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

Evolution of Producer Pricing MechanismsOne major drawback of the monopoly system for ginning companies is that itrequires fixed producer prices. When producer prices are fixed before planting,ginning companies take on great risk. The extent of this risk was fully revealedin the 2003/04 season, during which world prices dropped nearly 30 percent,creating trading losses for the ginning companies. All WCA countries have hadto face this issue in recent years.With the building up of producer organizations, all WCA countries in thestudy shifted from prices administered by the government to prices set jointlyby the cotton companies and producer organizations. In all of these countries,the price mechanism was, at least until the 2004 crisis, linked to a stabilizationfund designed to support producer prices when the world market was low, andto be replenished when the world market was high (by paying farmers lowerprices than could otherwise be paid). The rationale for these funds was to avoiddramatic drops in producer prices and to limit market risks for cotton companies.These support funds functioned well in Burkina Faso and Cameroon until2004. Since then, however, they have fallen victim to the unsustainably highprices agreed to among cotton companies and producer unions. In Cameroon,the fund was exhausted by 2006, though it was sufficient to cover sector lossesand so did not draw on the government budget. In Burkina Faso, the fund hasbeen depleted and could not cover the deficits during the 2005 and 2006 seasons.In Mali and in Benin, the funds were exhausted before 2004 and, therefore,could not be used when world market prices started to fall. The losses in thecotton sectors of those countries were covered by direct government subsidies.To remedy this situation, the Burkina Faso IPC adopted in 2006 a newprice-setting mechanism, based on a formula linked to world market trends.This system represents a move in the right direction but was not correctlyapplied for the 2006/07 season, resulting in additional losses for the cottoncompanies. In Mali, a new system was adopted for the period 2005 to 2008based on a conservative initial producer price 36 and on sharing of the actualselling price, at the end of the season, between producers and the cotton company.This system reduced the losses of the cotton company, yet it was unableto completely eliminate the losses during the 2007 season.Establishing price mechanisms that are acceptable to farmers and sustainablefor cotton companies (while providing incentives for them to be morecost efficient) appears, therefore, to be one of the major challenges for WCAcotton sectors in the near future. This challenge is especially important ifother features of the model (announcement of the producer price before theplanting season, panterritorial pricing, obligation to purchase all seed cottonoffered) are not reconsidered (that is, as long as no additional steps are madein liberalizing the sector).WCA cotton sectors are currently engaged in discussions, with the assistanceof donors (in particular, Agence Française de Développement), on aHISTORICAL BACKGROUND AND RECENT INSTITUTIONAL EVOLUTION 37