Heterogeneous welfare effect of cotton pricing on households in Benin Presenter : Didier Alia, PhD Student University of Kentucky Policymaker : Epiphane Adjovi, Director CAPOD

Outline Context Objectives of the study Methodology and data Findings Conclusions, caveats, limitations and way forward Policy recommendations 2

Context Importance of Cotton in Benin For the economy o 20% of agricultural land and 80 % of agricultural exports o 10–15% of the GDP For agricultural households o 237,500 direct employment for cotton farmers o 2.5 million of persons indirectly dependent on cotton revenue For the industrial sector o 18 ginning plants and 5 textile mills o 2 mills producing refined cotton oil 3,000+ urban jobs 3

Context Subsidy of producers in developed countries Declining demand Strong domestic production in China Declining world prices Strong euro compared to Dollars External Constraints to cotton production 4 4 Figure 1: Evolution of cotton price

Context Internal constraints of cotton production Low and declining producer prices over the period Late and irregular payments of price of producers Increasing production costs Stagnant cotton yield Complex and poor management of the sector Increase urbanization and demand for food crops disinterest among farmers in cotton, especially in the south 5

Context Complex Management and pricing system of cotton Ginners Input Dealers Producers Government 6 Overall management Support the organization of actors Subsidize/tax Guarantee input credit provided by dealers Guarantee the purchase of cotton seed from producers Provide extension services, etc. Market the cotton-lint Production decisions Acquisition of input credit from dealers Supply input credit to producer Purchase cotton-seed from producer Process cotton-seed into cotton-lint Supply seed to oil mills

Context Strong government intervention in the cotton sector Increase in producer prices for cotton from 190 FCFA/kg in 2009 to : 200 FCFA/kg in 2010– FCFA/kg in 2011– FCFA/kg in 2012–2013 Production Processing Marketing 7

Objectives of the study Analyse the impact of the recent increases in cotton price Analyse the responsiveness of cotton production to price increases Estimate welfare changes due the new price policy and evaluate potential effects of complementary policies Examine potential spillover effects of the cotton pricing policy on other agricultural sectors

Methodology Supply response Address estimations issues Welfare effect First order income effect of price change Second order income effect due to supply response Analyse the heterogeneity in the welfare impact Indirect effect Cross effects on the supply of other crops 9

Price, harvested area, and production data From Beninese National Statistical Database 42 communes over the period 1995 to 2011 Alternative crops considered: maize, millet, sorghum and related crops, rice, yam, cassava and other tubers, beans and related crops, and peanuts and related crops Household data Survey conducted in 2009–2010 by CEBEDES funded by SNV Covers all cotton-producing areas Data on production, revenue, consumption Data 10

Findings Cotton producer are sensible to price incentives Positive and significant response of cotton area Amplified effect over time YearArea (ha)Price (FCFA/kg) , , , , , Table 1 : Cotton area since the price increase 11

Findings… Figure 2: Density of simulated per capita expenditure before and after the price change Welfare effects 12

Findings… 31.6 % increase in prices For 9.8% welfare gain 11.3% gain in the North 4.3% gain in the South All farmers across the income distribution benefit but pro-poor gain in the south 13 Figure 2: Relation between the welfare gain and per capita expenditure

Findings… Effect on other crops No crowding-out effect on the production of other crop Potential positive externality on the development of some crops, such as millet, sorghum, and rice, mainly in the North Many farmers reported using fertilizer and credit received for cotton also in their production of other crops. 14

Conclusions Cotton response to price incentives is relatively important. Important welfare gains associated to price increase benefitting all cotton farmers. Benefits are homogenously distributed and high in the North Benefits are rather low in the South but have a pro-poor impact Complementary yield-enhancing policies to sustain the benefits No crowding-out effect, but potential positive spillovers on other sectors 15

Limitations and way forward Availability of (panel-)data at household level Factors explaining area allocation not observed or included in the analysis Issues with the estimation of the supply responses Absence of before-after the policies data Directions for future research 16

Policy recommendations 1.Sustain and further develop the Beninese cotton sector 2.Ensure that producer prices are enough to compensate productions cost 3.Develop access to high-yielding varieties, inputs, equipment and enhancement of extension services. 4.Pursuit of the reform of the sector in consensual agreement of all the actors 17

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