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July 19, 2011

Price formula means cotton boom benefits buyers, but not African farmers

by Cam Simpson and Alan Katz

Amado Kafando, 45, ..was elated following news on March 7 that the price of cotton, a crop he plants each summer in rows broken by a cow- tethered plow, hit a record $2.197 a pound, capping a two-year surge of 430 percent. Finally, he said, cotton could fulfill the promise of its nickname in his homeland of Burkina Faso: white gold.

Within weeks, Kafando was clenching his fists again, this time in anger.

The government and regional cotton monopolies, which Burkinabe farmers must sell to, announced they would charge growers 38 percent more for fertilizer -- and pay them as little as 39 percent of the world price at the time for their crop.

Thousands of the nation’s farmers took to the streets in May, threatening to do the unthinkable -- boycott planting the top cash crop in one of the world’s poorest countries.

A few days earlier, on the other side of the Atlantic Ocean, Jerome Vick... declared that he would do precisely the opposite. “We’re going to put in as much cotton as we can,” said Vick, 61...on the 5,000 acres (2,023 hectares) his family farms in Wilson, North Carolina.

The Vicks have already locked in a price of about $1.25 a pound -- more than double what Kafando will get -- for about 40 percent of their harvest later this year. If the Carolina weather cooperates and prices stop their recent slide, they expect a profit as high as $1 million, enough to add 300 acres.

The divergent fortunes of Kafando and Vick aren’t the result of differences in product quality. As it’s grown in the field, hand-picked west African cotton can be superior to that sprouting on the flatlands of North Carolina or Texas.

Nor is it about subsidies. Throughout much of the last decade, U.S. price supports were credited with Vick’s prosperity and blamed for the poverty in Kafando’s country. They artificially depress world prices, the argument went, robbing African farmers of the only cash most get each year. It was a debate that derailed World Trade Organization talks in 2003.

With cotton prices this year reaching record levels even though U.S. support programs remain, it’s clear the conventional narrative ignored more significant forces right outside the gates of African farms, said John Baffes, a senior economist at the World Bank who studies the global cotton trade.

Burkinabe farmers have no choice but to sell to government- sanctioned monopolies whose shareholders include trading firms such as Paris-based Geocoton and Paul Reinhart AG of Winterthur, Switzerland. In March, as cotton was hitting its highest price since the U.S. was recovering from the Civil War, a committee dominated by the monopolies altered the formula for setting the price each farmer gets. That cut payments for last season’s crop by 39 percent and reduced the base price announced in April.

This should have been a year “when people can finally get a few dollars and put a metal roof on their house,” said Thomas J. Bassett, a geography professor at the University of Illinois who has been studying and writing about west African cotton farmers for more than 20 years. “These mechanisms result in poverty for producers and wealth for companies and traders. It’s subtle and it’s dastardly.”

Representatives for the three regional cotton monopolies in Burkina Faso -- SOCOMA, Faso Coton and Sofitex -- declined multiple requests for interviews for this story. They also denied requests for financial statements or other disclosures.

Among the biggest shareholders in SOCOMA and Faso Coton are closely held international commodities trading firms. They enjoy privileged positions, according to an unpublished April 2010 report done for the United Nations’ Food and Agriculture Organization, sitting in the middle of a supply chain stretching from African cotton fields to factories that make bluejeans, T- shirts and other clothing.

Yannick Morillon, chief executive officer of Paris-based Geocoton, the majority shareholder of SOCOMA, defended changes to the price formula this year. SOCOMA would have suffered a 6 million euro ($8.4 million) loss if the formula hadn’t been changed, Morillon said. Cotton companies in Burkina Faso had contracted to sell most of their fiber before the price surged in the second half of 2010, according to a March 31 report by consultants hired to propose changes to the formula.

“The economic equation wasn’t possible any longer,” he said in an interview at Geocoton’s headquarters off the Champs Elysees. “And if the entire industry collapses, it’s the farmers that are affected.”

Any loss of cotton profits cuts deep in the rural and often impoverished villages of west and central Africa, where the livelihood of about 10 million people depends on the fiber. About 3 million of them are in Burkina Faso, a landlocked country where the World Bank estimates that one out of six citizens relies on cotton.

... in the village of Bakata, 17 miles from the nearest paved road, is where Amado Kafando was born and raises cotton today. Among the salesmen’s stalls more than 30 years ago, he noticed people beginning to treat his father differently; some nodded or even bowed slightly as the patriarch approached. The family had just sold its first cotton harvest.

Until that year, survival dominated the family’s daily existence...they had grown only subsistence crops -- corn and millet. Now their crop was exported into the global commodities market.

Since taking over after his father died in 1988, Kafando has roughly doubled the family’s lands to about 25 acres. He grows a mixture of cereals for food and cotton for cash.

 “I’m not a wealthy man,” Kafando said, “but cotton has improved our living conditions.”

If cotton money helps Kafando’s kids learn to read, they will be ahead of the more than 71 percent of their countrymen who are illiterate, according to the United Nations, in a place where many children are sent into the fields rather than the classroom.

Education can also improve their health in a nation where their father, although only 45, is well beyond middle age. Life expectancy here stands at just 54.

Using data on health, education and other socioeconomic indicators, the U.N. Human Development Report ranked Burkina Faso 161st out of 169 nations last year. About 46 percent of Burkina Faso’s 17 million people live in poverty, according to the World Bank.

Cotton, which constituted 23 percent of the country’s exports in 2009, is the perfect crop for the fields where Kafando’s father first planted the fiber. It needs steady rains for sowing, matching Burkina Faso’s June-to-August rainy season before maturing for harvest in October and November.

Bolls as big as baseballs and light as feathers also flourish in the flatlands of eastern North Carolina, where Jerome Vick’s father gave him 25 acres. Increasing the size of his farm has been an obsession for Vick since he and his wife developed those 25 acres in 1975 with $25,000 obtained from the First Union bank after two other loan rejections.

The family tried cotton... They first planted a few hundred acres of it in 1991...Then, the market turned. Though spikes occurred in 2003 and 2008, cotton averaged just 55 cents a pound from January 2000 to the start of 2010, Bloomberg data show.

The family turned those fields and hopes to soybeans. On Sept. 20, though, more than halfway into the Northern Hemisphere’s growing season, cotton for December delivery rose above $1 a pound in New York trading for the first time since 1995, as low world stocks and strong demand from China surprised forecasters.

The Vicks did an about-face, dedicating 150 percent more of their land to cotton than in 2009. They planted about 2,000 acres of the fiber this year.

Unlike Kafando, the Vicks have direct access to the world market. Through a broker, the family has contracted 42 percent of its expected harvest to Allenberg Cotton Co., a unit of Paris-based Louis Dreyfus SAS, at an average price of about $1.25 a pound.

The same market stirred hopes for similar prosperity in Africa, where Kafando followed the rising price of cotton on the radio or through friends surfing the Internet.

Functionally illiterate, Kafando said he doesn’t understand the formula used to pay him, let alone how changes to it this year will leave him with more income than last season yet much less than he could have earned. When he heard the price that monopolies were offering, he knew something was amiss.

“The price has multiplied by three or four times, so at our level it should be multiplied three or four times as well,” Kafando said. Instead, he said, the monopolies “are getting fat, and we are the ones who are feeding them.”

Anger throughout Burkina Faso prompted a government public relations campaign aimed at persuading producers to abandon their calls for a boycott -- and even to increase production. Provincial and village-level farm union representatives were invited for confabs across the country.

At the front of the room sat Laurent Sedogo, the nation’s agriculture minister. A poster proclaimed farmers should enter into a “new and dynamic contract” with the cotton companies and the government, which had vowed to boost production this season to 600,000 metric tons, 71 percent more than the 350,000 tons picked, processed and sold in the last one.

A few miles away the next day, more than 70 local union representatives packed long benches in a meeting hall no bigger than a classroom, debating how to counter Sedogo’s message.

Other than refusing to plant, though, there’s little they can do under the rules of the local cotton market because farmers must sell to the regional monopoly. The system in Burkina Faso, and in much of French-speaking west Africa, is a legacy of colonial times. A French state-owned textile company, Geocoton’s predecessor, established cotton buying and production monopolies in partnership with African state-owned companies, including Sofitex, now majority-owned by the Burkinabe government.

Today, the second-largest stake in Faso Coton is held by Reinhart through direct and indirect ownership. A family business that’s bought cotton since 1788, the firm remains one of the world’s largest traders in the fiber, according to the U.N.’s Food and Agriculture Organization. Reinhart declined to commentt.

The cotton monopolies give Kafando and the other farmers a base price set each spring through a formula controlled by a committee that includes the three monopolies and the president of the national cotton growers union.Introduced in 2006, the formula was meant to more closely align the  prices paid to farmers with the depressed world market of the last decade. In return, the growers were to get more transparency in how prices were reached, and a promise: They’d be paid based on world averages, not on the selling savvy of the monopolies.

Yet this year, as the world price set records, crucial components of the formula were changed. Six of eight revisions hit farmers, slashing pay 39 percent for the season that ended in March, according to data in the March 31 report by the consultants who came up with the new mechanism.

Some of the best-performing months in the history of the cotton market were removed from pricing averages, while poorer ones were weighted in. Months in which the monopolies failed to sell also got booted from the averages. That meant farmers paid the price for the companies having missed most of the surge in global fiber rates since mid-2010, the report shows.

Wilfried Yameogo, the Burkinabe government official who oversees the cotton sector, denied that the formula was overhauled to benefit the monopolies, calling the changes ordinary reforms that were in the works long before cotton’s price peak.

Karim Traore, president of the national cotton growers union in Burkina Faso, defended the formula change as necessary to preserve the health of the cotton companies.

“I want to make money from my harvest, but we need to have a balance so everyone gets their share,” Traore said. “The consultants told us that if the prices stayed as they were, the cotton companies were going to close their doors. But farmers can’t live without cotton companies. And cotton companies can’t live without farmers.”

The companies and the growers union, which holds government-financed stakes in each of the three cotton monopolies, provide training and seminars on how to improve yields.

Bassett, the Illinois professor, said farmers' unions, especially in Burkina Faso, are either too close to the cotton companies to bargain over prices for their members or incapable of marshaling the technical expertise needed for a robust defense.

“Who is protecting the interests of producers?” Bassett said. “The cotton companies represent their own interests.”

Sales between the monopolies and their trader-owners are opaque, and “signals of collusion are quite apparent,” according to the unpublished April 2010 paper for the U.N.’s Food and Agriculture Organization. Reinhart is first on a list of “approved customers” for Faso Coton’s fiber posted on the regional monopoly’s website.

“An improvement of governance would be to make information more transparent,” said Lorenzo Giovanni Bellu, an economist for the U.N. agency who co-wrote the report. “That would be good for everybody.”

After the formula changes were approved, the pricing committee announced on April 25 that the nation’s growers would get the equivalent of about 59 cents a pound for their cotton lint. That’s less than half the price Vick has locked in so far for the same product.

While subsidies for Vick’s fellow U.S. farmers aren’t an issue this year, during the past decade price supports in the U.S., Europe, India and China cut prices for cotton in Africa by about 15 percent, said Jose Tissier, deputy director of the agricultural and rural development division of the French development agency.

The mechanism in Burkina Faso gives cotton producers there access to credit and certainty that all of the crop will be sold, Tissier said, without endorsing the changes to the price mechanism made by the cotton companies and growers union.

By late June in this record year, the Burkina Faso government responded to the boycott threats by trimming the price hikes in fertilizer, the cost of which has surged this year. The offering price for cotton was left unchanged.

Some protest leaders urged farmers into the field. Others wouldn’t budge. A number of extremists ripped cotton plants from the ground of larger landholders, according to images shown on national television.

For all of them, cotton’s recent slide on world markets has added to their sense that the crop planted this year represents the season of a lifetime. Growers chasing the record prices will drive global cotton production even higher in the year starting Aug. 1, according to the International Cotton Advisory Committee, dampening prices.

Wherever the price settles by harvest time, though, Vick said his experience this season illustrates the benefits of an open market.

“We’ve sold enough that we have locked in a profit,” he said. “That’s the advantage we have over farmers in west Africa. We can lock in enough to make sure we at least break even, then we can gamble on the upside, on the profit.”

Vick wants this season’s yield to underwrite his legacy, building his farm to a size that would allow it to last for generations.

“Expanding our land can guarantee a place for my children to farm,” said Vick, whose hands remain gnarled from a bout of Guillain-Barre syndrome that nearly killed him in 2002.

Although 16 years younger than Vick, Kafando is just nine years shy of reaching life expectancy in Burkina Faso. He too wants to increase the security of his family. He had hoped to use the historic cotton prices to spread a small amount of wealth beyond the fields they farm, perhaps by starting an enterprise that runs from one of those shacks made of twisted tree limbs.

“Cotton farming is very difficult,” Kafando said. “You may be strong today, but tomorrow you can become weak. I used to dream of opening businesses and employing my brothers, putting money in the bank every day. Now I’m afraid it might be too late.”

full article...Bloomberg

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