Value of Price Stabilization Policy for Cotton Producers in Burkina Faso

Abstract

The common view of some specialists and practitioners is that the domestic pricing system in Burkina Faso discriminates against the cotton producer. However, the present study found that the local pricing system in the cotton sector of Burkina Faso was not always the inferior marketing channel when compared to the spot market and forward contracting. For the years during which the international cotton price was low, the local pricing system offers the best marketing alternative compared to international markets. During the years of high international cotton price if producers are less risk averse, the spot marketing is the best marketing channel. For some years even though the spot is on average higher than the local price it was not the best marketing option because it incurs risk. In other years the spot price was higher than the local price so that even if it goes down by one standard deviation it is still the best marketing option. However, for highly risk averse producers the local pricing system is always the best marketing alternative. Overall, the combination of the local pricing system with the international market (Spot and forward) is the best marketing choice for the cotton sector producers in Burkina Faso. The combination of different marketing channels was considered primarily for theoretical results. In practice, the local pricing system might be the best alternative because the domestic production model provides additional benefits that are not accounted for in the E-V model. Such benefits encompass technological support and foreign investments.