The cotton industry in Zimbabwe has grappled with a plethora of challenges threatening its viability. Southern Cotton Company (SCC) now says there have been drawbacks when it comes to acquiring export permits, with electricity challenges also prolonging the ginning period, which has its own consequences.
The company says it has been frustrated by bureaucracy in government offices particularly those under the auspices of the ministry of Industry and Commerce, whose mandate is to facilitate growth in exports. However, all hope is not lost despite the challenges as the company is targeting 60 000 tonnes of cotton this season. Business Reporter Melody Chikono (MC) spoke to Southern Cotton CEO Caos Nzenze (CZ) to discuss this and other issues. Below are excerpts of the interview.
MC: Kindly outline to us your operations.
CZ: Southern Cotton is a local company 100% owned by local Zimbabweans. We are the second-largest cotton producer in Zimbabwe in terms of contracted hectares and market share when we look at the private cotton producers that are not state controlled.
The business has been there since 2006 but between 2013 and 2016, the industry experienced some problems relating to low production due to low international market prices and side marketing. In 2013, we shut down operations for four years.
We then re-opened in 2017, thanks to our government and the (late former) President (Robert Mugabe) who had introduced the cotton presidential free inputs scheme in 2015 that saw a lot of farmers benefitting from it and went back into the fields to grow cotton.
Southern Cotton re-opened this year and complemented the presidential free inputs scheme by distributing free inputs for 15 000 hectares.
MC: So how can you describe your operations since re-opening?
CZ: We have been growing. In our first in year, 2017, we contracted 15 000 hectares. The yields were good in that year and our intake was fairly good. The second year (2018-2019) we contracted 42 000 hectares (180% growth).
However, the rainfall pattern was not that good for the season. There was a drought and the yields were affected and national cotton production went down by about 45%.
We have, however, not been discouraged by poor yields, we have grown our hectrage and we are projecting to do 60 000 hectares in the 2020 season.
We are almost 90% in terms of inputs distribution as the inputs have already been procured.
We are looking forward to this year as the rainfall projection, though it had a somewhat poor start, is now expected to do well, particularly for drought-tolerant crops like cotton.
MC: Talking about input distributions, how then do you balance the input costs and return on investment in this volatile economy?
CZ: You must remember that we are exporters and our revenue is mainly US dollar-denominated (up to 70%) when you look at the lint exports. So we are well cushioned.
MC: Earlier you indicated that you would be grateful if the central bank could review the retention thresholds, what would be your proposal and what is the justification?
CZ: Yes, we would be grateful if we could get 100%. Our business has got a huge appetite for foreign exchange. You look at the plant here (ginnery), all the spares in there are imported.
The wool packs (bales) we give to farmers for packaging are all imported, we look at the agrochemicals we give to the farmers are imported and various other capex needs we have for the business.
We need to retool this plant, it requires tractors, forklifts etc.The irony of this whole matter is that, after we have surrendered the forex to the Reserve Bank of Zimbabwe, we then have to go and queue for the same funds when we need to access forex for the spares and equipment and we will not get it.
MC: You just spoke about retooling? How much would you need to retool?
CZ: To retool the Tafuna plant, we would need about US$2,5 million. It is not just this plant, we have another one in Sanyati which would equally need another US$2,5 million so we require a total of US$5 million for retooling.
MC: So what can you say have been the broad challenges you have faced since you re-opened?
CZ: Our biggest challenge is power. We are seriously constrained in terms of plant availability because of power shortages. Ginning is supposed to be just for two months at most for the volume we purchased.
Our plea is that Zesa gives us the dedicated power supply line that we have applied for and allow us to gin uninterrupted for two months and we are done.
We then export our lint and bring in the much-needed foreign exchange into the country.
The other issue is that of export permits. The issuing authorities are taking too long to process our export permits, resulting in us being unable to meet our export orders on time.
As a result, we are being charged late-delivery penalties which are costing us in a big way.
MC: Can you explain more on the penalty issue?
CZ: The export-delay penalties on our export customers are hurting us. These penalties accrue as a result of the delays we have encountered in ginning because of power shortages and delays in issuance of export permits.
You see when we sign these offtake contracts, there are certain delivery timelines that we would agree with the offtake customers and, if we do not deliver on the specified timelines in the contract, we get penalised.
This is money we are losing as a country. We will, however, continue to engage Zesa for a lasting solution to our problems.
MC: What is your capacity utilisation at the moment?
CZ: We have more than adequate capacity. Our ginneries have capacity to process 50 000 tonnes of seed cotton per season and we are utilising not more than 20% of our operating capacity because of low production volumes and unavailability of power.
In terms of funding we get most of our facilities from banks. They have been supporting us as an export company.
If you look at our first year of operation after the break in 2017, we got support from the Reserve Bank of Zimbabwe under the export sector promotion facility and we started production.
By December of 2018, we had paid off the facility. We are getting adequate support from local banks but the issue of security is slowly becoming a stumbling block when it comes to accessing bigger amounts.
If you look at the obtaining hyperinflationary environment, the amounts of money we need to fully finance a season seem too big for one bank to finance us because of prudential lending limits, equally banks end up asking for security matching the big amounts which most companies do not have.
As an industry, we have since approached the Ministry of Finance through the RBZ to allow us to access government guarantees that we can then give to banks in substitution of the security they require so that we can access funding from local banks.
MC: What has been happening to cotton prices? Historically they have been the major discouraging factor towards cotton production.
CZ: I would say since we started in 2017, the prices have been competitive. You will realise that the hectarage has actually been increasing as more farmers were joining the bandwagon of cotton growing. Cotton became the most rewarding commodity in the just-ended season.
When we closed the buying season around August 2019, we were paying ZW$3 600 per tonne, and no other agricultural commodity was paying that much. It was quite competitive at that stage.
MC: You spoke about local spinners being inadequately capacitated to take up lint?
CZ: As ginners, we are mandated to sell up to 30% of our production to the local spinners but we have noticed that for the past two years that we have been in the market local spinners have taken time to pay for lint that we have been offering them, signalling lack of financial capacity.
Sometimes we have had to hold on to the lint for between 30 and 60 days waiting for them to pay before they can uplift which then puts a strain on us, cashflow-wise.
Our export customers, however, have ready funds to pay once they have uplifted the lint.
MC: What would be your comment on the industry? Do you think it offers a level playing field?
CZ: We applaud our government for coming up with the cotton free presidential input scheme which was implemented with the motive of boosting cotton production in the country and also reach out the marginalised rural farmers alongside private sector cotton credit inputs schemes.
The free inputs cotton programme has capacitated most farmers to go back into the fields and start cotton production.
However, we think the incentive should be given to farmers that have actually produced, and that the incentive should come in the form of a price subsidy to farmers that have grown the commodity.
We have witnessed situations where farmers, when they get these free inputs, they do not actually go to plant but sell them and keep the money.
So we feel that while the idea is good, it might not achieve the intended objective.