2 June 2012

Zimbabwe: 'Market Dynamics Control Cotton Price'


The cotton industry is on fire with growers and merchants fighting over the producer price of seed cotton. Assistant Editor George Chisoko (GC) speaks to the chairman of the Cotton Ginners Association David Machingaidze (DM) about the price impasse that is threatening to tear apart the sector.

GC: What do you make of the impasse over seed cotton pricing?

DM: Our farmers have a viability crisis caused largely by the poor commodity price for cotton, global subsidies, as well as low yields and quality.

Cotton is not a regulated commodity and ultimately the price is a function of market mechanisms. In the interests of it and in view of the central role that cotton plays, ginners and farmers also meet to determine a floor price for seed cotton at the commencement of the buying season.

Cotton producer prices are determined by world market prices of lint and seed cotton prices are set on the basis of agreements reached between contractors (Cotton Ginners Association) and the registered Growers' Associations. The agreements are based on the principle of a constant seasonal pool price derived from world lint prices prevailing at the time of agreement. There has been an unprecedented level of volatility in the market since March last year and this continues to this day. This has made it very difficult to determine any floor pricing as this amounts to chasing a moving target.

GC: Why are there problems between ginners and growers every year? Why isn't there clarity on pricing?

DM: Just like in any other industry, problems are common and will always be there, but the good thing is that some of those problems are not insurmountable. They can be discussed by concerned parties and resolved amicably. Global lint prices are not static as they fluctuate according to the dynamics of demand and supply. This can cause some misunderstanding between ginners and growers.

We would not say that there is no clarity on the issue of pricing because there is. There are facts and figures used to determine producer prices. The formula takes into account both the growers and ginners' cost of production as well as international lint price, at the time the lint will be sold. The formula also offers the sharing of sales proceeds from lint and ginned seed and ultimately equal sharing of any profits or losses.

GC: As ginners, it seems you have failed to make growers understand the concept of pricing as it relates to the international market. Don't you think you should make deliberate efforts to explain the price dynamics to avoid misunderstanding with growers?

DM: Ginners have not failed in this regard as they make frantic efforts to ensure the concept of pricing as it relates to the international market, is explained to growers by the relevant people during grower liaison meetings and at field day events. This is also covered in the print media for the benefit of growers. Most successful growers already understand the concept of pricing and they know how to mitigate any possibilities of low producer prices by improving their yields per hectare.

Farming is a business and people in business normally embark on feasibility studies first to ascertain the viability of the business they want to venture into. For them to arrive at a particular decision they would have probably worked with facts and figures and to say that they are ignorant of that information is not correct. Perhaps one needs to ask why certain growers have success stories to tell whereas others do not.

GC: Do you think our farmers have gotten that sophisticated to understand the international market in terms of the relationship between the price of lint and what is paid to growers as producer prices?

DM: The world is now a global village and most information is readily available. We have growers with access to radios, televisions, newspapers, satellite dishes, cell phones connected to the Internet, including houses installed with solar energy appliances. With some of these impressive gadgets at their disposal, they should be able to understand the international market and the relationship between lint and producer prices. Ginners have also assisted farmers with access to handsets and free SMS messaging.

GC: It is clear growers want nothing less than US$1,00/kg and, while your defence in terms of what is obtaining on the international market makes sense, do you think farmers will easily comprehend that prices have to come down because of issues to do with supply and demand?

DM: It will not be easy for growers to come to terms with that as most of them were expecting a higher producer price in view of the high lint price that was offered during the last season. Sooner rather than later growers will need to understand the trend of prices and deliver their seed cotton before it deteriorates in terms of quality and weight loss or worse still, before the market crashes further down as has happened in the last four weeks.

GC: The confusion over prices has made farmers to conclude that ginners are out to sabotage the industry and that you are working seriously against the spirit of indigenisation?

DM: There should not be any confusion over prices since all cotton growing countries operate under different conditions and circumstances and are ultimately affected by the same global lint prices. For farmers to think that ginners are out to sabotage the industry is unfortunate and misguided. Why on earth would ginners want to derail their core business by short changing growers who supply them with their raw material? Some of the ginners are indigenous companies and would not want to work against themselves.

Ginners and Government have supported and continue to support farmers by supplying them with inputs under their inputs credit schemes. In the past year alone, numbers of contracted farmers have increased from 215 000 to 250 000. Input support levels have also increased from US$13,2 million in 2009 to US$42 million in 2011.

GC: Farmers have threatened to withhold the crop until you pay them to their expectations, do you think it is a good move to withhold the crop given the volatility of the market?

DM: It is not in the best interests of farmers and the cotton industry if farmers withhold their crop as they tend to lose out in terms of better returns for their efforts. The quality of their cotton will deteriorate due to prolonged storage under unsuitable conditions. The world lint price has lost 20c in the past month alone having gone from 100c/lb for spot cotton down to 81c/lb. The market is continuing to crash towards the long term average of 69c and may even end up lower than this.

GC: How do you hope to come up with a situation that benefits growers and ginners in terms of pricing?

DM: We would like to believe that past and present price negotiations by concerned parties have been conducted based on utmost good faith and a win-win situation. Agreements undertaken by ginners and registered grower associations in seed cotton pricing also factor in the principle of equal sharing of profits or losses between ginners and growers and this approach is beneficial to both parties from a business perspective.

GC: The impasse cannot be left to go on without solution. What do you think can be the solution to the problems?

DM: The solution is already available and requires all parties to have a holistic approach to this problem and a common goal. Both growers and ginners are in business to make profits and should one way or another meet half way. We should not give up but continue to urgently address all the grey areas and save the cotton industry from total collapse. Cotton production contributes significantly towards the national economy in terms of foreign currency earnings. As such there is need to jealously guard against the recent gains in our cotton industry.

GC: Don't you think as ginners you may want to take farmers through some form of training for them to understand and appreciate pricing dynamics on the international market?

DM: We always try to enlighten our growers on this topical issue at meetings that we conduct with growers from time to time. However, there is always room for improvement and we will continue to introduce additional strategies to address this issue.

GC: Tell us about how other countries in the region are doing in terms of producer prices?

DM: Producer prices being paid by regional countries as follows:

Malawi is paying an effective price of 23 USc/kg equivalent.

Mozambique is paying 37.5 USc/kg for top grade and 28.5 USc/kg for "D" grade

Zambia currently has a stalemate on cotton pricing.

It should be noted, however, that farmers in the above countries are not paid hard currency but are paid in local currency. Cost of production will also vary in line with cost of inputs and any inputs subsidies.

GC: Can you shed light on the issue of subsidies paid by governments in some countries in as far as they influence the producer price?

DM: Subsidies paid to growers by governments in the major cotton producing countries, for example, India, USA, are influencing prices on the international market, causing distortions on that market and creating unfair trade practices. What this means is that because American growers are paid a high producer price, they are not affected when their lint fetches a low price on the international market, as they will have already benefited from a high producer price. Third world countries that are not subsidised by their governments are the worst affected by this scenario as they will be expecting to fetch higher prices to sustain production. This issue needs to be addressed at WTO level.

GC: What would paying prices above US$1,00 /kg mean to ginners?

DM: At this price level no ginner would remain in business.

GC: Are the crop volumes you get from growers still good enough for your viability?

DM: Current production levels have sustained viability for 14 ginning companies.

On average Zimbabwe produces 100 000 metric tonnes of lint and this figure is insignificant compared to global production of 28 million tonnes. For us to boost our lint output, we definitely need to increase our crop volumes from growers. To this end both our government and ginners are supporting growers by providing inputs to improve on productivity.

We have certain overseas markets that cannot have enough of our lint and the only way we can overcome this shortfall is by supporting growers to produce more volumes.

GC: What can be done to address the long-term viability of cotton production?

DM: There is need to strengthen regulatory frameworks in order to attract greater investment in inputs and extension by ginners. There is also an urgent need for greater collaboration amongst stakeholders in addressing the perennial problem of poor yields and quality. If the same time and energy invested in deciding cotton prices could be dedicated to yield improvement, I believe that the industry would make rapid progress in growing yields.

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