Just who sets cotton prices ? (Part-II)

Rakesh Manchanda

International events in the global cotton village that came to a head last year spread one message loud and clear : Zambian Cotton prices are lead, managed and supervised by global cotton prices outside Zambia.

Ginners and contractors monitored by Government all have a lesser role to play. For the first time in the last 100 hundred years, commodity prices reached maximum in mid-2011 and the very next year in 2012 prices crashed to their lowest ever in the last 10 decades.

This price crash brought a new untested challenge out into the open :
Who sets the cotton prices ?
You can count the number of seeds in a cotton flower. But no-one can count the number of cotton flowers and future wealth that one single seed can produce during a future harvest.

Farmers in 2012 demanded a fair price as they said they had produced a bumper crop, but they felt cheated when the price was reduced by half from 3.60 K to 1.60 K per kilogram.

Farmers in rural area depend only on stories and logic fed to them by traders. At times, in order to save his job and bounce back from the stigma of blame for the cotton price, a novice buyer unknowingly promotes the wrong logic that the `big fall` in price is due to the bumper harvest.

So farmers must blame themselves for the price fall. This is where the Ministry of Agricultural and Livestock must be alert and step in to update and support farmers, by utilising radio as an information empowerment tool. The Government’s role as weatherman and radioman further helps to predict excessive rains or drought in time using satellite technology.

Why was the domestic cotton price of no help in 2012-2013 farming season ?
In the farmer-factory divide, farmers’ concern is loud and clear. Let us understand what happens when cotton under pressure is suddenly declared a `controlled product` and farmers’ domestic prices are protected and frozen without any link to the world lint price. The classic lesson in Africa came from Zimbabwe during the last 2012 season.

According to the Zimbabwe media & cotton networks last season-2012, the honourable Minister of Agriculture fixed the domestic support price for farmers at USD 0.77/Kg.

This was more than double the USD 0.30/Kg which contractors had calculated and wanted to offer. At global level the international price was seen rolling down fast from 150 cents to 70 cents per kg.

At this turning point, cotton activity and export in Zimbabwe came to a halt. Reason? The price was not viable for exports. Contractors only protested mildly. They feared that if they opened their mouths, they would be branded anti farmers.

This incident was the eye opener in the last 100-year history of lint fibre export and cotton-growing. This Ministry price was later reversed after a few weeks but it led to a huge loss of valuable exports. Shipments were pre-booked two months in advance and hence were late. This experiment meant to protect the majority of farmers finally resulted in a complete break-up of the stakeholders’ cotton cycle.

There was a massive loss of local rural jobs. Export goodwill was damaged as the 3-month cotton collection season was reduced to 2 months. In Zimbabwe, the farmer’s price eventually plummeted to USD 0.30/Kg.

The International Lint price remains the driving force in finalizing any domestic price. The reverse benchmark of the international sale price at the time the lint would have been sold actually dictates control over two other variables such as the cost of production on the farm and the ginners cost of making fibre lint.

Zambia`s small share of the global cotton production and export in the global cotton village has reduced all Zambian cotton stakeholders to price takers and not price fixers. Due to limited national cash reserves, the Zambian government has to limit its role to providing just one subsidy, that on essential maize, although it has now diversified to rice, sorghum and cotton.

Farmers, through their unions and other stakeholders must understand this volatile link between the world lint market and their local prices. In almost all African cotton-producing countries, the buying price for seed cotton is a result of negotiations between ginners and farmers, which represents the level of prices offered for lint on the international market. More than 97 % of fibre lint is sold outside Africa, in Europe or Asia at a future date while the by-products obtained from crushing ginned grain produce cooking oil, animal cake and soap for a domestic sale.

The ICAC-International Cotton Advisory Committee states that world cotton production is dropping by 1.5 million tonnes from 27.5 to 26 million tonnes while the market appetite for consuming cotton is rising by 760,000 to 23.5 million tonnes. This supply-demand gap is helping to fetch better cotton prices this year.

The distribution of wealth generated by growing cotton is a tricky juggling act performed by global policy-makers. This invites conflicts worldwide both in agriculture and industry. Farmers are never happy burning their own cotton produce and turning `white gold` into white ash, as happened in Zambia during the 2012 season with reports of farmers` resistance and conflicts with police. There is nothing wrong with collective hard work, national spirit and fair intentions of 99% growth. The fault lies in global cotton financial governance.

Outside the purchasing power of global and local markets, humanity is crying out for more cloth. This establishes that the market is not the true mirror of price.

Real sales with real jobs at cotton-producing sites and its increase by organized audit training are the only ways to increase real cotton production globally. Better prices shall then continue to swim back to Zambia from overseas.

Note : Part-1 of this article appeared in Daily Mail in Zambia on April 18 2013. Author worked as a Director in Zimbabwe, Mali in Grafax Cotton Pvt. Limited and is now in Zambia and can be reached at rakeshmanchanda65@gmail.com.