ABSTRACT
Liberalization of the Cotton market in Malawi permitted private sector participation in the market. As such it was expected that the liberalized market would afford both the sellers as well as the buyers of cotton a fair return on investment as compared to the days when the Government was controlling the cotton prices. A major consequence of the market liberalization policy was that a new market structure has emerged because of the entrance of individuals firms and corporate organizations that now support production and marketing of Cotton in Malawi. However, there is very little empirical evidence on how this development in the Cotton market affected the performance of the market in terms of its efficiency. It is with this background that a study to analyse the performance of Cotton marketing in Salima and Balaka Rural Development Projects (RDP) was conducted. A total of 120 cotton producers, 30 traders and 4 cotton ginning companies were interviewed. A price spread method was used to determine marketing margins of private traders and ginners and measure marketing efficiency. The Hirfindahl Hirshman index was used to measure the concentration level and competitiveness of the cotton market in the two RDPs. A modified production function analysis using ordinary least squares was carried out to analyse factors influencing the quantity of cotton produced. Analysis of the structure of the cotton market revealed that the cotton market is less competitive in nature. Market margin analysis indicated that the cotton market would be efficient if producers sell their cotton through farmers‘ organizations. Results on regression indicated that land allocated to cotton, household income invested, amount of pesticides used in cotton production and gender as being main determinants of cotton produced and sold. All these factors were significant at 5% level. Key recommendations of the study includes; improved access to market information, encourage farmers and traders to form cooperatives /associations and enhanced accessibility to credit facilities and create policy environment that facilitate active participation of private traders and ginners in the marketing of cotton.
CHAPTER ONE
INTRODUCTION
Background Information
Agriculture is the most important sector of the economy and will remain the mainstay of the economy in Malawi in the short to medium term. Currently, agriculture employs over 80 percent of the country‘s labour force including subsistence farmers and contributes over 80 percent of foreign exchange earnings and supplies more than 65 percent of the raw materials most needed by the manufacturing sector. It accounts for 39 percent of the Gross Domestic Product (GDP) and contributes significantly to national and household food security (GoM, 2005).
The agriculture sector is dominated by the production of tobacco, sugar and tea, which are the main foreign exchange earners. At present, the tobacco industry which is the main stay of the Malawi‘s economy is facing a lot of challenges due to the anti-smoking lobby and other factors. As a result other crops are slowly becoming important sources of foreign exchange in Malawi; among such cash crops that have high potential to expand particularly in the smallholder sub-sector is cotton (GoM, 2005). Similarly, despite several challenges in agriculture the government anticipates to open up the economy to trade. This would be done through implementation of various programmes and policies that are outward-looking and export-oriented rather than import-substituting. Agriculture will therefore need to concentrate more on the production of commodities in which Malawi has competitiveness and export growth potential .e.g. cotton. This would be done through a commercial approach that emphasizes on efficient utilization of resources through more private initiatives and greater commercialisation of smallholder agriculture through linkages. Special focus is on increasing importance of the agro-processing industries that would require complementary growth in agricultural output for reliable and sufficient supply of inputs and raw materials (GoM, 2005).
Agriculture Policy Framework
The Malawi Growth and Development Strategy (MGDS) concentrate on agriculture as the driver of economic growth and recognise that food security is a prerequisite for economic growth and poverty alleviation. The Strategy focuses on increasing agricultural productivity and integrating smallholder farmers into commercial activities. Among some of the crops targeted here include tobacco, sugar, tea and cotton.
According to the MGDS (2005), the long-term goal is to develop a vibrant cotton growing and processing industry. In the medium term, the country‘s policy aims at increasing production of garments made from locally woven cotton cloth as opposed to imported synthetic fabrics. This will require development of a local textile industry to increase the flow of cotton from growers and ginners, thereby having a positive impact on the cotton sub-sector and opening up textile products for export. Currently, the linkages between the cotton sub-sector (production of lint cotton) and textile and garment production (manufacturing) are weak.
The Ministry of Agriculture and Food Security (MoAFS), noting the recurrent food crises and erratic sectoral growth rates has also developed an Agriculture Development Programme (ADP) framework which is going to guide investments for the sector for the next five years (GoM 2008). Similarly in this framework, the ministry prioritizes key areas for immediate intervention in order for the sector to grow sustainably while reducing malnutrition and poverty. Specific in this framework, under its agri-business component is also cotton among other high value crops targeted for meaningful investment.
Cotton Sub-sector
Cotton is one of the most important cash crops in Malawi. It ranks fourth as a foreign exchange earner for the country contributing 1.8% of the total foreign exchange earnings after tobacco 47.5%, sugar 11.5%, and tea 8.6% (GoM, 2008). In addition, cotton has immediate potential impact on growth because of the following reasons; four private ginning companies have invested in the last six years and have plans for further investment to revitalise cotton growing by smallholder growers through providing access to inputs and technical support and AGOA has created more opportunities for exports of garments to the USA and stimulated demand for textiles and cotton lint in the region, particularly in South Africa (GoM, 2005).
The major growing areas are; the Lower Shire Valley accounting for up to 50% of national production, the southern region upland areas around Balaka accounting for 30% of production and the Lakeshore area around Salima accounting for the remaining 20% (RATES, 2003).Cotton is predominantly grown by smallholders and it supports up to 90,000 farm families and it is approximately grown under 30,000 hectares. There were attempts by large commercial farms to cultivate cotton but most of them have stopped growing because of low profitability in the face of poor international prices over the past five years (GoM, 2004).
Malawi has been a Cotton growing country since the colonial era. The cotton sector was vibrant for many years but started to slump in the early 1990‘s due to among other reasons, the decline in global prices of the crop and the increasing cost of production, which eroded the profitability for small and marginal farmers (MCCCI website, 2008). Other problems includes high input requirements for cotton growing, including herbicides, pesticides and spraying equipment, high labour input required for weeding, spraying and picking, Poor credit discipline, which resulted in withdrawal of credit facilities, reduction in the number of buying points close to farmers and the increased role of traders who have generally taken advantage of smallholder farmers and problems with quality and availability of seed. Figure 1 below show the trend of cotton production for the past 10 years. This is against a benchmark of 70,000 metric tones of cotton that was produced in Malawi during the years 1986-1990 (Rates, 2003).
One of the major challenges faced by cotton farmers is the low seed cotton farm gate price on the market. From mid 1960‘s Agriculture Development and Marketing Corporation (ADMARC) was the sole buyer of seed cotton until 1994 when the market was liberalized following the adoption of an economic Structural Adjustment Program (SAP) with the World Bank. To a large extent as well, the sector was affected by market liberalization which led to a heavy influx of finished textile goods and garments hence pushing out of business the only and biggest company, then called David Whitehead and Sons in the manufacturing sub-sector (GoM, 2003).As such ADMARC scaled down its involvement and sold its ginneries.
On the other hand, the market liberalization permitted private participation in the marketing of cotton .This resulted into the coming of private cotton companies like Great Lakes, Cargill, Iponga, NAHDI and Toleza cotton Companies. These companies came in with the hope of increasing competition in the buying of seed cotton. However, instead of competing to buy seed cotton these companies colluded and in the process offered low farm gate prices (GOM, 2005).Virtually all the cotton crop is sold within Malawi to the above mentioned ginning companies despite the fact that there are claims that some of the seed cotton is exported to Mozambique through private traders. Therefore, this study was intended to evaluate the overall performance of cotton marketing in Malawi specifically during the post liberalization period. The Study was purposively carried out in Salima and Balaka Districts which is among the major cotton producing districts in Malawi.
Statement of the Problem
The deregulation of the cotton market permitted private participation in the market and it was expected that it would afford both the sellers as well as the buyers of cotton a fair return on investment as compared to the days when the government was controlling the cotton prices. A major consequence of the market liberalization policy was that a new market structure has emerged because of the entrance of individuals firms and corporate organizations that now support production and marketing of cotton in Malawi. However, there is limited empirical evidence on how this development in the cotton market affected competitiveness and efficiency. Currently, the government and private sector through their statements have created a picture that price is a major factor determining performance of cotton marketing. On the other hand, no studies have been undertaken to verify this. Therefore, this research work intends to fill the knowledge gap on cotton marketing especially on institutional and management factors that are critical in influencing cotton marketing efficiency. The study would also help to give a clear understanding as to why cotton production levels are still declining despite several interventions from the government and private sector.
Objective of the Study
Overall Objective
To examine the performance of smallholder cotton marketing in Malawi
Specific Objectives
i. To asses the structure of cotton marketing system in Salima and Balaka Rural Development Projects.
ii. To analyse the conduct of cotton market players in Salima and Balaka Development Projects.
iii. To determine the efficiency of cotton marketing in Salima and Balaka Rural Development Projects.
iv. To determine factors affecting the quantity of cotton produced and sold in Salima and Balaka Rural Development Projects.
Hypotheses of the Study
i. Cotton Marketing system in Salima and Balaka Rural Development Projects is not competitive.
ii. There are no price collusion tendencies in the cotton marketing system.
iii. Cotton marketing systems in Salima and Balaka Rural Development Projects are inefficient.
iv. The total farm size, per capita income invested, quantity of pesticides and labour, has no major influence on the quantities of cotton produced and sold in Salima and Balaka Rural Development Projects
Significance of the Study
The study will generate knowledge that will be used to improve Cotton marketing in Malawi. This will lead to more informed decisions by farmers, traders and policy makers. Furthermore, it will facilitate the ease with which the sources of inefficiency can be traced and find the possible ways to minimize loopholes in the marketing system .The findings of the study will also help potential investors, producers, traders, processors, governmental and non- governmental organizations that have a stake in cotton marketing system and want to intervene in it in the future.
Consequently, assessment of smallholder cotton marketing in Malawi will be of paramount importance as development of efficient markets enables farmers to increase income.This will provide farmers an incentive to adopt improved technologies and improve rural and urban food security.
Limitations of the Study
This study was limited to 2 major producing areas of cotton in Salima and Balaka Rural Development Projects in Malawi. The analysis was based on cross sectional price and production data of cotton collected from the 2 cotton markets. The data covered information of cotton marketing for the past 5 years(2004-2008) .The study focused on marketing of seed cotton, cottonseed, and lint starting from the farmers up to the ginners in the two districts. However, the study was based on information provided by farmers, traders and ginners and was assumed to be correct.
Definition of Terms
Market conduct: Refers to the patterns of behavior that firms follow in adapting or adjusting to the markets in which they sell or buy. Examining the relationship between the factors of market structure and these price-setting practices, it may be possible to make some predictions about the consequences of these behavioral patterns on performance (Pomeroy and Trinidad, 1995).
Market efficiency: analyzes the profits (net marketing margins) of market actors, looking at whether price differences across time and space are less than or equal to transaction costs.
Market performance: Refers to the impact of structure and conduct as measured in terms of variables such as prices, costs and volume of output (Bresslerand King, 1970). By analysing the level of marketing margins and their cost components, it is possible to evaluate the impact of the structure and conduct characteristics on market performance (Pomeroy and Trinidad, 1995).
Market structure: This is defined as characteristics of the organisation of a market, which seem to influence strategically the nature of competition and pricing behavior within the market. Structural characteristics may be used as a basis for classifying markets into perfectly competitive, monopolistic or oligopolistic (Bain, 1968).
Price spread: The difference between price paid by the consumer and price received by the producer for an equivalent quantity of farm produce (Archaya, 1986)
Smallholder farmer: These are farmers who own land that is less than 5 hectares (GoM, 2008).
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