Cotton growers are soon to gain access to a portion of up to 350 million Br credit made available by the Commercial Bank of Ethiopia (CBE) and the Construction and Business Bank (CBB) for the harvest season that starts in two weeks. The loan is similar to pre shipment export credit, where producers used to gain access to loans on the consideration that they would pay it back once transaction was completed, for which the Development Bank of Ethiopia (DBE) acts as a guarantor.
Those in the industry had been banned from exporting raw cotton since October 2010, as lucrative prices offered in the international market left the local market dry. In exchange, cotton producers were allowed to sell at international prices in the local market deducting freight and transport cost.
To guarantee the same profits as they would have gained through exports, the government had set a price ceiling of 42.78 Br for a kilogramme of cotton to last for three months, in November 2010. However, Cotton Growers were not happy with the price, claiming that the rise in international prices of cotton and revision of the cap were not commensurate.
The price cap was revised three months later to 57 Br for a kilogramme which the association felt was not close to the profit they would have made even if transportation costs were deducted from the 73 Br in the international market at the time.
Three weeks ago the price cap was lifted as the price for cotton in the international market took a sudden downward trajectory. The price of a kilogramme reached a record low of 4.9 dollars in March 2011, and kept falling to less than 3.6 dollars in June, reaching 2.5 dollars in August, according to Cotlook Index, which indicates global cotton prices.
Since the ban on exports, the association has been pleading with the Ministry of Agriculture (MoA) and the DBE for a solution to their shortage of credits to be used as working capital. It especially stressed the opportunity cost of not being able to export, which it claims would have made its members more profit than selling locally.
The credit was allowed after a sequence of high level meetings between presidents of the Central Bank, CBE, CBB and the MoA. The amount that is made available for the cultivation of cotton in the next harvest season was estimated jointly by the MoA and ECGGEA.
This was good news for the association which has been looking for a solution from relevant authorities for the past year in terms of securing financing. The credit that is made available now is only for the harvesting, collecting and ginning of the cotton.
The excitement of members of the association was visible as some of them met with Esayas Bahre, president of DBE and a representative of MoA, on Tuesday, September 6, 2011 to discuss the financing.
However, the excitement of the 18 members of the 24 member association and one independent grower assembled at Axum Hotel, on Haile G. Selassie St, was soon dampened upon learning of the details.
“Producers have to show a contractual agreement with textile and garment factories before they are allocated the credit,” Esayas explained to those in the meeting. “Previous performance in export and production is also one of the criteria for evaluation.”
This condition was not easily welcomed by the members. It would take away the bargaining power of growers when dealing with textile and garment factories, claimed many of the members.
“Now that textile and garment factories know our access to the credit is contingent on having a contractual agreement for supply, we will be put in a position where we can’t seriously negotiate a price we want,” Haddish Girma, manager of Lucy Agricultural Development Plc, said in the meeting, echoing the sentiment of those in the meeting.
But this might not be an issue considering the gap between demand and supply in the industry, according to Esayas, who stayed from 9:00 am to 11:00 am explaining the new credit option as well as answering questions on Tuesday.
“The banks cannot give credit without a proof of a bankable project or agreement,” he told those at the meeting. “If the issue between growers and manufacturers really exists, we will try to find a solution for it.”
The same is felt by those in the textile and garment industry.
It is unlikely that factories will import cotton and have to actually scramble to get their hands on locally available cotton, the basic raw material for their industry, than going in the direction indicated, one member of the Ethiopian Textile and Garment Manufacturers Association (ETGAMA), told Fortune on a condition of anonymity.
Nonetheless, this assurance is not that comforting to the cotton growers.
“The relationship between growers and textile and garment has gone sour since the export ban was imposed,” Berhane Gedey, owner of Bazel Agricultural Plc, the sole cotton grower present at the meeting, who is not a member of the growers association, said. “We were chasing them to commit to purchase and collect payment.”
If such issues are present they should be handled on a case by case basis involving stakeholders from both sectors, according to Endalkachew Sime, secretary general of ETEGAMA, who declined to comment in detail on the matter.
Such an opportunity may come sooner than expected. The MoA has scheduled a meeting for both cotton growers and textile and garment manufacturers this week, according to an official from the ministry close to the matter.
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