COMMUNISTS CAPITALIZE ON FREE WORLD'S COTTON PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
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• Document Creation Date: December 9, 2016
• Document Release Date: June 22, 2000
• Sequence Number: 30
• Publication Date: January 26, 1956
• Content Type: REPORT

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CONFIDENTIAL
NOFORN
Intelligence Report
No. 7106
DEPARTMENT OF STATE
Office of Intelligence Research
Prepared by
Division of Functional Intelligence
January 26, 1956
State Dept. declassification & release instructions on file
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This report is based on information available through January 20, 1956,
TABLE OF CONTENTS
Page
Abstract . . . . . . . . . , . . -. ? . . . . ? . . ... . . . . . . . . iii
I. Introduction . . . . . . . . . ? ? . . ? ? ? ? ? ? ? ? ? ? 1
II. World Cotton Situation and outlook . . . . . . . . . . . . 2
A. General Summary . 2
B. United States . . . . . . . . . . . . . . . . . . . ? 3
C. Volume and Pattern of Free T"'orld Export Trade . . . . . . 5
D. Importance of Cotton Trade to Countries of 7
the Free 1~Torld . . . .
E. The Cotton Position of the Communist Bloc . . . . . . . 7
III. East-;est Trade in Cotton . . . . . . 10
A. Free World Exports to the Bloc. . . 10
B. Bloc Operations in Free 11,orld Cotton Markets . . . . . . 11
1. Egypt . . . . . . . . . . . . . . . . . . . . . . . . 11
2. Pakistan ? . . . . . . . . . . . . . . . . . . . . . 13
3. India . . . . . . . . . . . . . . . . . . . . . . . . 14
C. Soviet Exports to the Free World . . . . . . . . . . . 11
A. Cotton: Exports from the Free World to vino-Soviet Bloc 17
Countries 1949-50 - 1954-55 . . . . ? . . . ? . ? ? ? ? ? ?
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TABLE OF CONTENTS, Continued
Page
LIST OF TABLES
1. Cotton: Distribution of Free -.orld exports, by Country
of Origin, Selected Periods, 1934-'38 - 1954/55 ? . ? . ? . ? . ? 6
2. Cotton: Exports as a Percentage of Total Export Values
in Certain Countries, 1937 and 1952_54 . . ? . ? . . . . . . . . 8
3. Cotton: Estimated :,Jxports from the USSR to the Free
V orld, 1951/52 - 1954/55 . . . . . . . . . . . . . . . . . 16
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The Lino-Soviet bloc is exploiting the mounting world cotton surplus
situation to further its stepped up economic and political offensive in the
Middle mast and South Asia. The most dramatic example was the recent ex--
change of Czech arms for surplus Egyptian cotton. Another instance was the
shifting of Qonmunist Cl-sina's cotton purchases from Pakistan to India and
Egypt in retaliation for the breakdown of the Sino-Pakistan trade agreement
negotiations. Such maneuvers have yielded the bloc political gains at no
economic cost and may in fact have brought positive economic advantages.
With the prospect that cotton :rill be in oversupply for some years, further
bloc manipulations in the Free World cotton markets seem likely.
Although the overall cotton position of the Soviet bloc is one of
approximate self-sufficiency at present consumption levels, it can move in
and out of the world market on a considerable scale at will, The Uh:SR has
been the principal supplier for the bloc's major raw cotton deficit region --
Eastern Europe. However, the satellites can and have been switching their
purchases to Free World sources releasing Soviet supplies for sale to Western
Europe. Thus, as a result of its recent increased sales to the bloc, Egypt
may in effect be displacing its own sales in its traditional markets, Exports
of USSR cotton to the Free 7.orld in the past season expanded by almost 100
percent, There is reason to believe that the bloc will continue to push such
sales both because of expanding domestic output and the opportunities to
derive economic and political advantages for purchases in Free World markets.
Such sales can help to relieve bloc difficulties in balancing its trade ac-
counts with iuestcrri Europe. It is much easier for the bloc to sell cotton in
Western Europe, possibly by shaving prices slightly, than to sell manufac-
tures. On the other hand Soviet manufactures, especially capital equipment,
should find a fairly ready market in the less developed areas where the bloc
is prepared to take surplus cotton in exchange.
Expansion of Soviet cot[-.,on exports outside the bloc will intensify the
Free '.orld's cotton surplus disposal problems. It has the added advantage
from the Communist viewpoint of increasing competition among tree World sup-
pliers for cotton markets behind the iron curtain. This in turn increases
the political and economic leverage the bloc can exert in coming to the aid
of distressed cotton exporters.
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I. INTRODUCTION
The Communist bloc is adept in making the most of the Free 1 orld's
commodity problems. The techniques employed are tailored to fit the particu-
lar situation. For example, early in the Korean Jar, when there was great
pressure on world wool supplies and prices,-and the US.Govcrnment had a
large military procurement program for wool manufactures,'it is believed
that the"US~_:R timed its purchases in the Australian wool market so as to
increase Us procurement problems and costs.- The increased purchases by two
major importers prompted other countries to engage in scare buying, and
generated friction among Free World. governments. Since then the irregularity
of Soviet purchases and'their concentration in a short period of time have
often' accentuated price fluctuations in the very sensitive Australian wool
market.
Another technique which has been used, and at times with serious re-
commodity
percussions in the West, is that of playing off a short sup_-1Y
against a strategic material. The classic example of this technique was
the agreement under which Communist China offered rice in exchange for
Ceylonese rubber at a time when rice was in very short supply. The details
of this agreement, and the trouble it has caused the Free v,orld, are so
widely known t1at there is no need to review them here.
Now that there are burdensome surpluses of most of the major agricul-
tural commodities that enter world trade, the opportunities for the bloc to
make economic and political capital out of commodity transactions is greater
than ever before, First, there is an unusually wide range of commodities
from which to select, including some which are traditionally i,:!ported by the
bloc in substantial quantities,, Second, the list contains commodities of
key importance to a number of underdeveloped countries, including some coun-
tries that are on the outer frin;._e of the anti-Communist community, Still
another facet of the problem, and one that lends itself to bloc propaganda
uses, is the fact the USis.engagedin agricultural disposal operations which
are the source of much concern.among competing exporting countries. Despite
the care the US is exerc.i,si.ng.to avoid disruption of world markets and
prices, it has not been able to allay the fears of other countries that their
exports will suffer sooner or later as a result of US disposal operations.
Cotton and rice:.offer outstanding current. examples of how the bloc
is making economic and political, capital of commodity transactions. It is
the purpose of this report to examine the cotton situation in the context
of Last-West trade relations.
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II. COTTOi SITUATION AND OUTLOOK
A. General Summary
:7;orld production and consumption of raw cotton have increased.signifi-
cantly since 1950/51,1 but production has consistently outstripped consump-
tion by a wide margin. Asa result stocks. have been accumulating rapidly
By July 31, 19551 the closing date of the 1954/55 season world stocks of
the fiber had risen to approximately 21,7 million bales, or nearly-twice the
total quantity exported in '1951,155.. The US alone had 11.1 million bales on
hand, or more than its total'exports.in the three preceding years.' In terms
of the rate of domestic cohsumption and exports in 1954/55 US stocks were
equivalent to nearly a year's supply. Stocks.in~other major exporting coun-
tries were of much smaller proportions in relation to 1954/55 offtake4 Most
importing countries were carrying unusually small stocks because of the
expectation of lower prices. As a group they held only a little more than
"three months' supply at the 1954/55 consumption rate, or minimum io ,,r king
stocks based on current consumption levels,
CO'ITOT S` 'I1,'w!'_T,_,J '..ORL PT OL;UCT IO 1 A14D COi SUMPTION, 1951-55
(In millions of bales)
Year beginning Excess of production
August 1 Production Consumption over consumption'
1951
36.4
33,1
3.3
1952
36.9
.34.6
2,3
1953
39.3
36.0 '
363
1954
38.3
36,6
:1,7.
1955
?,
40.5
36.8
3.7
Source: International Cotton Advisory Committee,
Cotton, Quarterly Statistical Bulletin,
Vol. 9, No. 1, October 1955, andFAS
OP. cit,
The 1955/56 world cotton crop is estimated at the all-time peak of
40.5 million bales, or 6 percent mpre than the previous near record of 38.3
million bales attained in 1954155." Since no substantial gain-in consumption
1. Season beginning August 1. 2. Unless otherwise noted, figures given in bales are in terms of equiva-
lent bales of 14.78 pounds net weight, except for the US. Those for the
US are reported in terms of running bales, the net weight of which has
averaged approximately 1G90 pounds in recent years.
3. USDA Foreign Agricultural Service, Foreign Agriculture Circular,
FC 10-55, 11/16/55.
4. FAS, off-, cit.
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is anticipated. for this season, a further rise in world stocks of over 3.5
million bales by July 31, 1956 seems likely, with the US holding the bulk of
the increase. In short; the vaorld not only is not reducing its,cotton surplus
this season, but, is actually adding more to its stocks than in any season
since the surplus began to develop.
The longer run outlook indicates that cotton is likely to be a problem
commodity for some years to come. The production potential is so far in ex-
cess of the current relatively high rate of consumption that the readjustment
of supply to demand is bound to be a ,painful process for producing countries.
This outlook presents serious domestic and foreign political and economic
problems for the US. Domestic interests are clamoring for government action
to make US cotton competitive in world markets. Foreign cotton producers
have expressed apprehension over the possibility that the US may "dump" its
surpluses on world markets, and some have made representations to the US
Government concerning its special export program for disposing of 1.0 million
bales of short staple cotton on a competitive bid basis. They take the posi-
tion that since a considerable number of financially weak underdeveloped
countries in the Free ';orld are dependent on cotton exports to a much greater
degree than the US, this country should not pit its financial strength
against them in the competition for world cotton markets.
B. United States
From an acreage 114 percent smaller than a year earlier, the US has
produced a crop of 114.5 million bales in 1955/56, or about 7 percent more
than in 1951/55 and 405 million bales mare than the official goal.1 Acreage
restrictions in the past tv:ro seasons and the continuation of price supports
at 90 percent of parity have enCouraed the utilization of the most.. suitable
lands and production techniques. Yields have established astonishingly high
records. For the 1955/56 crop the average yield per harvested acre is esti-
mated at about 1116 pounds compared vvith the previous record of 3141 pounds
for 19514, and the 1950-514 average of 292 pounds,
It is estimated that less than 12 million bales vrill be absorbed by
domestic consumption and exports in 1955156 as against 12.3 million bales
last season. Domestic consumption is expected to reach 9.2 million bales,
an increase of 0.1~ million, and exports of about 2.5 million bales are anti-
cipated, or about one million bales less than in 1951/55. On the basis of
these estimates, stocks will show a net increase of about 3.0 million bales
by July 31, 1956 leaving an all-tine leak carryover of about 114.0 million
bales.
The statistics cited in this subsection are from the USDA Agricultural
Marketing Service, The Cotton Situation, 1956 Outlook Issue, November 25,
1955, and The Demand and Price .situation, December 20, 1955
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During the past two seasons doaestic prices for cotton generally have
been above world market prices, As a result US exports have contracted
sharply despite substantial government financing of cotton sales under foreign
aid Programs, Export-Import Bank loans, and sales for local currency under
Public Laws 480 and 665. In 195V555., the US share of Free ':orld exports was
only'32 percent, as compared with about 40 percent in 1949/50-1953/514 and
in 1934-38. The US ratio has dropped precipitously in the first five months
of the current season. It may recover somewhat in the next few months under
the stimulus of the special program under, which the government. is offering
1.0 million bales of 15/16 inch and shorter cotton for export on an open com-
petitive bicl'basis, beginning January 1, 1956.` Even so, it appears doubtful
that the US will supply more than one-quarter of Free :orld cotton e1;-ports
for the current season.
COTTON : US SH! P. E IN FR `I'E 1.701 LD PRODUCT ION, C0T"STT,'iPTZOAT,
AND F PORTS, S 1Li]CT 1D P'$IODS, 1934-38 - 1955/56.
(Percent)
.
1934-38
1949/50--
1953/54
1954/55
1955156
(Preliminary)
Production
51
53
46
46
Consumption
29
36
32
33
Exports
40
40
32
25
Cotton plantings will be subject to acreage restrictions again in
195.6, for the third successive year. On the other hand, for the first time
since tiorld,``ar II, cotton prices may be supported at less than 90 percent
of parity. The exact price-support ratio has not yet bc.en"announced. If it.
wereto be set at the legal minimum of 75 percent of parity, and. if the pre-,
sent basic formula were continued, this would imply a basic minimum support
price of about 5cents a pound less than the current rate. Legislation :is,,
pending that proposes changes in the basis of the support price which would,
reduce it by' an additional three cents a pound. In December 1955, some
foreign cottons were quoted in Luropeaii markets at nearly eight cents'a
pound less than comparable US grades. Therefore, unless changes are made in
US price-support legislation, or surplus disposal legislation, prices of
cotton in the domestic market may continue to be higher than those in world
markets' in 1956/57.
The Council on Foreign :economic Policy has been seeking solutions to
US cotton problems, particularly to the problem of stimulating US exports of
the fiber without causing undue hardship to other Fr,,e orld exporting coun-
tries. The policy det rmination has not yet been made. The probabilities
are, however, that some type of e.,ecutive action may be taken in the near
future in an effort to rehabilitate US cotton export trade, although such a
program might not become effective until the cotton season beginning August 1;
1956. cJ.oreover, a number of bills with this objective are expected to receive
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congressional consideration early in 1956+ mile no prediction._04n be
made at this time as to the government's future cotton export policy, the
indications are that some steps will be taken soon to make US cotton competi-
tive in world markets, Thus, the outlook is for increased competition for
world export markets, and increased pressure in other Free Vjorld exporting
countries to take advantage of all possible markets for their surpluses. In
the context of Fast=;..est'trade relations; the outlook clearly holds prospects
of increased opportunities for the bloc to capitalize on Free bbiorld's diffi-
culties in cotton.
C, Volume and Pattern of Free 'Jorld Export Trade
The long-term downward trend in raw cotton exports, which has been in
evidence since the 19201s, has continued in recent years. This has occurred
despite a moderate upward trend in voa,,ld cotton consumption. It has been
associated with the development of the synthetic fiber industry and the ex-
pansion of cotton cultivation and textile processing facilities in, under-
developed countries which formerly obtained a significant share of their
cotton supplies in the form of imported textiles.
Free ':orld exports of cotton declined to about 10.7 million bales in
195)4/55, thus showing a reduction of 5 percent from the annual average for
the five preceding years and of 1)4 percent from that of 193)4-38. (Table 1.)
The decline from the levels reached in the period irnmediately preceding was
strongly influenced by the drawing down of inventories in importing countries
in expectation of a downward trend in prices. The decline from prewar
levels, in addition to being influenced by the factors noted above, also re-
flects to some extent the reduction of Iee World exports to Eastern Europe
following their incorporation into the Soviet orbit.
The shift in the country composition of 11'ree .norld cotton exports has
been much more pronounced than the decline in the volume of the trade.
Reductions in shipments by traditional major exporting countries like the US,
Brazil, and Egypt have been sharper than the contraction in the vvorld total
because of large-scale expansion of cotton production and trade in areas. like
Mexico, the Middle East, and dependent territories in Africa. Reductions in
exports from the Indian subcontinent have been due mainly to increased
domestic consumption, notably in Pakistan. The traditional exporters of
secondary importance-in world trade, such as Sudan, Peru, and Uganda, are
exporting roughly the same quantities as before World War II; hence, their
share of total Free '.orld exports is higher than before the war. Iran, Syria,
and Turkey have expanded their exports of cotton so rapidly in recent years
that they have become important cotton trading nations. .',ore striking still
is the meteoric rise of l.exico's cotton trade. In 1954/55 Mexico exported
approximately 1.3 million bales, as compared with an annual average of
105,000 bales in 19344-3.8, and it ranked second only to the US among Free
World exporters.
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Table 1. COTTON: DISTRIBUTION`" OF FREE '";ORLD EXPORTS, BY COUNTRY
OF ORIGIN, S: L CTED P 'MODS, 1934-38 - 1954/55
Country
1949/50-
1934-38 1953/54
Average Average
1954/55
(Thousand balesa)
United States
5,018
4,441
3,446.
Brazil
13065
641
900
Mexico
105
863
1,300
Peru
337
338
375
Sudan
257
356
2,99
Egypt
1,744
1,465
1,086
Iran
85
89
200
India (
172
220
(
2,746
Pakistan (
997
650
Syria
137
325
Turkey
77
326
250
Uganda
277
307
265
Others
715
1,085
1,379
Total
12,437
11,217
10,695
a. Bales of 47 lb, 21 .
' lcg~not tiioi ht except for the U >. Figures
for the US are in terms of running bales, of a net weight averaging
approximately 49o lb. (222.3 kg).
SOURCE: International Cotton Advisory Committee, Cotton Quarterly
Statistical Bulletin, Vol. 9, No. 1, October 19,5.
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D. Importance of Cotton 't'rade to Countries of the Free World
Cotton is one of the principal commodities in Free JJorld trade. Until
recently the value of raw cotton exports was exceeded only by that of petro-
leum. Mloreover, this commodity plays a key role in the export earnings of a
number of countries in Latin America, the Near East, South Asia, and Africa.
(Table 2.) Cotton plays a significant role in the export trade of a dozen
countries, and in half of these it outranks all other export commodities?
Cotton alone accounts for over three-fifths of the total exports of Sudan and
Uganda. In.Egypt the ratio of cotton exports to total exports has been over
four-fifths in recent years, as compared with three-fourths before Torld Var
II. Egypt's increased dependence on cotton makes it especially vulnerable
to Communist offers to take surplus cotton off its hands in exchange for other
goods and services.
E. The Cotton I'os:i._tion of the Communist Bloc
Sino-Soviet bloc production of cotton has been rising almost steadily
in recent years. The FAS estimates the bloc crop for 1954/55 at approximately
9.0 million bales, and anticipates that output in the current season will in-
crease to about 9.2 million bales. This would mean that the bloc's share of
the 1955/56 world crop would be nearly 25 percent. This compares with an
average of only about one-fifth of the world crop in 1934-38.
The bloc's cotton resources are concentrated almost entirely in the
USSR and China. The USSR is the world's second largest cotton producer.
The rise in its output is mainly responsible for the increase in the bloc's
share of world cotton production. The Soviet Union is a newcomer in the
ranks of major cotton exporters; it exported only minor quantities before
Vorld T:ar II. The U~_SR usually channels most of its cotton exports to
Eastern Europe, but it has stepped up the volume of shipments to the Free
Viorld significantly in ,the past tyro seasons..
Communist China':ranks fourth among world cotton producers, although
its production has shown a very slow postwar rate of recovery. Except in
1953/54 output has not. exceeded the 1934-38 average by as much as 10 percent.
Thus, per capita output is still much below' the prewar level. Cotton has
been in especially short supply in the past year because of adverse weather
conditions"in'19510 'However, the Peiping. regime declared that it would cut
cotton yarn output in 1955 rather than allocate more foreign e:~change for the
1. Cotton ranks first in the export trade of' Egypt_,_ -Mexico; :Par guay., Peru,
Sudan,. and Ug a..:.
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Table 2. COTTON: E 'OPTS AS A PI CT..'17AGE OF TOTAL EXPOIU'
VALU ES Ti`? C.Jt~"TAIN COUPITRI-l"S, 1937 AND 1952-54
Country
1937
1952
1953
1951
United States
11
6
3
5
Latin America
Brazil
19
2
7
15
Mlexico
1
23
2
27
Nicaragua
9
16
18
31
Paraguay
37
34
35
n a
Peru
25
34
30
26
Near East, South Asia
and Africa
Sudan-
67
68
62
56
Egypt
71
87,
85
82
Irana
4
16
23
24b
Pakistan
...
49
43
29
Turkey
It.
19
20
16
Uganda
n a
63
50
61
a. Figures are for the year beginning March 21.
b. Preliminary.
n a Not available,
SOURC1: International Monetary Fund# International Financial Statistics,
December 1955, and country tra e'rcturns,
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purpose of additional imports of raw cotton.; Commtiunist gfficials, recent?ly,,
have announced that a record crop -of .1.. million : metric tons,;_or..,6,5 million
bales, of cotton was harvested in 1955.- Independent,estimates indicate,a
considerably lower level of output, Under Peiping's new drive to complete
the 1953,57 economic plan ahead - of schedule, 1957 goals have.bee' advanced
to 1956; the official production target for cotton-has been increased from
1,637,500 tons (7.6'million bales) to'1,775,000 tons (8.2'million bales).
This goal is generally considered to be unrealistic. Nevertheless, there,is.?
little doubt that the Communist regime places great stress on expansion of
cotton production and is vigorously pursuing the.objective of self-sufficiency
in cotton..
Before World 17ar II; China was both an exporter and importer of cotton,
and on balance a net importer. Communist' China apparently has ceased to
export cotton. It has continued to import moderate quantities of medium and
long staple cotton. Such imports are obtained from Free':?orld sources. In
1954/55 they totaled about 140,000 bales, So far as is known, Red China is
not getting cotton from the ULSR, but the available. information on this sub-
ject is inconclusive.
Eastern j;tirope has a substantial cotton textile industry and only
negligible raw cotton resources, Its annual rate of imports is currently
estimated at well over 1.0 million bales. In keeping with Soviet objectives
of an economically integrated, self-sufficient bloc, the US,R has been
furnishing the bulk of Eastern uirope's raw cotton supplies.
The available evidence su;_gests that the bloc as a whole is approach-
ing self-sufficiency in cotton. The FI.S estimates that the. group's gross
exports -totaled some 1.4 million bales in 1954/55 and its gross imports just
under 1.6 million bales. All exports were made by the Ooviet Union and most
of the imports by Eastern Europe. In view of the difficulty of estimating
intra-bloc trade, these figures may be subject to a considerable margin of
error. Their main significance is they indicate that the bloc has a very
substantial cotton trade and that its exports and imports are of nearly the
same magnitude.
To sum up the situation, at present the bloc as-awhole is virtually
self-sufficient in raw cotton; it may become a net exporter in the near
future. At present levels of domestic consumption, the US,"-)'R is able to meet
its own needs-and those of the major deficit' region, Eastern Europe. However,
current per capita availabilities of textiles are admittedly unsatisfactory,
in the USSR. It is continuing its drive to expand cotton production and is
likely to continue exports even though they would slow up the upward trend of
1. IR- 02 R, Potential 'Ma ets in Me Sno- oviet Bloc for US
'Surplus
Agricultural i roducts, October , 1955, COPTL _ '11, TIAL.:
2. New York Times, December 27, 1955.
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domestic consumption, Red China is still short of cotton but is determined
to become self-sufficient, and willing for the present to limit consumption
rather than supplement domestic supplies through imports except to a very
limited degree, .ith this combination of export and import possibilities,
the Communists can readily manipulate cotton trade within and outside the bloc
by switching Eastern, Europe's imports from the USSR to Free World sources. and
channeling Soviet exports away from the satellites to non-Communist countries.
At the same time, if it decides-to do so, the bloc as a whole can reduce its
net take of Free World cotton while increasing the volume of its imports from
and exports to the Free 17orld. Furthermore, any increase in cotton exports
which a non-Communist country seems to derive from this trade is likely to
be more apparent than real, and if real it will be at the expense of other
Free World countries. The pattern of bloc purchases of free `.orld cotton no
doubt will be influenced by political considerations. Any country which
places reliance on continuity of export markets for cotton in bloc countries
is likely, sooner, or later, to find that no other markets are so'u.ncertain.
III. EAST ;iZT TR'.DE I1 COTTON
A. Free World ?sports to the Bloc
The annual volume of Free World exports'of cotton to Communist coun-
tries has peen"less than 600,000 bales. since 1919/50 (Appendix A). In
19119/50 the last full season of US trade:i,ith Mainland China, the Free World
shipped over 800,000 bales of cotton to the bloc. The US alone exported
nearly 300,000 bales-to bloc countries., nearly two-thirds of which went to
Mainland China. In 1950/51 when 'US exports of cotton were under allocation
controls, shipments of:US cotton to bloc countries ceased, These controls were
lifted in 1951/52, but the Iuropean satellites did not reenter the US cotton
market presumably because of Soviet policies since there was no legal.obstacle
to commercial exports of cotton from ,.the US to aestinations other than Commu-
nist China and North Korea.
In 1954/55, the Free World exported 1160,000 bales of cotton to the
bloc, including 2119,000 to Eastern .irope, 71,000 to the US`R, and 1110,000
to Communist China. Czechoslovakia, Poland, and Hungary were the principal
Eastern European markets,
The US,>R has been a fitful purchaser of Free 'World cotton, buying
fairly substantial quantities one year and very little the next, first in one
market and then in another..,According to all available information, the USSR
is more than able to supply all of.its industry's needs at present consumption
levels both as to quanta..ties and qualities,
Corriunist China's purchaseq of -Free `;arld cotton also have been
sporadic, In recent years the. .nnual imports 'from .the Free '.'World have ranged
from a low of 1110,000 bales in 1951./55 to a high of 328,000 in 1951/52..
While it has recently increased the volume of its purchases in Egypt and
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India, and reportedly is negotiating a cotton barter deal with Syria, so
far as is knotin it has not been in the Pakistan market.for some months.
Previously Pakistan was the major source of imports. It pis too early to
estimate how Communist"china's total purchases, of Free World cotton this
season will compare with earlier years. With the downward trend in cotton
prices some increase in imports would be possible without allocating any more
foreign exchange for cotton purchases than in 1954/55. lloiiever, an increase
in the ratio of high quality Egyptian cotton imports to total imports would
tend to reduce the volume obtainable from a given exchange allocation. On
the basis of the'evidence available to date, it seems likely that Copmunist
China's imports of Free World cotton in the near future trill be .within the
range of the past few years. Over the longer term, a downward trend and
possibly eventual cessation of imports is indicated, depending on the rate
of progress in expanding domestic output.
Egypt and Pakistan usually have supplied at least three-quarters of
bloc imports of Free World cotton since 19L9/5O, the last season in tvrhich US
exports to . the bloc were a significant factor in this trade. Turkey, Iran,
Brazil, Mexico, and Sudan, and at times Burma, have been suppliers, but on
a relatively small scale. There has been an appreciable increase in Sudan's
exports to the bloc in the current season. In addition, India recently has
announced that sizeable sales have been made to Communist China. Syria
reportedly is negotiating for the export of L.O,OOO tons (18L;.,000 bales) of
cotton to the USSR, and in addition will sell cotton to Poland under a newly
executed commercial treaty. Syria also is said to have received proposals
from Communist China fora trade agreement involving Syrian exports of
cotton.l
B. Bloc Operations in Free World Cotton Markets
This burst of activity by the bloc in Free Torlci cotton markets at a
time when bloc cotton production is higher than ever before, together with
the concentration in i-,.iddle Eastern sources of supply, can only mean that
cotton importing policy is dictated by political motives and economic con-
siderations other than a need to import cotton. The fact is that cotton
trade is being used as one of the prongs of the Soviet political and economic
offensive in the Middle East and South Asia. This can be seen most readily
in t...e bloc's recent operations in the cotton markets of Egypt and India on
the one hand, and in Pakistan on the other.
1. Egypt. Egypt is the only country besides the US v~rhic} has restricted
cotton acreage in recent years. The Egyptian restrictions, unlike those of
the US, have been due in part to government efforts to encourage cereal pro-
duction. Except in 1952/53, Egypt's cotton crops have been consistently
1. Middle East ECoromist and Financial Service,'December 195,9 as reported
by the iternationl ono aryLnd in International Financial News
Survey, Vol. VIII, No. 26, December 23, 95 .
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below the 193-38 average. Domestic consumption has risen to nearly W0,000
bales, or more than five times the prewar average while exports generally
have been much lower than the 1934-38 annual average of 1.7 million bales.
The value of Egyptian cot on exports reached an all-time peak of over
.470 million in the calendar year 1951. It has declined steadily since then
and dropped to about '325 million in 1954. Cotton export values for January-,
July 1955 were at an annual rate of approximately )290 million;'-about a
quarter of the total was accounted for by shipments to the bloc. Preliminary.
statistics indicate that the ratio taken by the bloc increased considerably
in.the third quarter of 1955,
Communist bloc countries are traditional markets for moderate
quantities of Egyptian cot-Gon. The share of the country-s total exports.
taken by the bloc did not exceed 15 percent until the past scason, when it.
rose to 22 percent. I:owever, the increase in the bloc's share of the total
was due only partly to increased shipments to Communist countries, It, was
also strongly influenced,by the contraction in dgyptls sales to its major.
markets -- Western Europe, India, and Japan. Despite an increase of,90,000
bales in exports to the bloc, total.cotton exports declined by about 1100,000
bales, or 27 percent, to less than 1.1 million bales.
The market outlook for !gyptian cotton outside the bloc is.generally
unfavorable, At present, there is no indication that the Free World will
take any more of its fiber this season than last (i.e., 842,000 bales).
The country's total cotton supply is estimated at 2.L million bales or some
300,000 bales more than in the past season. '-:ith a larger supply to move and
little prospect of expanding sales to the F'rue World, Egypt's receptivity
to Communist proposals for barter deals involving cotton is not surprising.
Bloc activities in the Egyptian cotton market have attracted world-'
wide attention since September 1955 ,,rhen it tifas announced that Czechoslovakia
was selling Egypt arms in exchange-for Egyptian cotton. The value of Czech
arms which 'ugypt is to receive reportedly amounts to 11 36 million (";103..4
million), which presumably is to be paid for mainly in cotton.l In a resume
of recent agreements 'Lletween gypt and Sino-Soviet bloc countries, ltpbassy
Cairo pointed out that reference to specific Soviet bloc cotton purchases: may
be found only in the Egyptian _:inistry 'of Finance announcement of August 8,
1955, which stated that CornmuniLt China had agr-ed to buy 290,000 kantars
(one kantar : 99.05 pounds) of cotton to be'paid for in sterling. The
Embassy noted further that in the case of all ot h.'r cor.,:.litments, sales to,
or purchases by, bloc countries are not limited to cotton, although cotton
is, of course, E;ypt's principal commodity export. 'Ho rever, on the assuription
that all Egyptian exports under the 1955 agreements with Communist China and
Hungary would be cotton, the Embassy has calculated the maximum value of
Egypt's cotton sales under these agreements at LE 17,44.0,000 0';50.1 million).2
D-612, Cairo, Decembers, 195.5; 2. Ibid.
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Egypt has additional agreements involving cotton with Czechoslovakia, East
Germany, Poland, Rumania, and the USSR, but the cotton component of, most of
these agreements is not determined by quotas, and.no precise value estimates
are possible. It has been estimated, however, that Egypt's exports of cotton
to the bloc in the year beginning September 1, 1955 will be about a third
larger than in the preceding year. An increase of this size would not be
enough to solve Egypt's' cotton disposal problem, especially since no appre-
ciable gain in sales to other markets is anticipated. However, it means a
further and significant increase in cotton exports .to the bloc that will tend
to strengthen the Soviet's economic foothold in Egypt.
2. Pakistan.. Following loss of access to US supplies, Communist China
turned to I'aH7tan as its major source of imported cotton. Pakistan was the
logical choice both from the s-'~,andpoint?of location and ability to supply
types similar to US cotton. Initially this change was very costly to the
Peiping regime since soft currency cotton was in short supply at that time
and Pakistan cotton commanded a high premium over comparable US cotton prices.
By 1951/52, a buyer's market developed in cotton which narrowed the spreads
between soft currency and dollar cottons; and sa~di.thin two years soft currency
cottons were selling at discounts from US cottons.
Exports to Corriunist China accounted for 17 percent of Pakistan's
total cotton exports in 1953/5 and 16 percent in 1954/55. As the Free
World's cotton surplus has mounted, the Communists have placed their purchases
so as to create the maximum difficulties for Pakistani. Last season most of
their purchases were made in large chunks very late in the season. In the
current season, Communist China apparently is striking back at Pakistan for
its failure to renegotiate the Sino-Pakistani trade agreement. Accordingly,
it has shifted cotton purchases from Pakistan to India and Egypt. These
actions adversely affected the Karachi cotton market early this season. How-
ever, because of rec(nt floods the Pakistan 1955/56 cotton crop may be less
than it was last year, and the lack of sales to Communist China may not
create a disposal problem. In fact, Pakistan's immediate concern is that with
expanded textile capacity and decreased domestic supply its current export
availability is much less than anticipated. This, together with the downward
trend in world cot..on prices, indicates a considerable drop in,-the country's
cotton export earnings for this season,
Over the longer term, a surplus problem is likely to reappear if
Pakistan's plans for expanding raw cotton' production are successful. Raw
cotton is one of the mainstays of the country's foreign trade. Hence, Pakistan
is exceedingly anxious to hold on to its cotton export markets and eventually
to expand them.
Confid.entia estiria ss reported n the Cairo despatcheferred to
previously,
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3.. India. India is both an importer and an exporter of raw cotton, and
on balance a large net importer, It has a deficit in medium and long staple
cotton and a surplus in short-staple varieties. The Government of India
(G0I) prohibits the importation of cotton having a staple length of less-than
1-1/16 inches, and limits rave cotton exports to specific quotas of short
harsh staple varieties in excess of domestic requirements. Until recently
there have been practically no export,s.of Indian cotton to. bloc countries.
Because of a bumper'crop in 1951/55, GOI increased the cotton export,:
quotas and late in the season raised the limit on the staple length of'ex-
portable cotton. This action prompted. early inquiries b'.r Communist China.
In June 1955, New Delhi'reported that Communist China was negotiating for the:
purchase of Indian cotton. In September, it was announced that negotiations,
'
the exportation of 40,000 bales of Indian cotton to
had been completed for
lainland China, the price to be settled by traders. In return, India was
said to be considering offers of caustic soda and soda ash by Communist China.
These negotiations have been grist to the Sino-Soviet propa.anda mills,
and at the same time an effective ;Weans of retaliation against Pakistan.
Thus, b, shifting the source of cotton purchases from Pakistan to India,..
Communist China has, without any?extracost (and possibly with some saving
contributed to Indo-yalkistani friction. The effect of these sales on the
total Indian cotton economy is slight, whereas sales of similar quantities;.
would be of considerable significance to Pakistan.
Another aspect of the cotton situation; which iss the source of concern
to Free 1 orld exporting countries. is the recent soviet-move to market some,
of its cotton in India. A representative of a Soviet export or;,anizatio.n has
been attempting, to promote business with Bombay mills. Trial shipments have
arrived, and the qualities included are said to coripare favorably with
American cottons. Invasion of the Indian-market by Soviet cotton would..in
tensify the Free Norld's cotton harketa.ng,problems: .
C. Soviet Lxports to the ;Free World
The Soviet Union has been actively promoting export markets for its
cotton in the Free `:orld during the past two seasons, This development.
apparently is a part of the drive to.balance their trade with Western IEurope.
Previously, practically all Soviet cotton exports were channeled to bloc
countries, except for some shipments to Finland. In 1953/54, small quantities.
were exported to several '.'.extern European countries (see Table 3). By
1954/55 the USSR was actively promoting cotton sales to Free Europe. Exports
to that area rose to 284,000 bales or nearly twice the 1953/54 volume. Ship-
merits to the UK alone totaled over 100,000 bales. There,..is.some?evidence'.that
the quality of cotton.offered-in?the UK?was high grade and that prices were 11
shaded slightly in order to effect the sales.
icker service, September
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The US,IR has been experiencing difficulties in balancing its trade
with the free :orld even at the recent lour levels of imports. Grain exports,
the traditional mainstay of Soviet export trade with the UK and estern
Europe, have contracted sharply since 1952. CompensatoryT increases in other
exports have been hard to achieve, especially since there is little demand
for Soviet manufactures at competitive prices. Sales of cotton have been
of some help in reducing the trade deficit ~.i th this region, The USSR is
unable to compete at world market prices for export sales of many types of
manufactures to underdeveloped countries. In an effort to stimulate trade
with underdeveloped countries, the USSR has been making offers to supply
capital equipment, mainly in countries where trade would be -roost useful
politically. If need be, cotton can'be accepted in payment for the equip-
ment since it can be used within the bloc, thus increasing Soviet availabili-
ties for export to the Free-L;orld, or it can be reexported, as circumstances
warrant. Mioreover, this can be done without prejudice to the bloc's basic
goal of autarky. Finally, it should be recognized that there is a possibility
that the US R may soon be exporting more cotton to the Free :'.orld than all
the bloc countries combined are importing from the 1,ree orld,
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Table 3. COTTON : EST I~ AT -D i 'PORTS F Rr i :: 2 < U. SR TO THE
FRED ti;oRLD, 1951/52 = 1954155a
(Season beginning August 1)
Country of
destination 1951/52 1952/53 1953/54 1954/55.
(Thousand balesb)
Europe
Austria
0
0
1
5
Belgium
0
0
29
9
Denmark
0
0
3
2
Finland
F
0
20
41
;
45
rance
0
0
25
39
Germany, Federal Republic
0
0
,E
7
Italy
0
0
16
44c
Netherlands
0
0
6
8
Norway
0
0
0
1
Sweden
0
0
0
14
Switzerland
0
#
1
1
United Kingdom
0
0
23
103
Yugoslavia
0
0
0
5
Other
0
0
0
1
Subtotal
20
145
284
United States
*
0
1
1
Total Free orld
*
20
146
285
a. Figures based on reported imports.
b. Dales of 478 lb. (216.8 - kkg,) net weight.
c. Estimated,
# Less than 500 bales.
SOURCE: International Cotton . dvisory Committee.
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COTTON; EXPORTS FROM THE FREE WORLD TO SING-SOVIET BLOC COUNTRIES
1949-50 - 1954"55
(Season beginning August i)
Exporting Czecho- East Communist
country . 'slovakia Poland Hungary Rumania Bulgaria Germany USSR China Total
(Thousand bales a)
Egypt
1949-50
47
17
13?
23
165
1
268:
1950-51
58
14-
14'-
2-
0
13
101
1951-52
37
8
23
35
2
1
39
17
162
1952-53
59
27
27
5
11
2
105
61
297
1953-54
53
5
25
1
10
52
154
1954-55b
54
37
34.
12
10
61
36:
244
Pakistan .
1949-50.
18
27.
0.,
89
39
173
1956-51
7
34
0
0
0
109
154
1951-52
11
41
0
0
0
299
351
1952-53
0
0
0
0
63
93
158
1953w54
0
0
5
0
0
154
159
b
1954-55
0
0
0
0
0
104
104
Turkey-
194950
25
0
2
0
0
0
0
27
1950+51
2q
3
1
0
0
t
*`
43
1951