rich countries are refusing to budge, then developing countries such as India
would lose out by continuing a fruitless ―development‖ round.

It may be a reasonable guess to assume that most citizens of these countries actually want
their fellow human beings around the world to be treated fairly and justly. If the media does
not report what their leaders are doing, how else will they know? Without deeper context,
shallow arguments such as requiring poor countries to open their markets even more because
the rich countries are doing it, are made without any scrutiny.

The failure was not just a sudden one. The history of the Doha round has been filled with
double-talk, with rich countries often demanding poor countries concede ground in unfair
ways, with poor countries occasionally taking a strong stance against these demands, and the
EU and US in particular driving for more open markets in poorer countries, sometimes even
blaming the poorer countries for failed talks, or calling deals criticized as bad for the poor, as
good for the poor.
 3. As governor of Mississippi or CEO of Perthshire Farms, how would you prepare for
a possible subsidy-free future?

The US is an inefficient producer of cotton at current levels relative to many other countries,
while the sector represents a huge drain on taxpayers. Viability depends on huge infusions of
capital from the general public on an annualized basis. In relative terms, the scale of the
transfers dwarf those made to other producer groups. In 2001/02, every acre of cotton
farmland was worth around $230 in subsidy, compared with $40-50 for wheat and maize.
Thus, being the head of Mississippi or the Perthshire Farms, I would first look into improving
the processing of cotton production as a whole. The inefficiencies in the system need to be
removed purely because one cannot rely on subsidies forever. Using expensive farm
equipment cannot be considered a solution. Sure, these machines can be used to improve the
process but they are not the be all and end all. If certain firms cannot compete with global
cotton players without the help of subsidies, these firms must decide whether to look at
salvaging their business (by bringing about process improvement) or whether to leave the
production of cotton to others and enter other crop markets. The whole US, and consequently,
the whole world, cannot be made be held at ransom purely because certain large players in
the US are simply not efficient enough to produce cotton at reasonable prices. At this rate, we
are moving towards a dead end.

Farmers are not unlike other investors: they invest in annual operating inputs (land rent, seed,
fertilizer, fuel, and chemicals), machinery, and land in the hope that they will earn enough
from the sale of their crops to cover their operating costs and payments on their machinery
and land. If they do, then they earn a profit. If not, then they must call on their own assets to
cover the loss or ask forbearance from their lenders.

Economists measure the cost of risk as the difference between the amount of money that an
investor expects to make on average from a risky investment and the smallest amount of
money that the same investor would accept to sell the risky investment. If the investment has
low risk, then this difference will be small. Very risky investments lead to a high cost of risk
because of a large probability that the investment will be lost. Most investors will not take on
high-risk investments unless the payback when the investment is not lost is substantial. This
gives rise to the risk/return trade-off. To induce investment in risky assets, the returns when
the investment pays out must be large enough to compensate investors for the high
probability that the investment will be lost.

The cost of risk is a real production cost. And because the cost of risk is greater for riskier
crops and in riskier regions, farmers like us who grow these crops or who farm in these
regions have higher costs of production than farmers who do not.

As farmers, we should treat risk just as they treat any other production input, such as
fertilizer, seed, and machinery, by balancing the returns from its use with the associated
increased cost. For example, in years in which the returns to corn are expected to be higher
than the returns to soybeans, farmers can increase expected profits by planting more corn and
less soybeans. But the increase in expected profits only comes about by taking on more risk,
because growing more corn typically reduces diversification. If I have a high tolerance for
risk (which means that risk imposes a low cost on them) I will tend to plant more corn than
will farmers with a lower tolerance of risk.

I would also invest in activities that reduce the cost of risk by more than the cost of the
activity. The value of the risk reduction from diversification of family labour and
management efforts into both on- and off-farm activities often is greater than the cost
associated with that diversification. Most farmers find that the value of associated risk
reduction is greater than the cost of hail, fire, disability, health, and life insurance. Many
farmers find that the value of reducing price risk is greater than the cost of buying put options
on commodity exchanges. And a few farmers find that the value of hedging against poor
weather during the growing season by buying put or call options on future weather is greater
than the cost of the options.

If farmers fully understand the risks they face and private markets exist to allow them to pay
for desired levels of risk reductions, then the efficiency with which agriculture operates
cannot be increased through subsidized risk management. The reason we have so many
subsidized risk management programs is either that the private sector is incapable of
providing the kind of tools that farmers desire or that Congress uses the subsidies to meet
some other objective.
 References
 http://www.guardian.co.uk/commentisfree/2010/sep/19/lucy-siegle-cheap-
cotton-pay-quality
 http://www.guardian.co.uk/environment/2010/nov/15/cotton-subsidies-
west-africa
 http://www.independent.co.uk/news/world/politics/wests-billions-in-
subsidy-shut-out-african-cotton-growers-2134211.html
 http://www.oxfam.org.uk/resources/policy/trade/downloads/bp30_cotton.p
df
 http://www.voanews.com/english/news/usa/US-Subsidizes-Brazilian-Cotton-
Farmers-in-Latest-Trade-Twist-92327264.html
 http://www.globalissues.org/article/663/wto-doha-development-trade-
round-collapse-2006
 http://www.card.iastate.edu/iowa_ag_review/spring_09/article1.aspx
Case Study on Ethical Dilemma:
Cotton Farmers in West Africa and
Mississippi
(Answers to the questions)

By,
Pratik Manek
Roll no:- 31
PGDM eBusiness (2010-12)