The fashion industry is waking up : Cotton Subsidies
Now is the perfect time to discuss cotton subsidies.
The fashion industry is waking up to its environmental impact and the American public is discussing the possibility of a Green New Deal, in which the federal government would invest billions in reducing greenhouse gas emissions and creating economic prosperity.
In the 2019-20 season, the US paid out more than $2 billion to cotton farmers, up from $1.2 billion the year before. That’s a significant amount of taxpayer money, so it deserves scrutiny. Are those billions helping us achieve our goals?
This is a question for the international fashion industry as well. Eleven countries reported to the International Cotton Advisory Committee (ICAC) in 2020 that they provide some sort of financial assistance to their cotton industry and anywhere between half and three-quarters of international cotton growers receive support in a given year. That can include direct payments to farmers, putting in protections at the border, subsidizing crop insurance, subsidizing transportation and inputs like fertilizer and water, helping with marketing the cotton, and setting a minimum price.
In the 2019-20 growing season, global government support for cotton was estimated to be $8 billion, a 39 percent jump from the prior year. That averaged to 20 cents a pound. With average cotton prices that year at 60.4 cents per pound, according to the USDA, that is a significant amount of support and it begs the question of what would happen to cotton and cotton farmers if subsidies were to go away.
There’s some evidence that they would be OK. U.S. support for cotton growers used to be well over $3 billion a year and accounted for half or more of a grower’s cotton revenue. That is, until Brazil brought a trade dispute in 2002 to the World Trade Organization against the United States, saying its direct payments to cotton growers and its counter-cyclical payment program created unfair competition and depressed prices for Brazil’s cotton growers — as well as other farmers around the world. (Counter-cyclical payments go to farmers when prices are low.)
The subsidies were hard to defend. In 2004, when researchers from Texas Tech University modeled out what would happen were the United States to suddenly stop all cotton subsidies, they showed that production would drop in the US as farmers switched to other crops and prices globally would rise, leading to higher production in Brazil, Australia and Africa until prices stabilized again. Another 2004 meta-analysis by the Overseas Development Institute concluded that subsidies do depress prices and that they harm farmers in developing countries, who are especially reliant on cotton for income.
The American Enterprise Institute, a slightly right-of-center think tank, has been especially critical, saying in a 2018 report on counter-cyclical price protection that it has “detrimental effects on world prices, which penalizes foreign producers, many of those in poor developing regions such as Sub-Saharan Africa.”
Farmers in India and especially West Africa can’t easily switch from cotton to food crops based on market signals — they don’t have access to infrastructure that would allow them to sell food crops for cash before they spoil. West African farmers also have little direct access to the market, so are shielded from short-term price fluctuations. But according to a 2007 Oxfam report, eliminating US cotton subsidies permanently could lead to about a million households in West Africa being able to feed another person based on the higher prices growers would get for their cotton.
In any case, Brazil won the dispute in 2005 and the U.S. was forced to pay Brazil $750 million and reform the 2014 Farm Bill, doing away with direct and counter-cyclical payments. U.S. support for the cotton sector plummeted to less than a half billion a year.
Cotton growers in the States still receive financial support through a complex web of programs. Like other commodity crops, upland cotton is covered under two different programs that protect cotton farmers against financial losses, by paying them when the market price falls below a threshold or paying them when their county doesn’t hit revenue targets. Growers also receive subsidized crop insurance that guards against natural disasters, which have been increasingly common, especially in Texas. And they have access to a low-interest loan program, so that they can hold on to a cotton crop and wait for better prices, instead of selling immediately at harvest because they need cash for farm operations.
In recent years, the U.S. government support for upland cotton growers has been rising again. The trade war with China forced the price for American upland cotton downward and it continued to fall when the pandemic hit. The U.S. government stepped in twice to bail out farmers, including cotton growers impacted by both crises. “We’re not a large operation, so we were extremely grateful for it,” says Steve Newsom of Newsom Family Farms, in the Texas Highs Plains west of Lubbock. His 4,000-acre farm focuses primarily on upland cotton, which suits the climate there well, with wine grapes, peanuts, sorghum and some other crops playing a secondary role. “It was during the time of record low prices. There were a lot of farms — ours is no different— that were on life support.”
One important distinction to make in this conversation is between upland cotton, which is a commodity crop grown in Texas and the South, and other types of cotton such as extra-long-staple Pima cotton, which isn’t considered a commodity and so isn’t covered under the U.S. support programs described above. It also sells for a higher price, making it a natural choice for farmers who have higher costs of labor, such as California farmer Cannon Michael, who grows extra-long-staple cotton and who is subject to stricter environmental and labor laws than other cotton-growing states. “In California, we have very high costs of production,” he says. “So most of the crops that we grow have to have some unique value.”
There is still plenty of grousing about US support for cotton growers. An Indian agricultural news site complained earlier this year that “the massive support provided by developed countries, especially the United States, has rendered cotton production uncompetitive in the Global South, leading to a disastrous impact on agricultural growth, export earnings and farmers’ welfare.”
But should the United States base its agricultural policy on what other countries want? Farming is a difficult business and at its base level, these supports protect U.S. farmers from having to sell the farm if a drought kills their crop or the price of cotton plummets for reasons outside their control — like, say, a global pandemic. The question is whether these supports lead farmers to plant upland cotton — a commodity crop — when by all rights they should be planting something else that is better suited for the climate or is more in demand.
“The loan and the insurance programs, I believe they are there to help a grower raise a crop rather than to engender unfair competition,” says Tim North, Co-CEO at the cotton trading company Ecom Trading. “Whether acreage in dryland Texas would not get planted without the insurance, that’s possible,” he says.
It’s not just that federal insurance makes cotton attractive. It’s that it makes planting a crop possible, especially if you’re not a wealthy or corporate farmer. “We plant crops that the banks will finance, and that goes back to the USDA federal crop insurance program,” Newsom explains. “If I want to try to branch out with a new crop like extra-long staple cotton, which I’ve tried, we can’t get insured on that crop. The bankers are like, we’re sorry there’s virtually no profit in cotton, but at least there’s some protection.”
(We reached out to Cotton Inc. and the Texas cotton advocacy organization Plains Cotton Growers but did not hear back by the time of publication.)
You might wonder if this is a matter of the United States not wanting to be reliant on a potentially hostile foreign power for such a crucial material. But if that were the case, there would probably be more government support for cotton mills and factories in the U.S., both of which continue to close up shop due to low-cost competition from abroad. Seventy-five percent of the U.S. crop is shipped overseas for milling, much of it to China.
And if you ask farmers, they’ll tell you they don’t want a handout. “From our farm’s viewpoint, we don’t want subsidies. We want our product to stand alone in the market,” says California grower Michael. Newsom agrees. “We don’t want a check, we want a chance. We want to compete on a global scale.”
Perhaps the United States could take a page out of Australia’s book. Australia has some of the lowest financial support for cotton in the world, having replaced direct subsidies with programs that help farmers smooth out their income and taxes across years, a boon in an unpredictable climate that can vary wildly from year to year. Farmers also pay reduced taxes on gas, since they’re not driving tractors on the roads.
But the biggest support that Australia provides its farmers is research on growing better cotton more efficiently and sustainably. For every bale a cotton grower produces, they pay a small levy to the Cotton Research and Development Corporation and the government matches it. At just AUD $18.7 million total in the coming year, it’s just a tiny portion of the $80 million budget of Cotton Inc., the American research and marketing organization. But despite this, Australia is famously good at growing cotton. What’s the difference?
“We don’t have agricultural subsidies and we don’t expect them, and we’ve learned to adapt by chasing higher yields at a higher quality, and it has allowed us to compete with countries that do have subsidies,” explains Rob Eveleigh Mob, Chair of the Lower Namoi Cotton Growers’ Association in New South Wales, Australia. “I wouldn’t put that all down to the research program but it helps quite a lot.”
“They set the bar,” agrees North. “The conditions under which they grow, with dire needs for water and a high yield, it’s exemplary. Australian cotton is one of the best cottons in the world.”
In the absence of market-distorting payments and insurance, Australian cotton growers make fairly rational decisions about how much cotton to plant based on the market price and the availability of water in any given year. “If you look at it from a purely economic view, it probably doesn’t make sense to pay someone a subsidy to grow a crop when you could buy it from somewhere else cheaply and focus on what you’re good at,” Mob says. “I guess it’s easy to poke a finger at people on the other side of the fence, and say why would you subsidize something if it encourages overproduction? That being said, if we were in the same position we would ask for the same thing,” he says jovially. “But we’re a small country with a small tax base, so we could never afford it.”
Cannon Michael, the California grower, thinks the rest of the United States could benefit from switching to a similar model. “Research and development of new ideas and technology supporting farmers transitioning from lower value crops to higher value crops, learning to use less chemicals in integrated pest management, like what we do in California, I think would be beneficial for the rest of the country to take up. There’s a lot of things that we can do that help farmers move forward without paying them to do something not valuable.”
This conversation is currently playing out dramatically in India, where farmers of all types of crops, including cotton, have been out in the streets of Delhi for more than three months protesting the governments stripping farmers of protections. Currently, the government sets a Minimum Support Price, stepping in to buy up cotton and other commodity crops if the market dips below the cost of production, as it did these past couple of years. “The minimum support price is very much needed,” says sustainable cotton consultant Rajeev Baruah. “The production costs are really high, productivity is low. Farmers are in deep trouble.”
But even the few subsidies the Indian government does have for farmers distorts production. India subsidizes fertilizer, leading to an overuse of nitrogen to the detriment of India’s environmental and soil health. It also subsidizes water, leading to an overuse of water in water-scarce areas. Baruah would like to see some of the government money that’s being spent on fertilizer – Rs.71076 crore in 2015 (almost $10 billion) according to a report called “Supporting Indian Farmers the Smart Way” – shifted to research, education and subsidies for sustainable agricultural practices.
We can’t close this conversation without talking about the elephant in the cotton field: China. China imposes tariffs at the border and pays growers directly in several provinces, mostly in Xinjiang, which is currently the subject of a U.S. import ban because of the risk that cotton is produced and processed there using forced Uighur labor. (Slave labor, a core part of cotton’s history in the US, could be considered another kind of sinister government subsidy.) While U.S. subsidies have in the past had an outsized effect on the global cotton market, as cotton prices shoot up, the global industry is looking not at us, but at China, and wondering what role they’re playing.
It’s clear from the trade war and recent history that subsidy cash payments are a blunt tool with which to support cotton farmers. If we’re going to move toward a more equitable and sustainable cotton industry, we should start exploring more precise ways to get us there.