Organic Cotton in India. Facts and figures 9/6/09. Organic cotton in India: facts and figures. General Issues in organic cotton sector of India

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1 Organic Cotton in India Facts, figures and issues By: H. Lanting, MSc. ETC Consultants India Pvt Ltd Organic cotton in India: facts and figures India produces presently over 50% of the certified Organic Cotton in the world. About 350,000 farmers were involved in season (A grade plus in conversion) About 500,000 hectares were cultivated in the season (A-grade plus in conversion) Facts and figures Thus about 5.5% of total cotton area is under organic cotton ( season, A grade plus in conversion). An average of 1.4 hectares is grown per farmer Yield about 860 Kg raw cotton per hectare Total yield was 73,702 MT of lint General Issues in organic cotton sector of India Rapid spread of Bt Cotton: from 4% in 2004 to about 70% in 2009 on average. In high production potential areas percentage Bt Cotton can be as high as 90%. Sudden increases of Minimum Support Prices by Government of India make it difficult for buyers and farmers Emerging shortage of farm labor resulting in higher prices for labor: costs of harvesting alone can be as high as 25% of gross income. Lack of investment capability and lack of access to credit A problem in Madhya Pradesh and Orissa? Areas a-grade and in conversion cotton Source: Barik, 2008 Total area under Organic cotton (OE 2008) Total area under Bt Cotton (Barik 2008) Grand total organic and Bt Estimated of Total area under convention al cotton Madhya Pradesh 56% 72% 128% Orissa 88% 0% 88% 12% Maharashtra 2% 81% 84% 16% Andhra Pradesh 0% 91% 92% 8% Rajasthan 1% 10% 11% 89% Karnataka 0% 10% 10% 90% 1

2 As most Organic cotton comes from MP, the problem needs to be resolved Areas only a-grade organic cotton Total Cotton Area in hectares Organic cotton 2007/2008 in hectares Estimated Production lint in MT contribution of the State to total Madhya Pradesh % 47,993 65% Orissa % 12,500 17% Maharashtra % 12,017 16% Andhra Pradesh % 64 0% Rajasthan % 1,116 2% Karnataka % 11 0% % 73,702 Farmers Dilemma Cotton farmers in India face serious profitability issues in conventional cotton and therefore look at alternative methods to enhance profitability : Bt cotton Organic cotton but often also other crops like: maize, soybean and sunflower. They also are heavily indebted to local money lenders in a high risk environment: too little and too much rain in the same season. Organic farming: do nothing farming Farmers often see organic farming as a kind of Do Nothing Farming, reducing their investments and risk. As a result their investments, especially in nutrient management but also seed, are often too low for optimal results. Farmers experiment with organic production, thus often parallel and part production takes place, compounding certification problems Profiling the Organic Cotton Farmer My educated guess is that the organic cotton farmer, who presently starts to form the backbone of the sector, has the following profile: Between 45 and 60 years of age without a successor; Family farm Risk avoiding Trying to rely on his/her own resources minimizing external inputs Relatively small compared with other farms in the area at large or Profile continued Relatively resource poor (money, capital assets, irrigation) compared with other farmers or From a relatively low productive area compared with other areas in the state/district or From tribal area with limited access to external resources (information, knowledge, money, inputs, capital assets..) and markets Markets difficult and prices not as good as hoped Transition period means loss of expected benefits to farmers: Markets for IC1 and IC2 are limited, thus premiums paid to farmers in first two years are often too low to keep them interested. Therefore farmers (and their promoters) often: exert pressure on certifiers to get immediate A-status saying they were already producing organically earlier. Want a fair trade certificate to enhance income during transition period. However, parties higher up in the chain are not eager to enter fair trade markets as it: Enhances their general basic costs whilst the volume is small; Demands organization of farmers into a potential opponent; 2

3 Non Cotton produce: a problem To ensure commitment of farmers it is important to market non-cotton produce at premium For non-cotton produce only limited organic markets exist (international but primarily local). Most farmers grow wrong crop or wrong variety for international markets Organic seed difficult to obtain and loss of genetic diversity Availability of untreated non-gmo seeds is very limited, indents have to be placed almost a year in advance. Mostly only major hybrids will be produced leading to loss of bio-diversity. Varieties, agro-eco-systems and markets: in dry environments only short staple cotton will grow, markets demand medium to long staple cotton. Organic farming enhances biodiversity and food security Most organic farmers rely on manual operations and can thus easily deal with intercropping To control pests many farmers intercrop with a mixture of cowpea, pigeon pea, green gram, black gram, soybeans and smaller crops like coriander. These crops provide income and food security Many new skills are required Farmers who want to become organic need to acquire new technical and social skills It is estimated that about 600 attitude, knowledge and skill changes are required They need to grow different non-cotton crops and need to produce biomass This requires substantial extension investment Can farmers pay for extension? There is no government extension agency specifically dealing with organic farming To get a sustainable organic sector farmers knowledge and skills need to be regularly updated Preferably the sector pays for extension, making it immune for policy changes (which would be the case if financed by Government) BUT: Farmers cannot easily pay as their total additional income from premiums is about 40 (US$ 56). Soil fertility management: a major challenge Organic carbon content of the soils is generally very low: less than 0.5% OC. Enhancement is required, requires application of large doses (more than 15 MT/hectare) and substantial investment. Strict rules of organic certification make Nitrogen Management and required correction of micro-nutrient deficiencies difficult. Maintaining proper Nitrogen levels at yields beyond 2000 Kg (raw cotton) per hectare is very difficult under the present restrictions. 3

4 Certification expensive and.. Insecurity for certifying agencies thus farmers: suspension of certifiers for short periods by APEDA happens regularly and has serious consequences for genuine organic farmers. Fines are also regularly given to certification agents: surely they will incorporate this in their price calculations. Costs of certification (internal system and external inspection) are high and often not borne by buyers. Farmers have difficulty accessing government subsidies (50% subsidy of certification costs is given by some state governments) Final farmers lists delay certification Only after sowing and more certain after germination, it becomes clear that a farmer is actually going to produce organically If emergence of seeds is poor, farmers might switch to other crops or might fill gaps with Bt seed or treated seed due to unavailability of organic seeds Thus inspections often start late. Are there enough inspectors? There are roughly 350,000 farmers to be certified for cotton only: assuming 25% sample to be visited at least once a season, about 90,000 farmers need to be visited requiring about 30,000 human days per annum or 250 inspectors one inspector per 1400 organic cotton farmers is bare minimum. (assuming 3 inspections per day inclusive of travel plus reporting time and 120 working days per cotton season). Internal Certification.. The figure presented in the previous slide is only valid if a genuine internal control system (ICS) is operational. This ICS is, to the best of my knowledge, only allowed for small scale organized farmers. Not for contract farming. The problem is: what is contract farming and what are organized farmers? Organic, not Bt, are we sure? As many Bt cotton varieties have been developed for Hybrids that were already in use, easy visual identification of Bt Cotton by certifying agencies is impossible. Only real desi varieties, short staple varieties and ELS varieties like DCH32 do not have look-alike GMO counterparts. Bt kits are available but expensive and time consuming thus not often used. Non-cotton GMO s posing threat for organic cotton To the best of my knowledge certification agencies handle buffers between GMO and organic cotton differently; In the near future, with introduction of Bt pigeon pea, maize and egg plant, certification problems will increase. These crops are cross breeders whilst cotton is over 90% self pollinating Thus buffer distances will have to increase making it more difficult to for farmers to get organic certification 4

5 Value chain: general There is overcapacity and old equipment at each and every step in the value chain Old equipment means low overheads but also low output per unit of time and often also less than desired quality Only very few units are vertically integrated and fully modernized. Most units are specialized. Power, labor shortage and wages increased due to National Rural Employment Scheme are general problems faced. Profitability is a problem at each and every step. Lack of liquidity and its consequence Many of the parties operating on organic market cannot immediately pay farmers as banks demand contracts with ultimate buyers before they grant loans. Farmers cannot get loans on the basis of value of their raw cotton but need cash to pay for subsequent harvests This leads to organic farmers selling the cotton they grew and at times buying other cotton at later stage The relative small volume of organic cotton is a problem Each step in the value chain (of any type of product and most manufacturers) deals with only a very small volume (say 5 %) of organic cotton. Fair trade cotton, an even smaller percentage, is increasing the general costs of a company and thus reduces competitiveness in conventional markets. Many clients, however, expect full organic and fair trade certified products Will there be consolidation in the organic cotton chain? Personal observations suggest that there might be a number of parties that will downsize their involvement in the organic market as their expectations of improved profitability did not materialize. Who will remain in the market? My guess: very large players (with risk bearing capacity and liquidity) and small players who can cater for small buyers in a niche market. Why does organic cotton market not grow? Prices are too high at all levels (except farm gate prices). Inefficiencies in the chain: Cotton is produced in widely dispersed areas which are at times difficult to access, increasing transaction costs. Volumes processed in each step in the chain are too small, leading to extra costs Quantities ordered by clients are relatively small and highly specific, leading to high costs One dollar becomes eight The practice of adding percentages in the value chain to calculate profit keeps farmers at losing end: a one dollar increase at farmers level leads generally to an eight dollar increase of the retail price 5

6 Conclusions The organic cotton sector in India is relatively small and its statistics still not reliable. The sector is fragmented therefore prone to inefficiencies increasing its costs Most of the organic cotton is rainfall dependent The average organic cotton farmer is small, resource poor with limited access to knowledge, inputs, credit and markets Conclusions 2 Yields of organic cotton are low mainly due to low Organic Carbon percentage leading to low soil fertility and water-holding capacity Organic seeds are difficult to obtain, thus a seed production program, producing medium and long staple straight varieties, is warranted A well coordinated research program for organic farming should be developed in consultation with organic production programs (The present well funded NCOF works a bit in isolation). Conclusions 3 APEDA should develop policies which protect genuine organic farmers whilst taking action against erring certifiers Certification bodies should declare their staff-farmers ratio as a proxy of their genuine capacities to guarantee their certificates and furnish proof of the same Conclusions 4 Farmers require immediate payment at harvest time. This is often not possible for buyers. The rules for providing loans against stock should change to make it possible for banks to give loans against raw cotton stocks to farmers. (this basically means: change the rules for storage at bonded warehouses.) Farmers should be organized in groups at village level to increase efficiencies and reduce costs, especially if they are expected to pay for services. Conclusions 5 Many houses are engaged in organic cotton value addition resulting in each handling very small quantities (about 5% of their turn-over) Though competition is OK, this is inefficient. It would be better that each house handles 50% organic and 50% conventional (to spread risks and to reduce costs) Conclusions 6 For this to happen, total volume of organic cotton on the world market should increase, which will only happen if prices for the buyer of the final product are similar. But: also at farmers level income of organic and conventional cotton should be similar, still a major challenge (as Bt cotton is presently by and large more profitable) 6

7 A partial solution? 7