Working Papers

Managing Cotton Price Risk in Egypt

Publication Number: ECESWP64-E

November, 2001

Author : Omneia Helmy

Type : Working Papers

Volatility in world cotton prices is an important policy issue for Egypt, as cotton is a key export commodity that affects many agents and activities. There are three main approaches to managing price risk of commodities in general and cotton in particular: domestic price stabilization schemes, direct income support programs, and the use of commodity risk management tools. These approaches differ in their mechanisms and economic implications. To cope with the problem of volatility in world cotton prices, the Egyptian government follows the domestic price stabilization approach. The government protects cotton growers from revenue variability by guaranteeing them a support price. Notwithstanding the merits of the government’s pricing policy, it has had various adverse effects on cotton growers, private traders, and the government’s finance. Thus, the aim of this paper is to address two main questions: How could Egypt better administer the current cotton pricing policy? And could the other two approaches: the direct income support programs, and the use of commodity risk management tools, be more effective alternatives to managing cotton price risk in Egypt? And under what conditions?