Cotton indutsry on death spiral

via Cotton indutsry on death spiral | The Herald October 22, 2014

Cargill’s closure of its local cotton business has sent a chilling reminder of the failed investment model for cotton contract farming. With ginning capacity utilisation below 20 percent for the second year running, it is clear that the industry is on a death spiral. Cotton farmers are almost 100 percent financed through contract farming as they lack the means to access funding from banks. Consequently, the size of the cotton crop is a function of contractors’ appetite for risk relative to the expected returns.

Equally, for a farmer to produce the crop, he must be getting returns commensurate with the risk that he is taking. Basically the value generated by the cotton sector needs to be equitably shared between the farmer and the contractor.

Farmers are generally protected by strong competitive forces in the sector which ensure that any contractor attempting to pay a less than economic price to the farmer will not be able to buy his crop.

The downside with the competitive mechanism is that it only works effectively where all parties have funded adequately, that is where the playing field is level.
The robust legal framework that is currently in place provides adequate protection for investment, but only if it is implemented effectively.
The current uneven playing field where some merchants finance inputs while others just harvest is a recipe for disaster.

Due to sustained losses, the major financiers in the sector have either pulled out, are in the process of pulling out of the sector or have scaled back on their inputs funding to the detriment of grower yield realisation.

Lower farmer yields in turn lead to lower levels of inputs debt repayment and higher levels of side marketing.
This in turn causes losses for ginners resulting in a further reduction in the inputs package. In the past few seasons the negative forces of poor debt repayment and side marketing have had the effect of decimating cotton production.

This is a clear case of chickens coming home to roost, being the unintended consequences of opening up the sector to players who are proudly sworn to doing nothing but plunder where others invest.

The reduced supply of inputs and agronomic support further reduces farmer yields thereby promoting side marketing.
An attempt to enforce meaningful minimum levels of funding for the 2013 /14 season has failed dismally.

There has also been an increased incidence of fertiliser abuse with farmers either selling it or using it on other crops. How then are yields supposed to improve on this scenario.
The cotton industry was viable until the early 2000s when it was opened up to a multitude of small companies which wreaked havoc in the sector by inducing side marketing.
This created challenges with debt recovery, yield as well as poor operational efficiencies.

The following measures have been tried to fix the sector: The promulgation of Statutory Instrument 263 /2009 to regulate cotton marketing and its subsequent revisions since then and enforcement of minimum funding and purchase quota systems in 2014.

Regrettably these policies have not worked and the current crop size confirms this. If the status quo is to be maintained, the country will see the continued suffering of cotton farmers and most likely a continued decline in funding and production levels.

The major cotton financiers are wallowing in debt arising from cumulative effects of poor volume and debt repayment performance.
There is need to radically reinvent the existing production model by reverting to a state monopoly which controls all funding and purchasing of cotton. Scale economies from this model will allow payment of higher prices.

Forward sales can be used to finance working capital.
Similarities can be drawn between the multicurrency environment and the situation in the cotton industry.

The multicurrency environment, while creating debilitating liquidity shortages due to the absence of monetary interventions, is a better solution than the hyperinflationary environment it as it has served to stabilise the economy.

There is a lot of merit in having a local currency but this can only happen when there is sufficient macroeconomic stability to support the currency.
Privatisation of the cotton sector was part of the IMF measures under ESAP which were designed to underwrite greater competitiveness in the sector.

While the intentions of this program were noble, there has not been a robust regulatory environment to protect investment in the sector and this has culminated in the collapse of cotton production due to rampant side marketing.

As with monetary policy, there is need for radical policy interventions to create stability in the cotton sector, the most effective of which would be nationalising the industry and putting on hold privatization until there is a viable investment protection proposition.
By so doing, the livelihoods of farming communities dependent on cotton may be salvaged.