Tajik Cotton Farms in Crisis After Price Tumble

Falling world prices are pushing Tajikistan’s already failing cotton industry to the verge of bankruptcy.

The government launched a new scheme last year making it easier for farmers to access loans on affordable terms, but there are fears that many of them will be unable to repay their debts because their income from last autumn’s harvest was nothing like what they were expecting.

Tajikistan’s economy has always been heavily reliant on cotton, which over recent years has contributed around a fifth of export revenues and provides nearly half the country’s workforce with jobs. Two-thirds of all farms grow cotton, many of them in the flatlands in the south of the country.

Aziz Rajabov is the top manager at a large farming enterprise in the southern Kulob region. Last year it took out a bank loan of 280,000 US dollars to fund expenditure over the growing season – a large amount even for an extensive farm complex like this.

When the harvest came in at 335 tons – “not at all bad”, according to Rajabov – its gross earnings should have come in at around half a million dollars, based on a high purchase price of 1,500 dollars a ton in the first quarter of 2008.

However, in the interim, the global financial crisis greatly reduced worldwide demand for commodities and by autumn, the farmgate price was just 850 dollars a ton, leaving the farm unable to clear the debt plus interest and other costs, not to mention make a profit.

Rajabov’s farm has held off on selling in the hope that prices will recover, so the cotton is sitting doing nothing at the local processing plant.

“It wouldn’t be profitable to sell it at the moment, as cotton prices have fallen. If we sold it now, we wouldn’t be able to repay the loan,” he said.

The crisis facing Rajabov’s farm is all the more alarming as it comes in the wake of an improved financing system introduced last year, which would have been a resounding success had it not been for the collapse in world prices.

Previously, cotton producers were dependent on advance loans extended by so-called “futures companies”, private firms which provided cash, seed and fuel at the beginning of each growing cycle. These companies often imposed high interest rates and took the whole of the resulting harvest at below market prices, so that Tajik farms ran up hundreds of millions of dollars in debt.

Farmers were unable to obtain normal loans as they had nothing that banks would accept as collateral.

Under a scheme announced in late 2007 and put into practice last year, state-run commercial banks were instructed to accept land-tenure certificates as guarantees, and to issue loans to farmers at a fixed annual interest rate of 12 per cent. That meant the real interest rate was zero or even negative, given that inflation was roughly the same figure. (See Tajikistan Vows to Revive Ailing Cotton Industry, RCA No. 526, 11-Jan-08.)

The National Bank of Tajikistan reports that farmers received loans totalling some 60 million dollars last year, two thirds of which came from government funds channelled to the banks and the rest from commercial banks’ own funds.

The central bank has recognised that falling prices mean farmers will find it hard to service their debts on time, and has shifted the deadline for repaying the capital from December 1 last year to March 1.

However, Rajabov fears that is not going to be enough, and is hoping for a further rescheduling “until June, at least”.

Industry experts say that falling prices have only added to the longstanding problems affecting cotton production in Tajikistan, and that taken together, these issues cannot be resolved even by an improved financing system.

At the heart of the problem, say analysts, is the persistent practice of making farmers grow cotton because of its strategic value to the state, even when they would prefer not to.

While President Imomali Rahmon has repeatedly said farmers should be free to grow whatever they want, local government officials continue to issue directives and production targets as if the Soviet Union had never come to an end.

Rajabov confirmed that his farm faced pressures of this kind.

“Cotton production is currently a loss-maker, and if we’d had a chance we’d have switched to a crop that was more profitable,” he said. “But our hukumat [district-level government] requires us to sow at least 70 per cent [of the land] with cotton.”

According to agriculture expert Kurbonali Partoev, part of the problem is that while the bigger farming units which dominate cotton production are technically commercial ventures, they display the same inefficiency and lack of incentive as their predecessors, the Soviet collective farms.

“Local authorities need to stop pressuring farmers and using outdated management systems,” he said.

Add to this soil depletion due to lack of rotation given the cotton monoculture, failing farm machinery, and underinvestment in developing better crop strains, and the result is a relentless decline in yields and consequently national production.

Scientist Vahob Vahidov points out that Israeli farms get five or six tons per hectare when they use seeds from Tajikistan, yet local yields average under two tons.

Annual production figures have averaged less than half a million tons a year since 2001, and fell from 419,000 tons in 2007 to around 350,000 tons last year.

“However much money you throw at agriculture…it will never be enough,” concluded Vahidov.

That is a view with which some Tajik bankers might sympathise, as they argue that the government has placed them in an impossible position by forcing them to lend at their own risk to farmers who may now default.

Concerns about the threats posed by these unpaid debts were raised at a January 15 cabinet meeting, at which the heads of Amonatbank and Agroinvestbank warned that they could face serious liquidity problems in an environment in which it was already hard for them to borrow on international markets.

Another banker, who asked to remain anonymous, told IWPR that the failure of farmers to repay loans could lead to the collapse of the banking sector.

At the cabinet meeting, Deputy Finance Minister Jamoliddin Nuraliev said the commercial banks had not helped themselves when they bumped up their annual interest rates, in some cases to 24 per cent.

The government has promised to increase state funding for loans to cotton farmers from 38 to 48 million dollars this year, but during the cabinet meeting, President Rahmonov also urged the banks to raise money from depositors.

Rajabov is all too aware how hard it will be for his indebted farm to raise funds this year.

“The 2009 sowing season is approaching, and if we are unable to repay our loan, I doubt anyone will give us money to plant. I don’t know to do,” he said.

Rukhshona Alieva is the pseudonym of a reporter based in Dushanbe.