Development of the Cotton Sector in West and Central Africa

1. Development of the Cotton Sector in West and Central Africa Gobind Nankani, Vice President of the Africa Region, World Bank Wilson Center conference on “Cotton – The Next Steps” October 26th, 2006

2. We all know that cotton is essential to the economies of the Cotton 4: Source: Enhancing Competitiveness in the Cotton 4, World Bank 2006

3. And most research shows that subsidies do have an impact on the world price and on African revenues… Source: Consultant study by Louis Goreux

4. But would the elimination of subsidies lead to a permanently higher price? • In its case against the U.S. at the WTO, Brazil used an econometric model to argue that if U.S. cotton subsidies were eliminated world prices would increase by 6.5 cents per lb. (12-14%); • The panel found that there was “serious prejudice” with respect to price suppression. • Since US exports would be replaced by higher cost producers, the world price would likely stay elevated in the medium term.

5. Keep the pressure on, but removing subsidies may take time… • …and Africa’s producers and ginners must be prepared to stay competitive at a world price which is hovering around 50-55 cents per pound. Source: Australian Commodities, Vol. 14

6. The last two seasons have shownmounting deficits in the sector… Source: World Bank staff estimates

7. After the difficult 2004/2005 season, initial estimates for the 2005/2006 ginning season show that: • Production fell by 15 percent; • Producer prices fell by an average of 18 percent; • The deficits also declined, but remained at an estimated US$68 million for the four countries in 2006. • In 2006/2007 the planting estimates show that production is rising again despite stagnant yields and producer prices, but will deficits continue to mount? Source: World Bank staff estimates

8. West and Central Africa’s competitiveness is threatened by several factors: • Slow reform of ginning parastatals which have little incentive to cut costs and which may become less attractive to private investors; • Stagnating yields; • Poorly developed input markets; • A lack of price risk management for ginners and price stabilization for producers.

9. The Cotton 4 are facing stagnating yields… • Burkina: over the last 25 years, production has grown steadily, but yields have not. Yields vary with rainfall, and production mounts by planting in marginal lands. • Yields are also stagnant for Mali, Benin and Chad. Source: Strategies for Cotton in West and Central Africa, World Bank 2006

10. How can producers increase yields? • Update fertilizer formulas; • Adopt more integrated management of soil fertility; and • Improve seed variety • Is genetically modified cotton a viable solution for stagnating yields?

11. Burkina Faso is the first country in the sub-region to experiment with insect-resistant transgenic cotton • Field trials in Bobo-Dioulasso show reduction in pesticide applications and yield improvement. • Using an Economic Surplus Model, IFPRI argues that Burkina Faso can capture US$ 9.5 million in present value through the adoption of Bt cotton assuming a 30 percent adoption rate. This is based on observed yield increases and pesticide savings. • Technology fee negotiations will be key to determine the magnitude of producer surplus Source: IFPRI, Assessing the Potential Economic Impact of Bt cotton in West Africa, 2006

12. How can the public and private sectors work together to reduce input costs? • Improve input: • price setting • procurement and • distribution; • Traditionally, the ginning companies have procured inputs, but now producer associations are also involved. Need more experience managing these contracts.

13. Can we stabilize prices for producers and ginners? • Producer prices are negotiated annually, in some cases with reference to a price mechanism. Relatively stable, but some bad years. • Ginners’ prices depend largely on how they manage the sale of their cotton on the international market, and how they manage their exchange rate risk. • When prices fall, governments have been covering the producers’ risk through fixed prices and the ginners’ risk through budget transfers. Mali: seed cotton prices (real, CFAF/kg) Source: Strategies for Cotton in West and Central Africa, World Bank 2006

14. Can West and Central Africa move up the Value Chain for cotton? • The first move is to improve the yield and quality of cotton and the improve ginning costs, but it is worthwhile for countries to envisage capturing more from their cotton production. • Each step along the value chain leads to substantially greater wealth and job creation. Source: Towards a Regional Textile and Garment Industry, PADECO 2005

15. Studies into the potential for West and Central Africa moving up the value chain find potential niches including: • Establishing a garment industry to service the local market, particularly with respect to uniforms, underwear, towels and African textiles; • Aiming in the medium term for an export-oriented cotton spinning industry, if: • Electricity reliability and price improves; and, • There is investment in the development of skilled labor in this area.

16. Next steps: • Keep pressure on to remove subsidies; • Focus on increasing yields; • Reform faster: the pace of reform must accelerate to avoid further deterioration of the ginning companies and and a lack of private investment. • Look more closely at input markets; and, • Promote price risk management and explore price stabilization schemes.

17. The World Bank will continue to work with the Cotton 4 and their partners to improvecompetitiveness. Specifically, we are investing in: • Continued strengthening of national programs in technology transfer and capacity building for producer associations; • Adding a regional approach to coordinate research and technology dissemination (West African Agricultural Productivity Program, June 2007); • Setting up framework for evaluating GM cotton (regional GEF biosafety project, June 2007); • Supporting reform through Development Policy Lending and technical assistance.

18. Working with other partners, the Bank is also committed to tracking developments and strengthening analysis of the sector. In 2007, we are planning: • A review of cotton sector reform across Africa, looking for best practices; • Supply chain analysis for fertilizer and other inputs; • More analysis and in-country training on price risk management with the CRMG; and, • Continued exploration of how to move up the value chain in the niche markets which show promise.