Organization and Performance of Cotton Sectors in Africa ... - infoDev

PRICING MECHANISMS IN WCAPricing mechanisms in WCA have a remarkably similar historical backgroundacross all countries and are based on a commonly accepted principle thatsingle-channel systems require fixed prices: unique for the entire cotton-growingarea in the country (panterritorial), fixed throughout the cropping season(panseasonal), and announced publicly before sowing. Another major featureis the guarantee of purchase by the cotton company of all quantities of seedcotton offered at the official price. Typically, during the 1970s and most of the1980s, the Ministry of Agriculture announced the producer price for seed cottonbefore the planting season, and the cotton company was mandated to purchasethe raw cotton from farmers throughout the country. There was intensebargaining each year between the government and the cotton company basedon standard costs for input and services including ginning (barêmes) becausethe cotton company was assuming the financial risks of the guaranteed priceand tried to cover risks and overhead through well-negotiated barêmes. Thisbargaining process, which featured little transparency, was replaced at the endof the 1980s by performance contracts negotiated and signed between the governmentand the cotton companies that set performance targets and costs. Asnoted in chapter 3, the results of the performance contract approach were generallydisappointing.Since the successive crises of the early to mid-2000s and so they could gainflexibility and reduce financial risks, most WCA countries reformed their pricingsystems with a two-tier payment: a base price negotiated at the beginning ofthe cropping season and a price complement to be paid at the end of the season,if the cotton company makes a profit (Cameroon) or if the realized salesprice is above the base price (Burkina Faso and Mali). Initial cropping seasonprices, administratively set until the end of the 1990s, are now typically agreedon before the planting season through direct negotiation between cotton companiesand farmers or, in some countries (Burkina Faso and Mali), through acommonly agreed on pricing formula within an interprofessional committee.The parameters of the pricing formulas have been progressively improved: referencesto production cost (in Mali) have been abandoned and have beenreplaced, in both Burkina Faso and Mali, by a fixed percentage (60 percent) ofthe free-on-board (FOB) price paid to farmers, thus linking producer prices toworld market prices. Even when such mechanisms are well designed andapplied, the sectors still face the uncertainty of what the actual world price willbe nearly one year from the time the initial producer price has to be announced.This uncertainty creates significant financial risks for the cotton companies thathave to buy at this preset price. If actual market prices are lower than this level,cotton companies will incur trading losses, eventually leading to the need forbailouts or financial restructuring.In all WCA countries, the pricing mechanism had been linked to a stabilizationfund designed to limit fluctuations in producer prices and prevent66 BAFFES, TSCHIRLEY, AND GERGELY