Project Summaries

06-926  Project Manager: J. M. Reeves


Darren Hudson, Texas Tech University

The purpose of this report is to provide information as to the level of subsidies cotton producers around the world receive, as it relates to production costs in the U.S. This will include information about direct benefits as well as indirect incentives (such as input subsidies). Information will also be provided as to the cost of producing cotton in various areas around the world in order to compare the basic economics of cotton production. Such analysis will reveal the relative importance all forms of subsidies may provide to sustain and encourage the production of cotton around the world.

In the past months, several measures instituted by the Brazilian government have been aimed at reducing inflation to prevent an impeding appreciation of its domestic currency, the Brazilian real (BLR), relative to the U.S. dollar. (USD). Already, bank reserve requirements have been raised; in addition, higher taxes on consumer credit, foreign bond issues, and on overseas loans and derivatives margins have been exacted to reduce the demand for the BLR. According to Brazil's finance minister, without these measures, the BLR would be at 1.4 to the USD (The Economist, 2011). Notwithstanding these measures, analysts estimate that the BLR could move to around 1.6 by the end of 2011. This anticipated level corresponds to a 10% appreciation from the current baseline level of 1.78 BLR/USD (in the next several years) that forms part of the macroeconomic assumptions utilized in the generation of baseline projections for U.S. agricultural markets by Food and Agricultural Policy Research Institute (FAPRI).

The immediate questions pertain to realignments in trade that will accompany this policy change. Following the exchange rate appreciation of the BLR/USD, how profoundly will Brazil's cotton exports be adversely affected? With Brazilian cotton exports becoming more expensive than those from the U.S., to what extent will cheaper U.S. cotton substitute for the now more expensive Brazilian cotton in the global export market? Will other export competing countries gain as well? As for cotton importing countries from Brazil, how significantly will their level of imports be altered and in what direction will it shift? And finally, are these effects on the international market of small or large order?

The appreciation of the Brazilian Real against the U.S. dollar could have implications for Brazilian exports and international markets and prices. It is important for U.S. textile manufacturers and cotton exporters to understand the likely changes in global trade patterns. This analysis utilizes the cotton global baseline model at Texas Tech University to project the likely impacts of a Brazilian currency appreciation.

Overall, our results indicate that even with a modest appreciation (10%), the impacts on global markets are likely to be small. Brazil will export less cotton, but only marginally (-0.07%). The U.S. and other exporting countries will take up the slack, but the effects are so small as to be negligible. The conclusion is that only with substantial appreciation of the Brazilian currency are we likely to see major effects on their exports and trade flows from other countries.


Project Year: 2012

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