Cotton Oilseed Sector

With the economic potential to significantly contribute to rural poor in Malawi, the cotton sector could conceivably be seen as a poverty panacea. Unfortunately, cotton has been a troubled agricultural product for the country, and a number of issues continue to impede its value in the market place.
With lint contributing at least 30% of volume, cotton is the fourth largest agricultural export after tobacco, sugar and tea, engaging over 300,000 farming families. The sector also supplies crude and refined cotton oil and cotton cake to domestic markets for human and animal consumption respectively. The history of cotton in Malawi, in common with many smallholder-based production systems globally, has been dominated by attempts to link input supply with output production at the quality and volume required to compete successfully in a crowded and volatile global market.
In 2011, contract farming based on ginner supply of inputs ended and was replaced by the contract-based system for input provision to registered producers. This was made possible with the Government of Malawi’s Cotton Up-scaling initiative that injected MK 1.6bn (US $10m) and other resources into the sector in an attempt to expand cotton production into non-traditional growing areas so as to diversify the economy beyond tobacco production.
The main growing areas are in four agro-ecological zones suitable for cotton production, namely low altitude (Shire Valley), lakeshore, medium altitude and high altitude. Cotton is grown principally for lint production, with oil and cake as valuable by-products. The global cotton lint market, currently around 24 million metric tonnes (mmT), is driven by the dynamics in the major consuming and producing countries. After a major price peak in 2011-12, when global production was very low, prices have stabilized with production in 2012-13 and 2013-14 marginally outstripping demand.
The 42,000mT of cotton purchased by ginners in season 2012-13 was worth US$26 million(m), while the 16,500mT of lint derived, priced at US$0.80/pound (lb) was valued at around US$29.1m. The value of the estimated production of 24,300mT of cottonseed at an average price of US$250/mT was around US$6m. Based upon a cake:oil:wastage output ratio of 85:12:3, it is estimated that approximately 21,000mT of cake was produced, worth around US$2.5m at an average of MK50/kg.9 On a similar basis, approximately 3m litres (ltr) of oil was produced, valued at US$5m at an average of US$1.67 (MK650/kg).
However, uplifting the cotton sector would directly contribute to increased income and employment for the poor, the latter particularly for men and women who work as casual workers in the ginneries, spinning and weaving factory, oil processing plants, seed de-linting plants, and on smallholdings and commercial farms. While women have some influence on expenditure, men generally control the income generated by cotton, except for the estimated 25% of farming households that are female-headed.
In the Shire Valley, cotton income is used to buy maize, which does not grow well in these areas, therefore, cotton growing is explicitly a means to secure food. It is ‘lumpy’ income, meaning a whole year’s crop is sold in one or two transactions. There are few formal savings opportunities, so income may be invested in livestock/poultry to be exchanged or sold for food at a later date. Additional cotton production also means more seed for oil processing, which can result in more oil available to rural households.
Despite its potential for pro-poor growth, the future of the cotton sector faces numerous market failure questions. The current seed multiplication model based on smallholders is operated by a monopsony of two suppliers, is expensive and fails to supply the required levels of seed, resulting in importing seed at even higher cost. Input (seed and chemical) and extension markets are distorted by the managed input supply system with insufficient inputs for some, often experienced, growers and oversupply to other, often less experienced, growers relative to land area to be planted. The monopsonistic procurement within the managed input supply system has substantially reduced the availability of extra seed/chemicals for open market sales, which have to compete with ‘free’ inputs. This is exacerbated by the lack of innovative rural distribution models for chemicals that could take advantage of income post sale rather than rely only on sales at time of planting/use. The lack of inputs particularly affects more experienced serious growers, who have had difficulty obtaining the necessary inputs. Overall this input supply gap contributes to declining overall productivity, quality and grower income, resulting in a cycle of low returns and low investment.
The levy system also incentivises under-reporting of processing volumes, resulting in under-collection of the levy thereby reducing the managed input system’s sustainability and supply of inputs for the ensuing season. Firms, particularly smaller oil processors, facing credit constraints and missing information, continue to use inefficient machines and have to handle poor quality seed cotton, as well as contamination with poly-propylene in the lint. As a result, the margins of processors and exporters are reduced by higher than necessary processing costs. These systemic inefficiencies and additional costs, in turn, reduce the price that ginners are willing and able to pay farmers.
Subsequently, international buyers lack confidence in the quality of Malawi’s cotton lint, reflected in a general price penalty/reduction i.e. from an estimated $0.88/lb to $0.80/lb. These market system volatilities are necessary to simultaneously increase smallholder productivity and exporter competitiveness. On the supply side, facilitating smallholder access to certified cotton seed and reliable chemical inputs will lead to increased utilization of quality planting materials and better control of pest and diseases, thereby increasing productivity and returns. Combined with facilitating access to information on good agronomic practices (GAPs), smallholder farmers can potentially double their current yields and improve the quality of cotton seed.
On the demand side, increased margins will be derived primarily from higher prices due to better quality lint, helping to secure the export market, and lowering of costs through an improved tax environment, particularly for formal oil products. This will ultimately result in higher incomes for poor households engaged in cotton production.