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

efore planting, price risk in the short run is borne by the cotton companiesthat will have problems operating profitably if market prices during the seasonfall below the level of the announced price. In the long term, taxpayers anddonors also carry risk because the companies may need to be financially supportedby the governments. Following the cotton price decline of the late1980s, along with an overvalued Communauté Française d’Afrique (CFA)franc, several cotton companies had to be bailed out; the financial difficultiesof most cotton companies in the region since the end of the 1990s are similarto the problems experienced at that time.PRICING MECHANISMS IN ESABefore the reforms of the early 1990s, cotton pricing mechanisms in ESAclosely resembled those of WCA in that a cotton parastatal (or cooperativeunions in Tanzania and Uganda) was the sole buyer of cotton at a preannounced,panseasonal, and panterritorial price. Following reform, pricingmechanisms in the region became more market linked, flexible, and diverse, inline with the diverse sectoral types that have emerged (table 5.2). No countryin the region operates a stabilization fund, nor have any generated sectorwidedeficits that the government had to cover.Mozambique operates the only local monopoly system in the region and isthe only country that maintains a fully administered, panseasonal, and panterritorialprice. The government’s role in price setting is strong in Mozambique,in part because of the very weak state of farmer organizations in thecountry. In Zambia and Zimbabwe’s concentrated sectors, preplanting priceshave been maintained, but this practice reflects business decisions by thedominant firms as they exercise price leadership in the sector; the governmenthas no say in pricing in either country. 44 Prices paid to farmers throughoutthe region are much more strongly linked to medium-term, and even shortterm,movements in the Cotlook A Index than they are in WCA. The way inwhich this linkage happens varies greatly, however. For example, prices inZambia largely adjust only year to year as a result of price leadership byDunavant, while in Tanzania and more recently in Zimbabwe (because ofescalating inflation), they fluctuate throughout the marketing season. Even inUganda’s hybrid system, which attempts to eliminate competition amongfirms, prices vary over the course of the marketing season.COMPARING PRICING PERFORMANCE AT THE FARMER LEVELTable 5.3 shows the share of the FOT lint price received by farmers in each of thestudy countries over the period 1990–2005. Producer prices for seed cotton areadjusted to lint equivalent using the average ginning outturn ratio, and any inputcosts borne by the companies are added to this result, to show the net valuereceived by farmers. The Cotlook A Index is then adjusted to FOT on the basis of68 BAFFES, TSCHIRLEY, AND GERGELY