Major crisis brews in cotton sector

cottonfield22Martin Kadzere Senior Business Reporter
A MAJOR crisis is brewing in the cotton sector amid revelations that ginners, who have been funding cotton production, may significantly cut down on financial support to farmers after failing to recover substantial volumes of contracted crop last season. According to industry players, most cotton contractors failed to recover their investment due to side marketing by farmers and buyers.

This has prompted many contractors to consider reducing financial support to farmers. The contract schemes constitute about 98 percent of cotton production and were introduced at a time when farmers were failing to access finance from banks due to lack of collateral.

While cotton production has been on the rise over the past few years, the viability of the sector has been adversely affected by side marketing, industry players have said.

The challenges emanated from a situation where some merchants were deliberately paying higher prices to entice sellers including those holding contracted crop.

Industry sources said the uneven playing field where some merchants finance inputs while others on only get involved in at the buying and selling stage was a recipe for disaster.

Major financiers are either pulling out, in the process of pulling out of the sector or have scaled back on their inputs funding to the detriment of grower yield realisation.

Low yields lead to lower levels of inputs debt repayment and higher levels of side marketing. This, in turn, causes losses for ginners resulting in a further reduction in the inputs package. In the past few seasons the negative forces of poor debt repayment and side marketing have had the effect of decimating cotton production.

“No minimum funding is being enforced, which means that the less you finance, the more you buy because your price will be higher as you will have lower costs,” said a senior executive with a leading cotton company.

“We now have total chaos in the sector.”

An attempt to enforce meaningful minimum levels of funding for the 2013-14 season failed. There has also been an increased incidence of fertiliser abuse with farmers either selling it or using it on other crops.

“The remaining ginners are doing seed only.

“No fertiliser means poor yields. Poor yields mean no viability, poor debt recovery, more side marketing. More side marketing means even lower inputs funding,” said one analyst.

The analyst said world prices were depressed with a China offloading stocks for next few years.

“The only solution to regaining viability is through higher yields, which come from correct inputs package as well as training of farmers on correct cultural practices,” the analyst said.

“The long-term solution is for farmers to access their own funding and sell independently or to revert to a State-sponsored monopoly. The contract farming system in cotton has failed.

“The challenge is that the cotton farmer is clearly not bankable. So who will finance the cotton farmer?”

The cotton industry was viable until early 2000 when it was opened up to a multitude of small companies, which wreaked havoc in the sector by inducing side marketing.

This created challenges with debt recovery, yield as well as poor operational efficiencies.

The following measures have been tried to fix the sector: promulgation of Statutory Instrument 263 of 2009 to regulate cotton marketing and its subsequent revisions since then and enforcement of minimum funding and purchase quota systems in 2014.

The major cotton financiers are wallowing in debt arising from cumulative effects of poor volume and debt repayment performance. In documents filed at the High Court by Cottco Holdings, which is applying for provisional judicial management, it cited high levels of farmers’ credit defaults and high levels of side marketing as key risks and challenges.

Cotton output for the 2013-1`4 season declined 6,2 percent to about 136 million kg, from 145 million kg the previous season. During 2011-12, cotton production was 350 million kg.

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