Value Chain Analysis Of Organic Cotton Sub Sector In Tanzania

VALUE CHAIN ANALYSIS FOR ORGANIC COTTON SUBSECTOR IN TANZANIA

OCHIENG JUSTUS Department of Agricultural Economics and Agribusiness Management, Egerton University,Kenya.P.O Box 536, Egerton, Kenya. Email:[email protected]

ABSTRACT Organic cotton production began in 1994 and Tanzania is currently the largest producer of organic cotton fibre in Sub-Saharan Africa ahead of Uganda. Besides, the cotton sector sustains directly or indirectly nearly 48% of the Tanzanian population for their source of income and livelihoods. This has led to growing interest by farmers, government, NGOs, private stakeholders in organic cotton supply chain since it act as a means to poverty alleviation. The export market is expanding rapidly and destinations for organic cotton include; Switzerland, Germany, USA, United Kingdom, Netherlands and Italy. The small-scale farmers has

greatly benefited

through ready markets, receive premium prices unlike conventional producers as well as training and extension services from government ,NGOs and private company buyers. However, a lot of inefficiencies exist in the organic cotton supply chain activities; production, processing, marketing thus making sustainability is a matter of concern to the players in the sector. Organic cotton producing areas are characterised by poor infrastructure, information asymmetry, lack of awareness of cotton products by consumers and poor market intelligence by traders among others. Interestingly organic cotton from small scale farmers have been certified by bioRe Ltd but niche international and regional markets opportunities have not been fully exploited and local consumers organic cotton products. This paper highlights the major opportunities, strengths; weakness and threats in organic cotton sector in Tanzania towards efforts of increasing production efficiency and competitiveness in this sector. This will lead to sustainable organic cotton production and marketing regionally and globally. Key words: Small scale farmers, Poverty alleviation, Value chain.

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1.0. INTRODUCTION. 1.1. History of organic cotton in Tanzania. Cotton is very important to Tanzania economy and was introduced around 1904 by German settlers as a plantation crop. Production of cotton on a commercial scale started at Ukiriguru, South of Lake Victoria (Baffes, 2002). Organic cotton in Tanzania production began in 1994. Tanzania is currently the largest producer of cotton fibre in Sub-Saharan Africa ahead of Uganda (Ferragno et al, 2005).Organic cotton farmers generally receive 20% higher prices than their conventional counterparts (Baffes, 2002). The organic cotton buyers, government and policy makers add fair trading commitments to organic farming by addressing some of cotton’s economic problems while organic farmer’s organisational structures strengthen rural communities and marginalised groups, including women.

Tanzania is well suited for the production of organic cotton, because of the low reliance on pesticides and inorganic fertilizer, inspection and certification are still not well developed or advanced (Ratter, 2002). This has made many farmers especially small-scale farmers to readily accept to produce organic cotton, but with the challenge of poorly organized supply and marketing chains.

In Sub-Saharan Africa (SSA) organic cotton is grown to basic standards set by the International Federation of Organic Agriculture Movements (IFOAM) and certified by private agencies (Ferrigno et al, 2005). Organic production is based on sound soil management using indigenous knowledge and research to improve techniques. Pest control combines indigenous systems and botanical pesticides, particularly those using neem. Fertilisation uses a combination of animal and green manuring, sometimes adding ingredients such as oil palm processing residue.

Most organic cotton projects in Tanzania are NGO and private sector led which put a lot of effort into capacity building for farmers and communities. With similar labour costs, the reduction in inputs and high yields compared to conventional cotton make organic cotton an economic and attractive option for farmers with much potential to increase production (Ton, 2002a).Growing organic cotton affords premium prices and reduces debt vulnerability for smallholders.

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1.2. Importance of the sector to the economy. Cotton, both conventional and organic cotton plays an important role in the economy specifically rural development in Tanzania. Besides, sector sustains directly or indirectly nearly 48% of the Tanzanian population for their source of income and livelihoods (Ratter, 2002).It’s the second largest export earner after coffee (TCB, 2008). This sector has been a major source of employment and income for many farmers as well as foreign exchange earnings with Mwanza and Shinyanga being the largest producers followed by Mara region (Rates, 2003). It contributed 24.5% of the country's total export earnings. Over 80% of all cotton produced is meant for export and only between 10-20% is consumed locally (TCB, 2008)

In Tanzania, average organic yields equal those of conventional production, 700kg/ha and 600kg/ha respectively (Ferrigno et al 2005). The demand for organic cotton is increasing rapidly, which Tanzania is capable to supply due its well position to serve these new sources of global demand and it also has competitive advantage over other producers since its organic cotton is regarded to be of high quality. Less than 1% of current global cotton consumption, demand for organic cotton is growing particularly fast, with several US and European retailers and brand-owners targeting minimum 5% organic content (Ferrigno, 2006). 2.0 . ORGANISATION OF SUPPLY CHAIN. 2.1. Production. Most organic cotton grown in Tanzania is project-based and donor supported. Farmers producing organic cotton generally receive higher prices than their conventional counterparts. Generally, cotton is produced by smalls-scale farmers on a total estimated area of about 300,000 to 400,000 hectares (Ratter, 2005) and only about 145,000 acres are organically certified (bioRe, 2008). Furthermore, this sector in characterized by low yields because some farms are still converting to full organic growing and climatic conditions (Ratter, 2002). Low production in 2007/2008 was mainly because of drought that affected cotton producing areas during cotton sowing season (TCB, 2008).

Organic production tends to occur initially through substitution of synthetic chemical pesticides with preparations based on locally available biological products, usually neem, combined with ingredients such as cow urine, chilli pepper, garlic, natural 3

soaps and pawpaw leaves. Intercropping and trap plants (such as maize and gombo) are also used. The most common problem pest in all regions is the bollworm; the preferred organic technique for dealing with these is to encourage predator populations (Ton, 2002a).

Majority of the small-scale farmers also lack necessary tools for production and their vulnerability in the conventional sector has led to their over representation in organic cotton production. With the help of environmental experts and self help initiatives, organic cotton farmers attract beneficial insects to their cotton plots to counter harmful pests (Rates, 2003).

The organic cotton farmers are contracted by the local company bioRe Tanzania Ltd. There has been a major growth in organic cotton production since its inception in 1994 as indicated in the Table 1, because many farmers are shifting from conventional cotton. Table 1: Tanzania Organic cotton production from 1994-2006(Metric Tonnes) Year

Production(MT)

1994-1995

-

1995-1996

10

1996-1997

100

1997-1998

100

1998-1999

100

1999-2000

200

2000-2001

250

2004-2005

1223

2005-2006

1336

Source: Ferrigno, 2006 Conversion Note: 2,200 pounds are in a metric tonne, and 480 pounds in a bale.

Organic cotton production in Tanzania continues to be strong and is over 5 times higher now than in 2000/2001. Table 2, below shows that all the organic cotton produced in 2004-2005 and 2005-2006, was all sold indicating that there is ready

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market for the product in the world market. The percentage of production indicates that the potential has not been fully utilized.

Table 2: Organic fibre production 2004-05 and 2005-06, cropping season. Year

2004-

Beginni

Production/

Sales/

ng stock

Harvest

0

0

Ending

Percentage

Fiber

commitments stock

production

type.

1213

1213

0

57%

Medium

1336

1336

0

54%

Medium

05 200506 Source: Ferrigno, 2006 Conversion Note: 2,200 pounds are in a metric tonne, and 480 pounds in a bale.

2.2. Processing. Cotton processing in Tanzania involves majorly primary processing of lint to yarn for sale to other textile mill industries or exported. The textile processing involves the following activities: ginning or purchase of lint, spinning, weaving, bleaching of the fabric, dyeing and printing of the fabric and knitting of the fabrics and apparels. Cotton seed produced during ginning process is used for extraction of cooking oil. The cotton oil production process involves delinting, decortications, extraction, filtration, neutralization, deodorization and bleaching. This product is sold locally for human consumption. Organic cotton seed and lint exported for production of cotton wool balls, organic cotton buds and organic cotton wool pads.

2.3. Marketing There is increasing demand by global consumers about safety and how the product has been produced gives organic cotton farmers a competitive advantage over conventional cotton producers. This is because better crop management replaces chemical inputs, the production costs is reduced and increased yield per acre. Organic cotton products are sold in local and export markets.

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2.3.1. Local Market. Domestic consumption is significantly low nevertheless lint consumption has increased from 20% in 2003 to about 25 and 30% in 2007(TCB, 2008). This is mainly contributed by lack of enough textile and spinning industries to process organic cotton despite the increased global demand for organic cotton products. 1. Fabrics Most textile mills produce African print (Kitenge and Kanga) for local buyers. 2. Apparels Market for locally made garment is low or almost non existent thus exported 3. Cotton seed /bale This product is produced by ginneries and sold locally and exported. 2.3.2. Export market The export market for organic cotton is growing rapidly. The market destination for organic textile products, cotton seed and bale include: Switzerland, Germany, USA, United Kingdom, Netherlands and Italy. The structural difficulties in Tanzania have discouraged many foreign investors from the region. Small scale farmers in this sector have a guarantee of market for their organic cotton at a premium price and are paid in cash upon delivery of their cotton by bioRe Tanzania Limited which is a sourcing company for certified organic cotton. 2.3.3 Pricing. Smallholder farmers growing organic cotton are paid premium prices (Ferrigno et al 2005) which reduce their debt vulnerability. The prices for cotton lint and seed is based on the prevailing world prices and applicable levies and marketing costs and price for cotton lint is pegged on CIF western Europe Lint price (Rates, 2003). However, prices paid to the farmer are sometimes determined by the buyers who may have opportunism to exploit farmers due to information asymmetry among organic small scale famers.

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Figure 1: Marketing and Value Chain of organic cotton in Tanzania. FARMERS

PRIVATE GINNERS AGENTS

PRIVATE BUYERS

PRIMARY SOCIETIES/ ASSOCIATIONS

PRIVATE GINNERS Release cotton seed and bale

EXPORT MARKET

COOPERATIVE GINNERS-Release cotton seed and bale

TEXTILE PROCESSING PLANT

LOCAL MARKET

EXPORT MARKET

YARN

SEED COTTON/ LINT

EXPORT MARKET

FABRIC

EXPORT MARKET

APPAREL MANUFACTURING

Source: Own; Adapted from Rates, 2003

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LOCAL MARKET

2.4. Institutional Support System. Cotton growing in the country is project based targeting poverty alleviation. Tanzanian government through its privatisation programmes is actively involved in promoting organic cotton production (TCB, 2008). Major stakeholders providing support services in organic cotton include: Tanzania Cotton Board (TCB) TCB is a government owned corporation that promote the growth of production, processing and marketing of cotton. It plays a major role in regulating the quality, marketing and export of cotton and advice the government on all matters affecting the conventional cotton and organic cotton industry. In organic cotton sector it facilitates the establishment of associations of stakeholders such as farmers, processors and ginners besides stimulating research and extension services to farmers. TCB also permits and license buyers, exporters of cotton products, operators of ginneries as well as protecting the interests of farmers against syndicate of buyers or exporters of organic cotton. Research Stations Two research centers namely Ukiriguru and Ilonga. Ukiriguru caters for Western Cotton growing Areas (WCGA) ((i.e Mwanza, Shinyanga, Mara ,Tabora, Singida, Kigoma and Kagera) while Ilonga caters for Eastern Cotton Growing Areas ( Morogoro, Iringa, Coast Region, Tanga, Kilimanjaro and Arusha) (TCB, 2008). Private buyers. Private buyers of organic cotton in the supply chain are bio Re Tanzania Limited, Pan Germany organic cotton circular and Coop Switzerland that are involved organic cotton projects. Non-Governmental Organisations (NGOs), CBOs and Other development partners. Local and international organisations backing organic cotton convince companies and international donors and policy makers of the viability of organic cotton by encouraging them to invest in organic cotton growing projects. These include; Busangwa Organic cotton assoction (BOFA), Care Tanzania, National Environment Management Council (NEMC), Sokoine University of Agriculture, Envirocare, INADES Formation, TanCert, Tanzania Organic Agriculture Movement (TOAM), Kilimo Hai Tanzania (KIHATA), Export Promotion of Organic Products from Africa (EPOPA), Sida, International Trade Centre (ITC) etc. 8

2.5. Key Success Factors Organic cotton farming began with only 45 farmers in 1994, consequently, the number of registered farmers increased to 134 in the 1996/97 season, with the area planted rising to 778 hectares (Baffes, 2002). Today, the number of registered farmers in bioRe project has grown to 1700 in the north of Tanzania (bioRE, 2008). Organic cotton supply chain is dominated by a number of key players which include farmers, traders, ginners, textile millers exporting companies and spinners. The following strengths and weaknesses have been attributed to the organic cotton supply chain: 2.5.1. Strengths. The number of farmers who are willing to participate in the current organic cotton projects increases day by day (Ton 2002) because it offers opportunities to get higher prices than conventional cotton in the international markets. The major buying companies in collaboration with research stations train farmers in associations on compost making, biodynamic preparations and social aspects of life. Besides, high-quality yarns and textiles are produced to satisfy the changing demands of consumers in the global market. As a result, bioRe have certified organic cotton from the farmers thus makes its products preferred by consumers particularly in Switzerland. As cotton seeds move from the farm to ginneries and textile mills until the final product is exported there is transparency of information throughout all supply chain stages as well as providing dignified production conditions for farmers and textile and ginners workers. 2.5.2. Weaknesses. Despite a promising organic cotton supply chain, there are some challenges facing all the actors who promote economic development through efficient production and marketing activities. Many small scale farmers are constrained by lack of input and output markets in marginal organic cotton producing areas and increased price risk and volatility due to withdrawal of the state from price determination (Rates, 2003).

In addition, they face regional competition from Uganda, the second largest producer of organic cotton in Sub-Saharan Africa (Ferrigno et al 2005). The level of competition is likely to increase due to efforts being made in Kenya by the government, NGOs and other stake-holders to produce organic cotton. The organic cotton products from Africa are required by the consumers in the European markets to meet very high quality standards, higher labour standards and minimum wages than 9

many competing regions (Organic Exchange, 2004). However, creation of an ‘‘Organic Cotton from Africa’’ brand and a strong production and marketing standards pose as a potential avenue of overcoming this constraint.

There is lack of awareness on organic agriculture among small scale farmers making it difficult for organic cotton farming to grow at a high speed in spite of of trainings conducted by buying companies and government extension officers. Small scale farmers are not access to adequate market information on current prices, market opportunities and potential buyers. Most local consumers are not aware of the products made from organic cotton due to lack of adequate publicity of organic cotton products in the country. 3.0. CURRENT SITUATION AND FUTURE PROSPECTS. 3.1. Growth potential. Even though Tanzanian’s organic cotton being in infant stage, there is a chance for growth as global demand for organic cotton continues to increase and farmers’ shift from conventional cotton. The sector has attracted the attention of many global investors, Government, Research stations and NGOs promoting sustainable agriculture in the region. With the increasing demands of the consumer to know how his or her products have been produced, gives an opportunity for heavy investment in organic cotton farming. Although, development of organic cotton requires serious promotional efforts at all levels from producers to consumers for an effective supply and value chain. 3.2. Market Opportunities and Threats. 3.2.1. Opportunities To start with, there are many niche markets that have not been exploited. The Meatu biRE project exports to Switzerland and there are other potential markets that have not been fully perceived. These markets include: Germany, USA, United Kingdom, Netherlands and Italy where there is high demand for organic fiber, organic lint and organic cotton seed and apparels.

Currently, the world market demand for organic cotton exceeds supply of 20000tonnes per annum (Organic Exchange, 2004) but the main producers still remain Turkey, India and USA. As result, Tanzania is capable of expanding its production to meet the world excess demand. 10

The producers, processors, traders have not fully utilized regional opportunities. Tanzania is a member of EAC, COMESA and SADC that promote regional trade among member states as well as advocating for reduced tariff rates. Tanzania organic cotton traders have not also exploited AGOA market due to low production and low quality standards hence, it is up to the farmers, traders and processors to increase production and improve international quality standards.

The low domestic consumption can be reverted by taking corrective measures like educating local consumers on the benefit of organic fibre and apparels, by local campaigns and charging affordable prices for the Kitenge, Kanga and Apparels. The government under the privatisation policy is looking for individuals or companies to buy off the industries which are not operating now, the industries which will eventually consume cotton and hence produce value added products with relatively higher producer price for export.

3.2.2 Threats. The risk is that larger companies now entering the market could squeeze prices paid to farmers, particularly premiums. Most farmers are not organically certified due to high certification costs. There is high dependence on limited number of buyers of organic cotton. The major buyers of cotton are bioRE Ltd who export them to Switzerland and other countries in Europe (bioRe, 2008).Organic farmers face competition from West Africa (Benin, Mali), Uganda, Turkey, and India among others and competition from Pakistan which is a newcomer to the organic cotton production (Ferrigno, 2006).

By focusing on higher-end textiles, Tanzania can gain from competitive advantage in specialised areas, rather than trying to compete against cheaper volume production. Lack of adequate infrastructure in producing areas like roads, communication and storage facilities makes transportation of harvest from the fields to ginneries and textiles mills very difficult and costly.

Many farmers lack capital, lack of awareness on organic agriculture, and information asymmetry pose a threat to the future of organic cotton production. Besides, agricultural research and dissemination of research findings is still minimal in most developing countries including Tanzania. Therefore, new research and policies are 11

needed that give priority to producer and consumer interests and support improved field production. 3.3. Benefits to the smallholder farmers. The smallholder farmers are capable of getting ready markets and higher prices for their produce. Organic cotton farmers generally receive 20% higher prices than their conventional counterparts (Ferrigno et al 2005). The quote from farmers shows indicates the value they attach to organic cotton 'We are paid immediately with no long delays like in conventional.”(Organic Exchange, 2004) Farmers benefit through guarantee markets for their organic cotton at a premium price and paid in cash upon delivery of their cotton by bioRe Tanzania Limited which export cotton Switzerland.

They also receive production support and training. Field agents from projects help elected farmers representatives with training and certification documentation, which uses an internal control system (ICS) to recommend a group for training. For instance, bioRe trains farmers by demonstrations on making of compost and biodynamic preparations, spraying of the preparations in the morning, contract farming, and social aspects (bioRe, 2008). Other organic cotton project run by GTA-IPM project provides extension and training services to farmers in WCGA.

Besides, farmers have been able to organise themselves into groups, associations, or cooperatives to enhance delivery of essential services such as group certification, marketing of produce, solving logistical problems like transport, bargaining power etc. By farmers being in contract farming arrangements, they have guaranteed markets for their output. Successful associations or cooperatives with ginneries are contracted to do ginning of the seed cotton which is later exported or processed further before exported.

Finally, there is less health risk to the small scale farmer. This is because of avoidance of toxic chemicals from insecticides, pesticides and inorganic fertilizers which may have adverse effect to farmer’s health and even affects his or her livestock. Organic production means less environmental pollution of soil and water by avoiding use of chemical insecticides and inorganic fertilizers.

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3.4. Sustainability of the supply chain. For this supply chain to be sustainable there is a need for determination to support sustainable expansion of organic cotton by all players. Developing dedicated supply chains with higher levels of communication, planning and support between manufacturers and retailers, their business partners and farmers will help existing projects and new projects to develop in a more sustainable manner. This ensures the right qualities and quantities of fibre are produced to meet the needs of specific brands and retailers.

The stakeholders including the government explore innovative ways of associating with farm projects and farmers, through profit sharing, joint ownership with farmers in the supply chain, forward contracting with pre-financing arrangements to ensure farmers enjoy fair prices, incomes and returns in the organic cotton sector. They should also finance development and production growth on their own terms and develop general market where higher prices for the products would be paid to farmers through forward contract arrangement in organic cotton projects. In well organised and transparent contract arrangements transactions would result to fair returns to farmers. Consequently, reducing market risk brought about by merchant and brokers and eventually making supply chain sustainable. With the increased investments from financial institutions, government, NonGovernmental Organisations, Private sector and Research institutions new organic cotton projects are being implemented to ensure farmers are competitive in the world market and expand production in a sustainable way.

4.0. CONCLUSION Considering the growing interest first by farmers, government of Tanzania (GOT), NGOs, private stakeholders in organic cotton supply chain, organic cotton has become an important export crop in the international markets. Organic cotton products are exported to Switzerland, Germany, USA, United Kingdom, Netherlands and Italy where there is high demand. However, a lot of inefficiencies exist in the organic cotton supply chain activities; production, processing, marketing making sustainability is a matter of concern to the actors in the sector. Therefore, knowledge of key strengths, weaknesses and growth potential of the supply chain is fundamental

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for finding sustainable solutions to increase the efficiency, competitiveness and maximise overall economic benefits from organic cotton production. 5.0 RECOMMENDATIONS The government should encourage farmers to utilize their growth potential to counter the promising competition from Uganda and Kenya. Tanzania is capable of expanding its production to meet the world excess demand through serious promotional efforts at all levels from producers to consumers for an effective supply and value chain.

Besides, utilize regional opportunities existing from the membership of EAC, COMESA and SADC that promote regional trade among member states as well as advocating for reduced tariff rates. These opportunities can only be utilized by increasing production and meeting international quality standards.

In order to gain from organic cotton sector the government should embark on developing infrastructure in producing areas like roads, communication and storage facilities that facilitate transportation of harvest from the fields to ginneries and textiles mills.

Finally, provision of institutional support services will help to improve the performance of organic cotton sector. This is possible through increased provision of affordable capital, extension services, awareness campaigns, research and development and designing agricultural policies that encourage production rather than discourage farmers from adopting organic cotton production.

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REFERENCES Ferrigno. S, Ratter. S. G, Ton, P , Vodouhê. S. S,Stephanie. W., and John. W.(2005): Organic Cotton: A new Development path for African smallholders? Gate keeper series 120, International Institute of Environment and development- iied.

Ratter, S.G. (2002): Organic Cotton Production In Tanzania Improves Food Security. Available on http://www.inra.fr/ciab/papers/RatterS.pdf. Rates (2003): Cotton – Textile – Apparel. Value Chain Report Tanzania. The RATES Centre. Nairobi, Kenya.

TCB(2008):Webpage Tanzania Cotton Board. Accessed on 6th November 2008. http://www.tancotton.co.tz/production.html

bioRe (2008): bioRE certified organic cotton from Tanzania. Available at http://www.remei.ch/en/home.html Baffes. J.(2002): Tanzania’s Cotton Sector: Constraints and Challenges in a Global Environment, Africa Region Working Paper Series No. 42 December 2002. Available at www.worldbank.org/afr/wps/wp42.pdf Ratter. S. G (2002): Organic and Fair Trade Cotton in Africa. Accessed on 17th November 2008.

Ton P. (2002a): Organic Cotton Production in Sub-Saharan Africa Pesticides. Policy and Livelihoods Series. PAN UK: London.

Organic Exchange (2004): Communities at the Heart of Organic Cotton Farming in Africa.http://www.organicexchange.org/Documents/Section2_SowingSeedsofChange. pdf, Accessed on 17th November 2008.

Ferrigno. S (2006): Organic Cotton Fiber Report Spring 2006, organic exchange, www.organicexchange.org

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