Is cotton the answer to Azerbaijan’s oil price woes?

A general view shows houses surrounded by fields outside the village of Qalaalti, Azerbaijan, June 20, 2016. REUTERS/Maxim Shemetov - D1AETMNKFCAB

Azerbaijan was once one of the largest cotton producers in the world, with 300 thousands hectares planted at the country’s peak in 1981. During the Soviet era, the crop generated between between a fifth and a quarter of the country’s income, earning cotton the nickname “white gold.”

But by 2005, 14 years after independence, the country was planting just 112 thousand hectares of cotton. By 2015, the land dedicated to cotton production had dropped to a mere 18.6 thousand hectares, the lowest in the history of Azerbaijan (Figure 1).

Figure 1. Sown area under cotton, hectares

Global_05.21_figure 1_cotton yields

Source: Author calculations based on data from the State Statistics Committee of the Republic of Azerbaijan

Cotton was a major export for Azerbaijan,  earning $124 million from cotton exports in 1997.  Two decades later, the crop generated just $24.2 million (Figure 2). Until 2014, this wasn’t a problem. Oil prices were high, and generated close to 90 percent of the country’s growing exports.

Figure 2. Cotton exports, million U.S. dollarsGlobal_05.21_figure 2_cotton prices

Source: Author calculations based on data from the State Statistics Committee of the Republic of Azerbaijan

Following the collapse of oil prices in 2014, the government has been scrambling to find other sources of income. On July 13, 2017, the Azerbaijan president signed a state program to increase production of cotton to 500,000 tons by 2022.

This is exactly the wrong approach.

The government is ready, the country is not

Even with growing government intervention, the cotton industry is losing ground. The average cotton yield in Azerbaijan is decreasing—most recently from 1,730 kilograms per hectare in 2016 to 1510 kilograms per hectare in 2017. While the government can accurately report that cotton production grew in 2016, this growth came at the cost of reduced grazing areas and grain fields. As a result, the price of beef and its imports into the country have doubled, and the grain harvest has fallen by 136,000 tons.

The productivity of the land and the yield of cotton are low. This is not new—due to the high salinity of the soil, they have always been low and required intensive irrigation. The only way the Soviet Union was able to grow high levels of cotton was by plundering the region’s water supply (see the Aral Sea disaster).

The irrigation system has shrunk. The Soviet system spanned multiple countries and cannot be replaced. And even if it could, the environmental costs would be devastating. To be profitable, farmers need to produce between 3.5 tons and 4 tons cotton per hectare, roughly double the country’s current yields. Without abundant irrigation, these levels simply cannot be reached.

A better way

While the search for economic diversity is admirable, cotton is not the way forward. Instead, the government needs to let the markets decide. Three things would help.

Diversify agriculture

When the Soviet command economy collapsed, crop patterns changed dramatically. Cotton and tobacco production dropped quickly, and were replaced by more profitable grains, fruits, and vegetables. Even if there were water for cotton, the farmers do not want to grow it. Without the heavy hand of government, farmers make decisions based on market signals, time constraints, and transactions costs. Whereas cotton production requires large, unbroken tracts of land, Azerbaijan’s farmlands are divided into smaller holdings. For the most part, wheat, fruits, and vegetables are being cultivated. Compared to cotton these crops require less labor and lower costs to produce. To produce 100 kilograms, the typical farmer spends 61.8 hours for cotton, 18 hours for sugar beets, 22.6 hours for vegetables, and 22.8 hours fruits (33.4 hours for 100 kilograms of grapes). Combined with lower prices, farmers are simply not willing to cultivate cotton.

Figure 2. Crop production by type, all categories of farms (thousands ton), 1991-2016

Year Cotton Tobacco Cereals & dried pulses Potatoes Vegetables Water- and other melons
1991 539.7 57.3 1346.4 179.9 805.3 61.9
1992 336.3 52.3 1337.2 156.0 555.1 50.1
1993 284.5 44.9 1147.9 152.2 487.8 46.9
1994 283.7 20.8 1039.2 150.3 482.9 44.9
1995 274.1 11.7 921.4 155.5 424.1 41.9
1996 274.4 11.2 1018.3 214.6 570.0 52.1
1997 124.6 15.1 1127.1 223.4 495.4 57.1
1998 112.9 14.6 950.3 312.5 502.3 78.8
1999 96.8 8.6 1098.3 394.1 670.8 206.3
2000 91.5 17.3 1540.2 469.0 780.8 261.0
2001 83.6 12.7 2016.1 605.8 916.4 290.9
2002 80.4 3.3 2195.9 694.9 974.6 330.3
2003 99.6 4.7 2057.8 769.0 1046.3 356.7
2004 135.7 6.5 2158.2 930.4 1076.2 355.3
2005 196.6 7.1 2126.7 1083.1 1127.3 363.8
2006 130.1 4.8 2078.9 999.3 1186.4 362.1
2007 100.1 2.9 2004.4 1037.3 1227.3 417.6
2008 55.4 2.5 2498.3 1077.1 1228.3 407.7
2009 31.9 2.6 2988.3 983.0 1178.6 410.8
2010 38.2 3.2 2000.5 953.7 1189.5 433.6
2011 66.4 3.6 2458.4 938.5 1214.8 478.0
2012 57.0 4.3 2802.2 968.5 1216.2 428.0
2013 45.2 3.5 2955.3 992.8 1236.3 429.8
2014 41.0 2.9 2383.3 819.3 1187.7 440.9
2015 35.2 3.5 2999.4 839.8 1275.3 484.5
2016 89.4 3.6 3065.1 902.4 1270.6 464.8

Source: The State Statistics Committee of the Republic of Azerbaijan, 2017

These shifts are paying off. The country’s farmers in 2017, for example, cultivated 66.5 thousand hectares of hazelnuts and exported 20.8 thousand tons of hazelnuts kernels, generating $114.5 million. Meanwhile, it took 207 thousand tons of cotton, harvested from 136.4 thousand hectares of cotton fields to generate just $52 million.

Liberalize prices

The government needs to liberalize markets for the whole agriculture sector, not only for cotton. Ending monopoly and monopsony activities across the sector, lifting import tariffs for agriculture-related production, and lifting export tariffs for agriculture products would encourage better production patterns and more profits.

End the state monopsony

The government does have a role to play, but it is not to set production goals. Eliminating price controls and monopsony activities in the cotton market will create competition and increase the procurement price of cotton. Higher procurement prices might encourage farmers to grow more, but to amounts decided by markets, not pre-determined by the state.

The Market has already voted

Azerbaijani farmers are moving away from cotton because they cannot compete. Compared to cotton-producing countries such as Turkey, Turkmenistan, and Uzbekistan, there is no textile industry in Azerbaijan that creates domestic demand for raw cotton. These countries have cotton that is known for its quality and have specialized in the international market, attracting well-known companies such as Zara, Nike, Adidas, and Ikea.

Consequently, farmers are not buying cotton-processing equipment and are not allocating labor to cotton. The amount of agricultural equipment—mostly the number of cotton harvesters combines—is low. In 2016, there were only 86 combines in the country. Manual cotton harvesting remains common. But farmers are not allocating workers to the task. To bridge the gap, the government is sending public servants (including doctors and teachers plus their students) to the cotton growing regions to help.

This is no way to grow cotton, much less grow an economy. Command and control is not the way forward. The government needs to allow markets to diversify out of cotton and produce other agricultural crops. It has to accept the fact that for the country to have a healthy environment and a bountiful economy then Azerbaijan’s countryside may well be without cotton.