“We should not treat the symptoms of the problem”

On September 13, the Cabinet approved measures to support raw cotton producers for 2024, which included setting the starting futures price for raw cotton on the commodity exchange at 7.8 million soums per ton. Farmers and clusters will not be able to sell cotton below this price, which is tied to global market quotes. Additionally, all exchange contracts will specify a minimum price of 6.8 million soums per ton. For each ton of cotton sold on the exchange, a subsidy of 1 million soums will be paid based on electronic invoices.

However, independent economist Yuliy Yusupov pointed out that officials based this price on seasonally high figures from earlier in the year, when the market trend was upward. By autumn, prices on the New York Stock Exchange had decreased, and according to recalculation methods, the price has approached 6,000 soums per kilogram. In neighboring Kazakhstan, cotton can be purchased even cheaper, he noted.

?"Textile enterprises are in a tough situation. It’s more profitable for them to buy cotton on the global market. Otherwise, they simply cannot compete with those purchasing cheaper raw materials," Yusupov wrote.

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Muzaffar Razakov explained that the current situation, where production costs exceed global prices, represents a market failure. He suggested studying international practices, such as the agricultural stabilization funds used in countries like the U.S., where the government covers price differences through specific programs for cotton farmers, though with strict participation requirements.

"The transition to a market economy and market regulation is both painful and complex. Neither we nor the government fully understand how to make this transition properly. Some advocate for an immediate switch to market regulation, but that would lead to chaos, which the government won’t allow. On the other hand, we’ve already experienced strict administrative control, which leads to significant issues. We all agree that moving toward a market economy is necessary, but no one knows exactly how to achieve it," he said, advocating for a balanced approach that takes into account the interests of both farmers and textile enterprises.

Earlier this year, there was an attempt to find an optimal solution for pricing, but it eventually led back to the idea of a minimum price. Muzaffar Razakov opposed setting a fixed minimum price and instead suggested recommending a price range or establishing a price corridor.

Old cotton prices from the past six years and 12 months were used to determine the minimum price, but Muzaffar Razakov proposed using futures indices to track price dynamics. However, this proposal wasn’t supported, and the minimum price was set at its local maximum.

"When we entered the 2024 cotton harvest season, global prices had significantly declined. Our textile industry is integrated into the global economy, so we cannot rely solely on internal factors. We must align with global market conditions, as that’s where we sell our textiles. This misunderstanding between farmers, local authorities, and the Ministry of Agriculture is significant. When we, as textile manufacturers, say, 'Imagine I buy cotton but can’t sell it—I'll go bankrupt,' they respond with, 'That’s not our concern, you signed the contract.' This creates a deadlock where market realities clash with administrative control. We are stuck between a rock and a hard place," he said.

Muzaffar Razakov also explained why he is against the minimum price. While some argue that it prevents market participants from underreporting contract values to reduce taxes and fees, he believes this treats only the symptoms, not the root cause. He emphasized that in the textile industry, the lack of substantial cash flow prevents gray-market operations.

"I am categorically against a fixed minimum price. Maybe a price corridor could work, but we cannot impose a rigid rule that says 'this and only this.' It will lead to speculation and provocations," Muzaffar Razakov added.

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He also pointed out that manual labor constitutes a significant portion of the cost of cotton production in Uzbekistan, and mechanization of agriculture requires large investments. Unlike textile clusters, farmers cannot afford harvesters, which increases their production costs. He called for a focus on reducing the production costs of local goods.

Muzaffar Razakov rejected claims that clusters pressure farmers into lowering cotton contract prices. In December, farmers were given the opportunity to choose which cluster to sell their cotton to within their region. Muzaffar Razakov emphasized that textile enterprises lack the administrative resources to pressure cotton farmers.

"Prices should be set naturally. There are many varieties and types of cotton, with a wide range of quality and yields. We can’t lump them all together under one price. For example, cotton from Kashkadarya and Bukhara produces a higher fiber yield compared to cotton from the Fergana Valley, meaning its cost will naturally be lower. The market must account for these nuances," he explained.

Muzaffar Razakov also emphasized the need to overcome the "growing pains" of the textile industry. Over the past five years, Uzbekistan has made significant strides in textile development—progress that took some countries 30 years. However, he acknowledged that challenges remain.

After COVID-19, Uzbekistan faced its first "real crisis" when demand for textiles froze due to high stock levels built up during the pandemic. Muzaffar Razakov believes that only the most competitive companies, those focused on optimizing costs, will survive the crisis.

"Our competitors are not within Uzbekistan. This is a big misconception by many policymakers. We aren’t competing with each other; we are competing on the global market, because that’s where we sell, not in Uzbekistan. Our fiercest competitors are India, China, Turkey, Bangladesh, and Vietnam. These five or six global players in the textile market are the ones we need to be competitive with in terms of quality, cost, logistics, and after-sales service," he stated.?

Muzaffar Razakov predicts that the textile industry will undergo a transformation as a result of the crisis: some enterprises will exit, but the strongest and most modern companies will remain.

As for the transition to market relations, Muzaffar Razakov believes it is inevitable. However, he noted that the key question is whether the market will be chaotic and unregulated or governed by state policies.

"I believe we should move toward natural market relations. For me, a market economy is the most natural way forward," he emphasized.

The key process for successful market integration, Muzaffar Razakov added, is Uzbekistan’s deeper integration into the global economic system. The more the country connects with global markets, the more market-oriented its economy will become. The transition to a market economy, he concluded, is a "national reform" that all players must support.

This initial article Russian language in spot.uz is available here.