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RR RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
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DE RUEHNT #1567/01 3071234
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R 031234Z NOV 09
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 1477
INFO ALL SOUTH AND CENTRAL ASIA COLLECTIVE
EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 04 TASHKENT 001567 
 
SIPDIS 
AMEMBASSY ANKARA FOR AG COUNSELOR 
 
E.O. 12958: N/A 
TAGS: ECON SOCI PHUM UZ
SUBJECT: UZBEKISTAN'S COTTON SECTOR STILL A BASTION OF THE COMMAND 
ECONOMY 
 
REF: 08TASHKENT1204; 08TASHKENT1323; 08TASHKENT1356; 1511; 1547 
 
¶1. (SBU) SUMMARY: The Government of Uzbekistan (GOU) continues to 
control the "commanding heights" of the cotton sector, exercising 
strict control over all aspects of cotton production and sale, from 
setting planting and harvest quotas to negotiating all ginning and 
export contracts on behalf of farmers. Major cotton policy 
provisions in Uzbekistan are aimed at stabilizing the cotton 
cultivation area, improving yields, efficient use of irrigation 
water, and increasing domestic mill use of cotton. Although the 
sector is in dire need of reform to alleviate environmental 
problems and the traditional reliance on child labor, little has 
changed since Soviet times.  Cotton still accounts for an important 
(albeit shrinking) portion of Uzbekistan's GDP. END SUMMARY. 
 
 
 
COTTON PRODUCTION DOWN SLIGHTLY 
 
 
 
¶2. (SBU) Uzbekistan's cotton harvest was later than usual this year 
after an exceptionally wet spring required replanting of crops. 
Total hectares of seed cotton planted in 2009 approximate 1.3 
million, down by around 70,000 hectares from last year. This drop 
may be attributable to a presidential decree in October 2008 
ordering a decrease in the cotton planting area in order to 
increase farmland available for food cultivation and to combat 
on-going irrigation issues. (See Ref B.) Nevertheless, this year's 
plant area amount is consistent with the GOU's aim to maintain the 
cotton-producing area at about 1.4 million hectares. Cotton remains 
the country's main agricultural export, accounting for roughly 12% 
of all exports and 7-8% of the country's GDP (2008 estimate). The 
global economic crisis has slowed the demand for Uzbek cotton, and 
exports are estimated to decline this year from 3.0 million bales 
to 2.9 million bales. 
 
 
 
¶3. (SBU) Uzbekistan is one of the few countries clinging to a 
Soviet-era command economy for cotton. Uzbekistan's Ministry of 
Agriculture and Water Resources (MOA), in consultation with 
regional advisors and local farm associations, mandates the amount 
of seed cotton to plant throughout the country. Each fall, local 
associations meet collectively to estimate the next season's 
expected output and necessary inputs. District plans are submitted 
to the regional authorities, and regional plans are approved at the 
national level. 
 
 
 
¶4. (SBU) This year, the Ferghana valley area accounted for more 
than 20% of the land under cotton cultivation (303,560 hectares), 
with significant portions of land also being cultivated in 
Kashkadarya (161,000 hectares) and Bukhara (117,948 hectares). On 
October 30, 2009, the GOU announced it reached its production 
target of 3.4 million metric tons (MMT) of seed cotton harvested. 
The GOU sets its production target each spring. This number is then 
broken down by region, and district hokims (governors) are 
responsible for making sure that the delivery quota is filled, down 
to each individual plot's share of the overall quota. Over the last 
several years, it has become increasingly difficult for producers 
to meet state targets due to poor farming practices and the absence 
of appropriate production incentives. (Note: Official production 
reports generally match the production targets, regardless of the 
actual yields. In December 2008, state media declared that farmers 
had harvested 98% of the total state target for seed cotton -- 3.6 
MMT. Independent analysts found this report unrealistic, as farmers 
struggled against an unusually cold winter with above-normal snow 
followed by an early and dry spring. End note.) 
 
 
 
COMPULSORY STATE ORDER SYSTEM STILL THE NORM 
 
 
 
¶5. (SBU) The Ministry of Finance has set the new average 
procurement price for seed cotton at Uzbek Soums 502,550 per ton 
(about USD 330), an increase of about 20% over last year's price, 
largely due to inflationary pressures. The GOU calculates its 
procurement price by subtracting official costs from export 
revenues. These costs include loans to farmers for inputs such as 
 
TASHKENT 00001567  002 OF 004 
 
 
fertilizers and pesticides, irrigation system maintenance (water is 
free for the agricultural sector), ginning and marketing costs, and 
financing of farmers' debt. In theory, this procurement price 
should be the full international price minus costs; however, the 
world price is calculated at an overvalued official exchange rate, 
and the charges for inputs, processing and marketing are typically 
understated. Thus, the price paid to farmers rarely results in 
profits, and every year Uzbek farmers cross the border to fetch 
higher returns in Kazakhstan. 
 
 
 
¶6. (SBU) Uzbekistan has established a special fund under the 
Ministry of Finance for purchasing agricultural commodities for 
State needs. At the beginning of the cotton season, the GOU 
deposits funds into local commercial banks, which then issue an 80% 
advance payment (actually a 3% loan) to cotton farmers. The banks 
pay this advance to farmers in two tranches: one paid before cotton 
planting, a second during vegetation and watering. After all cotton 
has been delivered to gins and the quality assessed, the balance is 
settled. Farmers must repay the original loan, if able, or seek 
debt-write-offs or other remedies if their revenues do not exceed 
their expenses, including financing costs. 
 
 
 
¶7. (SBU) In December of 2002, the GOU adopted a decree that allows 
farmers to sell up to 50% of their cotton output either 
domestically or abroad. This decree theoretically was supposed to 
bring the government's monopoly on the cotton market to an end and 
create production incentives. However, no concrete practical 
mechanisms have developed to allow this process to begin. 
Consequently, although officially the State order remains at 50% of 
the cotton produced, the State remains the only major player in 
cotton production and marketing. 
 
 
 
GINNING INDUSTRY DOMINATED BY STATE 
 
 
 
¶8. (SBU) The state cotton ginning association -- Khlopkopromsbyt, a 
joint-stock company in which the GOU holds 51% ownership, procures 
and gins all state-ordered and over-quota cotton. It coordinates 
the activities of farmers and approximately one hundred and fifty 
gins located throughout Uzbekistan. Financial issues between the 
cotton farmers and cotton gins are handled in accordance with a 
model agreement prepared between the MOA and Khlopkopromsbyt and 
approved by the Ministry of Finance. Khlopkopromsbyt earns a two 
percent commission for its coordination efforts, which is deducted 
from the cotton lint price at the time of sale. 
 
 
 
¶9. (SBU) Uzbek gins, on average, sell cotton lint at cost plus 10%. 
This 10% does not necessarily translate into revenue for the gin, 
however, because regional authorities may impose "social 
responsibility" fees on gins, such as to support a school or 
kindergarten located close to its territory. Uzbek cotton gins are 
less efficient than other cotton producers: gins have a relatively 
low outturn ratio (about 32%, compared to 35-36% in the U.S.), and 
gin fewer bales per hour on old Soviet equipment. Currently, 
average production costs of Uzbek cotton gins approximate USD 
240-250 per ton. In comparison, Kazakh gins' average production 
cost is reportedly USD 120-130 per ton -- almost half of Uzbek 
gins' production costs. There is little incentive to increase 
productivity, as any increase in the average profit margin becomes 
a basis for a decrease in the following year's State payments. 
 
 
 
¶10. (SBU) Three trading companies under the Ministry of Foreign 
Economic Relations, Investments and Trade (MFERIT) have a monopoly 
on contracts for exporting Uzbek cotton with Khlopkopromsbyt. 
Approximately 85% of Uzbek cotton is exported by these trading 
entities, with the remaining 15% sold through the Republican 
Commodity exchange or directly to domestic buyers by gins. After 
deducting a 2% percent commission for exporting services, the 
trading companies surrender hard currency receipts to the Uzbek 
Central Bank at the official exchange rate (an implicit tax). The 
difference between the national currency receipts and the domestic 
price is then transferred to the state budget. This year's average 
cotton lint price sold by cotton gins to the trading companies is 
Soums 1,812,000 per ton (excluding 20% VAT), or about USD 1,193. 
Uzbekistan expects to export around 700,000 tons of cotton lint at 
an average export price of approximately USD 1,460 per ton, netting 
 
TASHKENT 00001567  003 OF 004 
 
 
approximately USD 267 per ton (exclusive of commission and taxes) 
for the State. 
 
 
 
¶11. (SBU) Currently, Uzpromashimpeks, one of the MFERIT trading 
companies, is on the Committee for International Cooperation among 
Cotton Associations' (CICCA) default list after Noble Cotton, a 
Singapore-based cotton supply chain management firm, won an 
arbitration judgment against Uzpromashimpeks for failing to deliver 
cotton according to contract terms.  This judgment does not appear 
to have substantially impacted Uzpromashimpeks' selling position: 
at the recent Fifth International Uzbek Cotton Fair, which took 
place in Tashkent on October 14-15, 2009, several international 
companies made commitments with Uzpromashimpeks, including Chinatex 
Corporation and the newly-formed Dubai Cotton Center (DCC). (See 
Ref E.) 
 
 
 
MECHANIZATION OF INDUSTRY CONTINUES TO LAG 
 
 
 
¶12. (SBU) Currently, only 2-3% of Uzbekistan's cotton is 
machine-harvested, as compared to 70% machine harvested in Soviet 
times. Uzbekistan does not have the capacity (or any incentive) to 
manufacture modern cotton-picking harvesters, and the abundance of 
cheap labor, including child labor, makes it economically 
unattractive to invest heavily in machinery. The average price paid 
to cotton pickers in 2008 was 80 Uzbek Soums per kilo (about USD 
0.05). One harvester machine will clear about 500 hectares in a 
season; however, each machine costs hundreds of thousands of 
dollars. (Note: Few countries have the capacity to manufacture the 
industrial components for cotton-harvesting machines. Uzbekistan, 
if appropriately incentivized, could import harvester components 
and assemble machines domestically.) Contrary to Uzbek claims, 
hand-picked cotton is not necessarily of higher quality than the 
machine-harvested variety. While some international experts have 
cautioned against mechanization because of the need to use 
defoliants, other experts maintain that defoliants are safe for the 
environment and people if properly used.  Recent press reports 
indicate that the GOU may be taking a second look at mechanization. 
According to Uznews.net, an online media outlet, the GOU plans to 
reequip four industrial enterprises that produce agriculture 
equipment, including cotton harvesters. 
 
 
 
¶13. (SBU) Recent farm reorganization legislation may allow for 
greater mechanization of the cotton harvest. In late 2008, the GOU 
began the process of farm amalgamation, according to which smaller 
farms were merged into larger farms. The government set a minimum 
size of 80-100 hectares for cotton-and-grain producing farms and 
15-20 hectares for vegetable and fruit farms. While modern harvest 
equipment is simply too expensive for small farmers, the growth of 
large farms could make purchase of machinery more feasible.  The 
World Bank supports a program whereby farmers can access credit to 
buy farm equipment, including harvesters, while at the same time 
undertaking not to employ child labor. 
 
 
 
DOMESTIC CONSUMPTION AND TRADE 
 
 
 
¶14. (SBU) Uzbekistan is actively pursuing the goal of becoming a 
textile exporter. Current domestic consumption is about 25%, and 
outdated gins operate significantly below capacity. Since 2005, the 
GOU has invested significantly in developing the spinning industry, 
including offering tax (excluding VAT) and import duty exemptions 
for foreign investors. An Uzbek enterprise with direct foreign 
investment automatically receives a 15% discount from the world 
price of cotton fiber with a 120-day delay in payment. Forty-one 
joint ventures now exist with companies from Korea, Turkey, 
Germany, Japan and Switzerland. Total foreign investment in the 
sector was estimated at USD 1 billion at the end of 2008. 
 
 
 
¶15. (SBU) Currently, the main products produced by textile mills 
are cotton yarn and gray fabrics. The industry is expanding 
production of value-added products, such as shirts and other 
garments for the export market. At the recent cotton fair, the GOU 
announced that domestic cotton consumption for 2009 will reach 
300,000 tons, up from 250,000 tons in 2008. This increase is 
 
TASHKENT 00001567  004 OF 004 
 
 
smaller than previously predicted by the GOU, which had sought to 
increase the 2009 volume of domestic consumption as much as 50% 
through its modernization program. In addition to expanding ginning 
capacity, the GOU also is active in scientific research relating to 
cotton, including seed multiplication and other sophisticated 
biotechnology research. 
 
 
 
¶16. (SBU) Uzbekistan is a primary supplier of cotton to Asia, with 
Bangladesh, China (Mainland), and South Korea the major markets for 
Uzbek cotton. Uzbekistan accounts for 60% of cotton imports by 
Bangladesh and for about 10% of imports by China (Mainland). Russia 
still remains a significant and stable buyer of Uzbek cotton, 
importing about 100,000 tons per year. Uzbek cotton is also 
transported by rail to ports in the Baltics and Turkey for sale to 
Europe. The bulk of Uzbek cotton, however, passes through Iran to 
the port of Bandar-Abbas for export to Asia. The Trans-China 
corridor via Kazakhstan also serves as an alternative to the 
Iranian route. 
 
 
 
CHILD LABOR AND FORCED LABOR ISSUES REMAIN 
 
 
 
¶17. (SBU) The practice of using child labor in cotton harvesting 
remains prevalent and dates from the Soviet era. Last year, on 
September 12, the Cabinet of Ministers issued a resolution on the 
implementation of two ILO conventions against child labor that the 
GOU had signed earlier in the year, and this reportedly reduced the 
number of children in the fields at the beginning of the harvest. 
The GOU has also formulated a national action plan to carry out the 
ILO Conventions, but implementation of this action plan is still 
nascent. The extent to which child labor was used in the 2009 
harvest is difficult to estimate, as no independent assessment has 
been carried out, and there is no real baseline number with which 
to compare. Post continues to receive reports of some school 
districts mobilizing children to help meet quotas at local farms in 
this year's harvest. 
 
 
 
Comment 
 
 
 
¶18. (SBU) This year's cotton production is in line with previous 
years, at least officially. The cotton sector is in need of 
comprehensive reform from top to bottom. Although the GOU has made 
strides in diversification of crops, it has taken no steps to grant 
farmers greater control over what they plant, or to develop the 
necessary infrastructure that would allow farmers to sell their 
cotton themselves on an open market. Doing so would increase 
efficiency in the system, and, if farmers could pay a decent wage 
rate, attract unemployed adult workers (of which there are many) to 
work the fields, obviating the need to mobilize children during the 
harvest. Post will submit septel some ideas on how the USG might be 
able, with the UN and others, to assist with short- and longer-term 
measures to address the child labor issue. End comment. 
NORLAND