| || |
| ||Personal accounts || |
| || |
The Burkina Faso Fonds de Lissage:
“Since the 2006-2007 Harvest, the System Is Working”
an interview with André Pouillès-Duplaix,
Deputy Director of the Operational Technical Division of the Agence Française de Développement (AFD)
José Tissier and Anne Legile,
project managers, « agricultural and rural development » (AFD)
The Fonds de Lissage implemented with AFD’s assistance in the Burkina Faso cotton sector represents an especially worthwhile initiative as it demonstrates that solutions exist to cope with the instability of international agricultural markets1.
Aiming at reducing price volatility while respecting global market variations, the Fonds de Lissage is an example of management of price risks that affect all farmers and even sometimes threaten the very existence of their farms.
André Pouillès-Duplaix, Deputy Director of the Operational Technical Division at AFD, reviews this experiment conducted since 2007, and sheds new light on the concrete operation of the Fonds.
by Dominique Lasserre, Advisor, momagri
Dominique Lasserre: Is it working?
AFD : The system has been working since the 2006/2007 harvest on two levels:
• On one hand, the application of the price-fixing formula allows to determine in advance––before farmers start to sow––the harvest price by considering international prices and their eventual turning points… Hence the adoption of fair and less “political” prices than negotiated prices2in the previous system, and a priori less apt to jeopardize cotton companies and the sector as a whole, when the market price is too low compared with production costs.
• On the other hand, the recourse to the Fonds when prices peak to compensate cotton companies in cases where, in the end, they would have paid producers higher prices than the market would allow…
In both cases, producers, as well as cotton companies, are given partial security. Producers are secure since they know the cotton price and cotton production costs, thus their gross operating profit before deciding on cultivation option for the up-coming harvest––earmarking an area for cotton and another for grain, for instance… Securing producer acts to incite them to achieve sound yield increases. For their part, cotton companies are more inclined to make commitments to producers on an advance price, inasmuch as they know that price-fixing takes into account the reality of international markets and that the Fonds de Lissage exists…
DL: What is the cost of the system?
AFD: The initial matching contribution reached €18 million in the form of subsidies to the trade. It is difficult to answer your question, since many variable elements are involved (particularly the volume of cottonseed production, which varies from one year to the next…)
With regard to annual operation expenses, a bank––the BOA3 ––was selected after a bidding procedure. In accordance with its contract, the bank will receive a flat amount for the Fonds’ operations (estimation of potential drawing rights, future matching contributions, transfers…) for a 12-month period. Conversely however, the bank pays the Fonds de Lissage Association4 a fee of six percent of the Fonds’ amount.
DL: Is the Fonds meant to last?
AFD : Yes. In theory, the Fonds is a device created by two professional branches––UNPCB (producers) and APROCOB (cotton companies)––to serve as a long-term management tool for the industry.
The idea is that, once funded, the Fonds may, in the years when the price forecast turns out to be lower than the recorded market price, benefit from matching contributions that compensate drawings made during the years when the price forecast is higher than the market price…
Stochastic computations (Monte Carlo method) were resorted to, but since the main variable is the production volume, it is not possible to assert once and for all that the Fonds is sufficiently funded or not…
DL: What is the schedule to generalize such system?
AFD : A certain number of conditions concerning the industry’s operations at the national level must be met in any country that would be interested.
So to qualify, countries should, in theory, have achieved (or be undertaking) institutional reforms resulting in refocusing their government on the sole steering and follow-up duties––meaning the arrival of private investors and/or increased capital contributions in cotton companies by producers––and resulting in the industry’s management by its players only, in the framework of a trade association including producers and one or several cotton companies…
Certain minimal suitability criteria can later be introduced and defined as follows:
1. The national industries must be endowed with a smoothening and production price decision mechanism subject to an inter-professional agreement and defined by regulations that include automatic operational modes not exposed to influences. Consequently, AFD does not totally control the schedule, all the more so since it does not have the necessary financial subsidies to implement regional ease of execution according to the initial chart.
2. The national smoothening and price-fixing to producers mechanism must operate according to the following principles:
3. Management of national fonds de lissage must be entrusted to a representative bank responsible for the enforcement of regulatory mechanisms.
a) the formula for price-fixing to producers must be indexed to global price trends;
b) methods to determine prices to producers, matching contributions to the fonds de lissage and potential financial support to cotton companies must be calculated by mathematical formulas based on parameters that can be objectively ascertained by the various players;
c) the whole system must be compatible with the use of market tools––as additional smoothening means and other available resources––without which no national smoothening system can be durable.
As of today, the AFD estimates that only Burkina Faso and Senegal are qualifying.
DL: What lessons can be drawn?
AFD : As indicated in the introductory memorandum5, the project is not completed since it does not include market tools nor catastrophic and safety net notions. It is therefore difficult to speak of lessons at this time.
Western African cotton industries, however, are showing what can contractual agriculture contribute in terms of price risk management.
1 A more detailed presentation of the operating principles of the Fonds, is available in momagri’s July 6, 2009 article “The Fonds de Lissage for the Cotton Sector in Burkina Faso, A Pertinent Initiative to Fight Price Volatility”.
2 For many years, the Burkina Faso cotton market operated on the basis of prices negotiated between cotton companies and producers, with the unavoidable political fights they inferred.
3 Bank of Africa
4 The fonds de lissage is managed by the Association of the Fonds de Lissage (AFDL) that was launched in April 2008 during the charter general assembly of the Burkinabe cotton trade association, which includes producers and cotton companies.
5 Please see momagri’s July 6, 2009 article “The Fonds de Lissage for the Cotton Sector in Burkina Faso, A Pertinent Initiative to Fight Price Volatility”.