Comparative analysis of organization and performance of African cotton sectors: Learning from reform experience

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Comparative analysis of organization and
performance of African cotton sectors Learning
from reform experience
Presented on behalf of Research Team byColin
Poulton (CeDEP, SOAS) Other members of the team
include David Tschirley (MSU), Patrick Labaste,
John Baffes and Julie Dana (World Bank), Gerald
Estur and Nicolas Gergely (independent
consultants)SOAS, September 19th 2008
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Objectives of the Study

• Comparative analysis of the lessons from cotton
  sector reforms implemented in SSA countries
  during the last 20 years
• 9 countries cases Tanzania, Uganda, Mozambique,
  Zimbabwe, Zambia, Mali, Burkina, Benin, Cameroon
• Comparison across WCA and ESA
• Understand
• How a sectors history and current structure
  influence the set of feasible reform paths
• How the path chosen influences the types of
  challenges a sector might have most difficulty
  meeting (e.g. quality, productivity, competitive
  prices to farmers)
• Through this, to provide a stronger analytical
  basis for public and private stakeholders to
  design their countrys reform path
• Better understand to better advise (or decide)

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Market Context

• Price Trends
• Decline of 55 percent between 1960-64 and
  1999-2003 in real prices of cotton (similar to
  other major export commodities)
• Driven by annual average yield gains of 1.8, but
  stagnant per capita demand (competition from
  man-made fibres).
• Subsidies to OECD producers
• Full removal could raise world price by 10-15,
  but progress slow
• Exchange rate for WCA countries
• Depreciation 1995-2001, but dramatic appreciation
  since 2002 in real terms, now back at 1995
  levels
• Demand Side Increasing Importance of Lint
  Quality
• Inherent fibre characteristics and hand picking
  should generate premium
• Africa not capitalizing on its comparative
  advantage contamination!
• Valorization of by-products

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Case Study Countries
Mali
B. Faso
Cameroon
Unda
Benin
West Central Africa
East Southern Africa
Tanzania
Malawi
Zambia
Mozambique
Zimwe
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Case Study Countries
Mali
B. Faso
Cameroon
Unda
Benin

• West Central Africa
• Single channel systems
• Many years of investment (rsch, AT)
• Cotton as engine of rural development
• Intensive input use, high yields
• High total production
• Huge economic and political weight
• Limited reform
• Recent very serious financial crises

East Southern Africa
Tanzania
Malawi
Zambia
Mozambique
Zimwe
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Case Study Countries
Mali
B. Faso
Cameroon
Unda
Benin

• West Central Africa
• Single channel systems
• Many years of investment (rsch, AT)
• Cotton as engine of rural development
• Intensive input use, high yields
• High total production
• Huge economic and political weight
• Limited reform
• Recent very serious financial crises

• East Southern Africa
• - More diverse history
• Generally much less investment
• Not seen as engine of development
• - Much lower input use, yields
• - Lesser economic and political weight
• Much more reform
• No public financial crises

Tanzania
Malawi
Zambia
Mozambique
Zimwe
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Conceptual Framework

• 4 steps
• Typology of Cotton Systems (see Chart on next
  slide)
• National Monopoly
• Local Monopoly (Concession)
• Concentrated
• Competitive
• Hybrid
• Mapping SSA Cotton Sectors (see Chart on
  following slide)
• Indicators of Performance (see Chart on following
  slide)
• Process Core activities and Service Delivery
  (prices paid to farmers, input credit delivery,
  quality, valorization of by-products, research)
• Outcomes yields and returns to farmers, value
  addition, efficiency and competitiveness,
  macro-impact
• Linking Performance to Sector Types by analyzing
  sector performance vs the selected indicators

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Performance Indicators and Expected Performance
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Data

• Existing knowledge and secondary data summarised
  in 9 country case studies
• Updated to 2007 through country visits
• Supplemented by
• Farmer focus groups (2-6 per country) to develop
  disaggregated production budgets by farm type
• Interviews with ginners in ESA to piece together
  ginnery budgets company accounts in WCA
• Survey of lint quality for SSA lints undertaken
  by Gerald Estur

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Core Activities and Service Delivery Quality

• Fibre characteristics of African cottons
  typically superior to Cotlook A Index
• Also hand-picked (good for cleanliness)
• But major problem of contamination (increasingly
  penalised on world market)
• Analysis
• Compared average premium for top type of lint
  from each country in 2006/07 and mid-1990s
• Estimated average export price differentials
  across the nine countries relative to the A
  Index, based on
• average premium of the quotation for the top type
  of each country in Cotton Outlook over the
  Cotlook A Index during 2006/07
• Usual world market price differences for grade
  compared to middling
• Usual world market price differences for staple
  length, relative to 1-3/32
• Actual 2005/06 classing data for WCA countries
  and most recent available data or estimates for
  ESA countries
• deduction of one cent per pound to reflect
  difference between sellers offering price and
  actual negotiated contract price.

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Estimated Average Premium over A Index (US
cents/lb), 2005/06
Source Gerald Estur quality survey
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Change in Price Premia for Top Lint Types,
mid-1990s to 2006/07
Source Gerald Estur quality survey
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Core Activities and Service Delivery Quality II

• Performance best in concentrated sectors
• major reduction in contamination in Zambia
• Zimbabwe has suffered since entry of new
  companies post-2001
• Variable in national and local monopolies
• management culture and regulatory effectiveness
  are key
• Poor in competitive sectors, especially Tanzania
• Two conditions for a sector to produce high
  quality lint
• ginners can control their supply chain
• ginners have incentives to achieve high quality
  lint
• Both fulfilled in concentrated sectors, but
• In monopoly systems, control over supply chain
  may be constrained by political requirement to
  buy all seed cotton at pre-set price
• In competitive sectors unregulated competition
  undermines ability of ginners to control their
  supply chain, whilst limited vertical
  coordination between independent ginners and
  exporters weakens ginners incentives to produce
  high quality lint

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Core Activities and Service Delivery Quality III

• Quality Improvement
• Major challenge for all sectors, across types
• Many sectors not exploiting comparative advantage
• Potential 10-20 price gain for some sectors
  through better quality management (given inherent
  fibre characteristics of African cottons)
• Tanzanias comparative advantage may lie more in
  low cost, modest quality cotton than high quality
• Local auction system as way to improve quality?

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Core Activities and Service Delivery Prices to
Farmers

• WCA price setting administered, panseasonal,
  panterritorial, announced before planting,
  purchase guaranteed at official price
• Move in recent years to pricing systems providing
  more linkage to world price and more flexibility
• Greater farmer voice in pricing decisions
• ESA (excl MZ, UG post-2003) price leadership or
  competition
• Indicator share of FOT price paid to farmers
  1995-2005
• Competitive systems (TZ, UG) best performers
  (68-70 of FOT)
• Concentrated good in post-reform years, but
  sharp drop since 2000s
• WCA monopolies very low in the 1990s, sharp rise
  in 2000s but in context of sector financial
  unsustainability

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Farmer Share of FOT Lint Price, 1995-2005
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Core Activities and Service Delivery Input
Credit and Extension Delivery

• Well developed in WCA single-channel systems and
  has permitted intensification
• But yield stagnation within these systems since
  mid-1980s
• To the contrary, highly competitive post-reform
  structures in TZ and UG led to collapse of input
  and extension systems
• Concentrated models (ZB, ZM) have performed
  better, but repayment adversely affected by new
  entry
• Overall, monopoly and concentrated sectors best
  able to ensure provision of inputs on credit and
  also to provide some level of extension advice
• Provision of these services is undermined by side
  selling in more competitive sectors

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Core Activities and Service Delivery Research

• Critical for Africas cotton sectors to improve
  international competitiveness and contribute to
  poverty reduction
• African sectors seem to be lagging behind many of
  their major global competitors in this critical
  area
• At best, weak linkages with sector types
• history exerts a strong influence over research
  performance (lags inherent in agricultural
  research )
• governments slow to allow private stakeholders to
  contribute to research management, so predicted
  advantage of concentrated sectors in demanding
  and/or organizing effective research not seen in
  practice
• Two new technologies potentially interesting for
  cotton growers in Africa over the near to medium
  term
• genetically modified (Bt) cotton
• low-volume herbicides

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Core Activities and Service Delivery
Valorization of by-products

• Value of cottonseed oil and cake 20 to 25 of
  the value of lint
• Potentially growing markets with world market
  demand for vegetable oil and protein on the rise
• Currently domestic markets more profitable
  (import substitution)
• Whether country is landlocked or not has big
  influence on price paid for cotton seed
• Cotton seed prices in Burkina and Mali should be
  higher
• Landlocked, high demand for cake from livestock
  sectors (but also smuggled oils and difficulty of
  product differentiation)
• High processing cost (high quality oils)
• Underdeveloped markets for oil

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Outcomes Yields, Crop Budgets and Returns to
Farmers

• Results confirm that performance on yield levels
  is
• Strongly related to performance on input
  provision and extension
• Heavily influenced by past investments (WCA)
• Yield performance in ESA is correlated with
  sector organization
• More concentrated systems (Zambia and Zimbabwe)
  achieve higher yields than more competitive
  models (Tanzania and Uganda)
• Crop budgets
• Much higher proportion of cotton producing
  households found in the higher producing groups
  in WCA than in ESA
• Weighted average returns to both family labor and
  to all labor are higher in WCA than in ESA
• Between 25 and 75 of cotton producing
  households (depending on the country) would be
  better off hiring out their labor than applying
  it to their own cotton plots

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Weighted Average Returns to Family Labor and All
Labor in Study Countries (US / day)
Source project focus group exercises
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Production Cost of Seed Cotton, incl Labour
(US/kg)
Source project focus group exercises
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Outcomes Cost Efficiency, Overall
Competitiveness, and Macro Impact

• Ginning costs
• Sharply lower in market based systems (Zambia,
  Zimbabwe, Tanzania) than in monopoly or hybrid
  systems (WCA, Mozambique, and Uganda).
• Total net cost from farmgate to FOT
• Lower in market based systems, be they
  competitive or concentrated (due to lower ginning
  costs, overheads and financial costs higher
  sales value of seeds)
• WCA monopolies perform especially poorly in terms
  of company efficiency
• WCA sectors are the least competitive barely
  breaking even (Cameroon) or generating large
  deficits (Mali and Burkina Faso).
• ESA sectors appear to be competitive in world
  markets
• No budget support in ESA, periodic bailouts of
  companies in WCA

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Estimated Average Ginning Costs at 2006 Capacity
Utilization Rates in Study Countries
Source company accounts (WCA), project
interviews (ESA)
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Outcomes Cost Efficiency, Overall
Competitiveness, and Macro Impact II

• Higher value added per ha in WCA than ESA
• Farm-level value added per kg of lint as high or
  higher in ESA than WCA
• Higher soil fertility
• Higher value added at ginning level in ESA than
  WCA (low or negative)
• Total value added (farm and ginning levels) per
  capita of total population reflects size of
  sector
• Burkina scores most highly

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Total Value Added per capita by Cotton Sector,
2006/07
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Realized Performance by Sector Type
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Conclusions Lessons from Reform

• The analysis has revealed strengths and
  weaknesses in various systems, particularly when
  one looks at them over a long time period.
• no one model has proven superior to all others in
  all respects over time, and
• none of the systems under review offers a fully
  satisfactory and sustainable response to the
  challenges of future competition in the world
  cotton market
• Structure matters, even if other factors may
  count as well good predictive capacity of the
  typology
• Clearly reform does not imply a movement from
  one stable set of rules of the game to another
  stable set
• These objectives are important, notwithstanding
  factors that are beyond the direct control of SSA
  governments and stakeholders by-products, such
  as
• the evolution of the euro/ exchange rate, and
• the slow progress in reducing market distortions
  due to OECD subsidies

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Conclusions Opportunities and Challenges for
African Cotton

• Some challenges are common to all SSA sectors
• Three major challenges
• Achieving greater value through improved quality,
  marketing, and valorization of by-products,
• Bridging performance and competitiveness gaps
  through farm-level productivity and ginning
  efficiency, and
• Improving the sectors sustainability through
  institutional development and capacity-building
  of stakeholders, as well as strengthening of
  governance structures and management systems

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Conclusions Summary of findings for particular
sector types

• National monopoly model
• has generated strong returns to very large
  numbers of farmers,
• but poor cost efficiency has undermined these
  sectors competitiveness
• Competitive sectors
• are cost efficient and pay attractive prices to
  farmers,
• but their inability to provide input credit and
  extension, or to raise quality makes them
  unlikely to make substantial contributions to
  poverty reduction
• Concentrated sectors
• have performed well in quality and service
  delivery (input and extension), have been more
  efficient than the monopolies, and have also
  generated attractive value added per capita while
  making the highest contributions to state
  budgets,
• but their performance on seed cotton pricing has
  been disappointing and they may be inherently
  unstable .

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Conclusions Ways forward for particular sector
types

• Monopoly systems
• Cost reduction from farm gate to FOT needs to be
  a top priority greater role for private
  companies to achieve this
• Price setting rules must continue to be reformed
• Inter-professional committees and farmer
  organizations need to continue to be developed,
  with special emphasis on the operational
  abilities of the latter
• Clear rules for evaluating and re-tendering
  concession areas need to be developed
• Reforms in research organizations to make them
  more responsive to inter-professional committees
• Allow investment in the oil sector to create more
  competition

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Conclusions Ways forward for particular sector
types (II)

• Concentrated sectors
• Key challenge is to develop appropriate
  regulatory regime that understands strengths and
  weaknesses of the concentrated model
• Concentrated sectors need barriers to entry
  licensing rules that specify capabilities and
  conduct of firms wishing to participate in the
  sector
• Given problems of relying entirely on the threat
  of entry to discipline incumbent firms, develop
  formalized price setting mechanisms to replace
  price leadership?

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Conclusions Ways forward for particular sector
types (III)

• Competitive sectors
• Key state role in sector coordination, but need
  to strengthen the accountability of regulatory
  bodies towards both ginners and farmers
• Regulatory bodies and/or ginners associations
  work with other actors (e.g. local government or
  donors) to develop long-term programs to enhance
  soil fertility or promote animal traction

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Conclusions Final Reflections on Sector Types
and Looking Ahead

• Some degree of convergence in the forms of cotton
  sector organization in Africa likely to happen
  over the next decade
• Increase in the number of local monopoly systems
  in the short/medium term?
• Transition to concentrated systems desirable, if
  regulatory challenges can be overcome
• More competitive systems are probably part of the
  long-term future in most countries
• Need more effective rural financial markets and
  farmers organisations first