Governance

SustainAbility’s recent paper – Signed, Sealed…Delivered? – provides thoughtful insight and constructive recommendations on ways to make large scale shifts to new models of production, which will result in more sustainable and socially beneficial conditions.

My work is centered on linking market demands with improved raw material production through complex commodity supply chains and business realities. I believe that we must account for the true cost of a sustainability or ethical system and maximize the value to all supply chain actors. To do this we must understand where we reap the biggest benefits. Some key areas that should be evaluated include: running farmer support programs, implementing product traceability systems, and conducting audits to ensure integrity of the system. I would like to share the perspective I have gained from my work.

Building capacity among farmers

I am currently supporting Olam International’s efforts to pilot the Better Cotton Initiative (BCI) in Mozambique. Olam sources over 20 products, including cotton, and is the largest private microfinance provider to smallholder farmers. Olam is the second largest cotton merchant and largest private cotton ginner in the world. They have vast experience implementing farmer capacity programs in developing countries.

Through the BCI effort, our partners are able to see the true costs of running large-scale farmer capacity building programs that include training on better production practices, providing agronomic advice, supplying quality inputs, and facilitating equitable financing. Olam has proven that the benefits of these investments – higher yields of a better product and a secure base of dedicated farmers – lead to a better business for Olam. It is important to note that Olam sells this cotton at market rates.

Investing in these areas yields the added value of a stronger partnership between the farmer and the ginner that often leads to additional benefits (e.g. improved risk management). 

Tracing material in a supply chain

Costs and fees associated with tracing a product through a supply chain may vary between supply chains. But most include: developing and operating a tracking system, registering certified material, undergoing a facility and accounting audit, and paying special storage and transportation fees. At times, supply chain actors must absorb the majority of these costs while the brands reap the majority of the benefits. Regardless of final cost, these activities are geared towards marketing to consumers and don’t directly lead to the improvements we are seeking at the farm level. At times, the cost of tracing a product can actually limit the resources available for famer-level programs, and thus the degree to which an initiative can scale up.

Auditing at an industry level

Moving away from agriculture for the moment, it's helpful to look at global brands in the electronics industry, which have been effective in implementing industry-level programs. One such example includes the Conflict Free Smelter (CFS) program to support the industry’s ban of conflict minerals (minerals that fund the perpetrators of human rights violations in regions such as the Democratic Republic of the Congo) from their supply chains. The CFS program centers on conducting traceability audits of smelters processing ore from multiple sources to confirm that only conflict-free minerals are being used in our electronic equipment.

I lead a global team that conducts these audits and I have seen that rolling out a program across an entire industry can have real and direct business impacts. For example, some smelters won’t be able to sell their inventory until they pass the audit. Passing an audit may take some time as doing so requires a new way of doing business, including collecting documents not usually shared between sellers and buyers. However, businesses can benefit from improved inventory management and partnership with their buyers and global brands. Regardless, the cost of not undergoing the audits is much greater – the absence of your customers.

Moving forward

If we are to have a stable cotton industry and meet the demands for a growing population, we must ensure we are investing in ways that will lead to the biggest overall improvements. I believe investing in improved material production holds the strongest benefits for businesses and farmers alike. Two areas that hold the most promise include:

Helping farmers improve productivity by providing quality seeds, training on maintaining soil health, limiting use of inputs, offering financial assistance for investments in labor-reducing equipment (e.g. oxen) or irrigation.

Investing in agricultural research and development (R&D), particularly in underserviced regions with great potential to improve. It is widely accepted that the world as a whole has underinvested in agricultural R&D despite clear evidence that there is a very high rate of return to agricultural R&D.  And the investments we do make are not evenly distributed. The share of the bottom 80 countries slipped from 0.29 percent of the global total in 1995 to 0.26 percent in 2000.

I look forward to partnering with many of you to mainstream more sustainable production models through impactful efforts.

Questions for consideration

What efforts have been successful in providing economic returns as well as positive environmental or social impacts? Why did these work and other efforts aren’t as effective?

The most appropriate role of the government to help lift their people out of poverty is to provide an enabling environment. This role includes the removal of physical, legal, financial, socio-cultural and political barriers to basic services for all, in particular for the poor and disadvantaged groups.

The United Nations Economic and Social Commission for Asia and the Pacific’s (UNESCAP’s) study,Access to Basic Services:The Importance of Good Governance, argues that this is precisely what is needed to achieve their Millennium Development Goals (MDGs) and eradicate extreme poverty. The UNESCAP study does a nice job of investigating the importance of good governance and how countries with good governance in place have more effective systems to help their most vulnerable citizens. I would like to share a bit of the report with you.

The report discusses services that include primary and secondary education, primary and reproductive health care, HIV/AIDS prevention, care and treatment, and adequate water and sanitation. The study also points out the need to attend to the additional challenges that women face. Women are more vulnerable to poverty than men due to factors such as incomplete education, illiteracy, early marriage and childbearing, lack of access to employment, lower wages, lack of rights in divorce and lack of property rights.

The provision of effective and efficient services requires good governance. Good governance refers to a set of just processes by which decisions affecting public affairs are reached and implemented. Good governance ensures that all, including the poor and other disadvantaged groups, are included and have the means (a) to influence the direction of development as far as it affects their lives, (b) to make contributions to development and have these recognized, and (c) to share in the benefits of development that improve their lives and livelihoods.

The authors present the case that good governance is essential to ensure that strategies for basic service provisions and poverty reduction are effective and sustainable. Good governance involves nine principles:

1. Transparency: the degree to which the rules, standards and procedures for decision-making are open, clear, verifiable and predictable.
2. Participation: the opportunity for people affected by the decision to influence the process of decision making directly or indirectly.
3. Inclusiveness and equity: the principle that no one can be excluded from the process of development on the basis of gender, race, religion, etc.
4. Efficiency: a measure of how economically resources are used to produce the intended results.
5. Effectiveness: a measure of the extent to which the intervention achieves its objectives.
6. Subsidiary: the principle that decision-making takes place at the level most appropriate for the issue (usually the lowest level possible).
7. Adherence to the rule of law: the principle that every member of a society, even a ruler, must follow the law.
8. Accountability: the responsibility of a decision- maker to explain and justify the decisions it made and implemented, and the results these produced.
9. Sustainability: The likelihood that the positive effects of an intervention will persist for an extended period after the intervention as such ends.

 Barriers range from limited access to legal, financial, health and education services, lack of political power The authors also present a number of strategies for removing these and other barriers, including broadening the range of service providers to include the formal and informal private sector, civil society organizations and traditional institutions. Efforts should work to empower the poor and provide more efficient and equitable service provision, allowing the most vulnerable to find their own solutions that respond to their needs.

Poverty reduction requires strategies to help the poor overcome a range of physical, financial, legal and socio-cultural barriers. Good governance helps to ensure that all people have adequate access to basic services – a necessity if we are to achieve the MDGs and reduce and eventually eradicate poverty.

It is important to remember that relatively simple changes can make a major difference, but those changes must be developed in concert with good governance and designed to overcome the challenges that communities face, even as they differ from one community to another.

Questions for consideration

Can the cotton industry help the development of governance frameworks or create a culture of engagement with some of the most disadvantaged cotton communities?

The Rockefeller Foundation has commissioned a four-part series of Impact Evaluation Guidance Notes to help non-governmental organizations (NGOs) (and others) in conducting high quality impact evaluation as a means to demonstrate and measure the effectiveness of their efforts. The first guidance note in the series is Introduction to Impact Evaluation. I found the guidance note to contain a lot of helpful and practical guidance and suggestions that I would like to share with you.

This introductory guidance note provides an overview of impact evaluations used to measure effectiveness of social or environmental interventions. It begins by providing definitions for key terms, such as:

• Impacts: “the positive and negative, intended and unintended, direct and indirect, primary and secondary effects produced by an intervention.” (OECD Development Assistance Committee)
• Impact evaluations: “measure the change in a development outcome that is attributable to a defined intervention, impact evaluations are based on models of cause and effect and require a credible and rigorously defined counterfactual to control for factors other than the change.” (USAID)

The guidance note then presents common reasons for conducting impact evaluations, including:

• To help funders evaluate potential investments
• To decide whether or not an intervention is having a positive change
• To replicate an initiative or scale up a pilot project
• To better adapt an intervention for a different context
• To reassure funders that resources are being invested wisely (upward accountability)
• To inform beneficiaries of beneficial outcomes (downward accountability)

Methodology

There is much debate on the best methodology for conducting impact evaluations, based on differences of views on rigor, required evidence and qualifications of evaluators. The guidance note recommends that the following elements of impact evaluation should be considered when developing a methodology:

1. Clarifying the values that will underpin the evaluation (e.g. achieve desirable impacts and avoid negative impacts, evenly distribute benefits). The guidance note provides suggestions on methods to assist with the clarification of the values.
2. Developing and/or testing a theory of how the intervention is supposed to work. The guidance note includes possible methods to assist with testing the theory of change (e.g. logical framework (4x4 matrix) approach, results chain (sequence of inputs, activities and outputs), outcomes chain, and outcome mapping).
3. Measuring or describing these impacts and other relevant variables (e.g. processes, context).
4. Explaining whether the intervention was the cause of observed impacts.
5. Synthesizing evidence into an overall evaluation.
6. Reporting findings and supporting their use.

The guidance note cites reputable sources of indicators that an organization can use to develop goals or performance indicators. These sources include Human Poverty Index, UN Millennium Development Goals, and World Development Indicators.

Evaluation team

Impact evaluations are best done by credible, external evaluators, but the parties implementing the interventions should be an integral part of data collection and monitoring. Local evaluation experts often bring a perspective on cultural, political or other relevant contexts. The guidance note recommends three practices aimed at producing high quality evaluations: 1) use an evaluator team that has both internal and external perspectives, 2) ensure transparency on data collection and evaluation, and 3) triangulate with multiple sources of evidence.

The guidance note digs deeper into more specific details on each of the subjects mentioned above. The note concludes by recommending that any effort to conduct impact evaluation should start with a clear statement of its purpose, the key questions the evaluation should answer, who would use the results, and how the evaluation will address clarifying the values, developing a theory of intervention, measuring these impacts, explaining the intervention, synthesizing the evidence, and reporting the findings.” It is a well-written and useful guidance note. I look forward to reading (and blogging on) the rest of the four-part series.

The World Bank just released The World Bank’s Social Protection and Labor Strategy 2012-2022. . This strategy centers on filling four gaps in social protection and labor (SPL) efforts today: integration across programs and functions, access to SPL instruments, access to jobs and opportunities, and global knowledge of effective SPL approaches.

Resilience, equity and opportunity, themes taken from the title page of the report, are integral to the World Bank’s ten-year strategy. The World Bank believes that effective SPL systems build resilience by protecting individuals and families from sudden shocks that can overwhelm them otherwise. Equity – including access to public or private services such as finance, education, health care, jobs and markets – will help to ensure that people’s basic needs are met. Policies and interventions should provide opportunity to the most vulnerable members of the community.

The empowerment of women, the sharing of knowledge (including learning from others’ efforts), access to market information, and advancement of research and development, are also important elements of the World Bank’s strategy.

The World Bank promotes solutions that address multiple risks and reaches the poorest people of the poorest countries. This strategy aims to help governments move from fragmented approaches to a more synchronized and integrated system for SPL programs. Successful programs should also include mechanisms to reach informal work sectors (e.g. agriculture) that are often excluded from government safety nets. The bank’s program intends to help countries move toward a systematic approach that has five “SMART” characteristics:

Synchronized across programs

Monitored, evaluated, and adapted

Affordable, fiscally, and cost-effectively

Responsive to crises and shock

Transparent and accountable

The World Bank promotes programs that are integrated with complementary programs in other sectors or that have a different area of focus (e.g. health, education). Despite all of the focus on providing protection programs, the World Bank also recognizes that there is a need for balance between protection and competitiveness. The World Bank recognizes that jobs and opportunities – as well as access to markets and employment opportunities – are central to any sustainable poverty reduction strategy.

The World Bank also points out that knowledge sharing is integral to any SPL program. The World Bank is working with developing countries to capture evidence-based data that can inform future decisions and can be shared across regions in the proper context. The bank’s strategy responds to three knowledge gaps:

• Understanding what currently exists and identifying gaps by region or subject,
• Evaluating results to arrive at a clear and appropriate understanding of the effectiveness of SPL efforts, and
• Sharing knowledge and best practices across regions to help those countries that are suffering from limited knowledge and skills.

The World Bank aims to address these gaps by:

• Strengthening its capacity for monitoring the performance of SPL program implementers,
• Maximizing the availability and use of existing knowledge,
• Generating comparable and accessible data on SPL programs,
• Making information on SPL more widely available, and
• Scaling up support for impact evaluations.

I applaud the World Bank’s strategy and approach. Governments must engage in efforts to promote sustainable development, and taking this SMART approach will likely lead to a more sustainable and effective change.

Questions for consideration

Can the cotton industry adapt the World Bank model and promote a SMART approach throughout the industry?

Can the cotton industry help the World Bank’s effort to engage governments in the sustainable development movement?

Vijaya Switha Grandhi and Alec Crawford’s paper, Price Volatility in the Cotton Yarn Industry: Lessons from India, was published in October, 2011 by the International Institute for Sustainable Development (IISD). The authors look at the impact that cotton yarn price volatility has on small-scale weavers as well as at the public and private interventions that have been put in place to mitigate the effects of the impact.  While the scope of the study is quite specific and the volume of cotton that is processed by similar actors is small, the number and contribution of small-scale actors throughout the global cotton supply chain is vast. For example, the paper cites that there are 6.5 million handloom weavers in India – a workforce second in size only to agriculture. Given the recent export bans put in place by India’s government to ensure that their cotton processing industry has sufficient supply of cotton lint, this is a relevant study.

I would like to share some insight from this paper that I feel should be considered by other supply chain actors and the cotton industry to ensure a healthy supply chain.

India’s cotton yarn industry depends almost entirely on India raw cotton. Power is not evenly distributed along the supply chain. Weavers are largely dependent on traders and middlemen, who are often blamed by the weavers for price fluctuations.

The level of organization and political influence wielded by different actors (e.g. producers, weavers, spinners) determines a group’s influence or power. Strong and effective leadership is critical for cooperatives to influence and represent their constituents –mostly small-scale actors. Market share also factors into an entity’s overall power. For example, the powerloom industry, which now accounts for 40 percent of total Indian cloth production (handlooms account for less than 20 percent), employs approximately 4.8 million people (each with a vote in public elections). The powerloom industry holds more political power because of these larger market and employment positions.

The paper discusses how interconnected the various actors’ operations are. For example, if spinners stop operating then the mills will likely struggle to find the raw materials necessary to maintain their capacity and meet their customers’ needs. The authors also look at the many factors that contribute to volatility, from cotton production (unpredictable yields, government support policies) to spinning (hoarding, obsolete technology), distribution channels (monopolies, yarn hoarding), macro context (trade policies, uneven distribution of political power), technology (unclear government initiatives), finance (lack of institutional finance), and market (competition with synthetics).

The paper concludes with the following findings and recommendations:

• Institutional corrections: Traders can exploit the handloom weavers because the weavers are not well organized. Cooperatives and the government should stockpile some cotton to cushion the weaver during volatile times.
• Technology investments: Government and private actors should invest in sound and sensible technology improvements.
• Supply/trading timing: Timely delivery of reasonably priced cotton and yarn is essential to stabilizing prices and incomes.
• Finance:  Improving the inclusion of powerloom or handloom weavers – including those not in a cooperative – could have far reaching impacts on community livelihoods given the scale of the industry.
• Capacity building: Improvements in weavers’ knowledge and understanding of market and technology trends are warranted.

I believe there is a lot we can learn from this and other studies in light of recent challenges the cotton industry has faced from global price volatility. I hope we can continue to come together to strengthen the global trade of cotton – from small-scale weavers to large manufacturers and beyond.

Questions for consideration

There are many important findings in this study, but I note the importance of effective organization to help stakeholders their negotiating power. Is this an issue throughout the cotton industry? If so, can we help ensure a balance of power throughout the supply chain?

Part two of a four part series, The Impacts of Private Standards on Producers in Developing Countries, Literature Review Series on the Impacts of Private Standards – part II (International Trade Centre, 2011) presents results from 47 research papers regarding socioeconomic and environmental impacts of private standards on producers in developing countries. Programs reviewed include coffee, forestry, herbs, spices and vegetables.  Below I provide a brief overview of the study’s findings.

Costs

• Costs associated with participating in certification systems include audits and certifications, trainings, recordkeeping, and system upgrades.

Benefits

• Overall, the study indicates that producers benefit from participating in private standards but this is not a uniform conclusion. Some producers benefited from price premiums, enhanced business conditions, better relationships with buyers, better management and farming skills, improved market access, or enhanced product quality and yield. Producers appear to be most appreciative of technical support and access to credit.

Mixed results

• A number of studies found mixed results on net income for producers and some found a negative impact due to the cost of certification. Price premiums, improved product quality and increased yields appear to exceed the costs incurred to participate in certification programs. It is worth noting that some studies (Kilian et al., 2006) demonstrate that price increases were limited to superior quality product (coffee).  
• While producers may benefit, the study found improved revenues were unevenly distributed with the higher benefit going to the retailer.
• Farmers living at subsistence level and barely covering their costs of production are already in a difficult situation and unprepared to make additional investments with uncertain payoffs.  
• Another mixed finding was the benefit of cooperatives as a facilitator to the certification process. Some studies indicated that cooperatives may not always manage to improve producers' situations and are efficient and effective in delivering services to farmers.  

Additional considerations

• The study found that results improve in value chains that have strong seller-buyer relationships as opposed to transactional value chains. In strong partnerships, both parties were more likely to benefit from their shared investments.  
• For producers who opt to participate in certification schemes, the increasing number of certifications may dilute the marketing value of certifications in general, thereby reducing market and demand related benefits.  
• The authors also suggest that private standards are one tool in a broader set of voluntary and regulatory options. Programs that address multiple areas such as technical support, training, and financing are linked to better results. Leveraging existing programs and resources can help improve benefits and minimize costs.

I came across International Trade Centre’s Market Analysis and Research (MAR) Program and was impressed with amount of relevant and useful information that was accessible through their online tools. Throught the MAR program, ITC provides tailored market research and trade analysis, and training programs in market analysis for trade policy makers, trade support institutions and the business community in developing countries.  Here is a brief description of their core web-based tools:

Trade Map

The Trade Map provides online access to the world’s largest trade database and presents indicators on export, demand, alternative markets and trade flows of over 220 countries and territories and 5,300 products, including cotton. The Trade Map's features include:

• Analysis of present export markets: Provides an up-to-date profile of export markets, value, size and concentration of exports for a given product.
• Pre-selection of priority markets: Views the world’s major importing countries and which countries’ demand has increased over the past five years.
• Overview of competitors in global and specific markets: Identifies the leading exporting countries as well as a country’s position in world exports.
• Review of opportunities for product diversification in a specific market: Makes a comparative assessment of import demand for related products in an export market.
• Identification of existing and potential bilateral trade with any partner country: Compares actual bilateral trade, the total import demand of partner countries and the overall export supply capacity of the home country.
• Information on tariffs: Views information on tariffs faced by countries in their exportations or applied by importing countries.

Investment Map

The Investment Map aims to assist investment promotion agencies in defining priority sectors for investment promotion and opportunities for bilateral investment as well as identifying potential investors and competitor countries by sector. The Investment Map allows analysis by country, trading partner and sector.

Trade Competitiveness Map

The Trade Competitive Map (also known as Country Map) provides country market analysis profiles for around 240 countries and territories that include:

• Trade Performance Index: A general profile and ranking for a country’s key export sectors and indicators to assess each sector’s international competitiveness.
• National Export Performance and National Import Profile: An overview of the export/import performance of countries by looking at the composition of their trade portfolio in terms of the dynamics of international demand and sector diversification.
• The Consistency of Trade Statistics and Technical Notes on Trade Data: Provides a comparison of a selected country’s trade statistics with partner country statistics to identify discrepancies between the two and gauge their consistency.

Product Map

The Product Map consists of web-based portals designed for organizations active in international trade. Each Product Map presents:

• Market positioning tools:  Focus on the quantitative analysis of international trade for a given sector, including extensive information with which to compare national macro-economic performance by country, to analyze exports and imports, and to identify the products that have growth opportunities.
• Networking tools:  Aids subscribers in sharing their company profile or business proposals as well as link to trade support institutions, online market places and trade directories.
• Market intelligence tools: Provides more detailed information to enable institutions to look deeper into international market trends and to design better international marketing strategies.

ITC has done the industry a favor by providing access to current market data and relevant trade information that can help policy makers and trade support institutions develop effective programs and mechanisms to strength trade for their communities. This information also helps  supply chain actors who would not have otherwise had this knowledge develop appropriate business strategies as well as manage potential risks.

Questions for consideration

Does the MAR program include the most relevant information possible?

Do you believe that it will be utilized by supply chain actors or would another version be more relevant?

One would have to search high and low for a community that has as remained unscathed from the recent economic downturn. However, the Asia-Pacific region, as a whole, it the Asia-Pacific region has survived much better than other regions because of the risk and macroeconomic management measures that were developed in the aftermath of the 1997 Asian crisis. 

The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)’s study, Economic and Social Survey of Asia and the Pacific, 2010 assesses the critical issues, policy challenges and risks that the region faces in the months and years ahead as it leads the world economy to recovery after the first global economic contraction in modern history. The survey discusses multiple imbalances and development gaps, evaluates their differential impact across countries and sub regions, and identifies key policy responses for the short- and long-term. The report is very particularly relevant to apparel and textile manufacturing as it is a significant industry in the region.

While the economic crisis slowed GDP growth in all countries throughout the region, the countries that depended more on exports and global financial flows suffered more damage. This is understandable when you consider that exports can comprise up to 38 percent of a country’s GDP, not to mention that exports dropped at rates nearly twice those that followed the 1997 crisis.

The report suggests that economies highly dependent on trade with the US and Japan are more vulnerable than others to the collapse in external demand. It’s worth looking at an interesting dynamic mentioned in the report: despite the overall reduction of exports to the US, all ESCAP countries increased their share of the remaining US market.

The study also states that finance costs increase due to reduced export opportunities. In turn, this reduces export performance. The reversal of foreign capital flow can impact the whole country financially, from exchange-rate depreciation to a decline in foreign exchange, which will likely damage the economy as a whole. Governments should work with banks and financial institutions to provide a selection of tools, such as loans and guarantees, and share risks appropriately.

The report discusses additional impacts (e.g. increased unemployment, decreased social protection measures and the continual migration of laborers) before examining how countries that invested in public spending programs aimed at creating employment and strengthening domestic demand fare better than others. Results indicate that monetary policies played a smaller role than fiscal policies in supporting domestic demand.

In times of economic downturn, governments should develop policies that reduce entrenched poverty and protect the population at large from the risk of falling into poverty. Policies should provide social protection that develops short-term safety nets, prevents increases in deprivation, and promotes better chances of individual development. Policies that generate income opportunities and improve access to basic social services, especially in rural areas, are also critical.

Agricultural improvement services can have a large impact in rural communities that are often reliant on agriculture as a source of income. These improvements should include research and development, effective extension services with agronomic support, and increased connectivity through the use of information and communications technology to enable knowledge sharing. Programs should also address measures to improve transport systems and accessible financial support along with risk management tools (such as crop insurance), all of which could significantly contribute to reducing rural poverty.

The authors present future scenarios for:  inflation, commodity price volatility, increase in food prices, and an asset price bubble. Here are some conclusions that the authors of the UNESCAP survey shared:

• The system of institutes like the Consultative Group on International Agricultural Research (CGIAR) have a key role in generating new knowledge and technology in agriculture and putting it in the public domain, where it is available to national agricultural research systems for adaptation to their geoclimatic conditions.
• A key element here would be a system that could help small farms benefit from economies of scale in marketing and assist them in meeting international standards.
• The authors suggest that governments could aim to improve the banking architecture by establishing institutions that facilitate financial inclusiveness, such as credit bureaus and credit guarantee funds for microfinance activities. Governments might also undertake large-scale financial literacy campaigns to equip the poor to benefit from financial inclusiveness.
• The report ends on the note of when should governments end stimulus policies and how can they facilitate self-sustaining economic growth.  The authors also suggest that boosting domestic demand can make up for some export loss. Countries that are unable to create domestic demand should diversify their markets. Finally, policies that promote long-term structural rebalancing of economies can create healthier long-term trade conditions. 

I feel that there is a lot of good information in this report that can be used to create policies that protect vulnerable members of our societies and strengthen economies.

Questions for consideration

Will such policy interventions be possible in all regions? Are there other, non-policy, mechanisms that can provide similar benefits?

When financial experts speak of commodity markets they often discuss futures markets. But for a layperson like me, I didn’t really understand how “futures” work or how they influence commodity markets. I would like to share a bit of the basics that I have learned with you. 

Cotton’s Revolution held a Strategic Thinking Session on April 25^th to discuss cotton’s recent price volatility and how the industry can strengthen existing mechanisms and promote policies to address harmful price volatility. I was not in attendance but found the CCI’s summary of observations and Mr. Arvind Singhal’s presentation on Managing Impact of Cotton Supply Chain Volatility very interesting and important to share with others in the wider cotton community – and beyond.

The cotton industry is vast and involves a wide variety of actors – from small-scale farmers and weavers to spinners to global brands. It is influenced by entity outside of the supply chain such as hedge funds and speculators and faces competition from other fibers and crops. Some key observations from the Bangkok Session include the imbalance of power and lack of risk management mechanisms along the entire supply chain as highlighted in the following points raised by the thinking session’s participants:

• There is a need to develop mechanisms to enforce contract sanctity and to continue to foster communication along the entire supply chain.
• Speculators, hedge funds and pension plans can create artificial and higher levels of volatility, creating a higher level of risk for more vulnerable members of the supply chain.
• The lack of export from China and India, two of the largest producing countries, places the US, the largest exporter, in a strong negotiating position.
• A handful of large retailers have a disproportionate negotiating power. At the same time mechanisms do not currently exist to manage risk associated with their actions that hurt the entire supply chain such as defaulting on contracts and incentivizing bad buying behavior. Additional challenges that the retailers pose include their lack of knowledge about fiber characteristics and continuous change in sourcing personnel.
• E-commerce will open up communication connections between different supply chain actors. This could allow new segments of the supply chain to communicate to consumers without having to go through retailers.
• The consumer is an important stakeholder and the industry has not yet created a “sexy” or positive message about cotton.

In addition to these thoughtful discussion points, I also found Mr. Singhal’s presentation very interesting with some more detailed insight into contributors to cotton price volatility and examples of steps food companies are taking to manage risks in their supply chains. Some of the factors behind cotton price volatility that Mr. Singhal presented include shifts in production due to climate change, government interventions (e.g. India bans), currency movements and entry of large commodity speculators. He also shows how cotton has lost market share to other fibers as a result of higher prices. He also points out that retailers have changed sourcing patterns by increasing the number of seasons, reducing lead times (which helps control raw material costs) and many have outsourced to a sourcing management firm (e.g. Li & Fung).

Mr. Singhal provides us with four case studies on food companies’ strategies to manage the volatility of raw materials:

• Nestle has a four-point strategy to: 1) enhance connections with farmers and suppliers, 2) improve understanding of price movement trends and sensitizing customers accordingly, 3) innovate to replace expensive ingredients, and 4) reduce waste and improve efficiencies.
• McDonald’s approach involves establishing long-term contracts with suppliers and vendors, buying in bulk to take advantage of the economies of scale, using “no frills” logistics, and improving ability to forecast input costs.
• Barilla, a leading pasta company, takes a central role in deciding raw material procurement – even for its suppliers, stays abreast of raw materials demand-supply equation on price trends, and provides sourcing intelligence to suppliers to help them source better.
• Starbucks has a diversified procurement model and sources from multiple regions. It is important to note that Starbucks had to increase prices of its products when the purchased for an entire year in 2011 when prices were high.

These case studies indicate that large global brands are engaging more deeply in their supply chain, possibly creating new business relationships. If done correctly, these models could help manage risk along the supply chain. However, it could pose more risk to vulnerable members of the supply chain if the brands use an approach that increases their negotiating power.  Regardless, more direct engagement with retailers and brands appears to be inevitable.

 Mr. Singhal closes his presentation with some suggestions:

• Volatility will likely remain and brands and retailers can dampen its effects on the other members of the supply chain.
• Producers and traders should work more directly with retailers.
• Affected actors or cotton institutions should strategically address harmful, short-term government interventions.

This session was clearly a timely and covered issues that must be addressed to ensure a healthy and more stable cotton industry. We now must come together to develop effective and sustainable solutions to address the issues of most concern.

Questions to consider

What is the most pressing issue that the industry should address?

How can we engage the least involved members of our wider community - consumers, retailers, hedge funds and speculators?