Across Zambia, cotton is a key source of income for more than 300,000 smallholder farmers. As one of the few cash crops grown in the country, cotton means money for school fees, food, fertiliser and other household necessities.
It is also an important source of income for the investors. Using a contract farming model, cotton companies invest in farmers by providing inputs such as fertilisers and seeds on credit, expecting the farmers to sell back all of their cotton exclusively to them, so that their processing facilities can operate profitably.
But the cotton sector is facing a number of challenges. Production is at its lowest in decades, down by 50 per cent from 2012. This is damaging both companies’ investment and farmers’ incomes, and threatening the sector’s future.
There are many reasons why overall production is at a historical low, including low yields due to erratic rainfall, poor agriculture extension services, low world cotton price and poor-quality inputs given to farmers. But the elephant in the room is side-trading: farmers and companies trading with each other illegally, outside of formal contracts. It is leading the sector into a downward spiral.
With the sector at a crossroads, the Indaba Agricultural Policy Research Institute (IAPRI) and IIED embarked on research to understand the drivers behind side-trading and explore possible solutions with key stakeholders. While we are finalising the research, here are some key impressions.
Joyce, a cotton farmer and a mother of four
I need money to send my son back to school
Joyce’s 14 year old son, Matthew, is farming in the fields instead of attending school this year. The family is hoping for a good cotton price this year to pay for him to go back to school. In the past, as well as covering school feels, Joyce’s income from cotton-growing was high enough that it enabled her to build a brick house with a corrugated tin roof, a rarity in the village, and an indication of how rewarding cotton growing can be for small farmers if the price is right.
But with a steep decline in the world cotton price, farmers' incomes have fallen sharply. Nowadays, farmers complain that they make very little money after deducting loans owed to the contracted company. As a result, when they are desperate for cash, as Joyce is for school fees, they often break their contracts with their cotton companies and "side-sell" to other buyers who offer better prices, pay cash, or who come into the market early when money is needed most. Either that, or they side-sell all of their crop to avoid the loan repayment, because they simply make too little after paying back the loans.
It's not just farmers side-selling, however. Companies also break the law, buying from non-contracted farmers to meet their procurement targets and keep their processing machines running. Our research indicates that only 33 per cent of all cotton processing capacity in the country was used in 2016
A vicious cycle
Almost everybody agrees that side-trading must be stopped.
It is bad for the companies because they cannot recuperate their original investments in capital-intensive processing facilities, as well as inputs provided to cotton farmers. This in turn reduces the quality and quantity of their investments in farmers over time, further decreasing production.
It is also bad for the farmers because they are punished if they are found out; they are blacklisted by cotton companies and at times even household properties are confiscated. They may also suffer in forthcoming seasons from poor quality or fewer inputs being provided by ginning companies.
Significant obstacles will have to be overcome for side-trading to stop. Mistrust among companies and between companies and farmers is high. Companies suspect each other of stealing from 'their' contracted farmers. Farmers suspect that companies cheat them on the quality and price of inputs and the purchase price of their cotton harvest. It is a vicious cycle in which nobody has incentive to play by the rules, seriously undermining the sector's long-term growth.
Meeting farmers where they are
So far efforts to address the problem have mainly focused on preventing farmers from side-selling. Stricter law enforcement, private sector self-regulation, and higher penalties for farmers breaking contracts have been discussed. But ongoing research by IAPRI and IIED shows that, unless we make policies that work for farmers, side-trading will likely continue.
In our research, we spoke to more than 200 farmers about why they engage in side-trading and how contract farming can be improved to meet their needs and reduce side-selling.
Many of them are concerned about the lack of transparency in how the purchase price is set by the industry and the low quality of inputs provided by companies. Delayed payment, when farmers need urgent cash to feed family and pay for school fees, is also a problem, as are the long distances farmers must travel to take their cotton to a selling point.
The road ahead
"This year, life is especially tough for farmers like us," says Michael, a cotton farmer and a Board Member of the Cotton Association of Zambia. Cash is more important than ever because of the combined effects of drought and pests. The region was hit by a famine last year, and fall armyworms are attacking food crops – a real cause for alarm among many cotton farmers who rely on maize for their food.
As the Zambian government and the cotton industry discuss the way forward, any solution needs to address the practical needs of cotton farmers – starting from their seasonal needs for cash and preference for shorter distance to selling points.
The Cotton Board of Zambia is already exploring a more transparent price-setting mechanism that would allay farmers' negative perceptions of the industry. The board is also experimenting with more productive cotton varieties and higher quality seeds, as well as a database that companies can use to identify double contracting. On the company side, ginning companies are piloting an e-payment scheme for cotton bought in the 2017 marketing season in the Eastern Province. If it works, e-payment will be an added innovation that can help reduce incidences of side-trading by reducing payment delays.
IAPRI and IIED are working closely with the key stakeholders in Zambia – regulators, industry association, company managers as well as farmers' associations – in this research to find effective cotton policies that take into account the situation on the ground.
The cotton sector across Southern and Eastern Africa suffers from similar challenges. We hope that our research in Zambia and Zimbabwe will provide key insights into the nature of side-trading, and advocate for the importance of working with farmers rather than criminalising them.
Beyond the cotton sector, this case exemplifies the challenges often faced by both farmers and companies in contract farming arrangements, especially as markets become more competitive. We hope the research can contribute to an open discussion about how contract farming can best be designed to work in the favour of both smallholders and companies.
Technical Efficiency: Are Zambian Cotton Farmers Lagging Behind? [PDF] Stephen Kabwe, Thelma Namonje-Kapembwa, and Brian Chisanga. (June 2016) Working Paper No. 111.
The research mentioned in this photo story is being conducted in collaboration with the Indaba Agricultural Policy Research Institute (IAPRI), as part of the DFID-ESRC Growth Research Programme.