A committee of cotton and textile stakeholders formed last week by the government to rescue cotton growers from loss is to allocate the 10,000tn of cotton accumulated in their warehouses to the existing 15 textile companies for purchase.
The committee, which was established to bring an immediate solution for the cotton growers, during a meeting, chaired by Tadesse Haile, state minister of Industry, has allocated the quotas of the factories taking into account their respective demand until the next harvest, which will start in October 2012.
The committee will announce the respective quota of each textile factory in a letter next week, according to sources. There are 15 textile factories in Ethiopia, which have the capacity to produce 110,178tn on a yearly basis. Turkish owned Ayka is the largest producer.
Nevertheless, cotton growers are not comfortable with the figure that the committee has considered as the demand of the factories.
Taking the capacity of the factories to date, the committee stated that the textile factories' demand is actually way above the current stock of cotton that the growers have. However, cotton growers are not convinced, saying that the figure is based on their capacity not their actual demand.
"It is not in any way expected that the factories, which only purchased 18,000tn for the past 11 months starting from July, will have excess demand," according to a cotton grower.
"Surely, there is demand," Tadesse told Fortune. "But factories have financial problems, which we are trying to solve."
The Ministry of Agriculture (MoA) is negotiating with the Development Bank of Ethiopia (DBE) and the Commercial Bank of Ethiopia (CBE) to give loans for both textile factories and cotton growers, according to an official at the Agriculture Ministry.
Out of the factories, however, the state-owned Bahir Dar and Kombolcha textile factories have already purchased 2,768ql of cotton out of the total amount of cotton in stock as part of the rescue plan. Of the factories, Kombolcha Textile Factory has purchased the largest amount, at 1,425ql. This cotton was produced by small-scale farmers in Gambella.
The textile factories are expected to purchase the cotton at a price fixed at 29 Br to 32 Br a kilogramme by the committee last week, depending upon its quality. The price of cotton varies according to the length of the fibre. Those below 27mm sell for 29 Br, and those above 31mm sell for 32 Br.
A kilogramme of cotton in the international market was sold for 1.73 dollars as of Thursday, June 21, 2012 showing a slight increment over the proceeding two days of 1.65 dollars, according to the International Cotton Growers Association.
The main reasons for the overstock of cotton were the increased production of cotton in this fiscal year, the reduction in the price of cotton in the international market, and the fact that textile factories had not been purchasing as expected, according to the MoA.
Given special emphasis from the government, the production of cotton increased to 79,471tn in this fiscal year from 51,000tn of production last year. This happened because the government had increased the area covered by cotton to 111,886ht, exhibiting a 80,000ht increment over last year.
On the other hand, the 68,000tn of forecasted demand from textile factories actually fell by 8,000tn, which the MoA claimed was because the factories already had stock. All of this influenced the government to lift the export ban that was imposed in October, 2010/11.
Out of the produced 79,471tn, growers still have 10,000tn of cotton warehoused and, hence, were crying to the government for a solution, as the next planting has already begun.
Although cotton growers that Fortune talked to are happy with the immediate solution given, they still have reservations.
"The government should come up with a sustainable solution that will solve such market problems," a grower told Fortune.
Tadesse Haile shared the fears of the growers.
"Since cotton is regarded as a strategic commodity, the market should not be the headache of growers, at all," he said.