| SPORE No. 26 - April 1990 |
The ACP countries are losing out in the international market for major tropical products - despite the strategies operating under the terms of the Lome Convention. Yesterday it was palm oil; today it is coffee and cocoa; tomorrow - could it be cotton? And it is always Asia which picks up what the ACP countries have lost. But African nations could still pull back; they have natural advantages which they could exploit by learning the secret of Asian success.
By the end of 1987 the volume of exports of primary tropical products from Africa had fallen to that of 1961. This has added yet one more problem for hard pressed economies with large national debts, which depend heavily on income from exports. During 1989 only cotton maintained its value while coffee and cocoa plunged by 40% of their value in less than a year. The reasons are well known - a world glut and the failure of international price-regulating agreements. However, despite this unfavourable economic climate, Malaysia, Indonesia, Pakistan and Thailand have been increasing their share of markets, and often at the expense of ACP countries.
For some years these Asian agricultural "dragons" have been adversely affecting the market by contributing to the world surplus and the consequent fall in prices. In the 1950s palm oil was an African speciality but now it comes mainly from Asia. Africa now has a pitiful 2% of world trade in this commodity, compared with Malaysia and Indonesia which monopolize 95% of the market. Also, Indonesia gains ground every year with its cheap, good-value robusta coffee, which is the speciality of west and central African producers. However in cocoa, Cote d'lvoire remains the leader in world exports.
International trade figures confirm Asia's attack on these markets although it is difficult to gauge the relative competition between specific Asian and ACP countries. But one observation stands out as incontestable: if one country is gaining an increasing share of the market it can only be because it offers better value in terms of cost, quality or reliability. Therefore, what the ACP countries have to determine is just how that country gets its competitive edge.
A better understanding of this will be gained if the cost of the product can be analyzed from field to arrival in the importing country. Labour and capital productivity must be taken into account, as must the economic environment (currency, exchange rates, import facilities,export subsidies, transport infrastructures, and so on) in which each producer operates.
Some years of research may be necessary to 8 determine these data, which are not always readily available. The production costs calculated will provide a clearer if not a complete picture of the competitive elements of a given country and from case studies such as these (palm oil, cocoa, pineapple, cotton) the respective advantages of ACP and Asian countries on the international market can be gauged.
regaining lost ground
A French study by the Caisse Centrale de Cooperation Economique shows that in 1987
one tonne of palm oil cost 2700 FF in Cote d'lvoire and 3600 FF in Cameroon against 700 FF in Indonesia and l100 FF in Malaysia. In the fifties palm oil was an African speciality, so what can explain such a difference in cost?
South-East Asia possesses a major advantage: the average yield of palm oil in Asia is one-and-a-half times greater than in Africa. However, the best African plantations in the most favourable areas can match Malaysian production.
Malaysia and Indonesia have been extending their plantations for a quarter of a century, but ( and perhaps this is the secret of their success) there is also a policy of regular replacement and maintenance. Since it takes three years for a palm to become productive, this requires good production planning and results in the certainty of consistent high yields.
Unfortunately, in Africa lack of regular maintenance of plantations means that some oil mills do not work at full capacity. This under-use of processing plant is a serious financial problem since the machinery has often been bought on credit abroad. The CCCE study points out that many African oil mills have unnecessarily large capacity and the burden of debt repayment is consequently greater than necessary - a state of affairs virtually unknown in Asia.
Another Asian advantage is that many factories are in the private sector and have flexible management and tight control of production costs. They recognize that their survival depends on efficient low-cost production in the face of aggressive competition from American and Brazilian soya oil. In contrast, African companies are mairdy public-owned or semi-nationalized, and are managed centrally. Whereas one plantation in Cote d'Ivoire could manage a crop area of 46 ha an equivalent plantation in Malaysia had the potential to cultivate 406 ha. The Ivoirien one owned 521 trucks and 349 light vehicles for management and transport but in Malaysia their technicians travelled on mopeds while dispatch is subcontracted to private transport companies.
CCCE's research shows that when African plantations master the twin operations of maintenance and harvest, and get yields sufficient to keep the factories working continuously, then production costs per tonne of oil are not very different from the Asian average.
State protection a two-edged sword
The Asian advantage on the international market is in great part explained by differences in marketing policies. While Asia exports virtually all production, in Africa most production is geared towards an internal market. This is protected from the vagaries of the international scene thanks to the prices paid to both growers and consumers which are fixed by government and are far higher than world prices. Thus Africa, sheltered by state protection, has had virtually no incentive to venture onto the world stage.
In Malaysia the State allows competitive forces to fix prices of crude oil, while still maintaining some influence on them. It is up to the producers, the oil works and the refineries to adapt to world prices. But the corollary of that is that the State does not impose taxes as often happens in Africa. In Malaysia it is a sacrosanct rule that taxes should not have an adverse effect on the competitiveness of palm-oil production. In the decade 1977-87 palm product exports increased three-fold but taxes fell from 340 to 18 million Malay dollars. By this system of tax relief the State in Asia encourages the export of processed products.
Cocoa - keeping - the competitive edge
Even if Africa has not yet acquired the weapons to win the war to reconquer the world palm oil market, it still enjoys a dominant position with cocoa. Cote d'lvoire has been the top world exporting country since the 1970s with a production of 800,000 tonnes. But, here again, Malaysia is the danger. At present it is the third largest producer in the world and last year exported some 200,000t of cocoa. The Malaysian cocoa boom dates from the end of the seventies when international prices shot up. Cocoa production climbed from 90.000 t to 250,000t in five years and now stands at 600,000t, with seemingly no anxieties about the current low prices.
According to research done by CIRAD (Centre International de Recherche en Agronomie pour le Developpement), Cate d'lvoire has got solid advantages in this trade war. Large-scale plantations (100 to 10,000ha) provide 60% of Malaysian production, but in Cate d'lvoire 90% of production comes from small farms of 5 to 15 ha, which entail low production costs. These small Cate d'lvoire farms, being based on family units, do not need much capital or labour, and are therefore considerably more competitive than the large-scale Malaysian plantations. They are blessed with a climate neither too wet nor too dry and the local producers can get around 125 CFAfr per kilo. "In Malaysia, labour is more costly and frequent phytosanitary treatments make for production costs twice as high as in Africa", says Francois Ruff of CIRAD.
Until last July, when the world price was about 430 CFAfr per kilo, Cate d'lvoire guaranteed 400 CFAfr per kilo to producers. In addition to that, the Treasury took tax while transport costs to the port were around 550 CFAfr per kilo loaded on board at Abidjan - higher than in Malaysia. In October 1989 the President of Cate d'lvoire. Felix Houphouet-Boigny, had to cut the guaranteed price to growers from 400 to 200 CFAfr, which once again allowed Ivoirien cocoa to be truly competitive. Cameroon recently did much the same
It could be claimed that the Cate d'lvoire has a major advantage in the price war - the high quality of its cocoa. In Cate d'lvoire small-scale fermentation is done with banana leaves followed by a simple sun drying process. The large-scale Malay plantations use fermentation tubs and artificial drying techniques. This ought in theory to give the same result, but for as yet unknown reasons the Malaysian bean is too acid and does not taste as good. But Malaysia is striving to improve quality and the quality of Ivorien cocoa will not alone suffice to guarantee its 40% share of the world market. The food chemicals industry is sufficiently advanced that chocolate manufacturers can get rid of any defects in Malaysian cocoa.
Cotton: high technical performance
Cotton is a strategic crop in the Sudanese Sahel and was riding high on the world market before the sudden price fall of 1984. The rise in production in francophone Africa has often been quoted as a cause - from 129.000 t in 1961 to 1.250.000 t in 1988
The fall in prices necessitated a hard look at the competitiveness of Sudanese cotton compared to its principal competitor in Asia, Pakistan, where production costs are considered to be the lowest in the world. Technically speaking,countries such as Mali and Cote d'lvoire bear comparison with Pakistan. (In 1985/86 the lint yield was 482 and 538kg/ha for these two African countries, and 41 5kg/ ha for Pakistan). And, thanks to modern ginning factories, ginning out-turns are excellent in Africa, which holds the world record for this
These good technical performances from Africa are reflected in production costs of cotton fibre. According to studies done by the French Ministry of Cooperation and Development, a kilo of cotton fibre cost (excluding managerial staff) 466 CFAfr in Pakistan against 403 in Mali and 472 in Cate d'lvoire. But Pakistan leads in transport costs (five times lower than in Africa) and factory costs (half those of Cate d'lvoire and one third of Mali, which is landlocked). The African countries make this up with their larger ginning out-turns but Pakistan turned to devaluing its currency the next year and reducing the price of cotton seed from 116 to 82 CFAfr/kg of seed in order to try and gain the competitive edge over Africa. These two measures allowed a fall in production costs of cotton lint to 342 CFAfr - 25% cheaper than African cotton. This is typical of Asian economic strategy and it forced Africa to try desperately to improve the running of the distribution chain and ultimately to reduce the price paid to the peasant producers.
The challenge of the nineties
The ability of these Asian "dragons" to respond swiftly to signals in the international marketplace is probably one of their greatest strengths. Speaking purely technically, the African countries stand up favorably to comparison and sometimes even offer the better product (cocoa and cotton). But, at a time of falling prices, the Asian countries can adapt their prices more quickly and thus avoid the kind of cumulative losses which in Africa are borne by the nations' economies
Recent examples in cocoa, coffee, cotton and rubber show that the governments of ACP countries are just as adept at lowering prices to producers when the international market is collapsing. The economy may demand such a decision, but it has real - if not fully known - consequences on production. This problem is all the more acute for perennial crops such as coffee and cocoa: how can peasant producers finance the vital renewal of plantations during periods when the bottom has fallen out of the market?
The Lome Convention has come up with STABEX, a unique strategy to cushion the effects of the fluctuating world market STABEX is a fund which guarantees ACP agricultural export receipts and lends money to exporting countries which have fallen victim to international financial crises. But, because of insufficient resources, it could honour only half its commitments in 1987 and 1988.
The new Lome Convention will benefit from a 62% increase in EEC funding for STABEX in order to counteract the stagnant market in primary goods. Better still, the richer countries will follow the example of the poorest ones and will not have to pay back financial compensations. In the past, however, these funds have all too often gone towards financing bankrupt countries rather than getting agriculture back on a competitive footing. Lome IV will ensure that the STABEX funds will be given priority to restructure the more troubled sectors and to diversify agricultural exports. If the ACP countries can retain their technical performance and assimilate the flexibility of the Asians, they will regain their rightful place in world agricultural trade.
FOR FURTHER READING:
· BARBIER Jean -Pierre - "RÃ©flexions sur la competitivite' Afrique-Asie" - Paris: Caisse Centrale de CoopÃ©ration Economique, 1989.
· COSTE Rene - "La Malaisie peut, a court terme, compromettre l'e'conomie des pays Africains producteurs de cacao" - In: Marches Tropicaux, Paris, 1988.
· HIRSCH Robert, BENHAMOU Jean-Fran,cois - "Etude comparative technique et economique de production de l"huile de palme en Afrique et en Asie", Paris: Caisse Centrale de Cooperation Economique, 1989.
· JARRIGE Francoise, RUFF Fran,cois "Comprendre 1a crise du cacao", Montpellier: CIRAD, Xeme seminaire d'Ã©conomie et de sociologie, 1989
· MOLLHAJ - "The economics of oil palm", Wageningen: PUDOC, "Economics of crops in developing countries" No. 2, 1987.
· Ministere Francais de la Cooperation et du Developpement - "Le coton en Afriguede l'Ouest et du Centre: situation et perspectives", Paris, 1987.