WORLD TRADE WT/CFMC/37

1 November 2012
ORGANIZATION
(12-6003)

Original: French

DIRECTOR-GENERAL'S CONSULTATIVE FRAMEWORK

MECHANISM ON COTTON

Communication from Chad

The following communication, dated 19 October 2012, is being circulated at the request of
the delegation of Chad.

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NOTE ON THE REFORM OF THE COTTON SECTOR IN CHAD

1. Chad's cotton sector, like that of several other African countries, has been facing severe
difficulties since the mid-1980s. In order to remedy them the Government, in the wake of several
other attempts, adopted a "Strategy document on cotton sector reform in Chad" at the end of 1999;
this led to the development of a road map in August 2005, followed one month later by the
establishment of a technical team responsible for its implementation. The road map contains a
number of measures directed firstly at reforming the sector with a view to its recovery, and secondly
at withdrawing the State from Chad's cotton company, CotonTchad.

I. EVOLUTION OF COTTON PRODUCTION AND OF PRODUCERS' INCOMES

2. Chad, which was one of the leading cotton-producing countries in French-speaking Africa,
is now one of the smallest. Seed cotton production ranged from 17 tonnes in 1928/1929
to 108,482 tonnes in 1970/1971 when CotonTchad was set up. After that it showed sharp variations,
peaking at 263,000 tonnes of seed cotton in 1997/1998 and dropping to a low of 35,000 tonnes
in 2009/2010 - its worst ever level for 101,200 hectares, representing a decline in production of
around 87 per cent in 12 crop seasons (7.25 per cent a year). Production picked up slightly
in 2010/2011 and 2011/2012, rising to 52,570 and 78,895 tonnes respectively - an increase of
around 50 per cent a year. This 50 per cent a year increase is set to continue in 2012/2013,
with production forecast at 118,000 tonnes.

3. Similarly the producers' cash incomes, i.e. their earnings from the sale of the seed cotton,
fell from CFAF 50 billion in 1997/1998 to CFAF 6 billion in 2009/2010, an 88 per cent drop in the
cotton producers' purchasing power over 12 years.

4. Cotton lint production reached a record level of around 103,000 tonnes in 1997/1998; it then
began to fall, standing at 14,000 tonnes in 2009/2010 (less than 15 per cent of the peak figure).
Almost all of the lint produced each year is exported, at a price which has varied between
CFAF 737 per kg in 1999/2000 and CFAF 912 per kg in 2011/2012, with a record price of
CFAF 1,315 per kg in 2010/2011; the lowest price was CFAF 602 per kg in 2004/2005.
The remaining lint - an extremely small amount - is sold locally, at a price ranging between
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CFAF 500 per kg and CFAF 525 per kg over the same period, peaking in 2010/2011 at the same level
as the export price (CFAF 1,315 per kg). There are also sales to the Nouvelle Société Textile du
Tchad (NSTT): 128 tonnes in 2009/2010 and 300 tonnes in 2010/2011, at CFAF 703 per kg and
CFAF 1,319 per kg, respectively.

5. The causes of the decline in Chad's cotton production are both exogenous, as experienced by
the cotton sector throughout Africa, and endogenous to the country and its cotton company.

II. CAUSES OF THE DECLINE IN COTTON PRODUCTION

6. The main causes of the decline in production are the poor yield in the field and the reduction
in the size of the areas sown. The average yield per hectare is the worst in West and Central Africa.
The reasons for this weak performance are, in addition to poor soil and weather shocks:

(a) Production factors acquired late and in insufficient quantities, because of the partial
and late implementation of productivity credit;

(b) delays in the collection of, and payment for seed cotton, because of
the late implementation of seasonal credit;

(c) producers' non-compliance with cotton crop management techniques, because of

inadequate guidance;

(d) a shortage of pure seed, resulting in the sowing of HX seed (outside the seed
production zone);

(e) inadequacy and/or lack of permanent liaison between the cotton company and the
cotton producers;

(f) high price of inputs and agricultural equipment, despite partial State subsidies; and

(g) joint and several guarantees, and the administrative management of the arrears of the
village associations concerned.

7. To all this must be added the world cotton crisis, and in particular the drop in international
cotton lint prices and the weakness of the dollar against the euro prior to the 2010/2011 crop season.
The fall in cotton prices on the international market is the direct result of the United States' and
European Union's policies of subsidizing their cotton producers.

III. CONSEQUENCES OF THE DECLINE IN COTTON PRODUCTION

8. The decline in production has huge repercussions for all stakeholders in the cotton sector,
causing significant losses across the board. Those worst affected are the cotton producers and their
organizations, the Société cotonnière du Tchad (CotonTchad) and its principal shareholder (the State).

A. THE COTTON PRODUCERS AND THEIR ORGANIZATIONS

9. The cotton producers' cash incomes, i.e. their earnings from the sale of the seed cotton, enable
them to meet various needs such as paying for their children's schooling and for agricultural
equipment, purchasing food, building up savings in local micro-finance institutions, and other
necessities of life. These incomes have fallen significantly, leading to a decline in the cotton farmers'
purchasing power. This forces them to fall back on their food crops, sell their agricultural equipment
and/or cattle and resort to moneylenders, thus being drawn into a downward spiral of impoverishment.
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B. COTONTCHAD

10. The low levels of seed cotton production made it impossible for CotonTchad to absorb its
fixed costs; the result was a disastrous financial situation which contributed to the company's loss of
credibility vis-à-vis third parties. The subsidies provided by the State each year were not enough to
turn the company around and set it on the path towards financial equilibrium, despite commendable
efforts made (implementation of draconian savings measures and staff cuts).

C. THE STATE

11. CotonTchad's disastrous financial situation caused the State to introduce a policy of providing
balancing subsidies for the company. Between 2001/2002 and 2009/2010, the amount of the
subsidies granted to CotonTchad ranged from CFAF 2 billion to CFAF 24.7 billion a year; these
subsidies amounted to a total of around CFAF 100 billion at the end of 2011. The State also incurred
tax revenue losses as a result of the decline in the business activities of CotonTchad and its partners
(various suppliers, carriers, banks, forwarding agents, insurance agencies, etc.).

12. The national economy in general has been adversely affected by the losses sustained by the
producers, CotonTchad, the State, and all the companies working with CotonTchad which have found
it difficult to consolidate their business activities, leading to low earnings.

13. In an attempt to turn this situation around by revitalizing cotton production, the State
embarked upon a radical restructuring of the cotton company, involving the dissolution of the old
company and the creation of a new one, called the Société Cotonnière du Tchad Société Nouvelle
(CotonTchad SN).

IV. RESTRUCTURING OF COTONTCHAD

14. The CotonTchad Restructuring Plan provided for the creation of CotonTchad SN, to which all
of CotonTchad's operating assets and liabilities would be transferred, and the dissolution of
CotonTchad, with the State acquiring its remaining assets and assuming its remaining liabilities;
the Plan was approved by the Government in September 2011.

15. On 30 December 2011, the Board of Directors and an Extraordinary General Meeting (EGM)
of CotonTchad shareholders approved: (i) the creation of CotonTchad SN; and (ii) the conclusion
of an agreement between CotonTchad and CotonTchad SN on the transfer of cotton-related business
activities. The Extraordinary General Meeting also decided on the dissolution-merger of CotonTchad.

16. In application of the CotonTchad EGM deliberations of 30 December 2011, CotonTchad SN

was validly constituted as a limited liability company. CotonTchad's business and, more broadly,
all of its cotton-related assets and activities, were transferred to CotonTchad SN under the terms
of a transfer agreement concluded on 25 January 2012 between CotonTchad as transferor, on the
one hand, and CotonTchad SN as transferee, on the other. Non cotton-related assets, together with
existing financial liabilities, were excluded from the scope of the transfer and remained on
CotonTchad's balance sheet, to be passed on to the State on completion of the dissolution-merger of
CotonTchad.

17. At an Extraordinary General Meeting of the shareholders of CotonTchad SN on 3 April 2012,

the new company's shareholders approved a capital increase reserved for CotonTchad in an amount of
CFAF 5 billion. They also decided that CotonTchad SN would be administered by a Board of
Directors and led by a Chairman and Chief Executive Officer.
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18. By Decree No. 1113/PR/PM/MCI/2012 of 24 July 2012, the State appointed the Directors of
CotonTchad SN; by Decree No. 1132/PR/PM/MCI/2012 of the same date, the State acquired the
remaining assets and assumed the remaining liabilities of CotonTchad, and by Decree
No. 1137/PR/PM/MCI/2012 the State assumed responsibility for financing the strategic liabilities of
CotonTchad which have been transferred to CotonTchad SN.

19. On that basis, CotonTchad SN has been definitively constituted and is currently working on
the implementation of its Business Plan, drawn up for the period from 2012/2013 to 2015/2016.

V. COTONTCHAD SN BUSINESS PLAN

20. Efforts to revitalize cotton production must continue, given the cotton production potential
in Chad: availability of cultivable land, producers' eagerness to resume cotton growing, etc.

21. For the four crop seasons (2012/2013, 2013/2014, 2014/2015 and 2015/2016) covered by
the Plan, CotonTchad SN has set itself the short-term and medium-term goal of gradually increasing
production, starting at 100,000 tonnes of seed cotton in 2012/2013 and rising to 300,000 tonnes
in 2015/2016. Achievement of this goal of increased production will be dependent on improvements
in a combination of factors and production conditions:

(a) The total area sown to cotton is expected to increase from 200,000 hectares
in 2012/2013 to 400,000 hectares in 2015/2016;

(b) the proportion of this area which is under high-productivity cultivation is projected to
rise from around 40 per cent in 2012/2013 to 50 per cent in 2013/2014 and should
continue to progress, reaching 70 per cent in 2015/2016;

(c) the quantity of inputs will rise as the area under high-productivity cultivation
increases;

(d) whereas the yield from enhanced traditional cultivation is expected to remain
at 350 kg/hectare, the yield from high-productivity cultivation is projected to increase
gradually from 750 kg/hectare in 2012/2013 to 930 kg/hectare in 2015/2016; and

(e) the number of cotton sector field officers will increase from 102 in 2012/2013 to 150
in 2015/2016.

22. Given its economic and social importance to the country, cotton must naturally play a key
role in rural development. As cotton growing is currently the most organized sector, it is a driver for
the modernization of agriculture.

23. The Plan to revitalize cotton production in the short and medium term
(2012/2013-2015/2016) is reasonable given normal climatic conditions; however if it is to succeed,
interventions will be required of all the agricultural development actors, and measures will need to be
applied to the cotton sector stakeholders. These areas of intervention and measures include:

(a) Strengthening of cotton production extension activities, and of guidance for

cotton producers;

(b) making inputs available to the cotton producers in sufficient quantities and in a
timely manner;

(c) assisting producers with the acquisition of agricultural equipment;

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(d) collection of the seed cotton crop in its entirety and in a timely manner, and payment
as and when the seed cotton is collected;

(e) input backlogs to be processed as rapidly as possible; and

(f) provision of support for the reorganization of cotton producers into cooperative
enterprises whose internal management is organized and efficient.

VI. OVERVIEW OF THE 2012/2013 CROP SEASON

24. In a bid to revitalize cotton production, CotonTchad SN has taken a number of steps aimed at
increasing production in 2012/2013. They include collecting and paying for all 2011/2012 seed
cotton in a timely manner, as in 2010/2011, releasing significant quantities of seed for sowing,
ordering inputs, recruiting field officers, etc.

25. The harvestable area (minus flooded fields, representing about 10 per cent) recorded at the
end of September was 256,821 hectares, of which some 70,000 hectares (27 per cent) are under
high-productivity cultivation. The harvestable area is 49 per cent greater than in
the 2011/2012 crop year.

26. Given the small proportion of this area which is under high-productivity cultivation, the
average yield in the field should be around 460 kg/hectare. A crop of roughly 118,000 tonnes of seed
cotton is therefore forecast.

VII. CONCLUSION

27. Achievement of the objectives as set out in the 2013-2016 Business Plan should bring in more
than CFAF 25 billion for the producers in the 2012/2013 crop year, with this amount rising to around
CFAF 67 billion in 2015/2016. A total of CFAF 170 billion is estimated over the period of the Plan,
i.e. an average of CFAF 42.5 billion a year, which is double the average for the past 15 years.

28. It is clear that the resources generated by cotton will not just be maintained; they are set to
double in four years. This will significantly improve the lives of four million people living in the
cotton-growing zone. Cotton is the only business that directly distributes cash income of this order in
the rural environment.

29. Similarly, the impact on the construction of rural infrastructure, job creation, food security,
the modernization of agriculture, the State's tax revenue and the incomes of all the entreprises
working with the cotton company, will be considerable.

30. While it is true that these goals for the revitalization of the cotton business are ambitious, they
are realistic because they are part of a proactive approach based on the farmers' eagerness to resume
cotton growing, the quality of Chad's lint, and above all the proven support of the State, at the level
and within the time-frames required.

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