SUB-SAHARAN AFRICA: Building foundations on cotton

Feature

posted 15 Mar 2002 in Volume 5 Issue 6

SUB-SAHARAN AFRICA: Building foundations on cotton

Investment in the cotton industry is as much-needed as in most other agri-sectors in sub-Saharan Africa. Bruce Robertson from Plexus Cotton in the UK relates the Great Lakes Cotton Company experience - a subsidiary of Plexus that has met success and put something back in Uganda, Malawi and Zimbabwe.

"To send my children to school and to pay for medicines". This is the overwhelming response from farmers in Uganda when asked what they do with their cotton revenues. It is in the rural areas where Africa's poverty is most acutely experienced and the cotton industry in Africa invests directly in the rural poor. Growing cotton provides a viable alternative to interminable subsistence and donor handouts. It is perhaps the most pervasive industry in its effect upon poverty alleviation because every farmer, no matter how marginalised, can grow cotton and receive cash by selling it to a local ginnery. Plexus Cotton, through its subsidiary Great Lakes Cotton Company has invested directly in the cotton industry through ownership and shareholdings in ginneries in three sub-Saharan countries, Uganda, Malawi and Zimbabwe.

It is growing through experience and certainly has a lot to learn but Great Lakes is proving through practical example that investment in some of the poorest and economically challenged countries in Africa can be both profitable and developmental. Its experience is worth documenting because while cotton is one of the industries in Africa that can compete internationally it is not the only one.

Tourism, coffee, cocoa, tobacco, mining, horticulture and tea are also capable of competing internationally and the experience of one successful investor can open the door for others leading to the concerted push vital to Africa's future.

Missing the old official bodies

In many of the major African cotton growing regions the established body for promoting cotton business has disappeared. One can point to the former Tanzania Cotton Marketing Board, Uganda Lint Marketing Board and the Nigerian Cotton Board to name but a few. To see the worth of these organisations one can point to the fact that even up to 10 years ago Tanzania was receiving a premium over SJV of nearly six cents/lb. These organisations have now been consigned to history - despite the fact that they ensured the proper marketing of the lint, the regulation of the cotton industry in their country and proper financial management of the cotton crop of the country. Today Tanzania trades at a two or three cents/lb discount to SJV.

This article will document Great Lakes' experience in Uganda because there is not space to write also about the other areas. Suffice to say that similar models are being followed in other Countries as well:

Uganda the first

The first investment by an associate of the Great Lakes group was in Uganda in 1995. Uganda's cotton industry had thrived from its inception in 1903 to the early 1970s. It produced 400,000 to 450,000 bales per annum of high quality roller ginned cotton, providing income for peasant households throughout the country and earning foreign exchange as most cotton was exported.

Two ginneries were bought in eastern Uganda, neither of which had operated for four years. The gins were re-habilitated and investment in cotton production began with the provision of inputs to 78,000 small farmers. Gin throughput increased from 3,700 bales in the first year to 21,500 bales in the second year, proof that farmers wanted to grow cotton and that eastern Uganda had the capacity to rapidly revive its cotton sector. In the third year, however El Nino devastated the Ugandan cotton crop and the companies production dropped back to 4,500 bales.

The company found itself at a crossroad: the inputs it had distributed to boost crop production had not been recovered due to intense competition for buying of seed cotton in a liberalised market and El Nino had put a strain on the entire industry. The Great Lakes Group realised that the only way forward was to co-operate with other ginners to increase the national crop. Great Lakes played a leading role to formalise the ginners association into the Uganda Ginners and Cotton Exporters Association (UGCEA) comprising all 16 ginneries in the country. The UGCEA set as its goal the rebuilding of the Ugandan cotton crop to 250,000 bales within five years.

‘Co-opetition’ the key

Fundamental to this was its introduction of ‘co-opetition’ in the Uganda cotton industry, whereby ginners co-operate with each other to grow the national cotton crop and then compete to buy the cotton from the farmers. The UGCEA borrowed funds on behalf of the ginners from a World Bank cotton programme and provided seeds pesticides and spray pumps to 1.2 million farmers throughout Uganda. So through their association the ginners co-operated to grow the national crop. Cotton production increased from 33,000 bales to 82,000 bales. The following year production increased to 118,000 bales and cotton became one of Uganda’s economic success stories.

The borrowed funds were repaid through the ginners paying a levy on each kilogram of seed cotton purchased. An international monitoring organisation was employed and positioned staff at each ginnery to ensure that debts were repaid - the UCGEA achieved a 100% repayment on its farmer input programme, virtually unheard of in Africa.

The next phase in the crop development programme, started this season, is a concerted push to improve the yield per hectare achieved by farmers. The cotton programme has given farmers access to inputs, but yields remain frustratingly low due to poor agricultural practices and zero use of fertilisers. The UCGEA has teamed up with the IDEA project, an American-based agricultural development NGO. IDEA has had huge successes in increasing maize yields over the last six years through convincing farmers to invest in fertilisers and herbicides and to apply modern agricultural techniques to their maize crops. In co-ordination with IDEA, the UGCEA has established 2,000 demonstration plots an all the main cotton growing areas in Uganda. Extension officers have selected the best farmers in each district, provided them with a cotton inputs package and trained them in best practice methods of cotton farming. The farmers set up 0.25 acres as a control plot using traditional growing methods. Alongside this plot he plants another 0.25 acres of cotton using fertilisers, a herbicide, correct plant spacing and correct timing of planting. All the farmers in the surrounding area visit the demonstration plot through three formalised field days. They see for themselves the huge difference in yields between cotton grown traditionally and cotton grown using modern techniques. In the experience with maize production this has created pull effect, with farmers buying fertilisers and inputs for cash. We expect to see the same benefit with cotton. Uganda has a near perfect climate for cotton production. With improved farming techniques and fertilisers to supplement the soil in some of the more populated areas yields can increase exponentially. For farmers, increased yields directly improve cotton's profitability and encourage growth in areas planted to cotton, creating a virtuous circle.

Reliable crop

In our efforts to grow the cotton crop, the Great Lakes Group has enjoyed the support of the Ugandan government, which sees cotton as an integral part of its poverty alleviation programme. Cotton means cash to peasant farmers - no other crop is more reliable than cotton as a means to put ready cash in the pockets of the farmer at the time when he most needs it (ie, December to February). By growing cotton and selling it to the Great Lakes ginneries every farmer has access to school fees. In fact during the first week of February when most schools require fees to be paid a flood of cotton comes into the ginneries. Local authorities reported that during the first two years of the rehabilitation of the ginneries, school attendances rose dramatically. The other basic requirement for cash is to pay clinic bills, and the cotton income enables basic health requirements to be met and paid for. So the two cornerstones of development, health and education, are supported by cotton, not in the form of ephemeral handouts, but through commercially viable and therefore sustainable earnings from cotton production.

Particularly interesting is the cotton industry in Uganda and in Malawi and Zimbabwe where Great Lakes also has cotton ginning operations, are the financing structures for the operations. Cotton ginneries are capital intensive and the machinery is bought in US dollars. So project finance usually required to establish a ginnery, with facilities in a combination of local and foreign currencies. The cotton ginning operation has a huge working capital requirement, because seed cotton is purchased for cash from the farmers over a short time period (in Uganda, literally using bank notes and coins at the ginneries), the cotton is stored for weeks or months before it is ginned, and the lint is paid for through cash against documents (CAD) or letters of credit. So the ginners need to borrow large sums of money relative to the size of their businesses, for three to six months per year. Typically a ginner producing 20,000 bales of lint, (at current prices around US$3.3 million) will require a seed cotton purchasing facility of around US$1.5 million, for four months.

The ginneries’ assets are not sufficient security for the working capital loans, so trade financing facilities are required. Security is provided through the LC or CAD contract being assigned to the bank, and the stock being held for the account of the bank. As around 30% of the ginneries production is sold forward, in physical sales to spinners or merchants, sales contracts and LCs are readily available as security. The stocks of seed cotton (raw material) and lint and seed (products) build up rapidly during the buying season, and can be monitored by internationally recognised inspection companies such as ACE or SGS.

Need to climb out from dependency

We have provided the example of Uganda - similar models are being followed in the other countries in which we have investments. In conclusion we would comment that Africa's economic challenges are well documented with their budgets becoming increasingly dependent on the largesse of rich nations. This precarious position has to change. Africa's primary economic challenge is to work itself out of this dependency, to produce its own wealth sufficient to sustain the needs of its citizens.

Integral to its development is economic growth - the vast educational, health and infrastructure needs have to be funded. The economies will only grow on a sustainable basis through direct investment in their productive sectors. Domestic capital resources are a necessary source of investment, but are insufficient. Africa needs foreign capital inflows to achieve the growth levels required. Yet only 1% of the world’s direct investment goes to Africa - less than Singapore alone. Thus, a key question for Africa is can it attract foreign capital? Are there opportunities for foreign investors to make dollar-based returns sufficient to justify the cost and the risk of investing in Africa? Can companies invest to achieve profitable returns as well as contributing to development? These questions are often overlooked in the debates of Africa, lost in the concentration on AIDS, war and poverty.

The experience of Great Lakes is that in the cotton sector, foreign direct investment in Africa can be both developmental and profitable. It is not an easy environment in which to operate, with its political instability, foreign exchange restrictions, skills shortages and infrastructure deficiencies but cotton from Africa can compete without subsidies with cotton from all other cotton producing countries. It is a true wealth creator, for all stakeholders, and with focus and patience, the cotton industry in Africa can be a mainstay in Africa's renaissance.