Comparative analysis of organization and performance

of African cotton sectors: Learning from reform

experience

Presented on behalf of Research Team by

Colin 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

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 sector’s 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 country’s reform path

Better understand to better advise (or decide)

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

Zambia

Zim

’we

Moz

ambiq

ue

Tanzania

Mali

Cam

eroo

n

Malaw

i

B. Faso

U’n

da

Benin

West & Central Africa East & Southern

Africa

Case Study Countries

Zambia

Zim

’we

Moz

ambiq

ue

Tanzania

Mali

Cam

eroo

n

Malaw

i

B. Faso

U’n

da

Benin

East & Southern Africa

Case Study Countries

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

Zambia

Zim

’we

Moz

ambiq

ue

Tanzania

Mali

Cam

eroo

n

Malaw

i

B. Faso

U’n

da

Benin

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

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

Case Study Countries

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

Is competition allowed for the purchase of seed cotton?

Yes No

Market-Based Regulated

Are there many buying firms, or few?

Many Few

CompetitiveSystems

ConcentratedSystems

Is there more than 1 cotton buyer?

National Monopoly

Is each firm assigned an exclusive geographical area in which to buy

seed cotton?

Yes No

Local MonopolySystems

HybridSystems

No Yes

Location of Cotton Sectors within African Cotton Sector Typology

National Monopoly

Local Monopoly (“Concession”)

Concentrated, market-based

Competitive Hybrid

Cameroon

Mali Chad*

Senegal* (private)

Mozambique Burkina Faso

Côte d’Ivoire* Ghana*

Zambia Zimbabwe

Tanzania

Benin

Uganda

* Not included in this study

Performance Indicators and Expected PerformanceNational & Local

Monopolies Concentrated Competitive Hybrid

Process Indicators

Quality and Marketing Estimated average realized premium over Index A on world markets (US$/lb lint)

Medium High Low No clear prediction

PricingMean % of FOT price paid to farmers

Low if left to companies alone

Low High No clear prediction

a) % of cotton farmers receiving input credit, b) Adequacy/quality of input credit package, if provided

c) Repayment ratea) % of companies providing assistance

b) Qualitative assessment

Research # of varieties released and taken-up, past 10 years

High Medium Low No clear prediction

Intermediate Outcome Indicators

Yield Kg of seed cotton produced per hectare

High Medium Low No clear prediction

Company cost efficiency

Adjusted farm gate to FOT cost (US$/kg lint)

Low Medium High No clear prediction

Final Outcome Indicators

Farmer welfareReturns per day of family labor (US$/day)

Overall competitiveness

Ratio, total FOT cost to total FOT value

a) Total value added per capita b) Net budgetary contribution per capita

No clear prediction

No clear prediction

No clear prediction

Extension High Medium Low

Macro impact

No clear prediction

No clear prediction

Input provision LowMediumHigh

Type of Indicator Measured By

Expected Performance

No clear prediction

DataExisting 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

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 seller’s offering price and actual negotiated contract price.

Estimated Average Premium over A Index (US cents/lb), 2005/06

CROP EXPORT VALUE

-3 -2 -1 0 1 2 3 4 5

Benin

Burkina

Cameroon

Mali

Mozambique*

Tanzania

Uganda

Zambia

Zimbabwe

Theoretical Average Price minus Cotlook A Index (US cts/lb)

* Not quoted in Cotton Outlook

Source: Gerald Estur quality survey

Change in Price Premia for Top Lint Types, mid-1990s to 2006/07

Source: Gerald Estur quality survey

Change in Premium over Index A Received by Top Lint Type, by country, mid-1990s to 2006/07

-2

-1

0

1

2

3

4

5

6

Zambia

Cameroon

Moz

ambiq

ue

Burkin

a Fas

oBen

inM

ali

Uganda

Zimba

bwe

Tanza

nia

US

c/lb

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

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)

Tanzania’s comparative advantage may lie more in low cost, modest quality cotton than high quality Local auction system as way to improve quality?

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

1995-99

2000-05

1995-2005

Farmer Share of FOT Lint Price, 1995-2005

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

Core Activities and Service Delivery: Research Critical for Africa’s 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

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

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

Weighted Average Returns to Family Labor and All Labor in Study Countries (US$ / day)

0.00

0.50

1.00

1.50

2.00

2.50

US

$/d

ay

Returnsto FamilyLabor

Returnsto AllLabor

Source: project focus group exercises

Production Cost of Seed Cotton, incl Labour (US$/kg)

Source: project focus group exercises

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

US

$/k

g

Group 1

Group 2

Group 3

Group 4

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

Estimated Average Ginning Costs at 2006 Capacity Utilization Rates in Study Countries

0.00

5.00

10.00

15.00

20.00

25.00

ce

nts

/kg

lin

t c

ott

on

variable costs/kg of lint

f ixed costs/kg of lint

Source: company accounts (WCA), project interviews (ESA)

Outcomes: Cost Efficiency, Overall Competitiveness, and Macro Impact II

Higher value added per ha in WCA than ESAFarm-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

Total Value Added per capita by Cotton Sector, 2006/07

0

2

4

6

8

10

12

US

$ p

er c

apit

a

Value added I

Value added II

Realized Performance by Sector Type

National Monopolies Local Monopolies Concentrated Competitive Hybrid

Process Indicators

Quality and Marketing Estimated average realized premium over Index A on world markets (US$/lb lint)

Variable across countries

Low High Low Medium

PricingMean % of FOT price paid to farmers

Variable over time Low Variable over time High Variable

a) % of cotton farmers receiving input credit, b) Adequacy/quality of input credit package, if providedc) Repayment ratea) % of companies providing assistance

b) Qualitative assessment

Research # of varieties released and taken-up, past 10 years

Variable over time Low Variable Variable Variable

Intermediate Outcome Indicators

Yield Kg of seed cotton produced per hectare

HighVariable across

companiesMedium Low

Variable across countries

Company cost efficiency

Adjusted farm gate to FOT cost (US$/kg lint)

Low Low Medium HighVariable across

countriesFinal Outcome Indicators

Farmer welfareReturns per day of family labor (US$/day)

High, but … Low Medium MediumVariable across

countriesOverall competitiveness

Ratio, total FOT cost to total FOT value

Low High High MediumVariable across

countriesa) Total value added per capita b) Net budgetary contribution per capita

Macro impactVariable (value

added vs. budget)Medium High Medium

Medium LowVariable across

companies & over time

Variable across countries

Extension High Medium Low MediumVariable across

companies & over time

Type of Indicator Measured By

Realized Performance

Input provision MediumHigh

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

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 sector’s sustainability through institutional development and capacity-building of stakeholders, as well as strengthening of governance structures and management systems

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 .

Conclusions: Ways forward for particular sector typesMonopoly 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

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?

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

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