Annex 1
Policies for Strategic Crop and Livestock Subsectors
I. Cotton - Overview
In general terms, the cotton sector is operating well, with strong production increases in recent years, relatively attractive returns for producers and strong demand for cotton in the domestic market. This demand is relatively well insulated from the general adverse swings in the international textiles markets, as Turkish manufacturers have concentrated on the production of high quality finished goods and have established strong off-take contracts with quality fashion houses. This stability of the sector is in large part due to the fact that the GOT has withdrawn from direct involvement in the sector and that producers are learning to cope with being exposed to the international market.
Problems identified in the cotton sector are not fundamental (as exist in some other sectors). Still, their resolution would lead to further growth and increased efficiency. It will be important for producers to continue to strengthen their competitive position by increasing their efficiency and rationalizing their production. The role of government will lie in continuing to improve the business and production environment through the provision of enabling legislation and a continuing reduction in intervention in the sector. The long-term success of the cotton sector in Turkey will be tied heavily to the future of the sector on the global markets (a factor largely outside of the control of producers or the GOT).
Background - The production of cotton in Turkey has increased enormously (2,150 percent) since 1934, and the most marked increase has taken place since 1988. In the past seven years, there has been a15 percent increase in seed cotton production (current production around 900,000 MT). Production is centered in 4 main areas: the Aegean region (28 percent), Antalya (2 percent), Çukorova (19 percent), and the Southeast Anatolia Project (GAP) area (51 percent). The fastest growing area for production of cotton has been the GAP area (a 17 percent share in 1991 which increased to 51 percent in 2002). The main reason for this dramatic increase in the GAP area is due to the irrigation and cropping of previously unutilised lands, developed by a major government infrastructure program.
Since 1963 domestic consumption of cotton has increased by 650 percent, to 1,250,000 MT per annum. The basis of this dramatic development has been driven by the creation of a modern and efficient textile sector geared towards exports. The sector currently represents about 10 percent of GDP and around 35 percent of total country exports of US$ 39 billion. Given the slower rate of increase in domestic production of cotton lint, the increase in demand has been filled by a dramatic increase in imports (224 percent in the period 1996 – 2002) and a marked decrease in baled cotton exports in the same period (57 percent). A contributing factor to this export decrease has been the increase in supply of competing cotton from other origins, e.g. Central Asia, Greece etc. Whilst they may not be of a similar quality to the Turkish cotton, they are relatively cheaper and have therefore taken a large share of the blended yarn markets. The relative weakness of the international markets and the severe drop in prices for American cotton, in comparison with other growths, has also been an added spur for consuming markets to switch away from Turkish cotton.
Policy Developments and Their General Impact - The GOT used to intervene heavily in the cotton sector (mainly through the ASCUs), with payments of high premiums and directions to Ziraat Bank to extend favorable credits to cotton producers. Since the adoption of the new agricultural strategy in 2000, government involvement in this sector has been reduced, as the ASCUs have become independent and the premium payments have reduced from US$ 0.09/kg (2000) to US$ 0.05/kg (2003). The GOT has continued to encourage the textile sector by not introducing a tariff on baled cotton, and this has enabled the textile sector to remain competitive in the currently depressed global textile markets. The effective rate of protection (ERP) for yarn is actually 27 percent, which provides an incentive to textile manufacturers to import baled cotton and process it domestically, as opposed to importing yarns from cheap markets such as China, Pakistan or India.
The biggest impact on the cotton sector is currently coming from the GOT’s development of the GAP area. The GAP project is providing irrigation to vast tracts of land in the east of the country (total 1.7 million hectares at project end). Much of this new land is being sown to cotton, and the GAP area is becoming the major supplier of cotton in Turkey. The total cost of this investment by the state will be US$ 32 billion (of which US$ 17 billion has already been spent).
The continuation of the premium payment system at US$ 0.05/kg seed cotton represents a premium of almost US$ 0.06/lb baled cotton. At current world market prices, this represents a 10 percent payment to producers, which is a direct cost to the state. As producers are already profitable, this payment is an unnecessary burden on the Treasury and is causing various distortions (such as an inflated cost for land rental).
Supply Chain Issues
ASCU/ACC sustainability. The Agricultural Sales Cooperative Unions (ASCUs) currently take delivery of producers’ seed cotton against a preliminary price, which they increase if the market rises post delivery. However, if the market falls post delivery, then the ASCUs do not reduce their payments to producers or seek to recover their market loss. This means that the ASCUs are subject to 100 percent market exposure, a risk that they are not able to hedge. This could mean that they will make substantial losses (especially given the size of their open market positions) in an adverse market. Given their relatively weak capital bases (especially Çukobirlik) and inability to make speculative market gains, this places the ASCUs in an unsustainable position.
Both the ASCUs and the Agricultural Credit Cooperatives (ACCs) offer unsecured credit to the producers in their areas. This risk is partially managed by ASCUs by the fact that they are also off-takers of the product and that there are usually few competitors in the immediate area. ACCs, however, do not take the product as a repayment vehicle and are therefore reliant on producers selling to parties who will honor their payment obligations and also that the producers will then pass on these funds to the ACCs. Both organizations are therefore running substantial credit risks. This risk is further heightened by the fact that neither producers, nor the organizations, are beneficiaries of crop risk insurance and therefore are prone to the potential effects of a crop failure.
Whilst the above organizations are supposed to be producer organizations and to therefore represent the interests of their members, there has to be a concern that their senior management are often drawn from within their members. In order for these organizations to be sustainable, there has to be a realization that they need to be run on commercial lines and that therefore issues such as pricing and policy need to be based on sound commercial principles, as opposed to being palliatives for the membership.
Commodity Exchange. Whilst this is operating well, there are various shortfalls in its operations. Firstly, although there is a growing import of cotton, the prices of these trades do not have to be registered at the exchange, which means that there is an apparent disconnection between the domestic and import markets. More importantly, the exchange only provides spot market prices and usually only for recorded trades outside of the exchange. In order for the exchange to be able to develop into an actually traded market, the law on collateralization and warehouse receipts will need to be adopted. This will enable both buyers and producers to use the exchanges as a real forum for spot trading. Equally, the lack of contract enforceability and weakness of the rule of law and court judgment enforcement means that a futures market has not been able to develop, an important risk management tool for producers, buyers, and the commercial banks.
Outlook - On the whole, it has to be noted that this sector is performing well and, with a strong domestic textiles sector, the outlook for the immediate future is very positive. This is enforced by the fact that the textiles sector in Turkey is largely based on higher quality finished goods and off-take contracts with solid fashion houses. Although the lower quality end of the international market is subject to excessive price squeezes caused by swings in supply and demand, the sector in Turkey is shielded (to a certain extent) by the nature of their production. However, what the producers are coming to realize is that, with the reduction in their protection levels and a falling premium payment, they are prone to swings in the international price of cotton. This competition will be strengthened when some of the directly competing growths take the necessary steps to improve the quality of their cotton. Ultimately, the future of this sector (as in many other countries) will depend on the outcome of the WTO negotiations with regards to the removal of subsidized production and export of cotton from the USA.
Recommendations - To ensure the medium- to long-term success of this sector, the GOT must ensure that it encourages producers to become as efficient as possible. To this end, it is recommended that the premium payment must be cut to a level that is commensurate with the intentions of ensuring that the product is traded legally. At current market levels, this would equate to a payment of roughly US$ 0.03/kg for baled cotton, or US$ 0.01/kg for seed cotton. Any payments in excess of these amounts are a direct cost to the Treasury and merely enable producers to continue with inefficient practices such as tractor over usage or non-mechanized crop picking.
Linked with the above issues of efficiency, it will be imperative for the GOT to support land consolidation with greater investment co-financing in cotton growing areas. A crop such as cotton is dependent on the maximization of labor saving technology in countries where there is a relatively high cost of labor. From a study of the cost of production (COP), it is clear that the largest cost (after land rental) is harvesting and this is because the crop is currently hand picked. However, it will not be possible for many producers to switch to machine harvesting due to the small sizes of their fields. The problem of small field sizes has been, in large part, caused by the past practice of land parcel division between all the inheritors on a physical basis. Land consolidation investments and the minimum plot size conditions that are attached to participants in state supported land consolidation efforts can address this fragmentation substantially.
As we have seen above, the further development of both the commodities exchange and the agricultural banking system is dependent on a producers’ or traders’ ability to warehouse baled cotton. In this regard, it is recommended that the GOT expedite the introduction of legal provisions enabling the issue of warehouse receipts. In conjunction with this, the GOT needs to take steps to improve the areas of contract enforceability and judicial process.
II. Maize – Overview From an initial overview, it could be argued that the sector is operating well, with large domestic production and strong demand for maize in the domestic market. The profitability of the processing sector of corn syrups and feed for the poultry industry ensures that demand is relatively price inelastic at the moment. Given the profitability of the trading operations of the TMO (State Grain Board), the sector also represents a revenue source for the GOT.
However, the cumulative effect of import licensing, excessively high tariffs (80 percent), TMO’s market interventions, and a very active secondary traded market (approximately 70 percent of domestic production) is having disastrous side-effects on a number of agricultural sub-sectors and minimizing producer profitability. The situation created by the foregoing is unsustainable, and Turkey faces the very real risk that insulation of the maize sector will lead to a collapse in competitiveness of this and other related sectors, unless the state changes the nature and focus of its policy in the maize sector.
Of particular concern are the serious adverse effects which the policies in this sector are having on the development of the livestock sector. With demand for livestock feed (cattle) being so price elastic, one of the major inhibitors to development of the livestock sector (a priority sector for the GOT) is the high cost of feed caused by the state’s current maize sector policies. Moreover, as the GOT protects the maize sector to the detriment of other livestock feeds (e.g. soybeans), producers will be reticent to diversify/switch their cropping.
Background - Domestic demand for maize has risen over the past seven years by 27 percent (3.6 million MT in 2002). This has been met by a 25 percent increase in domestic production (to a level of 2.5 million MT) and a 31 percent increase in imports (1.2 million MT in 2002). There was a 58 percent decrease in imports in 2001, largely due to the devaluation of the TL. Imports recovered in the following year by 119 percent, reaching almost the same level as prior to the 2001 crisis.
Demand for maize oil, largely driven by its adoption in preference to other oils for health reasons, has increased in excess of the demand for maize itself – by 75 percent. This increase has been met by a 24 percent increase in domestic production, a 42 percent increase in imports and, most notably, by a 69 percent decrease in exports. This last change indicates that processors are now achieving attractive domestic prices and demand levels for their products. (It is also interesting to note that the inter-period increase in imports coincided with decreases in the international prices of competing oils.)
Production of maize feed cake has naturally increased, in line with the domestic supply of maize, by 24 percent. There has been a dramatic increase in feed cake imports, and it is likely that this demand has been driven by the continuing increase in poultry production. Maize seed cake is a major ingredient in poultry food due to its high energy content. Nevertheless, imports still represent only 5 percent of total domestic supply.
Another major factor affecting domestic demand for maize is its use in the production of starch and corn syrups for the food processing industry. Although the Sugar Law restricts the processing of natural starches to corn syrup to 10 percent of production, an exception is made for syrups that are being produced for further processing of food stuffs for export. On the basis of this exception, most processors are producing up to 90 percent of their natural starches as corn syrups. The profitability of producing corn syrups is high, and there is therefore a strong incentive for processors to maximize their syrup production.
Policy Developments and Their General Impact - The main distortions in the maize market are caused by the actions of TMO and secondly through import restrictions and high tariffs. TMO is a major purchaser of maize in the internal market. In the 2003 season, TMO pushed a 47 percent increase in market price post harvest by declaring high sales prices, which were followed by the rest of the market. The reason for such interventions is not clear, as producers are not benefiting substantially from this price rise and it simply leads to higher raw material costs for the processing sector. Notably, processors or traders cannot freely import maize until TMO has disposed of all of its stocks. Even after this time, processors have to obtain a state import license for each specific shipment. Therefore, whilst TMO has only around a quarter of the market, these other restrictions amplify its power to influence prices.
Turkey’s import policies have caused major distortions in the market for maize and its bi-products. There is an 80 percent import tariff on maize itself, which obviously enables the secondary traded market to raise the price of domestic maize, as the available alternative is much more expensive. This tariff also has a dramatically negative effect on the effective rates of protections (ERPs) for maize by-products: corn oil has a 31 percent import tariff, which only equates to a 4 percent ERP; feed cake has an import tariff of 13 percent, but an ERP of 25 percent. Applying heavy tariffs to the raw product is a disincentive for the processing industry in the oil sector. The 135 percent tariff on syrup produces has an ERP of 172 percent, which is giving a very high level of protection to this sector and explains the high internal price for this commodity.
Whilst starch processors are able to absorb the extra costs that are created by these price escalation measures, other agricultural sub-sectors are suffering. The area worst hit is the cattle feed sector, where maize and its by-products are an important ingredient in prepared meals, and the high prices for maize have a direct relation to the price of the meal. Except in the poultry industry (where returns are high), livestock producers demand for feed is extremely price elastic and the demand for feed is currently very low because of the prices. This creates a vicious circle - as feed processors experience a 35 percent utilization of capacity, their unit production costs rise, further adding to the cost of the feed. As discussed in the section on livestock, it is clear that better feed rations for livestock would lead to both increased profitability and production levels.