The recent fall in the world price of cotton has produced a serious loss of export revenues and fiscal receipts for some of the poorest African countries at a time when many of these countries are reforming their cotton sectors to make them more competitive and less state dependent. The cotton sectors in the CFA franc zone countries in West and Central Africa (WCA)2 have until recently been characterized by a single parastatal company which provided inputs and other services to farmers, and purchased all of their cotton harvest. This system, while it produced substantial increases in cotton production, typically paid prices to farmers that were lower than those in cotton-producing countries with more competitive arrangements. For several WCA countries, cotton is the largest source of export receipts; cotton is often the only cash crops and the cotton sector is key to rural poverty reduction. Consequently, the Bretton Woods institutions—the IMF and the World Bank—have advocated reforms that should lead to a less centralized system and allow for free entry into ginning and competition for the purchase of seed-cotton. This would raise the level of efficiency and reduce both costs and margins in the ginning sector, thereby creating room for higher farmer shares in export prices.3
This paper considers (i) the factors behind the decline in world prices and their implications for long-term growth of the cotton sectors in WCA countries, and (ii) the reforms that need to take place to increase the competitiveness of the cotton sectors in these countries and enable them to cope with similar trends in international markets in the future. In particular, further progress needs to be made toward greater competition and free entry in all major subsectors of the industry. The paper also discusses the consequences of the large and (in the case of the United States) rapidly increasing subsidies to cotton producers by developed as well as developing countries in Europe and Asia. While it stresses the need for African countries to put in place systems that provide growers with a larger share of the world price, and at the same time make the sector less vulnerable to fluctuations in export markets and hence less reliant on government involvement, the paper also underlines the importance of significant reduction or removal by other countries—in particular the United States, China, and countries of the European Union—of their support to cotton farmers. Removal of the subsidies in these countries would eliminate incentives to overproduction, which displaces African exports now and constrains further growth of the cotton sector, and hence the ability to fight poverty, in the WCA countries.
The present paper is not meant to provide an in-depth analysis of the policy and institutional problems or the long-term growth challenge facing the cotton sector in West and Central Africa. The objective of this paper is to (i) address the main global and domestic policy issues surrounding the cotton sector and (ii) provide guidance on reform strategies for the cotton sector.
II. The Global Context
A. Global Production and Trade Patterns
The world cotton market is characterized by dispersed production (though mainly in the northern hemisphere) and extensive trade in lint cotton. Though cotton’s share in textiles has declined over time in favor of synthetic fibers, cotton remains by far the world’s most important fiber, with a share of about 40 percent. Major producers, in declining order of importance, are China, the United States, India, Pakistan, and Uzbekistan. WCA countries together are smaller, but still important producers, accounting in the latest crop year for about 5 percent of world production (Table 1) and 13 percent of exports.
|China, Peoples Rep. of||2,703||4,142||4,513||4,774||4,513||3,837||4,425||5,123|
|West and Central Africa 1/||214||364||536||683||878||848||701||959|
|China, Peoples Rep.of||-773||610||-278||-659||70||344||47||-65|
|West and Central Africa 1/||185||336||440||600||778||816||689||818|
CFA franc zone only.
CFA franc zone only.
B. Global Policies Affecting Cotton Production and Trade
Most major producers outside of the WCA region have programs aimed at supporting cotton production. In 1998/99 and 1999/00 such programs were in place in the following eight countries, accounting for an estimated 53 percent of world output: Brazil, China, Egypt, Greece, Mexico, Spain, Turkey, and the United States.4 For the 1998/99 crop season, the level of assistance offered by governments to the cotton sector in those 8 countries amounted to $5.4 billion. In the following year, Egypt reduced its price support, but the seven other countries maintained theirs. Over 40 percent of the support was provided by the United States (Table 2). The high levels of subsidy have been a main source of the downward pressure on world prices (Figure 1).
Figure 1.Nominal Price, Real Price and World Stocks of Cotton, January 1985 - December 2002 1/
Sources: USDA; and IMF staff.
1/ Stocks reported in August, the last month of the cotton marketing year. Real cotton price relative to average WAF, MU CPI, based in 1990.
|U.S.$ Per kilogram||Million U.S. dollars|
|China, People’s Republic of||3,829||0.34||1,534|
|World cotton price||1.25|
The European Union provides the most generous assistance to cotton growers, more than 100 percent of world prices. Moreover, EU subsidies for cotton are exceptionally generous when compared to other crops: 3 to 4 times larger per hectare than for maize and oilseeds and 7-8 times larger than for cereals. However, production (limited to Greece and Spain) is much lower than that in China or the United States. The Common Agricultural Policy’s cotton subsidy system was reformed in 1999 to increase penalties for excess production. China provides substantial assistance to cotton farmers through a reference price system for cotton. Currently, the procurement and marketing of cotton are monopolized by the government and the procurement and sales prices are determined largely to subsidize the farmers. This has resulted in domestic prices that are about 20 percent higher than world prices. With China’s WTO entry, the state-trading monopoly is expected to be phased out and domestic prices should move closer to international prices. In the United States, the program of agricultural support is notable because it has been based on the assumption that agricultural prices would remain stable or increase slightly, and thus initially aimed at enhancing the role played by market forces in production decisions when it was designed in 1996. As production expanded and prices started to fall, the level of subsidies increased significantly. Instead of facilitating the adjustment of production to the excess supply and declining prices, the U.S. price supports have led to increasing production in the United States by making cotton more profitable than competing crops like soybeans, corn or sorghum.5 For instance, U.S. cotton farmers are expected to receive more support in the current crop year than in 1999, when cotton prices were also at very low levels.6
The recently renewed U.S. farm bill has (i) locked in place levels of spending that have been inflated in recent years by “emergency” funding measures, (ii) introduced a new countercyclical element tied to product prices, and (iii) expanded the programs’ coverage to other agricultural products.7 The new farm legislation is expected to contribute to continued overproduction and lower world prices of the agricultural products covered by the programs, in particular cotton, perpetuating the problems faced by WCA exporters.
III. The Cotton Sector in West and Central Africa
This section describes the current situation in the cotton sectors of the region, before turning in the next section to the reform agenda. While cotton production has expanded rapidly, the share of the international price paid to producers has been relatively low, reflecting inefficiencies in the ginning, marketing, and input distribution subsectors. A transition toward more competition and transparency and hence greater efficiency in processing and marketing of cotton should allow West and Central African countries to raise production further and expand their export market shares.
A. Production and Ginning Performance
Cotton production in West and Central African countries has increased fourfold since the early 1980s (Figure 2). Cotton has proved to be an economically viable crop that has had a significant positive impact on exports, economic growth, and rural development. Cotton ginning, input supply, transport and marketing constitute significant economic activities in most of these countries. Cotton-related activities account for a large share of rural employment and exports, and generate a significant share of government revenue. With the exception of Benin, cotton production stagnated or declined in the WCA countries in the six years preceding the devaluation of the CFA franc in 1994, but accelerated after the devaluation (Table 3). Production increased by 16 percent a year on average from 1993/94 to 1997/98, then declined for three years, before reaching a new peak in 2001/02. Over the past four years, production increased substantially in Mali, Côte d’Tvoire, Burkina Faso, and Cameroon; it declined slightly in Benin and markedly in Chad and Togo.
Figure 2.Cotton Production in CFA Franc Zone and Rest of Sub-Saharan Africa, 1980-2001
Source: International Cotton Advisory Committee.
|Central African Republic||8||13||12||7||20||16||11||9||11|
|Central African Republic||5||11||9||3||17||15||10||8||9|
The development of the sector has resulted in consistently good-quality cotton, high average crop yields (by international standards), and high ginning ratios. In 1995/96, farm yields were in the range 1000-1200 kg/ha, except in Burkina Faso and Chad, where they were below 1000 kg/ha. Ginning ratios, at about 40-43 percent, are also high in the WCA countries by international standards. By contrast, ginning ratios are closer to 34–36 percent for similar cotton in India, and in Zimbabwe they are around 39 percent. Several factors have contributed to successful cotton production in the region: application of appropriate soil nutrient replenishment, pest management, and seed varieties well suited to local conditions, the provision, by the government and/or the cotton companies, of support services and infrastructure; guaranteed producer prices and output markets; high input-credit recovery rates; and well organized village-level associations.
B. Institutional Environment
Despite the sector’s historically strong performance, its institutional environment has led to numerous inefficiencies, which provide considerable scope for improvement. For instance, in all but two countries (Benin and Côte d’lvoire), the cotton sector is under the control of a single company that controls the provision of inputs and other services to farmers and operates as the sole buyer of the entire cotton crop. With the exception of Burkina Faso, national governments are majority shareholders of these companies. The lack of transparency under these managed monopoly systems creates a multitude of opportunities for rent seeking and the mismanagement of resources, generally at the cost of farmers, the national budget, and the economy as a whole.8 In particular, it severely limits incentives to minimize costs and stifles entrepreneurial decision-making at all levels of the supply chain.
Essentially, the viability of national sectors under the current systems is based primarily on their ability (i) to tax producers and accumulate profits in times of high export prices, and (ii) to rely on budgetary support from national governments in times of low international prices. This strategy has not worked well in many countries owing to poor management of the stabilization fund by the cotton monopsonists. This strategy needs to be changed in an era of increasing globalization and regional integration. The fact that producer organizations are getting stronger reduces the room for taxation in the future. Similarly, increased pressure on budgetary resources will reduce the ability of governments to rescue national parastatals during future crises.
The current pricing system provides some stability to farmers, but at a high cost in terms of income foregone and lower long-term growth potential. The table below illustrates the impact of the current system on pricing in individual countries in WCA.9 Before the devaluation of the CFA franc in 1994, producer prices in the WCA countries were about half of the international levels. In the period immediately following the devaluation of the CFA franc (1994/95–1996/97), producer prices in the CFA franc countries declined significantly as a ratio to international prices owing to deliberate domestic policies to consolidate fiscal positions and lower inflationary pressures. During the period 1997/98–2000/01, producers’ shares increased to slightly above their pre-devaluation levels on average. Nonetheless, this ratio was higher in countries, such as Benin and Côte d’Tvoire, which were relatively more advanced in the implementation of structural reforms in the sector.
1. The relatively large gap between the domestic producer prices and lint equivalent export prices of seed cotton is explained primarily by (i) the rising operating costs of the cotton companies (Figure 3); (ii) the implicit subsidies to other areas of the sector offered by the cotton parastatals (such as to private ginneries, as well as to the domestic oil and meal processing companies); and (iii) the provision of a variety of public services (e.g., infrastructure maintenance, provision of schooling and health services) by the cotton companies in the cotton growing regions.
Figure 3.West and Central Africa: Ratio of Operating Cost to Total Cost 1/
1/ Average ratio is for Benin, Burkina Faso, Chad and Mali. Operating costs include all costs, except the purchase price of seed cotton. Costs are on an fobbasis.
IV. International Competitiveness and Growth Potential of WCA’S Cotton Sector
The competitiveness of the region’s cotton sector is evidenced by the low level of costs when compared to other countries and the strong growth in production over the last two decades. Comparisons of the costs of production of the various cotton producers of the world are difficult to make because of incomplete data. The most comprehensive source is that of the International Cotton Advisory Committee (ICAC), which performed a survey of the cost of producing raw cotton in 2001/02 in 28 countries, including the largest producers (China, the United States, India, Pakistan, and Uzbekistan), four countries in WCA, and six others in Sub-Saharan Africa. Though it should be stressed that even these data are imperfect, it emerges that WCA countries were among the world’s lowest cost producers. The current decline in world prices has illustrated the level of competitiveness of WCA’s cotton sector. Although subsidies in the order of US $50-60 million were required for the zone as whole to cushion the effect of falling world prices, the national cotton sectors would have been profitable if the international price had exceeded 50 cents per pound. Few other countries can produce cotton profitably at this price level.
WCA countries can produce cotton cheaply and cotton is generally far more profitable than alternative crops in many parts of the region. While farmers can shift relatively easily from cotton to soybeans in the United States, Australia, or Brazil depending on relative prices, growers in many WCA countries have much less scope for substitution. In Burkina Faso, the main choice is between the cotton/maize mix, or niebe alone. As shown in Table 2 above, cotton production in WCA’s most important competitor countries takes place under heavy subsidization. Farmers in the two main producing countries, which account for almost half of world production, enjoyed support as high as 20 percent of world prices in the case of China and 50 percent in the case of the United States, while EU subsidies exceeded 100 percent. Producers in the WCA region are currently the main losers with respect to global policies, being penalized both domestically through implicit taxation and in international markets through subsidies in competing countries. There is no question, therefore, that producers in WCA countries would significantly benefit from a less distorted international environment for cotton production.
According to estimates made using the ICAC world textile demand model, the removal of U.S. subsidies would produce a fall in U.S. production that would lead to a rise in the international price in the short run by as much as 12 cents per pound.10 Such an increase in the world price of cotton would increase revenues from cotton by about $250 million in WCA, which compares to the total ODA flows to the region of $1.8 billion in 1999, and $50–60 million of subsidies provided to WCA farmers in the current crop year to cushion them from the fall in prices. Elimination of government subsidies in the US and China, by far the world’s largest producers and the world’s largest exporter in the case of the US, would stimulate a reallocation of production towards lower cost producers, including those in West and Central Africa. Though the long run price increase may be smaller than indicated by the above estimates, due to induced adjustments in production and consumption, the impact on long-term growth and poverty reduction in Africa would be significant. Reduction in the proportion of cotton production that is insulated from market forces as a result of government price support could also be expected to lower the volatility of the (free) world cotton price. Greater market stability would improve the environment for trade and encourage production in more competitive exporting countries such as those in the WCA region.
V. The Reform Agenda: The Road Toward Competitive Cotton Sectors
The long-term strategic objective in the cotton sector is to increase and sustain its contribution to poverty reduction through employment creation and income generation in the rural areas, in addition to contributing to export earnings and government revenues. Growth linkage research in the West Africa region has shown considerable multiplier effects stemming from expansions in income from cash crops on employment and income in the rest of the rural economy. The implications of sustained growth in the cotton sector or lack thereof for poverty reduction, as well as the need for reforms to bring about such growth, should therefore be looked at from that much broader angle rather than from the immediate impact within the sector or short-term effects on public finances.
Since individual countries in WCA are at different stages in their progress toward establishing competitive sectors, the reform agenda needs to take into account the situation in each country. The following sections present roadmaps for reforming individual cotton sub-sectors that depend on the institutional environment in each country. They (i) summarize the main features characterizing the various subsectors in the current situation, (ii) describe the key features that would indicate successful reforms of these sectors, (iii) specify short term target changes that need to be achieved in order to move towards competitive national cotton sectors, and (iv) identify specific actions that need to be undertaken by governments, private sector stakeholders, and development partners.
The reform agenda that is outlined below reflects the progress that has been achieved toward reaching a consensus from the intensive consultations that have taken place since 1998 between the Bank and the Fund, the French Cooperation, national governments, producer organizations, and ginning companies. This growing consensus was confirmed in July 1999 in Ouagadougou at the regional symposium on the future of the cotton sector in West and Central Africa. An important conclusion of this symposium is the need to introduce competition at all levels of the sector in order to raise efficiency and sustain growth.
Experience suggests that successful reform of the cotton sector to achieve a competitive system is bound to take several years to complete. The reform plan has to be properly sequenced and managed so as to limit disruptions that could be detrimental to production. In most cases, however, the principal steps of the reform process would involve (i) spinning off to the private sector the noncore activities of the cotton parastatals (including extension services, transport activities, purchase and distribution of inputs and equipments, and marketing of seed cotton and cottonseeds); (ii) reinforcing the technical and commercial capacities of farmer associations so they can directly contract for bank credit through a private-sector based-recovery system which links repayment of credit to the marketing of the seed cotton; and (iii) introduce competition by opening up the sector to private ginneries, which in most cases would require privatizing ginneries that are owned by the parastatals. In addition, marketing of fiber needs to be performed through transparent and competitive bidding processes. Over the short- to-medium term, there is considerable scope to lower the operating costs of the inefficient cotton monopsonies.
It bears emphasizing that the reform process would require that development partners provide the necessary technical assistance in support of programs to effect a successful transition to open and competitive systems. This approach is working well in Benin, where the IMF, World Bank, and bilateral donors have worked closely with the government and the private sector to facilitate the reform process. Similar support is also being provided to the cotton sector in Mali and will need to be extended to other countries in order to raise the chances of success in reforming the sector.
A. The Provision of Input Credit
Successful reform of this sub-sector would ensure effective credit recovery while allowing the emergence of competitive primary marketing. Currently, credit recovery is achieved in two ways. In all but one country, the ginning companies, public or private, serve as intermediaries for the input credit, which they also recover on behalf of commercial banks or traders. In the remaining case (Benin), the recovery of credit is carried out through a private sector-based Agribusiness Trade Association (ATA)-type mechanism and does not involve ginning companies. While the latter system maintains the critical, direct link between seed-cotton payment and credit recovery, it eliminates the intermediation by ginning companies, which, in the case of state companies, has attracted rent-seekers with little interest in undertaking long term investments in input distribution activities. In fact, the system in Benin replaces the traditional intermediation/guarantee by the state company through a series of contracts between the private sector operators that are involved. Therefore, the next step in the transition under this system should be the development of an effective contract enforcement system to protect the integrity of the new mechanism. The transition in the remaining countries would involve two steps that could be carried out simultaneously or sequentially, that is: (i) reduction of credit intermediation costs; and (ii) the introduction of a private sector-based recovery system, perhaps first of an ATA-type like the Benin model, which should operate well under a competitive contract farming system.
The strategic objective in this sub-sector should be to sustain the broad access by farmers to input credit at reasonable cost by encouraging the development of recovery mechanisms that are transparent and compatible with competitive primary marketing systems. In the context of limited farmer assets and underdeveloped financial markets, these mechanisms would have to maintain a direct link between the payment of seed-cotton and the recovery of input credit. The mechanisms would operate best when owned and managed by the private sector, but they will require assistance both from national governments and development partners.
B. Marketing of Seed-cotton
Primary marketing should be conditioned by the requirements for an effective input credit-recovery mechanism. The indicator for successful reform should, therefore, be the emergence of a marketing system that allows free entry without jeopardizing the recovery of input credit. Judging from the experience in WCA, such a system would have to link seed-cotton payment directly to input credit recovery. The least complicated and least risky transformation that would satisfy this condition would lead to a system of competitive contract farming, at least during the initial years. Under contract farming, local farmer organizations would negotiate prices and sales contracts, on an annual or multi-annual basis, with one or several ginning companies. These contractual arrangements would provide member farmers with the necessary legal and institutional tools to tackle many of the production and marketing problems that they face, ranging from technology generation and dissemination, to credit access, input procurement, product quality, and price stabilization. For instance, sales contracts could be used to provide collateral for input credit, and ginning companies could collaborate with local producer organizations in purchasing insurance and other instruments to stabilize prices and incomes. In order to ensure the success of contract farming, the technical and commercial capacities of local farmer organizations would have to be strengthened significantly to allow them to adequately negotiate and enforce contracts with ginning companies and other private sector operators, including commercial banks and input distributors.
Currently, three types of primary marketing systems exist in the region. The first, which prevails in all but two countries, Benin and Côte d’lvoire, corresponds to the traditional one-company-monopoly model. The second system is the one in Cote d’lvoire, where the traditional national-level monopoly has been replaced by 3 geographic monopolies. A third system is adopted in Benin, where the monopoly of the national cotton company has been lifted and prices and marketing decisions are negotiated among private sector operators at the national level. In the three cases where several ginning companies exist (Benin, Côte d’lvoire, and Togo), the price of seed-cotton is decoupled from the allocation of quantities among these companies. In the case of Benin and Togo, the allocation of seed-cotton is done on the basis of the share of installed ginning capacities. In Côte d’lvoire, the quantity of seed-cotton that a company receives is in principle determined by the level of production within its assigned geographic area. In all these cases, the prevailing system does not allow for competition for seed-cotton among ginners. Moreover, it penalizes efficient ginning companies and rewards less efficient ones.
The move toward a system of competitive contract farming would allow for decentralized pricing, eliminate the administrative allocation of seed-cotton, and encourage competition among ginning companies. This would, however, require organizational, technical, and commercial capacities on the part of producer organizations that currently are underdeveloped. Consequently, the next step in the transition, which should be carried out in parallel to the strengthening of the capacities of producer organizations, should consist in setting up private-sector-based mechanisms to negotiate pricing and marketing decisions. This move should be combined with the removal of geographic monopolies, in the case of Côte d’lvoire, and the lifting of the monopoly of national companies over seed-cotton marketing in the remaining countries, as well as the setting up of sector-based input recovery mechanisms. In Benin, the next move should consist in decentralizing the negotiation process. Once the capacities of local producer organizations have been sufficiently strengthened, sectors could graduate to systems where ginning companies negotiate pricing and marketing decisions directly with local producer organizations.
An important step that needs to be taken as part of the reform of domestic marketing systems would consist in removing the barriers to cross-border trade in seed-cotton. All cotton growing countries that are considered in this paper are members of regional integration bodies that have enacted policies to create common regional markets in West and Central Africa. Moreover, cotton is a major tradable commodity and allowing cross-border trade would raise competition for seed-cotton, improve producer incomes, and create incentives for investment in the sector.
C. Cotton Ginning
Currently, the ginning industry is characterized by two modes of organization: one that is based on a single company monopoly system and another that is based on managed coexistence between public and private companies. In countries where a single-company monopoly exists, the next immediate move should include three steps: (i) open up the sector and bring in new entrants, (ii) ensure that national companies reduce unit costs by rationalizing ginning operations and spinning off non-core businesses such as transport and oil mills, and (iii) maximize revenues by selling cotton-seeds at competitive prices and adopting efficient fiber export arrangements. In countries where private ginning companies are already operating, the next step in the transition should be to move towards more competition between state and private companies commensurately with the reforms in the input and primary marketing sectors. Countries should at this stage move to open up regional markets for seed-cotton and allow ginners to compete for seed-cotton at the regional level, thereby encouraging greater efficiency among ginning companies.
The ginning subsector has been one of main sources of inefficiencies in the supply chain, hence the strategic importance of promoting competition and thereby greater efficiency in this sub-sector. Beyond the regulatory frameworks for contract enforcement that have been referred to in the preceding sections, national governments would have to facilitate the entry of new operators and competition by privatizing the national companies, preferably in separate entities in order to avoid the emergence of private monopolies. The support to be provided by donors would include assistance for the planning and implementation of the privatization processes and the strengthening of national capacities for contract enforcement.
D. Import and Distribution of Fertilizers and Pesticides
Successful reforms in the fertilizers and pesticides subsectors should lead to competitive private-sector-based importation and distribution systems. Three different institutional constellations are discernable currently, corresponding to cases where: (i) the national company is alone in charge of the procurement and distribution system; (ii) the national company imports through private importers but remains in charge of the distribution process; and (iii) an ATA type organization manages the procurement process on behalf of farmers, but importation and distribution are undertaken by private operators. In the transition process, one could envisage countries moving progressively from the first to the third constellation. In that process, in countries where the national company is directly in charge of importation and distribution, the next step, which should be taken immediately, is to move to a system where the company imports through private traders. The subsequent step would be to set up an ATA-type mechanism to take over the organization of the procurement process from the national company. These two steps could be taken simultaneously, in cases where farmer organizations have sufficient capacities to set up and manage such a mechanism. In countries where such a system already exists or where the national company procures through private traders, the immediate next step should be to establish transparent competitive bidding procedures. The systems at this stage should attract only professional importers and distributors who are able to mobilize the necessary financial resources and are willing to make long-term investments in import and distribution activities. The final move from the ATA-type system to a fully decentralized procurement system would depend on the availability of an effective input credit recovery mechanism and the degree of decentralization of primary cotton marketing. The move becomes less urgent, however, if the ATA-based system is coupled with transparent and competitive bidding procedures.
The strategic objective should be to sustain the broad access to quality products that has been a key achievement under the administered monopoly but in the context of competitive import and distribution systems. In addition to removing barriers to entry, national governments would have to enact and enforce adequate regulatory systems to protect contract rights, maintain quality standards, and safeguard human health and environmental safety. The private sector would complement these efforts by establishing ATA-type institutions to coordinate the provision of sector-wide technical support services and thereby raise the demand-responsiveness and facilitate the contribution of beneficiaries to the financing of these services. The role of the Bank and other donors would be to assist in building national capacities for the development and implementation of regulatory systems and providing support to ATA institutions.
E. Seed Production and Multiplication
Two organizational structures are currently observable for the seed subsector among WCA countries. The first involves a system where the cotton company finances the research program, controls the seed distribution system, and works with contract farmers for the multiplication of improved seed. The second, about to be instituted in Benin, consists in an ATA-based system of co-financing research and extension services and sub-contracting for seed multiplication coupled with distribution through local farmer organizations. The objective in both cases should be the establishment of well functioning private sector-based multiplication and distribution systems. The immediate next step in the transition in the first case should consist in moving towards an ATA-based system, whereas in the second case, the next move should be towards expanding the role of the private sector both in seed multiplication and distribution. The pace of transition in both cases would be limited by the level of development of the private sector.
Continued access to high quality seeds but through cost efficient multiplication and distribution systems should be the strategic objective in the seed sector. The accompanying measures that are called for here are basically the same as in the case of the fertilizer and pesticides sectors. However, in addition to enacting and enforcing adequate regulatory systems, governments would have to support and improve the performance of the national research systems. The private sector would also have to put in place institutional mechanisms that would enable it to participate more effectively in setting research priorities and augmenting the limited public resources to finance strategic research for the sector. Assistance by donors would help develop national regulatory systems and support research.
F. Pricing Policies
For the current crop year (2001-02), farm-gate prices have already been set and additional financing is being sought to cushion farmers for some of the drop in world prices. For the next crop year, the following general principles should guide the countries of WCA: pricing mechanisms adopted for 2002-03 should not call in question the objectives of enhanced competition and privatization, nor roll back the reforms that have occurred. Thus, in Benin, where there is a publicly-owned ginning company and 6 private companies, and where the prices are agreed among ginners, producers, and other market participants, a return to government-set cotton prices should be avoided.
Moreover, in countries where a government-owned monopoly remains, prices paid to growers should largely reflect fluctuations in the world price as they would in a competitive environment with private ginning companies, which is the medium-term goal. Countries should not attempt to resist the influence of world prices, in particular by taking on a commitment to keep domestic prices artificially high in the face of low world prices. Doing so could imply unreasonably large budgetary costs. Thus, governments should strictly limit the extent of the subsidies they provide to cotton growers and ginning companies. Until reforms have produced a framework for competition among ginning companies, price setting (and hence the division of the proceeds from selling lint cotton) should in any case emerge from a transparent and equitable mechanism, agreed among the market participants (producer groups, the state, ginning companies, and financing institutions providing input and crop credits). In the past, it has been the case that ginning companies have justified low prices paid to producers on the basis of inflated costs. Ginning companies should be audited and compared to best-practice firms elsewhere.
Pricing mechanisms differ with respect to who bears the risk of price fluctuations over the course of the harvest. Two polar cases can be envisioned. In the first case, the price to be paid for cotton is set at planting time; as a result, the risk of price fluctuations between planting and harvest is borne by the ginning company or the government. In the other polar case, no price is quoted to producers until the cotton is delivered to the ginning company and sold by the latter. In this case, all the risk is borne by the producers, those least able to do so. In practice, in most countries some variant of the first case has been adopted. However, a problem with this system is that it often requires the government to step in with subsidies, in effect shouldering the downside risk.
Since effective competition among ginning companies does not yet exist, an intermediate pricing mechanism that shares some of the risk between producers, ginning companies, and the government may be desirable for the 2002-03 crop season. For instance, in most countries with a single monopoly company and no private ginneries, such a mechanism could guarantee a minimum price to producers at the start of the season, with a top-up later if world prices remained at the initial level or increased. Ginning companies could hedge some of this risk by selling forward, but full hedging is impossible, since the size of the crop is not known and the cost of hedging could be prohibitive in some circumstances. In this system, both producers and growers share some of the risk (and all could increase their receipts when world prices firm, in proportions that are equitable and defined in advance). Such a practice would be similar to the ristourne (rebate) which is familiar to growers in the region, but would differ from it on a major point. The second payment would not be based on the ginning company’s surplus, but instead would be based on the excess of the world price over the value that had been assumed in setting the guaranteed price. The excess could be shared between growers and ginners according to the percentage agreed upon when the guaranteed price was set; the state would also benefit through higher taxes on ginning company profits. The ginning companies would have an incentive to reduce their costs since doing so would boost profits. Such a scheme would not eliminate the risk of subsidy, but it would considerably reduce it if the guaranteed price were sufficiently conservative.
On the one hand, past attempts at reducing the impact of price fluctuations on growers’ incomes through stabilization funds have not been very successful. One of the reasons for this failure has been the lack of a clear understanding between growers, ginneries, and the state as to the ownership and control of the funds’ resources. In Mali, for instance, growers feel that the stabilization fund resources have been largely used at the discretion of the CMDT to cover deficits of its own making. In Burkina Faso, on the other hand, where the fund is clearly owned and controlled by growers, the resources are better managed and protected from the cotton company. As a consequence, the resources are available for use to stabilize prices and government subsidies are not expected to be required in 2001/02.
Reforms of the cotton sectors and the price-setting mechanisms should lead export proceeds to be distributed more fairly through transparent negotiations between the parties, and each party should have the responsibility to manage his own price risk. Ginneries could cover their price risks as any other private enterprise would do. Growers are not well equipped to cover price risks on their own, since their savings are generally invested in the form of animal husbandry which cannot be easily disposed of when cotton prices fall. But village associations at the local or national level could enter into contractual obligations with private insurance companies that could provide them with income protection for an acceptable premium. Such arrangements would limit the need for government intervention.
The cotton sector in WCA is currently undergoing difficult times due to the historically low world price, partly reflecting generous subsidies to cotton growers in the United States, China, and the European Union, as well as owing to the incomplete transition to competition among private ginning and marketing companies. Cotton is a key component of any program of rural poverty reduction in the region, given its importance for the exports of these countries. Prospects for poverty reduction would be considerably improved by removal of subsidies by industrial and other developing countries, which are increasing supply artificially and putting downward pressure on world prices. The WCA countries would benefit greatly from removal of price supports and subsidies to cotton growers in the other parts of the world.
Prospects for poverty reduction in the WCA countries would be improved with the reform of the cotton sectors in order to enhance competition and allow a larger share of the world price to be passed through to farmers. An objective of the reforms should continue to be the development of a sector in which the government has limited involvement in setting prices or providing subsidies. Privately owned ginning companies should compete with each other in determining prices, which would be agreed in an open and transparent manner. Such a system would require institutions to ensure credit recovery, so that purchases of inputs could be financed. Thus, it will be important to develop growers’ associations and legal mechanisms for collecting debts. Though such institutions and competition among private ginning companies will not develop in time for the next crop year, it is important to continue to make progress toward this objective. In the meantime, pricing mechanisms adopted should not call into question the objectives of enhanced competition and privatization, nor roll back the reforms that have already occurred.
Ousmane Badiane and Louis Goreux are, respectively, a Lead Specialist, Food and Agricultural Policy, and a consultant at the World Bank. Dhaneshwar Ghura is Deputy Division Chief in the IMF’s African Department. Paul Masson is a Senior Fellow at the Brookings Institution and was a Senior Advisor in the IMF’s African Department when the paper was written. The authors wish to thank a number of colleagues at the World Bank and the Fund for useful comments. This paper has also been issued as World Bank Policy Research working paper 2867 (July 2002).
The cotton-producing countries considered here are Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, Côte d’Ivoire, Mali, Senegal, and Togo. We discuss neither non-CFA countries in West and Central Africa (Ghana, Guinea, Nigeria), because their cotton sectors are organized differently, nor the smaller CFA franc zone producers (Guinea-Bissau, Niger).
Given its sectoral expertise, the World Bank has taken the lead in guiding the reform of the cotton sector in WCA. However, IMF programs have also incorporated elements of cotton-sector reforms for these countries where they were central to macroeconomic stability.
See Carlos Valderrama Becerra, 2000, “The World Cotton Market: Prices and Distortions,”. paper presented at the 10th Australian Cotton Conference, Brisbane, Australia, August 17, 2000 (Washington: International Cotton Advisory Committee)
U.S. farmers receive benefits under a number of government programs: production flexibility contract and commodity loan programs, subsidized crop and revenue insurance, and market loss assistance. U.S. policies have resulted in a decoupling of the U.S. price for cotton that farmers receive from the world price. Despite historically low world cotton prices, prices received by U.S. farmers have actually increased since early 2001, once the value of the loan programs (as a per-unit subsidy) is included.
See Leslie Meyer and Stephen MacDonald, “Cotton: Background and Issues for Farm Legislation,” U.S. Department of Agriculture, Economic Research Service, July 2001.
See United States: Selected Issues—Country Report No. 01/145, August 24, 2001, (Washington DC: International Monetary Fund).
Various sector diagnostic studies and technical audits of cotton companies that have been carried out in many countries over the years have repeatedly documented a considerable level of rent seeking and relatively high operating costs in the ginning sector. The latest examples are the technical audit of the cotton company in Mali in 2000 and the survey of ginning costs in Benin in 2001.
Part of the difference in this ratio across countries is explained by the higher transport costs from ginneries to seaports in landlocked economies.
Becerra, 2000, op. cit. Reduction of EU subsidies could be expected to have a similar, but much smaller, effect, given the significantly lower level of production that is involved.