Impact of efficient refuge policies for Bt cotton in India on world cotton trade

India is a major cotton producing country in the world along with the U.S. and China. A change in the supply of and demand for cotton in the Indian market has the potential to have an impact on world cotton trade. This study evaluates the implications of efficient Bt cotton refuge policies in India on world and U.S. cotton markets. It can be hypothesized that increased refuge requirements for Bt cotton varieties in India could decrease the world supply of cotton because of the lower yield potential of non-Bt cotton varieties planted in refuges. A decrease in world cotton supply could potentially raise world cotton prices, ceteris paribus. This study conceptualizes the impact of efficient refuges in India on world cotton markets by using a partial equilibrium model. The hypothesized cotton trade scenario includes India, U.S., China, and rest of the world; where India and the U.S. are assumed to be net cotton-exporting countries and China is assumed to be a net cotton-importing country. The Chinese Tariff Rate Quota (TRQ) and the U.S. marketing loan program are explicitly included in the model. Impacts of increased adoption of Bt cotton varieties and increased domestic demand for textiles in India (because of the higher standard of living of the Indian population in recent years and increased exports of cotton-based textiles associated with the elimination of import quotas under the Multi-Fiber Arrangement (MFA)) are also considered in the model. The conceptual model hypothesizes that an increase in the supply of raw cotton in India due to increased adoption of Bt cotton would shift the excess supply curve upward in the world cotton market, resulting in a decrease in world price and an increase in the quantity traded. An increase in the world supply of cotton does not, however, translate into sustained higher revenues/profits for adopters of Bt cotton as prices for cotton could fall worldwide. As indicated, the rising domestic demand for textiles in India could increase demand for domestic and imported cotton in India, which would result in a decrease in the excess supply in the world market and an increase in price and a decrease in the quantity traded. If Indian cotton farmers comply with efficient refuge requirements, the supply of cotton would be expected to decrease, which would further shift the excess supply curve downward resulting in higher world prices. So, it is conceptualized that the expected impact of refuge compliance would be to alter cotton trade flows and increase world prices of cotton. However, the net change in world price and the trade of cotton is determined by the elasticities of demand and supply for the various countries. A partial equilibrium structural econometric model of Indian fiber markets was developed to measure the impact of change in refuge requirements in India on world price and trade of cotton. The model includes supply, demand and price relations for cotton and man-made fibers along with the proportion of the area under Bt cotton. Acreages under Bt and non-Bt cotton, and yield levels of cotton in three regions in India contribute to cotton production, which builds up total domestic supply after incorporating beginning stocks and imports. The model takes into account inter-fiber competition among cotton, wool and man-made fibers based on their relative prices. Fiber demand is derived by estimating textile consumption and mill demand for cotton and man-made fibers. Cotton ending stocks and cotton trade are also taken into account in order to close the model. Finally, world cotton price (A-Index) enters into the model through cotton trade equations. The estimated model was used to build baseline projections for supply, demand and prices of cotton and man-made fibers in the Indian fiber market. The baseline projections for the world fiber market were developed by linking Indian fiber model with the world fiber model developed and maintained by the Cotton Economics Research Institute (CERI), Texas Tech University. The baseline projections assumed that the area under Bt cotton in India would remain fixed at 2007-08 growing season levels. After developing baseline, two alternative scenarios were evaluated: Scenario 1 assumes that cotton producers comply with efficient refuges; and Scenario2 assumes that cotton producers grow 100% Bt cotton acreage and no refuge. Indian fiber model was shocked under each of the scenarios and the impacts on world cotton markets were observed. The policy effects are measured by comparing the differences between the scenarios and the baseline projections. The results revealed that the world the U.S. prices were higher when efficient refuges are mandatory as compared to the scenario when all the areas are under Bt cotton. The net trade decreased under refuge restrictions as compare to the scenario when 100% of cotton area is under Bt cotton. However, the U.S. cotton exports were projected to decrease whether the farmers in India comply with efficient refuges or they grow all of their cotton area under Bt cotton. Finally, it was concluded that farmers’ compliance with optimal refugia in India could increase world and U.S. cotton prices and decrease the world net trade of cotton. Therefore, the proportion of Bt cotton according to the optimal refugia has the potential to impact world cotton markets because India is a large cotton producing country having 25% of world cotton area.

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 Record created 2017-04-01, last modified 2018-01-22

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