SUMMARY OF THE OUTLOOK FOR COTTON...3 Cotton Production to Recover in 2016/17 While Consumption Remains Stable...3

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1 COTTON : Review of the World Situation Discover Natural International Cotton Advisory Committee Fibres Initiative Volume 69 - Number 4 March-April 216 Table of Contents SUMMARY OF THE OUTLOOK FOR COTTON...3 Cotton Production to Recover in 216/17 While Consumption Remains Stable...3 Prices of Cotton and Competing Crops...4 Outlook for the 216/17 Season...5 Price Forecasts for the Coming Decade...7 Outlook for Cotton...7 Conclusion...8 Impact of Prices on Cotton Production in Two Regions of Africa...8 Background...8 Country-Specific Descriptions...9 Impacts on Production, Area, and Yield...12 Conclusion...13 WOMEN COTTON FARMERS: THE GENDER PERSPECTIVE WITHIN THE VALUE CHAIN IN ARGENTINA, BOLIVIA, COLOMBIA, PARAGUAY AND PERU...18 Introduction...18 Methodology...18 Results and Recommendations...18 Indicators for Measuring Progress Towards Empowerment...2 Tables Supply and Distribution of Cotton /16 Supply and Use of Cotton by Country /17 Supply and Use of Cotton by Country...16

2 ICAC SUPPLY AND DISTRIBUTION OF COTTON April 1, 216 Seasons begin on August 1 211/12 212/13 213/14 214/15 215/16 216/17 Est. Est. Proj. Proj. Million Metric Tons BEGINNING STOCKS WORLD TOTAL CHINA USA PRODUCTION WORLD TOTAL INDIA CHINA USA PAKISTAN BRAZIL UZBEKISTAN OTHERS CONSUMPTION WORLD TOTAL CHINA INDIA PAKISTAN EUROPE & TURKEY VIETNAM BANGLADESH USA BRAZIL OTHERS EXPORTS WORLD TOTAL USA INDIA CFA ZONE BRAZIL UZBEKISTAN AUSTRALIA IMPORTS WORLD TOTAL CHINA VIETNAM BANGLADESH INDONESIA TURKEY TRADE IMBALANCE 1/ STOCKS ADJUSTMENT 2/ ENDING STOCKS WORLD TOTAL CHINA USA ENDING STOCKS/MILL USE (%) WORLD-LESS-CHINA 3/ CHINA 4/ COTLOOK A INDEX 5/ / The inclusion of linters and waste, changes in weight during transit, differences in reporting periods and measurement error account for differences between world imports and exports. 2/ Difference between calculated stocks and actual; amounts for forward seasons are anticipated. 3/ World-less-China's ending stocks divided by World-less-China's mill use, multiplied by 1. 4/ China's ending stocks divided by China's mill use, multiplied by 1. 5/ U.S. cents per pound.

3 March-April SUMMARY OF THE OUTLOOK FOR COTTON Cotton Production to Recover in 216/17 While Consumption Remains Stable Cotton planting in Northern Hemisphere countries commenced. In 216/17, world cotton area is expected to expand by 1% to 31.3 million hectares, still well below the record of 36.2 million hectares reached in 211/12. From December 215 through February 216, international cotton prices as measured by the Cotlook A Index averaged 69 cents/ lb, which is the same level as a year ago. However, prices for competing crops during the same period have fallen, making cotton more competitive this year compared to last. World cotton production in 216/17 is projected to increase by Million hectares World Cotton Area and Yield Area Yield 5/6 7/8 9/1 11/12 13/14 15/16 Kg/ha %, to just under 23 million tons, as the world average yield is anticipated to improve by 4% to 732 kg/ha. In 216/17, India s area is forecast up 4% to 12.4 million hectares due to improved domestic cotton prices in 215/16 from continued government support and strong demand. Assuming yield is similar to the 4-year average of 522 kg/ha, production could reach 6.5 million tons in 216/17. On March 18, the Chinese government announced it was lowering the target price for cotton grown in Xinjiang, China s largest cotton-producing province, to 186 yuan/ton from 191 yuan/ton in 215 and 198 yuan/ton in 214. As a result, area is likely to contract by 1% to 3.1 million hectares and production to decrease by 1% to 4.6 million tons. Cotton area in the United States is projected to increase by 2% to 3.3 million hectares and production by 9% to 3.1 million tons. In 215/16, cotton production plummeted in Pakistan due to adverse weather, pest outbreaks and lower quality inputs resulting in the lowest average yield on record since 1998/99. In 216/17, cotton area in Pakistan may expand by 3% to nearly 3 million tons, and production is expected to jump 35% to 2.1 million tons as yields recover. After declining by 2% in 215/16, world cotton consumption is anticipated to remain stable at 23.9 million tons. Consumption in China, the world s largest consumer of cotton, is projected to decrease by 5% to 6.8 million tons. Higher wages and domestic cotton prices, particularly in comparison with polyester prices, have made cotton spinning less attractive, with yarn imports from lower cost countries like Vietnam filling in the gap. In 216/17, Vietnam s cotton consumption is forecast to rise 16% to 1.3 million tons, making it the fifth largest consumer. Consumption in Bangladesh, the sixth largest, could increase Price of Cotton Relative to Competing Crops at Planting Time* in North Hemisphere ( ) Price ratio Cotton Production Brazil 14/15 15/16 16/17 Pakistan USA 4. China. Maize Soybeans Rice Sugar Wheat Maize, soybeans, rice: February-March average (except for 216: February Ratio). Wheat: previous September-October average. India Million tons Cotton (ISSN ) is published every two months by the Secretariat of the International Cotton Advisory Committee, 1629 K Street, NW, Suite 72, Washington DC. Editor: Rebecca Pandolph <rebecca@icac.org>. Desktop publishing: Carmen S. León. Subscription rate: $245. (hard copy); $2. (electronic version). Send address changes to COTTON, 1629 K Street, NW, Suite 72, Washington DC Copyright ICAC 216 No reproduction is permitted in whole or part without the express consent of the Secretariat.

4 4 COTTON Cotton Consumption Bangladesh 14/15 15/16 Vietnam 16/17 Million tons 25 2 World Ending Stocks Rest of World China Turkey 15 Pakistan India China Million tons 5/6 7/8 9/1 11/12 13/14 15/16 by 1% to 1.2 million tons. After several seasons of growth, cotton mill use in India and Pakistan contracted in 215/16 due to weaker demand. However, India s consumption is projected to rise by 4% to 5.5 million tons in 216/17 while in Pakistan demand is expected to increase by 1% to 2.2 million tons. After declining by 3% in 215/16, world cotton trade is expected to recover by 1% to 7.5 million tons in 216/17, as consumption grows in import dependent countries and production rebounds in major exporting countries. Vietnam and Bangladesh are likely to be the two largest importers of cotton in 216/17, with import volumes expected to rise by 25% to 1.4 million tons and by 5% to 1.1 million tons, respectively. China, once the world s largest importer of cotton, could see imports fall by 13% to 936, tons as the government continues to restrict import quotas. Exports from the world s largest exporter, the United States, are projected to increase by 1% to 2.2 million tons. However, exports from India, the second largest, are forecast to decline by 13% to 1 million tons as expanding mill use makes less cotton available for export. In 215/16, world ending stocks are expected to shrink by 8% to 2.3 million tons. The growth in cotton production while cotton consumption remains stable means that the reduction in stocks in 216/17 will likely be smaller. World ending stocks are projected to fall by 5% to 19.4 million tons. Assuming that sales from its official reserves are successful, China s ending stocks are forecast to decrease by 7% to 12 million tons by the end of 215/16 and by 1% to 1.9 million tons by the end of 216/17 Prices of Cotton and Competing Crops By Rebecca Pandolph, ICAC Many farmers in the Northern Hemisphere, which produces about 9% of the world cotton crop, have already made their planting decisions by the end of March. The area devoted to cotton is expected to increase by 1% to 31.3 million hectares in 216/17. Although cotton prices in 215/16 remain below the levels observed from 21/11 until 213/14, prices for many competing crops have fallen during the current season. Maize, wheat, soybeans, rice, sorghum, and sugar are considered the main crops competing for area with cotton, and their prices are measured by commonly accepted indicators published by the World Bank. Like cotton, many of the competing crops have experienced lower prices due to excess stocks. This article describes the trends in price competition between cotton and these alternative crops in the current season and in the coming decade, based on currently available forecasts. 1 It also examines the potential impact on cotton area in the coming decade. The Cotlook A Index is highly correlated with competing crop prices. Macroeconomic shocks, such as the Great Recession in 28/9, and weather phenomena usually affect the supply-demand balance of different commodities in the same direction, leading to correlations in their prices. The World Bank index of agricultural prices climbed from 79 in December 28 (21=1) to 13 in July 211. It declined in the following years, reaching 84 in February 215. International cotton prices rose and fell more markedly than other commodities in the early 2s, though they followed the same trend as other agricultural crops during the mid- 1) Unless otherwise specified, this article refers to international commodity prices that are unadjusted for inflation.

5 March-April s. However, international cotton prices did not rise as quickly as other agricultural crops in mid-28. In July 21, international cotton prices began their rapid ascent, reaching a record $2.3/lb in March 211 before falling to $1.14/lb in August 211, showing greater volatility than other crops. Cotton prices continued to fall until reaching $.82/lb in June 212 and averaged $.83/lb for the remaining months of 212. In 213/14, they averaged $.91/lb, but in 214/15, the season-average price of cotton fell 22% to $.71/lb. Furthermore, international cotton prices from August 215 through February 216 declined by 2 cents to $.69/lb. Outlook for the 216/17 Season Maize The United States is the largest exporter of maize, accounting for 37% of world exports in the year ending September and U.S. maize prices (no. 2, yellow, f.o.b. US Gulf ports) are commonly used as an indicator of world prices. In the 2s, maize prices averaged $126.8/ton. In the last five years, maize prices have climbed to an average of $243.4/ ton, peaking at $333/ton in July 212 as severe drought in the United States threatened the maize crop that year. Global maize production exceeded consumption in the last two seasons due to the accumulation of stocks in China and, to a lesser extent, in the United States and Brazil. In 213/14, maize prices dropped by 32% to an average of $28/ton and in 214/15, prices fell by 17% to $172/ton. The average price of maize for the first seven months of 215/16 was $164/ton. Maize prices averaged $16.4/ton in January-February 216, down 8% from the January-February 215 average of $174.2/ ton. Maize is one of the main competing crops with cotton in the four largest cotton-producing countries as well as in many West African countries and Turkey. The ratio between the Cotlook A Index and maize prices reached a high of 17.4 in March 211, the second highest level in the last 15 years, before falling to 5.5 in November 212, the lowest level in 15 years. The ratio averaged 1.5 between February 2 and February 216. In January-February 216, the average ratio was 9.3, making cotton more attractive to plant than during the corresponding period a year earlier when the ratio was 8.7. Wheat Wheat prices (no. 2, hard red winter, export price delivered at the US Gulf port) averaged $259.7/ton during the last ten years. Prices fell by 64% from a peak of $439.7/ton in March 28 to $157.1 in March 21. Prices fell to an average of $289/ton in 211/12, but rose to $332/ton in 212/13. However, wheat prices fell by 8% to $36/ton in 213/14 and by a further 23% to $237/ton in 214/15, as consecutive seasons of bumper harvests weighed on prices. By the end of 215/16, world stocks of wheat are expected to reach a new record high. International prices for the first seven months 21 = Price Indices: Wheat, Maize, Cotton Jan-6 Jan-9 Jan-12 Jan-15 * Source: World Bank Wheat Maize Cotton of the season averaged $175/ton. Monthly prices decreased during the first two months, but have subsequently been fairly stable. In September to October 215, wheat prices averaged $173/ton, which is 3% lower than the prices for the same period in 214. The ratio between the Cotlook A Index and wheat prices dropped from 9 in September-October 21 to 5 in September-October 212. The ratio for the September- October period averaged 7 in the last 15 years. The price ratio of cotton to winter wheat in September-October 215 was 5.7, down from 6 during the corresponding period a year earlier. Rice Rice prices (5% broken, white rice f.o.b. Bangkok) nearly quadrupled in the 2s, increasing from $241/ton in January 2 to a high of $97/ton in April 28. Prices then fell and ended at $532/ton in December 28. Prices remained elevated in 29, averaging $555/ton, before falling to $489/ ton in 21. Rice prices recovered to an average of $553/ton in 211 and 212, but declined in the last two years. In the first six months of 214, rice prices averaged $419/ton before increasing to $445/ton in August 214. Rice prices averaged $412/ton from August 214 to July 215. In August 215, prices fell by 5% to $373/ton. Prices fell again in September by 4% to $357/ton before recovering by 4% to $373/ton in October 216. Over the next two months, prices decreased slightly to an average of $366/ton. In January-February 216, rice prices averaged $377/ton due to steady demand and stable exchange rates. Rice is one of the main crops competing with cotton in China and India. The price ratio of cotton to rice peaked at 1.3 in March 211 and then fell by 71% to 3 in June 212. The price ratio remained below the 15-year average of 4.7 until March 214, when it rose to 5.1. The average ratio for the 214/15 season was 3.8. However, in August 215, the ratio rose to 4.2. Between September 215 and January 216, the average was unchanged, but fell to 3.8 in February 216. The price ratio for January-February 216 was slightly higher 2) 214/215 Export Statistics: Quick Reference Guide, U.S. Grains Council, U.S. Grains Council. Web. Mar. 28-Apr. 1, 216, default/files/15usgc-37_ar%2export%2stats_fnl.pdf.

6 6 COTTON Price Indices: Rice, Sorghum, Cotton 21 = 1 25 Rice Sorghum Cotton Price Indices: Soybeans, Sugar, Cotton 21 = 1 25 Soybeans Sugar Cotton Jan-6 Jan-9 Jan-12 Jan-15 Source: World Bank Jan-6 Jan-9 Jan-12 Jan-15 Source: World Bank at 3.8, making cotton prices relatively more attractive when compared to the January-February 215 ratio of 3.7. Sorghum Sorghum has advanced in popularity in recent years due to growing demand, tolerance to drought, and low planting costs. World production and consumption of sorghum has grown significantly since 212/13, driven in large part by increased demand from China for use as feed. The United States is the largest exporter of sorghum, accounting for 74% of world exports in the season ending September and U.S. sorghum prices (no. 2 milo yellow, f.o.b. Gulf ports.) are considered to be a good indicator of world prices. Sorghum prices averaged $127/ton from 2 to 29. In October 21, prices rose to $21/ton, up 9% from the previous month, averaging $269/ton in 211/12 and $274/ton in 212/13. Although prices decreased by 22%, to an average of $214/ ton in 213/14, they remained well above the average that prevailed from 2 to 29. In 214/15, the average price fell by just 1% to $211/ton, which was a significantly smaller decline than those experienced by cotton and other competing crops. Prices decreased by 16% to $176/ton during the first seven months of 215/16 as demand weakened. Sorghum competes with cotton in Australia, the United States, and several African countries, including Burkina Faso and Mali. The ratio between the Cotlook A Index and sorghum prices reached a high of 19 in March 211 before falling to 6.2 in November 212. The season-average ratio in the last 15 years is 1.3, but has remained below this point since 21/11. In January-February 216, the average ratio rose to 8.4, making cotton more attractive to plant than during the corresponding period of the previous year, when the ratio was 6.4. Soybeans Soybean prices (US, c.i.f. Rotterdam) climbed steadily from $262/ton in January 25 to $634/ton in July 28. By the end of 28, prices had fallen to $36/ton. Prices climbed to $53/ton by June 29 and remained steady over the next three years, averaging $495/ton. Strong demand relative to production pushed the average price of soybeans up 6% to $574/ton in 212/13, but prices fell in the next two seasons as world stocks accumulated due to large harvests in the major producers. In 213/14, the average price of soybeans fell by 7% to $536/ton, and in 214/15, it declined by 22% to $419/ ton. After increasing to $45/ton in July 215, prices fell by 6% to $381 and by 3% to $368/ton in August and September 215. In October 215, prices recovered by 2% to $376/ ton before returning to $368/ton in November 215. In the next three months, average monthly prices followed this alternating trend of rising then falling. In January-February 216, soybean prices averaged $368/ton, down 11% from the average price in January-February 215. Soybeans compete with cotton in both India and the United States, the two largest cotton-exporting countries. In the last 15 years, the ratio of the Cotlook A Index to soybean prices averaged 4.4 and reached its highest point in March 211 at 9.2. Since March 211, the price ratio fell to a low of 2.7 in August 212. After increasing to 4.1 in April 213, the ratio has ranged between 3.3 and 4.3 in 213 and 214. As the price ratio returned to 4.1 in January- February 216, cotton has become more attractive to plant this spring compared to last spring, when the ratio was 3.6. Sugar The price of sugar (International Sugar Agreement daily price, raw, f.o.b. Caribbean ports) averaged 37 U.S. cts/kg since January 25, and 46 U.S. cts/kg from January 21 through December 214. In July 29, the monthly price rose above 4 U.S. cts/kg for the first time and remained elevated for the next nine months. Prices fell to an average of 36 U.S. cts/kg from April to July 21, but again rose to over 4 U.S. cts/kg from August 21 to March 213. However, from April 213 onwards, prices have remained below 4 U.S. cts/kg except 3) 214/215 Export Statistics: Quick Reference Guide, U.S. Grains Council, U.S. Grains Council. Web. Mar. 28-Apr. 1, 216, default/files/15usgc-37_ar%2export%2stats_fnl.pdf.

7 March-April in October 21 when the average price was 41 U.S. cts/kg. From August 214 to July 215, prices fell by 16% to 32 U.S. cts/kg compared with prices during the same period a year earlier. The average price from August 215 to February 216 was 3 U.S. cts/kg, compared with 35 U.S. cents/kg during August 214 to February 215, as the currency in the largest sugar exporter, Brazil, depreciated against the U.S. dollar and weakened international prices. Pakistan is one of the main countries where cotton competes with sugar. In the last 15 years, the ratio of the Cotlook A Index to world sugar prices peaked in January 24 at 5.9 before declining to 1.5 in May 26. Another peak occurred in April 211 when the ratio reached 4 before falling below its 15-year average of 2.7 in the following years. In August 215, the ratio reached rose to 2.9, but quickly fell in the following months. In January-February 216, the ratio averaged 2.3, making cotton somewhat more attractive to plant compared to the same period last year when the ratio was 2.1. Price Forecasts for the Coming Decade In considering the long-term prospects for cotton area, expected prices for competing crops can provide some insight. Both the World Bank and the Organization for Economic Cooperation and Development in conjunction with Food and Agriculture Organization (OECD/FAO) provide long-term commodity price forecasts for cotton, wheat, maize, rice, and sugar. 4 The World Bank also develops long-term price forecasts for soybeans. Many crops, including cotton, have accumulated stocks in the past few seasons, causing prices to fall significantly. However, both organizations expect prices for maize, wheat, and cotton to recover from 216 onwards. The OECD/FAO forecasts prices for rice to recover in 216, and increase by an average of 2% a year. However, the World Bank predicts rice prices to recover in 217 and growth in annual prices to average just 1%. While there is variation in annual price forecasts for sugar, both organizations predict prices to fluctuate until the end of the forecast period (224 for OECD/FAO, 225 for the World Bank), though the general trend will be modestly upward. The World Bank projects that nominal soybean prices will increase by about 3% a year from 217 to 225. Prices for soybeans, are expected to be higher in the next ten years compared with prices in the previous decade, while prices for sugar are anticipated to remain roughly unchanged. However, prices for maize and rice are anticipated to be lower in the coming decade than in the recent past. With regard to cotton, the World Bank forecasts that the average price will be higher than in the last ten years. However, the OECD/FAO projects cotton prices to be lower than the last decade, but higher than the long-term average of 7 U.S. cts/lb. For wheat, the World Bank predicts world Ratio Ratio OECD/FAO Price Ratio Forecasts (Cotton to Competing Crops) Wheat Maize Rice Sugar World Bank Price Ratio Forecasts (Cotton to Competing Crops) Wheat Maize Rice Sugar Soybean prices to be lower than last decade, while the OECD/FAO forecasts wheat prices to be higher. In real terms, the World Bank predicts that prices for soybeans, maize, sugar, and wheat will grow by an average of 1% a year from the start of the forecasting period and gains in the real price for cotton to average 2% a year. On the other hand, the World Bank expects prices for rice to decline by 1% a year in real terms. OECD/FAO predicts inflation to have a more negative effect on prices for wheat, maize, and sugar with prices for these crops declining by an average of 1% a year in real terms. However, the OECD/FAO predicts real prices for rice to remain stable and for cotton to increase. 5 Outlook for Cotton Based on price forecasts by the World Bank and OECD/FAO, the price ratios of cotton compared to all competing crops are expected to increase over the projection period. However, the gains in cotton prices relative to competing crops are 4) Prices discussed here are in nominal U.S. dollars. 5) World Bank Group World Bank Commodities Price Forecast (constant US dollars), January. World Bank, Washington, DC. Web. Mar. 29-Apr. 1,

8 8 COTTON modest, particularly for soybeans and maize. These forecasts suggest that throughout the coming decade, cotton prices could remain moderately more attractive relative to those of competing crops. However, these forecasts are based on the expectation that cotton prices will grow modestly in the coming decade despite excess stocks. The Secretariat is now forecasting a season-average Cotlook A Index of 72 U.S. cts/lb in 216/17 ($1587/ton). This is similar to the price forecast for the World Bank ($1583/ton), but higher than for the OECD/ FAO ($1397/ton) for the same season. If the lower forecast is realized, then cotton prices would be much less attractive than expected relative to competing crops in 216/17, which could discourage farmers from planting cotton in some regions of the world in 217/18. If the prices forecasts after 217 hold, then the price of cotton may be more attractive than competing crops, which could encourage some expansion in area over the next eight to ten years. However, comparing world prices of cotton with those of competing crops is not always helpful when projecting future cotton plantings. In some cotton-producing regions, such as China and Central Asia, commodity prices paid to farmers do not always follow world price trends. In West Africa, there are few viable alternatives to cotton and therefore the impact of competing crop prices on cotton plantings is limited. Conclusion In February-March 214, the prices of many competing crops fell against the price of cotton, which encouraged farmers to plant more cotton in 214/15, and world area grew by 4% to 34 million hectares. However, by February-March 215, cotton prices had fallen much further than competing crops, leading farmers to switch to more profitable competing crops, and world area declined by 9% to 31.2 million hectares. In February 216, the price of cotton has remained stable compared with declining prices for most competing crops. Cotton prices saw a marked improvement against prices for both maize and sorghum. The ratio of cotton to soy and rice increased modestly in February 216 compared to February- March 215. The ratio of cotton to sugar was unchanged. The recent gain in the price attractiveness of cotton may attract some farmers to plant more cotton in 216. In the long term, nominal cotton prices are expected to rise faster than prices for competing crops, and cotton area may expand modestly over the next decade with rice most likely to lose area to other crops, including cotton. References Five-year Global Supply and Demand Projections, International Grains Council, December 215, Web. Mar. 28-Apr. 1, igc.int/en/downloads/grainsupdate/igc_5yearprojections215.pdf. OECD and FAO. (215), OECD-FAO Agricultural Outlook 215, OECD Publishing, Paris. DOI: World Bank Group Commodity Markets Outlook, January. World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3. IGO. publicdoc/216/1/ /cmo-jan-216-full- Report.pdf. World Bank Group World Bank Commodities Price Forecast (nominal US dollars), January. World Bank, Washington, DC. Web. Mar. 29-Apr. 1, pubdocs/publicdoc/216/1/ /cmo-jan-216- Historical-Forecasts.pdf. Impact of Prices on Cotton Production in Two Regions of Africa By Rebecca Pandolph, ICAC Cotton is grown in over thirty countries in Africa. While production has generally trended upwards since the 196s, it has grown much faster in Francophone Africa than in Southern and Eastern Africa. Many countries have adopted price schemes of various sorts to encourage farmers to expand cotton plantings. Prices paid to producers have a direct impact on area, but a number of countries also provide financing or other support for inputs, which affects yield and improves returns to farmers. This paper examines the reasons for the different growth rates and the impact different price schemes have on area, yield and production in these two regions of Africa. Background Since independence, the structure of cotton sectors in many African countries has changed over time, with many moving from a state-dominated sector towards greater liberalization. 6 This past has influenced how the cotton sector has evolved in each country and the structure influences the type of price-setting mechanism adopted. During the 199s, most Francophone African countries introduced new producer price-setting mechanisms aimed at increasing the linkage between the world price and prices paid to producers as part of a series of other reforms. A number of these countries shifted 6) For further background on the various cotton sectors in Africa and their evolution see: Tschirley, David; Poulton, Colin; Labaste, Patrick. 29. Organization and Performance of Cotton Sectors in Africa: Learning from Reform Experience. Agriculture and Rural Development. World Bank. World Bank. openknowledge.worldbank.org/handle/1986/264 License: CC BY 3. IGO.

9 March-April to prices set jointly by producers and cotton companies in the 2s, with stabilization funds established to prevent prices from dropping too low. Mismanagement and unsustainable producer prices led to the depletion of many of these funds, particularly after 24 when world cotton prices plummeted. In contrast to Francophone African countries, where the state shaped the cotton sector before and after independence, the cotton sector in Eastern and Southern Africa countries was initially shaped by commercial or missionary entities, with government involvement increasing over time after independence. In the 199s, many Eastern and Southern Africa countries also underwent reforms, but the pricesetting mechanisms tended to be more closely linked to the world market and more flexible than in Francophone Africa. They did not have any stabilization funds, which prevented governments from incurring deficits to cover losses in such funds, but also did not provide more stable prices. Cotton price schemes in both Francophone African and Eastern and Southern African countries have continued to evolve since the 199s to better adapt to the changes in the global market place, with prices becoming increasingly linked to the international market. Given that these countries are not large exporters on a global scale, they are generally price takers with little influence on international prices. As such, the volatility in cotton prices and exchange rates have shaped the evolution of price schemes over time, with each country making choices based on their sector s history and perceptions of the current market. One such adaptation came after the extreme price volatility experienced between 29 and 211. A few Francophone African countries established smoothing funds, which play a similar role in helping to smooth price variations to that of the stabilization funds, but the management and operation of these funds has been taken on by independent banks. While variations exist in structure and price mechanism among the countries, countries within the same region tend to share broad characteristics. In general, there are fewer cotton companies in Francophone African countries than in Eastern and Southern Africa and most tend to set a minimum price, based in part on current international prices, before the start of sowing. As a result, much of the price risk in these countries tends to be carried by the cotton companies instead of producers. However, both cotton companies and producers are exposed to price fluctuations between seasons, with countries adopting different strategies to handle the changes. Togo, Ghana and, at times, Côte d Ivoire offer an additional bonus to farmers if prices are higher at the end of the season compared with the time when the price was set. Mali has a support fund that supplements farmer returns when international prices fall below the set price, while both Burkina Faso and Cameroon have smoothing funds. In Eastern and Southern African countries, there tends to be a larger number of cotton companies and gins, which increases competition, and prices are generally set before the marketing of the season s crop International Prices and Regional Area US cents/lb Francophone Africa Area Eastern and Southern Africa Area A Index (previous season) /1 5/6 1/11 15/16 Million hectares 3, 2,5 2, 1,5 1, based on trends in the international market. In some cases, a price is set just before sowing, but with the flexibility to change at the start of marketing if international prices have altered significantly. Many of these countries set a base price using a formula or negotiations between different participants in the cotton sector. In these countries, the producers take on more price risk and also tend to base planting decisions on the prices and returns from the previous season. Many countries in both regions use some kind of contract farming, wherein a cotton company or companies, either private or public, provide inputs directly or financing to purchase inputs to producers, who then agree to sell back a set volume of cotton to the company. Contracting companies can be a single entity or several. In some countries with multiple companies, a company may be assigned a specific area or zone from which it can procure cotton. In other countries, a company that wishes to contract with farmers is registered or licensed with a state agency, but is then free to form contracts with any farmer regardless of location. However, side-selling or side-marketing, where farmers that obtained inputs or financing from one cotton company sell their crop to another company after the harvest, has been an ongoing issue under these arrangements. This becomes less of an issue In countries where there is a strong relationship between farmers and the cotton company, which in turn makes cotton companies more willing to offer riskier financing, such as for purchase of harvesting equipment. Such arrangements tend to be particularly beneficial to producers, since cotton companies usually obtain better interest rates than an individual grower. Country-Specific Descriptions This section looks at the price-setting mechanism used in various countries from the two different regions to better understand their differences. It also discusses the support that countries provide to producers for financing or obtaining inputs. Support for the purchase of inputs can improve farmers returns by reducing the cost of production. 5

10 1 COTTON Francophone African Countries Burkina Faso Since 1996, cotton farmers in Burkina Faso have been organized into producer groups that are responsible for the distribution of inputs, management of short- and medium-term credit, and marketing of seedcotton. These groups are brought together under the National Union of Cotton Producers in Burkina (UNPCB). Cotton companies are organized under the Professional Association of Cotton Companies (APROCOB). These companies provide inputs and extension services to producers, purchase and gin seedcotton and add value to cotton by-products. These two associations are gathered together in the Inter-branch Cotton Association of Burkina, which sets the purchase price for seedcotton and the transfer price for inputs, while also overseeing a smoothing fund. The smoothing fund was established in March 26 to minimize year-to-year price fluctuations. The smoothing mechanism guarantees a floor price by providing funds for payments to producers when world prices fall below the announced price. The floor price is fixed between March and April and is indexed to international cotton prices and adjusted by exchange rate projections. When sales prices for lint exports are higher than the announced fixed prices, some of the additional earnings are added to the fund. Once the fund is replenished, a bonus may be paid 14 months after the sale of the lint on the international market, with 6% distributed to farmers and 4% to be shared among the cotton companies. If production rises above 5, tons of seedcotton, then the farmers share increases to 62%. The Bank of Africa oversees the management and operations of the smoothing fund. There is also a cotton input fund that helps to subsidize input costs for both producers and cotton companies Francophone Africa Area and Prices CFA franc/kg Area Average price in Francophone Africa (current season) /1 5/6 1/11 15/16 Million hectares Côte d Ivoire The sector consists of a joint trade organization (INTERCOTON) that includes an association of ginning operators and an association of producers. Reforms to the cotton sector in Côte d Ivoire were initiated in 213, after years of socio-military conflict that impeded development of the cotton sector, and came into effect for the 214/15 season. An Input Committee was created to preside over the Cotton and Cashew Council, which is in charge of determining the sales price of inputs to farmers and ensures that all farmers have access to quality inputs at the lowest possible cost. INTERCOTON is responsible for the actual distribution of inputs to the farmers. Difficulties with the fixed price mechanism that was in place since 28 gave impetus to a study for a new arrangement that would take into account the costs of the sector participants (freight, ginning, etc.) and remunerate the different participants fairly. Under the current price scheme a price is announced to farmers before planting starts, and in some years a bonus may be paid to farmers after the crop is harvested depending on the availability of funds and export earnings. The new price setting mechanism will include a smoothing fund and is intended to guarantee that growers receive at least 6 percent of the CIF price, with the remaining 4 percent split among other stakeholders for handling costs and compensation. The new price mechanism is expected to go into effect in 216/17. Cameroon The cotton industry in Cameroon involves two main actors: cotton growers, organized under the umbrella of the National Confederation of Cotton Producers of Cameroon (CNPCC), and the Société de Développement du Coton du Cameroun (SODECOTON). Since 1973, cotton growing in Cameroon has been managed by SODECOTON, a parastatal tasked with promoting and managing the cotton industry and other staple crops. The Government plays both a sovereign and regulatory role through the Ministry of Agriculture and Rural Development, the supervisory ministry for SODECOTON. The government uses a revolving fund to provide working capital for purchases of inputs and to support smallholder farmers access to fertilizer. SODECOTON encourages farmers to harvest their crop by the end of December, in order to ensure that the cotton is of good quality and can sell for higher prices. In general, the producer price is set before sowing. A price risk management fund was created in cooperation with producers with the objective of supporting the sector by covering for price increases even when international prices are low and alleviating the effects of exogenous shocks. However, ongoing low international prices in the last two seasons have shrunk the amount of funds available for the purchase of cotton, which in turn have caused delays payments to farmers or pushed back the timing of purchases. In such cases, farmers may be tempted to sell cotton to buyers in neighboring countries where funds for payment are readily available, thereby exacerbating SODECOTON s financial situation. Eastern and Southern Africa Countries Kenya The Cotton Development Authority (CODA), formed in 26, is the regulatory body that promotes, coordinates, and monitors activities in the cotton sector to enhance transparency.

11 March-April Kenyan Shilling/kg 1,2 1, Kenya Cotton Area and Prices Area Average prices (previous season) /1 5/6 1/11 15/16 Thousand hectares Following the establishment of CODA, a seedcotton price formula, based on recommendations from growers, ginners and textile manufacturers, was introduced to inform cotton sector participants of the expected price for the season. The pricing model uses world cotton prices as a benchmark for lint and then derives a minimum producer price based on the expected ginning outturn ratio, profit margins for ginners, freight costs, exchange rates, and ginning costs. The formula establishes a minimum price to be paid to farmers. In 214, CODA was merged with the Kenya Sisal Board to form the Fibre Crops Directorate, under the Agriculture, Fisheries and Food Authority of Kenya. The Fibre Crops Directorate has taken on the same role as CODA in regulating the cotton sector. Additionally, in order to promote transparency, all seedcotton purchasers are registered with the Fibre Directorate. In the last ten years, Kenya s government has also supported smallholder farmers by providing them with planting seeds for cotton, research, and extension services. Irrigation schemes have also been rehabilitated, though cotton is still primarily grown on rainfed land. Additionally, the government has worked with banks to develop products for advancing credit for targeted inputs to support smallholder farms, though the high interest rates have led to low uptake by farmers. Zimbabwe Nearly all cotton in Zimbabwe is grown under a contract arrangement wherein ginners and merchants that are members of the Cotton Ginners Association provide input financing to farmers and are licensed by the Agricultural Marketing Authority (AMA). The AMA is Zimbabwe s agricultural sector regulator and licenses cotton companies to participate in the production and marketing of seedcotton. Cotton companies must be licensed every year by AMA. The responsibilities of AMA include ensuring that the marketing of seedcotton is orderly and farmers in a contract do not sell cotton to non-contracted ginners or other buyers. At the start of the season, representatives of the cotton sector, including the AMA, farmers, and the Department of Agriculture, decide on the input package and financing that will be provided to farmers for that season. AMA requires contractors to sign contracts with individual farmers that specify the area the contractor will support, the volumes they intend to purchase, and the financing for inputs will be made available to farmers. These registered contractors supply inputs like seed, fertilizers and chemicals to contracted famers on loan. In addition, the contractors are also responsible for providing extension services. Zimbabwe has around 12 ginning companies that are licensed contractors and operate around 18 gins spread across the country in all producing areas. Mozambique Mozambique uses a regional concession system for cotton production and pricing. Private companies are given exclusive rights to a cotton concession area in which they promote cotton production, supply all inputs on credit and purchase seed cotton. Two meetings are held to set prices. The first occurs before the start of planting and the second occurs just before the beginning of marketing of the crop. Depending on movements in international prices, the price paid to producers may change between these two meetings, thus exposing farmers to price risk. Currently, the cotton sector is considering a price stabilization mechanism to be implemented in 216, at the earliest, which aims to reduce producers exposure to price volatility and ensure the long-term, sustainable development of Mozambique s cotton sector. Uganda In 1994, Uganda began liberalizing its cotton sector, by opening seedcotton marketing and ginning to competition from local and foreign companies in the private sector. In addition, the Cotton Development Organization (CDO) was established to monitor the production, processing, and marketing of cotton in Uganda. Under the Cotton Development Act, CDO sets an indicative price to be paid to farmers, gins and for exports, as well as monitoring prices actually paid to these groups. The indicative price is the lowest price that can be paid and is based on current international prices, the volume of production for the season, demand, and costs for transport and ginning. Seedcotton is sold to gins through agents or farmers groups who are responsible for procuring, storing, sorting and delivering the crop. Gins often advance funds to the agents to cover the some or all of the costs associated with transporting cotton from the farm to the gin. In addition, gins are required to set aside a set volume of cotton seed that is then treated by CDO and distributed freely to farmers for planting in the next season. These additional costs are deducted from the price paid to the farmer, so the actual farm gate price is usually not much higher than the indicative price. Prices are announced during planting and do not take into account the value of cotton seed, which by weight is much more significant than lint. 7 7) Ahmed M., Ojangole S., 212. Analysis of incentives and disincentives for cotton in Uganda. Technical notes series, MAFAP, FAO, Rome. < cdouga.org/wpcontent/uploads/213/1/uganda_technical_note_cotton_en_jan213.pdf>

12 12 COTTON Tanzania Cotton Area and Prices Tanzanian Shilling/kg Thousand hectares 1,2 6 Area 1, 5 Regional Cotton Area Million hectares 3. Francophone Africa Eastern and Southern Africa Average price (previous season) 1.5 /1 5/6 1/11 15/16. 5/6 7/8 9/1 11/12 13/14 15/16 Tanzania The Tanzania Cotton Board (TCB) performs regulatory functions within the cotton sector on behalf of the government. Its duties include ensuring adherence to cotton farming procedures and regulations, ensuring a steady supply of inputs, maintaining a level playing field for the cotton business companies and collecting, refining and disseminating information to stakeholders. The TCB is required by the Cotton Industry Act (21) to convene a meeting in consultation with stakeholders before the season opens, in order to negotiate an indicative seed cotton price based on market forces. The Tanzania Cotton Growers Association, the Tanzania Cotton Association (comprised of ginners and buyers), the Ministry of Agriculture, Food Security and Cooperatives, the Cotton Development Trust Fund and the TCB all participate in negotiations on the indicative price. The participants consider the costs to farmers and ginners and international prices when determining the indicative price. In 214, a stabilization fund was created to help farmers repay loans when prices fall below a certain level. Price announcements are often delayed by lengthy negotiations, which contributes to large fluctuations in production volumes as farmers only information at planting time is the previous season s price. After several pilot programs, Tanzania extended contract farming throughout the country in 211/12 in an arrangement involving 35 ginning companies that contract with farmer business groups representing around 7 to 75% of all cotton farmers. Ginners supply inputs on credit to farmers, who are contracted to sell back a set volume to the ginner at or above an indicative price. In recent seasons, the number of cotton buyers that are licensed to enter into contracts with farmers has slowly declined as a result of the stiff competition for a relatively small volume of production, high farm gate prices relative to the international prices, and difficulties in the implementation of contracts. Impacts on Production, Area, and Yield The type of price mechanism and exposure to risk influences producers decisions on how much area is planted with cotton. The type of price-setting mechanism that is adopted affects which cotton sector participants are exposed to price risk and the extent of their exposure. As African countries increasingly align prices to the global market, interseasonal risk has increased, since most countries are price takers on the international cotton market. However, the structure of the cotton sector and the price mechanism impacts who bears the risk for changes in prices within a season. In countries where guaranteed prices are determined before planting, nearly all of the risk is transferred to the cotton companies that will purchase the cotton. As discussed above, in these countries a price stabilization or other type of fund is often established to mitigate this risk. In countries where the prices are set at marketing, then producers bear much of the risk and planting decisions are often based on returns from the previous season. In countries where producers are highly exposed to price fluctuations, area tends to follow movements in international prices, increasing in seasons that follow high prices and decreasing after low prices. Since 2/1, cotton area in Eastern and Southern Africa has moved in the same direction as international cotton prices in the previous season. However, while the area under cotton in Francophone Africa has shown a similar pattern in some years, cotton area has diverged greatly in other years. This is particularly notable after 21/11, when prices fell in 211/12 and 212/13 after the spike in international quotations and area in Eastern and Southern Africa countries contracted in 212/13 and 213/14. However, the area in Francophone Africa expanded significantly in 212/13 and then generally remained stable in the next four seasons despite declining prices. This is due to the fact that the average price in Francophone Africa remained stable in those years. Since 21/11, area in Eastern and Southern Africa has expanded by an average of 3% a year, while the area in Francophone Africa has grown by 12% a year. While area partly determines the volume of production in a given season, yield determines the rest. Most cotton in