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Martin Kadzere Senior Business Reporter
COTTCO Holdings Limited posted a $30 million loss for the year to March 31 2015, from $15 million profit achieved in the same period last year. It should be noted, however, that the prior period results included a $37 million gain on disposal of investments, which is profit in accounting, but not real cash profit.

As such, in real terms the company incurred another huge loss in the prior period.

The company literally has no shareholder value to speak of and is now primarily debt-funded.

Problems for Cottco have dire consequences not just for its shareholders, but for the nation at large.

As the main financier of cotton crop inputs, Cottco plays an important role in the lives of rural farmers and the communities within which it operates.

The failure of Cottco’s business model therefore has far-reaching implications for the many communities depending on cotton farming and ancillary services to the industry for a living.

The depressed international lint prices, write-down of receivables as well as a high producer price have been cited as the reasons for the cotton company’s loss position.

This begs the fundamental question whether there still is a viable investment case for the cotton industry. On the basis of Cottco’s latest results, the answer has to be a resounding “no”.

The fundamental challenges revolve around the issues of poor grower viability leading to high propensity to side-market in an industry in which controls against side-marketing remain lax.

Cottco does have unique financial challenges which have manifested themselves in exceptionally high turnover at board level.

However, any investor entering the cotton financing business would be faced with the spectre of low grower productivity and viability challenges, which have often been blamed for the rampant side marketing and the related debt and volume losses.

It was no surprise, therefore, that after an 18-year presence in the cotton industry, Cargill finally shut down its local cotton operations.

The cotton industry is headed virtual collapse. Inadequate levels of inputs and agronomic support lead to low yields and high side-marketing, which culminates in poor debt recovery.

Poor debt recoveries result in contractors perceiving a higher level of risk and consequently cutting back on the value of input financing. This further compounds the problem of low yields and results in a reduction in crop production.

The low crop size further compounds contractors’ challenges with overhead absorption, resulting in low producer prices. Simple logic dictates that the industry cannot continue to proffer the same failed solutions to the challenges of poor viability and side marketing.

There is need for a radical paradigm shift to come up with pragmatic and lasting solutions for the sector.

The current common buying model of centralised cotton purchasing, despite its flaws, is an acknowledgement of the fact that free market forces cannot be allowed to reign over crop that has been grown under contract.

This model still carries significant risk and is unlikely to result in any meaningful investment in the sector for as long as the grower remains fundamentally unviable.

The huge subsidies that continue to be paid to growers in most major cotton producing countries have the effect of artificially depressing the international lint price.

Against this background, the Zimbabwean cotton farmer can only become more viable if the contractor paid the farmer a higher price.

The examples of challenges faced by Cottco and Cargill, illustrate that merchants are incapacitated in this respect.

So, is there no hope for this strategically important sector?

Policymakers will benefit from rewinding the clock to the CMB era when the country enjoyed a global reputation for top quality crop.

There are important lessons to be learnt here.

The current centralised buying arrangement suffers from the fact that each company has its own overhead structure that needs to be financed.

With the challenge of global subsidies, one way to meaningfully improve grower viability is to consolidate the industry thereby creating economies of scale which can result in a huge improvement in the cotton producer price.

A State-controlled monopoly for cotton would also finally overcome the challenge of side marketing.

With a lower risk signature, it will be possible for growers to receive meaningful inputs and agronomic support.

This will then drive a virtuous cycle of higher yields, better debt repayment, higher inputs packages, higher levels of production, better efficiencies, thereby setting the industry on a path to reclaim its former glory.

Operation of a monopoly will also allow a return to the payment of quality related bonuses which will improve crop quality and farmer viability.

The implementation of an industry consolidation framework would need to take cognisance of the value of investment by merchants to date as well as any related fiscal covenants.

Vertical integration in the form of downstream investment in textiles offers a significant opportunity for the payment of better prices to the farmer from the benefits of local value addition.

With the Asian economies increasingly losing their low labour cost advantage, an opportunity is being created for African cotton producers to go further down the value chain and enjoy far higher returns as a result. It is critically important that policymakers address the plight of the sector from an impartial national interest perspective and urgently put in place measures which can salvage livelihoods for cotton farmers.

It does not take a rocket scientist to distinguish the production systems which have worked from those which have not worked.