Central Asia struggles to profit from high cotton prices

By bne IntelliNews March 11, 2011

Clare Nuttall in Almaty -

Record prices should be good news for Central Asia's cotton producers, especially Uzbekistan, but raising production in response to high demand is proving difficult.

In fact, after an increase in production in 2010, Uzbekistan, while still one of the world's largest exporters, is set to produce less than originally forecast this year, according to the US Department of Agriculture. The USDA's February 9 report on world cotton production lowered Uzbekistan's 2011 export forecast by 250,000 bales to 3.5m.

The country is expected to produce 4.65m bales of cotton this year, considerably higher than the 3.9m produced in 2010, but below the USDA's January estimate of 4.8m. Uzbekistan has been working to increase yield on its cotton fields, but there are limits on how much production can grow. The land has been cultivated intensively for decades, with heavy use of pesticides and fertilisers. Tashkent complains that use the Amu-Darya and Syr-Darya rivers for hydropower generation in upstream countries is reducing the water available for irrigation.

Uzbek cotton is also being boycotted by several international clothing manufacturers and retailers, including Gap, Walmart and Levi Strauss, due to the continued use of child labour during the harvest. "Many schools are closed down as children, some as young as 10, are sent to the fields to pick cotton by hand for up to three months," says a report from the Environmental Justice Foundation.

Cotton from Tajikistan was also included on the US Labor Department's July 2010 list of commodities produced using indentured or child labour.

Among the other Central Asian countries, Turkmenistan is expected to produce 1.5m bales, up from 1.25m last year, says the USDA, while production in Tajikistan is expected to fall from 0.48m in 2010 to 0.38 in 2011. Meanwhile, Kazakhstan is managing to increase the area devoted to cotton culture slightly, after its cotton harvest fell 11% in 2010. The head of the Kazakhstan Cotton Association, Sain Rysbayev, said that rising cotton prices had prevented further shrinkage of the area devoted to cotton culture, Interfax reported.

Priced to go

The efforts to increase production in Central Asia follow a year in which cotton prices soared to levels not seen since the American Civil War (1861-1865). Prices for May 2011 delivery cotton on the ICE Futures US exchange reached a record $2.197 per pound on March 7.

There were poor harvest in two top producers, China and Pakistan, in 2010. Despite a bumper harvest in India, the world's second-largest cotton producer, Delhi capped exports to protect the domestic textiles industry. Demand from other major exporters such as the US, Uzbekistan and Australia grew strongly in 2010. Since then, floods have damaged large swathes of Australia's cotton plantings. The news that Central Asia's cotton harvest would be less than previously estimated has also affected futures.

Ryland Maltsbarger, senior economist with IHS Global Insight's agriculture service, says the high prices are partly due to the low harvest, but supply is not the whole story. "The turnaround in demand has been greater than expected in most places, due to strong demand from Asia. After two years of low prices, production was low, and supply did not have time to respond to the rebound in demand. Prices will not come down until new supply from Australia and Brazil starts to come onto the market in June," he says.

Such was the concern over obtaining enough of the raw material to keep mills and garment factories running that importers have been trying to strike individual deals with producing countries to ensure continuing supply. In November, the commerce minister of Bangladesh, Faruk Khan, visited Tashkent and secured an agreement that Uzbekistan would export 250,000 tonnes of cotton directly, bypassing international traders.

Maltsbarger points out that Australia has already doubled the area under cotton, while Brazil has increased the area sowed by 26%. "We expect Pakistan and the US to sow more this year, and India may also expand production after the previous record set last year," he tells bne. "However, as oil and food prices are also high, China - one of the largest producers - is likely to find it difficult to expand cotton production because there is more emphasis on grain and oilseed due to concerns about food security."

The USDA's global cotton output forecast is currently 115.25m bales, down from the 115.46m forecast in January, while demand is estimated at 116.55m. Reportedly stocks are very low in many countries so continuing price pressure. This is likely to be felt in places from the workshops of south east Asia to the high streets of Europe, where in recent years there has been a boom in low cost clothing. "Despite Asian expansion and the bounce back after the downturn, I expect demand to moderate in 2011," says Maltsbarger. "Prices are three times as high as they were a few years ago, so price is a major deterrent. Growth in the EU and other OECD countries that are textile importers is still slow."

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