27 July 2012

Zimbabwe: Cotton Prices Should Follow Market Rates


While the decision by Government to set minimum cotton prices to break the deadlock between ginners and farmers will definitely spur growers into selling the crop they have been withholding, the decision appears to have ignored a lot of pricing fundamentals.

Government - through the Minister of Agriculture, Mechanisation and Irrigation Development Joseph Made - on Wednesday announced prices for seed cotton ranging from 77c/kg to 84c/kg, a price range that created excitement among cotton growers and obviously grumbling among the ginners.

We have always advocated for good prices for growers, urging ginners to always strive to pay farmers market determined prices.

We see no reason why ginners, given high lint prices on the international market, would pay low prices as that will obviously be a big rip-off.

It is the implication of the new prices that gives us a headache about the future of the industry. In the very short-term, farmers can benefit immensely but in the long-term we see the industry collapsing.

No one in their right frame of mind can be excited about short-term gains but rather the long-term survival of the industry.

We all want our farmers to make profit from their toil because farming is a business but when Government starts ignoring the world market pricing fundamentals as they relate to local producer prices, we indeed begin to worry.

It is a fact that almost 98 percent of the country's seed cotton production is contracted by ginners who inject millions of dollars into ensuring farmers grow the crop.

We are unsure if ginners are capable of financing production of a price-controlled crop. The decision to set prices will definitely impact on production, which had increased from 250 000 tonnes last year to 300 000 tonnes this year.

Price control will, without any doubt, erode the gains made to date.

The price that growers can be paid is determined almost entirely by the price Zimbabwean cotton lint fetches on the world market, given that the local industry consumes less than 3 percent of the cotton produced.

We believe that the prices announced by the Minister are way above the realistic market prices and do not seem to be taking into account the final price of the lint on the international market where current pricing on New York futures is 69,51c/pound.

Clearly if ginners buy at the new prices, they will not be able to continue with business.

In Zambia, ginners are currently buying at 31cents/kg. In Malawi prices started at 26c/kg and have now reached 37c/kg while in Mozambique the parties have agreed on two grades, which are paid 28,5c/kg and 37,5c/kg respectively.

The new prices, while good for the farmers now, make the cotton contracting business model non-viable and this is creating uncertainty for the future.

It would be tragic to the industry if contractors/ ginners were to abandon this model, which has been in existence for over 20 years.

Livelihoods for farmers, direct employees as well as downstream industries such as transporters, loaders, suppliers and retailers would be affected. We are convinced that the price impasse could have been resolved through ginners and farmers dialogue.

Price negotiations with farmers seemed to have deadlocked this year due to the high price expectations from farmers against the backdrop of continuing fall in the world price for cotton.

There was need to respect the agreement farmers and ginners had reached on May 29 this year, which stipulated price ranges from 28c/kg for bottom grade to 38c/kg for top grade cotton payable by ginners, with farmers approaching Government for a 16 cents subsidy that would have given them an effective price range of 44c/kg to 54c/kg for bottom and top grades respectively.

We hope that the Government has prepared for the worst, as there will be need for the mobilisation of US$42 million inputs by the fiscus by September as the private sector, given that cotton has become a controlled crop, may pull out of cotton financing.

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