Policy Viewpoints

Managing Cotton Price Volatility in Egypt

Publication Number: ECES-PVP10-E&A

October, 2001

Author : Omneia Helmy and Ahmed Galal

Type : Policy Viewpoints

The volatility of cotton prices is a notable feature of the world cotton market. For major exporters of cotton like Egypt, it is vital to devise an effective mechanism for managing cotton price volatility to protect the interests of farmers, traders, industrialists, and the economy at large. It is not surprising, therefore, that the Egyptian government has adopted a policy that guarantees farmers a floor price. Notwithstanding the well-intended objectives of this policy, the analysis below shows a number of shortcomings in the approach followed and its implementation. Accordingly, questions arise as to whether the current approach is the most suitable for Egypt. If Egypt were to retain the current system for now, what are the necessary reforms to ensure its efficiency? Finally, what system should Egypt adopt in the long run? This edition of Policy Viewpoint addresses these questions. The upshot of the analysis is that the current conditions in Egypt suggest that the best course of action in the short run is to continue and in the meantime reform the existing system, especially with respect to the institutional setup, pricing formula, and distribution mechanisms. Meanwhile, parallel reforms are necessary to gradually move away from the price-based subsidization scheme to direct income support and eventually to commodity derivatives. To explain the rationale for the recommendations outlined above, section I of this Policy Viewpoint briefly reviews the phenomenon of world cotton price fluctuations. Section II discusses the alternative approaches to managing commodity price risk. Section III assesses the current cotton pricing policy in Egypt. The final section outlines the broad policy implications, recognizing that implementation would require more details and refinements.