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Analysing the cotton industry

Even today cotton farming remains an important component of agriculture but only to the extent that it is a shadow of its former glory.

ONCE upon a time, Zimbabwe used to have a very vibrant cotton industry and cotton farming was the major source of livelihood in most drier parts of the country, including Kadoma, Sanyati and Gokwe to mention a few due to its drought resistance nature.

Even today cotton farming remains an important component of agriculture but only to the extent that it is a shadow of its former glory.

According to the Agriculture Marketing Authority (AMA), cotton farming is a source of livelihood for over 600 000 families in the country.

Cotton is a very versatile product with many by-products including yarn, clothing, blankets, industrial textiles, and cotton wool. The key stakeholders in the entire cotton value chain are the farmers, ginners, spinners, oil expressers and textile manufacturers.

The textile industry used to benefit from a thriving primary sector with companies like David Whitehead flourishing at that time. The former government-owned Cotton Marketing Board, now Cottco Holdings is another key player in this market, accounting for close to 80% of cotton production.

The cotton industry suffered from a cocktail of factors, including corruption, failure to adapt and lack of preparedness amongst other factors.

The introduction of genetically modified cotton completely changed the landscape and our market was prolonged to adapt. The payment structure to farmers also has not helped the situation, making it difficult for farmers to plant well in time.

 At some point, Cottco Holdings used to be one of the biggest listed companies in the country, a testament to its significance even in economic terms. The company is now suspended from trading on the Zimbabwe Stock Exchange (ZSE), but the suspension does not mean delisting and it recently released a trading update up to January 31 2024.

The Chinese market continues to be the biggest destination for the company’s exports with over half of cotton sales going there. Cotton lint, which is the fibrous white coat that covers the seeds internationally, rose 14% to US$0,85/lb by the end of November, according to the trading updates.

The collection of lint for both the local and foreign customers is underway and 7 776 metric tonnes are still in stock.

The process of separating the lint from the seeds is called ginning and according to the company, the erratic power shortages affected this process.

As of the company’s reporting period, 58 326 metric tonnes had been ginned, representing 84%, whilst 1 066 metric tonnes had been toll-ginned.

Toll ginning is a system that allows the farmers to have their cotton ginned by a third party and pay for that service but remain the owners of the product.

The cotton seeds are used for manufacturing cooking oil and their prices remained flat, despite the local demand now surpassing production. In the 2023 cotton buying season, a total of 69 419 metric tonnes was recorded, which was a 46% increase from the 2022 season. The company highlighted that liquidity challenges hampered the business from drawing down all its dues, thereby, affecting the operations.

Yarn is the long, continuous strand of fibre that is used in textile production. It is made from short staple fibres, which are the shorter pieces of cotton that are separated from the seed during ginning.

Cottco reported that 475 metric tonnes of lint had been converted to yarn from April 1 2023 to the end of January. Cotton farming in Zimbabwe is done under a contract scheme where they are provided inputs, which they will offset after they have sold the product.

According to the trading update, Cottco settled US$19,6 million to its farmers, which represented 83% of the payment, whilst the balance was in the local currency. Outstanding dues are expected to be cleared by the end of the first quarter.

Overall analyst’s opinion

It is refreshing to get consistent updates from Cottco, which has not done that much since its suspension. The cotton industry is a long walk from its glory days and will require combined efforts to achieve that. Cottco is the major cotton buyer and controls over 80% of the market, hence plays a pivotal role in ensuring that the cotton farmers are incentivised to grow the cash crop.

Cottco Holdings, which is partially owned by the government was moved into the Mutapa Investment Fund. The rationale for moving companies into the fund was to make them more efficient and profitable, and restructure their operations. Perhaps the intention extends to Cottco.

In areas like Sanyati and Gokwe, former cotton farmers, who have resorted to maize farming on subsistence level need to be incentivised back and this will be done through early and adequate payments for the crop.

For all exports, I opine that the farmers should be paid 100% in foreign currency to avoid being prejudiced by the local currency depreciation.

I also opine that for the cotton market to return to its good old days, there has to be a limit on the imported second-hand clothes and even the new but inferior clothes.

This will incentivise the textile industry to exploit that gap and be able to do so with limited unfair competition from second- hand clothes.

  • Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.

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