The year 2016 is likely going to be the worst cotton marketing season since the global financial crisis in 2008 in light of the subdued global prices of cotton lint.The cotton Number 2 contract is currently trading at 57,42c per pound of lint on the New York Futures market, down from 66c per pound a year ago. The sharpest reduction was experienced in the period between December 2015 and March this year, which saw the prices declining sharply from 64c per pound to 57,42c per pound, translating to about 13 percent. The lowest price was experienced in 2008 at the height of global financial crisis at 44c per pound.
In 2011, the cotton price was at its highest level in quarter of a century. Demand in the developing world was growing while bad weather devastated the cotton fields of China and Pakistan, ranked number one and number four in the world for production.
The recent price collapse has largely been driven by weakening demand from China, the largest market for cotton. Weak import demand has led to China reducing its strategic stock reserve and actually exporting into the world market, thereby depressing prices.
What does all of this mean for the cotton farmer?
The minimum price of cotton for the lowest grade has generally averaged about 30c per kg of seed cotton. Should current trends persist, there is a substantial risk of cotton prices going below 30c per kg.
“This does not bode well for the viability of the African cotton farmers, Zimbabweans included,” said one economic analyst with a local financial institution.
Farmers in the major cotton producing countries such as the US, China and India all enjoy some price protection in the form of either guaranteed prices or lifeboat subsidies which kick in when world cotton pricing dips below agreed levels.
The effect of these global subsidies is to artificially reduce world price of cotton by as much as 30 percent as a result of inefficient production occurring due to price subsidies.
The Doha round of WTO talks on agricultural subsidies has failed to resolve the issue of agricultural subsidies and it is likely that producers from developing nations, which do not get subsidies, will continue to suffer at the hands of richer nations.
However, the effects of a price drop are likely to be alleviated by the fact that most local farmers have not incurred huge debts after the Reserve Bank availed free inputs.
“We hope that this will go some way in alleviating the effects of any global price reduction of the producer price as a result of the vagaries of world pricing and crop subsidies,” the analyst said.
Zimbabwe’s cotton production, at its peak, was the major source of incomes and livelihood for rural communities around the Gokwe, Sanyati, Rushinga and Checheche areas. It also accounted for close to a fifth of the country’s agricultural exports.