Cotton revenues could someday equal petroleum
But U.S. overproduction continues to hit Azerbaijan’s export prospects

The joint Turkish-Azerbaijan cotton company known as MKT is almost single-handedly recreating the cotton industry in Azerbaijan. It’s a tough task – the total acreage now planted in cotton is just half what it was during the Soviet period. Former workers on inefficient collective farms workers must be re-taught how to grow cotton and use credit; the firm must also finance the stakes of 15,000 small cotton farmers, and finally, there’s been a drought the last two years.

Yet MKT has managed to overcome these problems one by one. The one difficulty it can’t overcome is historically low world prices for cotton, caused chiefly by U.S. overproduction.

According to the International Cotton Advisory Committee, a nine percent production increase in the Northern Hemisphere would increase world production level to a record 29.4 million tons in 2001/2002. World consumption, however, is expected to grow to only 19.9 million tons. World prices, therefore, fell from 66 cents per pound in December 2000 to 42.5 cents per pound in September.

The U.S. overproduction has severely affected those developing countries which depend on cotton as an export crop. In Azerbaijan, according to the resident manager of a United States investment company, if cotton were to be produced at the level attained in 1988 (1.3 million tons) with a decent world price – and the complete modern value-added processing system were present to take the product upstream from the field to finished clothing – cotton could outdo oil as the country’s key revenue generator. Cotton would also employ as much as 50 percent of the population.

This tremendous potential will go unrealized, however, as long as cotton prices remain mired at the present level. MKT General Manager Osman Nurettin Paksu says, "We’re not asking for money from the United States, only fair play. Give me a market to sell my products."

Two Turkish and two Azerbaijani companies founded MKT in 1996, just as the Azerbaijani economy began to a recovery from the difficult first years of independence. In 1997, Azerbaijan privatized the old collective farms system, the first of the former Soviet republics to do so, and passed agricultural reform laws.

"We experienced losses for the first two years," admits MKT Deputy General Director Ikram Sh. Kerimli, "but thank God we lived through it. Now farmers are thinking more like farmers, not Soviet workers on a collective farm.

"Going through the reforms was a bit of a scary process," he recalls. "If you look back, you can understand why foreigners were reluctant to invest."

MKT has overcome many problems. Before independence, about 97,000 hectares were planted with cotton. That dropped to about 60,000 and in 2001 increased again to about 85,000, according to Kerimli. Moreover, he says, not all farmers knew how to grow cotton. "Of all agricultural products," Kerimli says, "cotton is the most difficult."

Cotton is a "water-demanding" crop, he explains, and that has presented other problems. The country has an irrigation system, but it is old and needs to be refurbished, and a recent two year drought has not helped.

In the future, Kerimli says, the 85,000 hectares planted to cotton will be the minimum. World prices permitting, the plan is to increase the cotton growing areas to 150,000 hectares. The key, Kerimli emphasizes, is market stabilization. "It is the farmers who are making the decisions," he says, "and those in cotton are dedicated to it."

MKT appears just as committed to Azerbaijan’s cotton farmers as they are to their crop. "As part of the agricultural reform process, the government stopped subsidizing cotton growers directly. There was some tax relief, and favorable fuel prices were made available to farmers. However, credit facilities for agriculture were not developed, and farmers were unfamiliar with the use of credit.

So, MKT started financing cotton farmers, though not directly. It works through 15 local gins, factories, cotton oil refineries and a thread factory. In exchange for these companies providing seeds, fuel, and equipment, farmers sign agreements that amounts advanced will be deducted from harvest proceeds. Normally, a fixed purchase price for the raw cotton is negotiated at the time of signing.

Describing the results, Kerimli says: "In 1998, the negotiated price was good for both MKT and the farmers. In 1999 and again in 2000, it was good for the farmers. In 2001, because world prices for cotton collapsed , it was bad for both."

MKT also provides technical advice to farmers on new types of seeds, fertilizers, and chemicals. It finances the farmers’ fuel and lubrication purchases, equipment maintenance and irrigation costs. MKT does this despite the fact that the interest rates it must pay to the banks that finance the $10 million required, can range from 10 to 18 percent.

The company sells almost all of its raw cotton abroad to companies such as Memphis-based Dunavant Enterprises, Inc. and Paul Reinhart, A.G. of Switzerland. The distinct yellowish tinge of Azerbaijan cotton sets it apart from others, the firm says.