1. Proposal for a mechanism to attenuate cotton price volatility
EU - Africa Cotton Forum
5 and 6 July 2004

2. Growing volatility of world prices destabilises the cotton sector
Price increases too uncertain to enable investments in cotton production
Price decreases lead to rural poverty, production drops, destabilisation, cash flow interruptions
An attentuation mechanism is essential:
Failure of state stabilisation systems
Insurance mechanisms backed by futures market seems prohibitive and ineffective (lack of distant futures market)
Self-insurance system run by sector itself seems most promising

3. On voit que la tendance a été décroissante de 2% par an cours des 15 dernières années, et que la volatilité semble croître, parfois amplifiée par le taux de change

4. Objectives of mechanism being proposed
Attenuated effects of rate volatility on producers, while maximising producer prices
Contribution to improving competitiveness, thus encouraging stakeholders to optimise their performance
Ensured funding for critical functions
Compatibility and coherency with privatisation process
Management by actors in the sector (POs and interprofessional level)
Inseparable from global sector management method, and key element of its good governance

5. Architecture of mechanism
1st level: mechanism for smoothing prices controlled by PO
initial price system + eventual complement at end of season
complement at end of N campaign paid to PO which, in turn, can pay it to the producers as a complement to the initial price N+1
2nd level: self insurance controlled by interprofessional level
set since minimum price for producers that corresponds to “discouragement threshold”
withdrawals if above threshold to feed self-insurance fund, support if below threshold
adjusted minimum price if downward trend
3rd level: regional support mechanism, managed at supranational level
to overcome exceptional crises (to avoid strong macro-economic and social impact)

6. Calculation and distribution of profits from campaign
(Average FOB rate observed Cotlook index)
Gross profit for season
(balance)
Self-insurance fund 49
taxes (X%) 37
Add’l revenue SC (X%) 77
32fcfa/kg CG)
producer’s share
(balance)
163
Fixed costs SC
Common costs
Specific costs
240
Cost critical functions 30
min. price producer
To be added to minimum producer prices
860
427
(175fcfa/kg CG)
Predefined fixed amount
Ascertained at end of season
In green: figure for 2003/4 season based on average costs and simulation

7. Simulation of effects of mechanism
Simulation of CIF price for fibre (fcfa)
Total price received by producer (fcfa/kg CG)
La simulation sur 10 est bâtie sur l’hypothèse (défavorable) d’une reproduction du cycle de la dernière décennie, avec une poursuite de l’aggravation tendancielle de 2% par an. On parvient grâce au mécanisme à éviter les à-coups et à maintenir un prix au producteur de plus de 190 fcfa/kg CG, avec un prix minimum qui suit la tendance décroissante. Avec une hypothèse moins défavorable (reproduction du cycle à l’identique) le prix moyen au producteur serait de 198 fcfa/kg
Minimum guaranteed price

8. Advantages of proposed mechanism
Allows for effective smoothing of producer prices under normal conditions
Can be generalised, regardless of SC configuration, as long as contract-based management between reliable actors is possible
Encourages improvement of performances, thanks to flat-rate costs
Divides risks and profits among stakeholders, allthewhile ensuring financing for critical functions
But insufficient if volatility becomes worse or if mechanism starts with several years marked by deficits
Need for a third regional level

9. Lines of thought for third level regional mechanism
Intended to cover catastrophic risks with an exceptional macro-economic impact, and not an eventual downward trend
Managed at supranational level (funding agency or international financial institution)
Accessible to sectors that join the system, as long as mechanisms function well at lower level (self insurance)
Could be administered as advances granted at concessional rates, to be reimbursed in 3 to 5 years
Drawing rights could depend on volumes exported by each sector
Amount required about 100€/tonne exported, i.e. 100 M€ for the whole region or 70 M€ for the three main sectors