The European Commission has today taken a number of initiatives to help developing countries enhance their export performance and reduce their vulnerability from price fluctuations of major international agricultural commodities such as cotton and coffee. The key objectives of these initiatives are to improve the income of commodity producers in developing countries and reduce producers' and states' income vulnerability to price fluctuations. The initiatives involve a comprehensive EU action plan on agricultural commodity dependency and a wide-ranging strategy for the support to the cotton sector in Africa. The Commission also proposes to simplify the criteria to benefit from FLEX, the EU instrument to compensate African, Caribbean and Pacific (ACP) countries for short term fluctuations in export earnings.
Poul Nielson, EU Commissioner for development and humanitarian aid said: 'The problems faced by many commodity dependent developing countries today are acute and potentially very damaging. They can be reduced but there is no magic formula. The affected countries must be prepared to take the lead and drive the necessary comprehensive response to the dependency problem. The EU must stand ready to offer its full support. With the proposal of a commodities action plan we have outlined a common vision for this support, which will now have to be followed up by Member States. A first concrete step will be the adoption of the revised FLEX instrument, in partnership with ACP countries. This would underline the EU's willingness to offer immediate solutions to the urgent problems faced by these countries."
Welcoming today's action plan EU Trade Commissioner Pascal Lamy added: 'Commodity dependent developing countries are particularly disadvantaged in their efforts to reap the benefits of a more open international trading system. The case of African cotton producers is a clear example of this. Market access is important and has to be improved in a number of major markets, including developing ones. But trade alone is clearly not a sufficient answer as we have witnessed in the case of African cotton, which already has full market access in the EU.. We need to support the development of the supply side. We must also continue our efforts to reduce trade distorting support. These are key objectives of the on-going WTO negotiations which need to re-start in earnest if development friendly outcomes such as these are to be assured'
Internationally traded agricultural products such as cotton, sugar and cocoa provide a major source of employment and income for millions of people in developing countries as well as a major source of revenue for their governments. 54 commodity dependent developing countries (CDDCs) today generate over 20% of their total export earnings from three or less agricultural commodities.
The Cotton sector in Africa exemplifies the commodity dependence problem. Some African countries rely on the cotton sector to provide as much as 39% of their exports earnings. 15 million workers are employed by this sector alone in Africa.
The action plan adopted today constitutes the basis for a comprehensive response to agricultural CDDCs, which unable to counter the sharp decline and volatility in international prices, find themselves caught in a vicious circle of declining income, declining investment, stagnating competitiveness, persistent poverty and dependence.
An EU action plan on Agricultural Commodity Chains, Dependence and Poverty
The Commission's action plans identifies six major areas of intervention:
Putting the commodity problem on the agenda: support commodity dependent developing countries (CDDCs) in elaborating comprehensive commodity strategies covering critical parts of the commodity chain and fully integrating these in their overall poverty alleviation policies. The EU should also play an active role in reforming the international commodity bodies, making them more receptive to development concerns
Responding to price decline: support the implementation of commodities strategies. In the context of the on-going negotiations for Economic and Partnership Agreements (EPAs) between the EU and ACP regions, it is also proposed to back regional initiatives in support of commodity development such as regional networks of farmers organisations, quality-enhancing services, investment promotion or commodity branch organisations. A total of € 600 million has already been allocated for trade-related assistance within the EPA negotiations.
Managing risks and increasing access to finance: support for new financial instruments and commodity risk insurance schemes, to fight against inadequate access to finance and cushion against price fluctuations. Support for the development of insurance tools at macroeconomic level to counter fluctuations in commodity prices which reduce predictability of government revenues and limit developing countries' ability to implement the reforms in favour of sustainable development and poverty alleviation. Finally the EU instrument to compensate for losses of export earnings (FLEX) will be simplified to ensure it reaches those most in need (see below).
Support for diversification: the EU should assist CDDCs to make informed choices on promoting diversification and support the implementation of these choices. Provision of direct aid to local producer diversification is also proposed.
Successful integration of CDDCs in the international trading system: the Commission stands ready to pursue this goal in the on-going WTO talks under the Doha Development Agenda, as well as through the 2006 revision of the EU's system of trade preferences in favour of developing countries (GSP) and in the on-going review of the EU's rules of origin. The recent launch of a Helpdesk for exporters from developing countries is a further contribution to this end.
Enhancing sustainable corporate practices and investments in CDDCs: it is proposed to engage international commodity companies in the promotion of corporate social responsibility, sustainable codes of conduct, promotion of public private partnerships and promotion of international competition.
A support strategy for the African cotton sector
Building on the above general vision, the Commission also proposes a specific strategy for an EU-Africa partnership in support of the cotton sector based on two complementary axes of intervention:
Obtaining fairer trade conditions on international cotton markets: the EU supports the calls from the four African cotton producers (Benin, Burkina Faso, Mali and Chad) to pursue a reduction in trade-distorting subsidies within the WTO. In particular, within the agricultural negotiations in the Doha Development Agenda the EU calls for:
(i) Better market access for Least Developed Countries exports of cotton and textiles: developed countries should give duty free and quota free access for cotton and textiles from the world Least Developed countries, in line with the EU's Everything But Arms (EBA). It is also proposed to address the erosion of trade preferences and tariff escalation.
(ii) Elimination of all forms of export subsidies in this sector;
(iii) Reduction in trade distorting domestic subsidies: the EU, which is a minor cotton producer (2% of world production) is currently discussing a comprehensive reform of the EU support for its cotton producers by partly de-coupling support from production, thus abandoning the most trade-distorting support.
Trade-related technical assistance: helping developing countries to defend their interests. The EU has already allocated more than € 80 million in supporting African countries to identify, present and defend their cotton related interests
Supporting African cotton producing countries in consolidating the competitiveness of their cotton sectors, including implementation of comprehensive development plans for the cotton producing regions; strengthening of cotton related institutions and policies; facilitation of the integration within the cotton chain; improvement of responsiveness to evolutions of markets and technologies; and promotion of quality recognition.
The potential of Economic Partnership Agreements for the cotton sector is stressed and the Action plan also includes measures to mitigate the impact of price fluctuations including access to mechanisms to manage revenue risks and compensation for sudden losses of export earnings through the EU's FLEX instrument.
As a first concrete step to co-ordinate activities, during the first half of 2004 the Commission intends to call an international seminar on cotton including all stakeholders concerned, ie. cotton producing African countries, EU Member States and International institutions such as the World Bank or the IMF.
FLEX improving compensation of export earnings losses
As another concrete step, the Commission proposes to expand and simplify the use of the FLEX instrument to compensate for export earning losses.
FLEX was introduced in 2000 in the framework of EU ACP co-operation to assist governments facing sudden losses of revenues. It provides additional budgetary support to ACP countries that have registered: (i) A 10% loss in exports earnings (2% in the case of LDCs); and (ii) a 10% worsening of the programmed public deficit. Past experience shows that these eligibility criteria have been too stringent. From 2000-2 in only 6 out of 51 cases have ACP's been able to meet both criteria. Support from FLEX in the six cases has totalled € 35.65 million.
It is proposed to extend to landlocked countries and island states the special clause on a 2% loss in export earnings applied to LDCs, and eliminate the 10% benchmark on the worsening in the programmed public deficit.
Had the proposed criteria been applied to the 51 cases from 2000-2002, ACP countries would have received € 255 million through the FLEX system. This would have represented a 600% increase in the use of the instrument.
Changes in FLEX will have to be adopted by the EU Council in view of a final decision by the EU-ACP Council of Ministers in May 2004. The proposed changes would then come into force in the first half of 2004, providing a timely and effective response to vulnerability of price fluctuations for the cotton producing countries and other CDDCs.
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Facts and Figures about agricultural commodities, dependence and poverty
Internationally traded agricultural commodities, such as coffee, cocoa and cotton are, directly or indirectly, major sources of employment and income for millions of people in developing countries. Through taxation and redistribution, they make major contributions to the provision of basic services such as health and education in these countries.
54 commodity dependent developing countries (CDDCs) today generate over 20% of their total export earnings from three or less agricultural commodities. For some like Burundi the dependence on one single commodity exceeds 75 pct. of total exports. Three or fewer primary commodity exports constitute the bulk of their export revenue. These countries are located mainly in Sub-Saharan Africa, but also in the Caribbean and Central America. Many are LDCs, landlocked or small island states.
Between 1970 and 2000, prices for some of the main agricultural exports of developing countries, such as sugar, cotton, cocoa and coffee, fell by 30 to 60 percent (constant dollars). Although the long-term downward trend in real prices requires producing countries to continuously address the competitiveness of their commodities, these countries have few resources to counter the situation.
International commodity markets are characterised by cyclical trends: relatively long (and increasingly deeper) periods of low prices, and short periods of high prices. There is important volatility within these cycles. These price patterns create vulnerability both for individual producers and at the macro level. They discourage investment, and lead to macroeconomic imbalances: curtailing export earnings, debt service capacity, imports, credit availability, government revenues and provisions of basic services such as health and education.
Commodity chains cover a range of steps from the primary producer to the final consumer, through collection, primary processing, wholesale, export and import, further processing or packaging, and retail. Producers receive a very small percentage of 'value added' within the chain. They have always had weak bargaining power in markets dominated by large (sometimes monopoly) purchasers, and have faced inelastic demand and severe price swings attributable to supply fluctuations. For many producers, the alternative income opportunities are few, making the impact of price falls even greater.
With the abandonment of international market intervention and domestic market reforms in the 1990s, commodity producers in developing countries have largely been left on their own in their struggle with the demands of the market. Often Governments have not introduced adequate policies to accompany liberalisation. In developing and transitional countries, the private sector has replaced commodity-trading organisations such as marketing boards. However, supporting policies remain weak: producers and traders have great difficulty in e.g. accessing credits and other services.
The international market environment is also changing. In the past, commodities were homogenous and the retail sector focused primarily on cost competition. More recently, processors and retail chains are increasing margins by shifting into a diversified range of branded products and by creating new market segments.
Commodity processors and retail chains are increasingly integrated within the commodity chain, to ensure stable access to supply, better control the chain and be able to trace their products down to production levels. There is also an important ongoing concentration: Transnational corporations are dominating most markets and prefer to work with large-scale suppliers.
Commodity issues have now moved back onto the international agenda. The poverty implications of recent price falls have prompted the international community to make general commitments to take action (e.g the Third UN Conference on the Least Developed Countries in Brussels, 2001; the Doha Declaration of November 2001; the Finance for Development Conference in Monterrey, 2002; the World Summit for Sustainable Development in Johannesburg, 2002; the United Nations General Assembly, 2002). Most recently, two groups of commodity-dependent countries (West/Central Africa and East Africa) have focused the attention of the on-going WTO talks on their plight, arguing for special efforts to improve their situation.
The specific situation of cotton
The recent fall in world cotton prices has had a serious impact in several West and Central African countries, where cotton is the main source of income for a large population, estimated at about 10 million people. In some of the less developed countries cotton represents the main cash crop and the largest source of export receipts and government revenues. For instance, cotton represented 79% of Mali's exports, 65% of Benin's and 56% of Chad's in period 1999-2000.
To get to the bottom of the problem, it should be noted that the world market price for cotton depends on several factors: the level of world production and consumption, the price of synthetic fibre, the level of production-linked subsidies in major cotton exporting countries and the level of border protection.
While all of the above factors play a role, the significant decline of cotton prices in recent years has clearly been demand-driven. The share of cotton in world fibre consumption, in gradual decline since the 1960s, has dropped to just over 40 % of total fibre consumption (down from 65% in the 1960s).
What is the EU's role in the cotton market?
The impact of the EU on world cotton prices is minor for the following reasons:
The EU market is wide open to cotton imports, including textiles and clothing: the EU applies a zero tariff on cotton imports from ACPs as well as from the world's 49 poorest countries (LDCs).
The EU is the world largest importer of cotton. Between 20% and 80% of cotton exports from Mali, Benin, Burkina Faso and Chad reach the EU.
The EU is a price-taker and not a price-maker: Since the EU is not a net exporter of cotton, but the largest importer of cotton world wide, it has little, if any, influence on world prices.
EU production represents less than 3% of world production, while EU exports only account for 4% of world cotton exports. The EU is a net cotton importer.
EU does not have export subsidies for cotton.
EU domestic subsidies for European cotton growers are subject to a production ceiling: when the quantity is exceeded, the amount of the support is decreased. The support provided by the EU is mostly destined for small cotton growers in rural areas in Greece and Spain.