Egypt's cotton sector has come a long way since its liberalisation eight years ago, but it has yet to strengthen its international market position. Niveen Wahish investigates The cotton harvest season is almost over and marketing is underway. Although this year's crop size is estimated at a little over 5.5 million qantars -- a drop from last year's crop of 6.3 million -- experts expect demand to be covered. With leftover inventory from last year of 2.3 million qantars, said Fathi Ne'matallah, deputy chairman of the Textile Federation, local spinning mill needs, which stand at around 3.5 million qantars, will be met. This will leave an extra two million qantars for export and a little over two million as this year's inventory. Prices this year are a bargain. Not only is the drop in the value of the Egyptian pound against the US dollar rendering Egyptian exports cheaper, it is also allowing exporters room for discounts. Moreover, both private and public sector exporters are competing to offer lower prices. Nonetheless, cheaper prices are not much of an advantage. The price of the competing US Pima cotton, which is subsidised by the US government, can be slashed down considerably. Cotton subsidies to giant farms in the US reached $4 billion in 2001, for a world market worth $3 billion, a recent Newsweek article cited. Egypt produces medium-long staple (MLS), long staple (LS) and extra-long staple (ELS) cottons. These cottons produce a wide range of yarn counts needed for the production of fine textiles. However, international market demand is for the LS and ELS type Giza 70,88. The remaining varieties have, in the past, been consumed locally, because they were considered overpriced. The situation this year might be different. According to Zaki Edkawi, chairman of EDCO Cotton Export Company, a 20 per cent rise in demand is expected in 2003 for these cottons due to the drop in the value of the Egyptian pound. In fact, he forecasts that Egyptian cotton exports will reach 2.5 million qantars this year due to increased sales of these types of cotton. Egypt and the US have a monopoly over the production and trade of LS and ELS cotton varieties. In the 1960s and 70s, Egypt supplied 80 per cent of the world market, but later lost market share to its US competitor, Pima cotton. Today, Egypt alone supplies 55 per cent of the world's needs of LS and ELS cottons, while the US Pima supplies 40 per cent. Over the past couple of years, the government has been working on reinstating the fame of Egyptian cotton, launching a cotton logo to reinforce consumer awareness. Egypt's "white gold" has seen many ups and downs. For over 30 years (1963-1994), the planting and processing of the crop was monopolised by the government. The government bought the cotton, ginned it and sold it to local producers or exported it. Ginning is the process by which cotton lint is separated from the seed. The government set the price paid to the farmer, the export price and the price at which it was sold to local spinners. In 1994, the rules changed with the new cotton sector liberalisation law. Farmers were free to decide the crops they wanted to plant and private traders were allowed to buy the crop, gin it and either sell it to local spinners or export it. The course of liberalisation has not been smooth. During the first couple of years, the government was confused about whether to continue its tough control of the market or to leave things to the private sector, said Amin Abaza, president of the Alexandria Cotton Exporters Association (ALCOTEXA). So, despite the liberalisation, the government continued to interfere. One thing the government still interfered in was the price of cotton. It guaranteed farmers a minimum delivery price for their crop for fear they may turn to other crops with better revenue. The floor price is in place to stabilise farmers' incomes and to keep cotton profitable and competitive compared with other crops, said Heinz Burgstaller, the German team leader at the Egyptian-German Cotton Sector Promotion Programme (CSPP). "If farmers abandon the cotton crop, this will mean the end of Egypt's cotton," said Abaza. In the early years of liberalisation, the government-set price was much higher than the international price, which left the government with a heavy bill to pay. The government lost some LE6 billion in the two seasons of 1994/95 and 1997/ 98, Abaza said. Since then, the government has learnt a lesson. It still keeps the delivery price, but has lowered it to just below the export price. As a result, during the past three years, the government has not needed to cover the difference between export prices and the delivery price because the international price of cotton was slightly higher. Moreover, the drop in the value of the Egyptian pound has rendered export prices higher than the local price. Should international market prices drop, however, this may be problematic. A review of the world situation of cotton by the International Cotton Advisory Committee (ICAC) expects a fall in the price of extra fine cotton. The review said "the excess supply of extra fine cotton will continue to depress market prices during the next two years." However, it added that in the longer term, lower prices could stimulate consumption and cause exports to increase. Meanwhile, the local spinning and weaving industry is also affected by fluctuations in cotton prices. When the cotton sector was monopolised by the government, domestic spinning and weaving industries were given subsidised cotton. Today, they must buy the cotton at market price. However, ELS and LS cottons, which are quite expensive for domestic industry, are not the ideal raw material for local spinning mills, which are only able to produce low-count yarns suitable for coarse textiles. For them, cheaper imported short- staple cotton is a much better option. According to Burgstaller, spinners need cotton at the lowest possible price. "On average, 60 to 70 per cent of the spinners' cost is for raw cotton," he said. And while imported short-staple cotton costs less than 50 cents per pound, Egypt's LS and ELS cotton costs around $1 per pound. Since the liberalisation, spinners have been allowed to import short-staple cotton, but duties, taxes, port fees, and fumigation raise the cost of imported lint. This year, the government has decided to subsidise the cotton given to spinners. The initiative, Ne'matallah said, will mean local spinners will use Egyptian rather than imported cotton, thus saving foreign currency. It will also encourage the use of the accumulated cotton inventory. Supplying local spinners with their cotton needs has always been a government priority. In fact, in 1996, only 300,000 tons of Egyptian cotton were exported because traders were obliged to meet the needs of local spinners first. As a result of this control on the freedom to trade, the Egyptian government is today facing a lawsuit at the International Centre for Settlement of Investment Disputes (ICSID) affiliated to the World Bank. ICSID provides facilities for the conciliation and arbitration of investment disputes between contracting states and nationals of other contracting states. The claimants are a group of US investors, among whom are the Champion Trading company and the family of Mahmoud Wahba, a Connecticut-based businessman who had set up the largest private cotton trading and ginning company, Al-Ahli Cotton Company, immediately after the liberalisation law of 1994. In an e-mail sent to Al-Ahram Weekly, Wahba said the venture, which had expanded to 17 ginning mills and employed 5,000 people, closed down because of government decisions requiring traders to buy raw cotton from local farmers at the minimum price, while refusing, in the meantime, to allow them to export their cotton overseas. As a result, the company was forced to sell its inventory at a huge loss. Wahba and his partners are claiming compensation for their losses estimated at $100 million. "Arbitrary decisions by state officials and their failure to adhere to liberalisation and privatisation laws caused the collapse of my family's cotton business," Wahba said. Today, the government has a clearer vision for the market and is interfering less. The private sector plays a larger, more confident role. Burgstaller said that last year the private sector was responsible for 70 per cent of total Egyptian exports of lint cotton. According to Abaza, private sector cotton exports last year was valued at $220 million. The private sector has also developed its marketing techniques and now has the ability to offer discounts. "The private sector is more efficient and is able to give farmers a better premium," Abaza said. However, some issues need yet be tackled. Amin believes the rules of the market should be more uniform. The government continues to treat the public sector differently, especially when it comes to financing. So highly dependent is cotton trade on financing that, in the past, Egyptian banks made it their main business. Today, public sector companies receive the financing they need from public sector banks, whether or not their performance is up to par. On the other hand, should private companies not pay the bank back at the end of a season, the bank will not finance them the following year. Private trading companies resort to selling their inventory at the end of the season, even if at a loss. "This does not encourage efficiency," Abaza said. Meanwhile, to maximise the benefits from Egyptian cotton, more attention needs to be paid to the cotton industry. Developing Egypt's spinning and weaving industry in order to manufacture cotton locally and export would provide a much- needed value-added. Abaza thinks local spinners must not confine themselves to fine count threads, when there is a demand for the whole range of threads. In some countries there is a spinning and weaving industry where there is no crop, Abaza said. A ministry of agriculture study published by CSPP recommends that the cotton sector and the spinning sector be treated as separate. "Forcing one to satisfy the needs of the other is counter- productive and deprives each sector from its own competitiveness," the report said. Having the finest cotton in the world is not enough for Egypt to grasp a larger share of the international cotton market. The process by which that cotton reaches the international market is important. "Contamination affects the reputation of the cotton," Abaza said. From the hand- picking to the shipping stage, the cotton can be contaminated, which turns manufacturers away. Farmers must be made aware that they are planting a high- quality product for a high-quality market. "If the processing of the cotton from the time it is a seed until it is packed and shipped is controlled, we will undoubtedly have the best cotton in the world," Abaza said. International factors have also affected Egyptian cotton. LS and ELS cotton is more available now than at any other time in the past, leading to a steady decline in prices. Meanwhile, synthetic fibres are gaining ground. At the recent annual meeting of the International Cotton Advisory Committee (ICAC) held in Cairo, Alfonso Lievano, who chairs the committee, pointed out that while the cotton market grew by eight per cent, that of synthetic fibres has grown by 160 per cent. Additionally, cotton prices have dropped dramatically. Terry Townsend, executive director of ICAC, told conference participants that the average price per pound of lint cotton is expected to drop by between $0.10 and 0.20 over the coming decade to average around $0.60. This is lower than its price throughout the past 30 years, during which it averaged around $0.72. According to Townsend, the decline in cotton prices during 2001/02 alone has led to direct losses of $14 billion in the cotton sector. In the mid-1990s, prices had reached record highs of over $0.90. Another key issue affecting cotton markets worldwide is the negative effect of tariffs, non- tariff barriers and subsidies. Some industrialised countries are guilty of creating these market distortions, which subsequently affect production and trade of the crop. The Egyptian-German Cotton Sector Promotion Programme (CSPP) is a joint project between the GTZ (German Technical Co-operation) and the Egyptian Ministry of Agriculture and Land Reclamation (MALR). GTZ is a German government-owned company implementing technical co-operation projects all over the world. The project was launched in the summer of 1995, but actually started its operations in 1996, two years after the liberalisation of the cotton sector. The purpose of the project is to increase productivity, promote Egyptian cotton internationally, analyse the cotton market and propose policy changes to foster the liberalisation process and raise farm income. "Our biggest concern is that farmers are not getting enough income," said Heinz Burgstaller, the German team leader at the CSPP. This problem can be addressed by working on increasing yields and reducing the cost of production through the introduction of new production methods and usage of better seeds. Although the cotton-planting area is smaller now than in the past, the yield has increased from the 1960s until now by roughly 30 per cent, making up for part of the reduction in area planted to cotton. While the average yield per feddan in the 1960s was 5.5 qantars, in the last three years it reached more than seven qantars. The project also aims to train farmers on methods of pest control, a vital factor for the success of the crop. In the past, the government purchased the pesticides and sprayed the crops. Today, both the government and approximately 5,000 private dealers all over the country supply pesticides. There is a programme in process to give dealers a certification to sell pesticides, after they have been trained on the regulations and handling of agricultural pesticides. There are now 185 model villages in the eight cotton-producing governorates (Beheira, Daqahlia, Kafr Al-Sheikh, Sharqiya, Gharbiya, Menoufiya, Beni Suef, Minya) where the CSPP is training local pesticide dealers, farmers and co- operatives to work under a liberalised pest-control system. In these model villages, the government's role is limited to guiding and giving advice, while the farmers decide when to spray and who sprays. Most pesticides are available at market price. A few, especially the one for the boll worm, the most damaging of all to the crop, are partly subsidised. The government will be phasing out the pesticide subsidy in 2003. The government no longer does the pesticide control itself. It now provides advice through 1,500 extension agents, who are government employees located in the villages and working closely with farmers in a participatory way. The project was also involved in the creation of the logo for Egyptian cotton and the establishment of a unit within ALCOTEXA to market the logo. The logo is registered in 58 countries. The Ministry of Foreign Trade (MoFT) and ALCOTEXA own it. ALCOTEXA is in charge of receiving applications and giving licences.
