Azerbaijan's "white gold"
Cotton market rebounds

ANALYTICS  24 April 2024 - 14:28

Since the beginning of this year, the leading cotton-producing countries have been experiencing an upward trend in prices against the backdrop of a global rise in commodity prices. Experts forecast that the growth in demand for cotton raw materials, yarns and fabrics will be sustainable in the coming years.

However, despite the favourable trading environment, due to rising production costs, as well as climatic changes in the US, China, Pakistan, India and several other regions of the world, raw cotton production is declining. Last year, this negative trend was also observed in Azerbaijan, where the cotton harvest decreased by more than 14 per cent. Many measures have been taken in our country to support cotton production, and recently the Ministry of Agriculture held a regular meeting on the prospects for the development of the industry.

The pandemic years 2020-2021 had an extremely negative impact on the cotton market, reducing both production and consumption worldwide. However, the global energy and commodity crisis, the breakdown of logistical links and other negatives of 2022 played a triggering role that made adjustments to the cotton market structure. Globally, demand dynamics have improved again, partly due to lower supply. Another important demand driver was the extreme drought in the summer of 2022, which reduced cotton yields in China, India, the US and Brazil by 28-30 per cent. The situation was not much better in Pakistan, where heavy rains destroyed almost 20 per cent of the crop, while production declined in Australia and Benin.

To assess the extent of the damage, it should be considered that the countries listed above account for over three quarters of the world's total production. Although cotton prices fell slightly in 2023 due to the global recession reducing demand from processors in Turkey, Pakistan, Bangladesh, Indonesia and India, the overall commodity market remained resilient due to continued production cuts in some of the world's leading cotton-growing countries.

The worst situation today is in the US, where, due to higher production costs, high taxes, and an expensive labour market, the competitiveness of American cotton is decreasing year by year, being displaced by cheaper products from Brazil. There are less than a hundred cotton processing mills left in the US (a century ago there were about 900), and the number continues to decline (8 mills closed in 2023 alone) along with the bankruptcy of textile mills that use cotton fibre and yarn to produce fabrics. This negative impact is transmitted along the value chain: having lost their domestic market, American farmers are reducing their cotton plantings and replacing them with more profitable crops.

China also reduced cotton production by 6.1 per cent to 5.618 million tonnes in 2023, due to both unfavourable climatic changes and worsening profitability. Farmers in Kazakhstan, Kyrgyzstan and Tajikistan are facing tangible problems related to water scarcity and low production profitability, while in Turkmenistan, on February 9 this year, they were forced to multiply the purchase price of raw cotton, as the rates, unchanged since 2018, did not cover production costs at all. Uzbekistan, the leader in the post-Soviet space, significantly increased its raw cotton production last year to a record 3.8 million tonnes: however, in this republic, most of the cotton is processed domestically, and given the high share of added value, the full production cycle helps to compensate for the industry's characteristic negativity.

One way or another, the growth in demand and prices for raw cotton since the beginning of this year suggests that the industry is expected to stabilise, with the seasonal average cost of cotton expected to be 86-87 cents per pound in 2024. Overall, the global cotton market size, valued at $43.96 billion in 2024, is expected to increase to $50.22 billion by 2029, at a compound annual growth rate of 2.7 per cent. The global cotton market is also expected to stabilise in the medium term in Azerbaijan, where they are looking for ways to increase production and boost industry profitability.

Unfortunately, last year was not the best for domestic cotton growers: according to the State Statistics Committee, the country harvested 276,100 tonnes of raw cotton, a decline of 14.4 per cent compared to the previous year. In recent years Azerbaijan has been experiencing serious problems with water shortage for irrigation, especially in the summer period: for example, in 2023 there were difficulties in water supply to farms in Aran and several other lowland regions of the country, also the number of hot days (over 40 degrees Celsius) sharply increased relative to the climatic norm. Cotton production, which requires relatively frequent and generous irrigation during the spring vegetative growth and summer season, suffers the greatest losses.

However, other subjective factors also influenced the development of the industry: in particular, there was an increase in production costs due to an increase in tariffs for diesel fuel, water, gas, electricity, and petrol. The media also reported on the poor quality of pesticides imported into the country, not to mention the rising prices for foreign agrochemicals, machinery, spare parts and other components, which increased the costs of farmers and processors.

Finally, local labour market conditions have changed significantly in recent years and raw cotton pickers were not motivated to work at the old rates. In this regard, in August 2021, wholesalers decided to increase purchase tariffs by an additional 50 manat ($29.4) per tonne, and similar measures were taken in January 2022 - tariffs increased by another 50 manat. However, against the background of inflationary processes in the country, as well as the growth of global commodity prices, the issue of increasing the purchase prices for raw materials was again actualised in August 2022: the purchase prices per tonne of cotton increased by an additional 50 manat according to the raw material grade.

Thus, the updated rates for the 2022 crop are set at 800 manats ($470.5) for the first grade, 780 manats ($459) for the second grade, 740 manats ($435) for the third grade and 700 manats ($412) for the fourth grade. Plus, for each tonne of cotton delivered to procurement points, farmers will be paid a subsidy of 170 manats ($100). The industry is supported not only by increased funding but also by the introduction of high-yielding American, Turkish and Greek cotton varieties and modern agro-technical methods of cultivation.

In recent years, some 16,000 units of various machinery have been purchased to increase productivity, including 400 modern cotton harvesters, mostly American John Deere models, so that 87 per cent of cotton is now harvested mechanised. Ultimately, all these innovations have increased yields to 50 and even 60 quintals per hectare: however, such high yields have been achieved only in some experimental plots, as well as in a number of specialised agroparks, where beer irrigation systems have been used to ensure good germination and save up to 40 per cent of water. Alas, but the average yield in Azerbaijan is about 28-29 centners per hectare, which is almost half the level of world industry leaders.

"Cotton growing is one of the key branches of agriculture with long traditions, and comprehensive measures on its development are being implemented in Azerbaijan with state support," Deputy Agriculture Minister Sarvan Jafarov said at a departmental meeting dedicated to cotton growing on April 22. According to him, until April 22 this year, domestic cotton processing companies have signed contracts for cotton production on an area of 100,500 hectares, and these agreements covered 15,167 farmers and other producers of cotton raw materials. As for the state support to cotton growers, new steps on reconstruction (concreting) of irrigation canals, introduction of economical irrigation systems, introduction of yielding drought-resistant varieties of raw material have been identified as the key direction today.

An equally important goal is to increase the share of cotton raw material processing products - yarn, fabrics and garments - in the structure of domestic exports. So far, our country mainly exports cotton fibre: in this segment, a 44 per cent growth was achieved in January-February 2024, and 33.5 million worth of cotton products were supplied to foreign markets. However, there are plans to develop a full-cycle cotton cluster in Azerbaijan in the future.

In this regard, the implementation of Uzbekistan's experience in creating a production chain from cotton raw material to finished products is extremely important: within the framework of long-term agreements between Tashkent and Baku, the Uzbek company PAHTAMASH, the region's largest manufacturer of cotton ginning equipment, plans to equip Azerbaijani primary cotton processing enterprises with its equipment, including future factories in the Karabakh region. Uzbekistan will also supply seeds of highly productive cotton varieties and assist in training highly qualified personnel in the cotton and weaving industries. In order to accelerate the implementation of such projects, in February 2024, the head of state signed a decree approving the "Directions of strategic investment projects that provide for the issuance of a document to encourage investment": according to the document, the cotton processing segment is included among the production projects based on local raw materials.

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