Sunday, February 06, 2011

Major Central Asian Export Still Rising

Paul Krugman: Commodities: This Time is Different
FT: Exchange Poised to Tackle Cotton Rise
Bloomberg: Commodities Overtake Stocks, Bonds After Two-Day Gain
Reuters: Exchange Tightens Reins on Rampaging Cotton Market
National Cotton Council of America: Top Cotton Producers
University of London, School of Oriental and African Studies: Study: What Has Changed?

Commodity prices have risen steadily for the past five months, passing stocks, bonds and the dollar. In January alone, the S&P GSCI, a diversified index of a 24 commodities, gained 3.1% while the dollar fell 1.6%. Of the commodities hitting record highs, cotton has had the largest percent increase in price in the past year. Increased demand and uncertainties over supply have helped double the price of cotton in the past year and increase the price by 16% in the past month. On the demand side, cotton prices are hitting record highs largely due to increase in demand from China and a rise in U.S. consumer spending. The supply side has also been constrained for several reasons, including poor weather conditions for farmers and the unrest in Egypt, a major cotton exporter.

Major exchanges, however, are focusing on how to prevent large-scale speculation of cotton that may artificially inflate the price. The ICE Futures US Exchange, a leading New York soft commodities exchange, approved a restraint that requires proof of economic necessity for any sale over 30,000 bales beginning in March. Krugman of the New York Times suggests that Chinese farmers may be physically hoarding cotton, which reduces supply and therefore raises the price. By limiting the sale of cotton over 30,000 bales, the exchange hopes to curb large-scale speculation that could also artificially increase the price in an already booming market. Keeping the price an accurate reflection of supply and demand for the commodity may prevent a surge in price that could harm mills and merchants.

Among the top ten international cotton producers are Uzbekistan and Turkmenistan, where cotton is mainly picked by hand. Both countries require children to pick cotton without pay instead of attending school. Students work in the fields for more than one month per year in some regions. The practice of using forced child labor began across the region during Soviet rule and shows no signs of receding. A University of London study shows that the region has made little progress in preventing child labor practices.. The child labor abuses have not gone unnoticed. Some corporations have refused to purchase cotton from the region. For example, in 2008, Wal-Mart ordered its suppliers to refrain from sourcing cotton from Uzbekistan on account of their labor practices. With cotton prices surging, however, the Exchanges proposal of restricting large-scale orders may not be a sufficient enough incentive to change the child labor practice in Central Asia.

Discussion Questions:
1) Is the sales restriction on large quantities of cotton sufficient to prevent the continuing steep rise in cotton prices, or is the rise a true boom in price due to supply and demand factors?
2) As cotton becomes more lucrative, will Uzbekistan and Turkmenistan switch to more expensive mechanized farming which will be more efficient and eliminate the need for child labor?

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