South-South cooperation with ITC facilitation

8 December 2011
ITC News

Introduced in the early 1900s, cotton farming in Kenya did not expand greatly until the 1970s. At that time, cotton was identified by the government as a crucial crop to fight poverty in the country, and at least 20 ginneries were established. The industry’s collapse in the early 1990s, however, affected the entire cotton value chain. Many ginneries closed after taking the famers’ seed cotton without paying for it. Reintroducing cotton in such an environment was therefore a big challenge.

Within this context, ITC introduced Kenyan ginnery managers and cotton farmers to stakeholders in the cotton-to-clothing value chain in China, who explained their business model and requirements. One major lesson the Kenyans learned was that they needed to focus on quality and domestic value addition.

On the domestic value addition side, as Kenya only produces around 12,000 metric tons of lint cotton, which is fully consumed locally, it became clear through the interaction with the Chinese stakeholders that Kenya had to exploit the existing potential of the domestic market for both lint and cottonseed first, before turning to exports.

Thus they learned of the importance of adding value to the product before the sale. As only 35%-40% of the seed cotton consists of lint, there is tremendous potential to add value to the cottonseed by crushing and expelling the seed oil, which is then processed into other products. The remaining oil cake is processed into animal feed. In fact, a local market was available but had not been capitalized on by Kenyan ginners.

Makueni Ginneries is one of those companies that participated in ITC’s African Cotton Development Initiative. The company, which was privatized in 2000, has a capacity of over 10,000 bales per year. To meet domestic demand and effectively add value to its product before the sale, the company decided to buy a Chinese oil expeller, operated by four people, with a capacity of 1,000 kg per day. At the time, it had difficulty selling cottonseed, which had to be transported to Nairobi and was sold for only 6 Kenyan shillings (US$ 0.06) per kilogram to a cartel of cottonseed traders. After the expeller was installed, animal cake feed manufacturers began placing orders for cottonseed cake, and the cottonseed oil was sold for further processing into edible oil or to paint factories. The value of seed cotton increased to 30 shillings per kilogram, a 500% improvement. Moreover, the cartel broke and the seed cotton price increased to 30 shillings for all ginneries. With an estimated 22,000 tons of cottonseed for the entire country, the increase in price amounts to a potential US$ 5.7 million for the entire season. This increase in price directly benefits cotton farmers, as the increase will be shared among ginners and farmers. Training on calculating seed cotton prices helped to ensure fair gains for everyone.

Partnering along the value chain

In Viet Nam, ITC exposed Makueni Ginneries to companies all along the textiles and clothing value chain. All companies visited had very high cotton quality requirements, but also needed a minimum quantity that the company could not yet deliver. During the trip, representatives from Makueni Ginneries also visited a factory specializing in cotton products, such as sanitary towels. As this company does not need large quantities of seed cotton, they source lint from textile manufactures, which is expensive. Makueni Ginneries therefore saw the business opportunity to export lint and, in parallel, partner with them to produce sanitary cotton products in Kenya, for which there is a large market.

The ginnery has agreed in principle with the factory on both but will start by selling lint, which they will process and sell back for final packaging of sanitary products. The idea is to work backwards, learning from the Vietnamese experience, and adding value subsequently at each stage of production until the ginnery has a fully sanitary cotton plant. They do not anticipate marketing problems because Kenya’s new constitution makes it mandatory for the government to supply sanitary towels to all girls’ schools. Moreover, Makueni Ginneries will also be able to process and supply hygienic cotton for general use to hospitals.

Involving the government

Finally, value addition and market expansion are also necessary for the domestic textile and clothing industry, which faces difficulties from illegally imported products as well as second-hand clothing. For an industry to survive in this situation, it will require support from a large buyer. The Kenyan government is one such buyer, procuring products for public institutions, including hospitals and universities. With the Chinese experience, Makueni Ginneries approached the prime minister for support to the industry and it was decided that public procurement for products such as textiles and clothing should first be sourced locally. This is a very big boost for cotton and the textile industry, as it enlarges the market.

As Kenya’s cotton industry expands, companies need to address the marketability of all products along the value chain. Value addition widens the domestic market and creates opportunities abroad. South-South cooperation has been a crucial starting point for the process.