Abstract

This paper focuses on the parastatal marketing of cotton in Burkina Faso. The parastatal companies have bought cotton at a guaranteed price, announced prior to planting, reducing a key element of risk for producers. The cotton sector reforms in the late 1990s and early 2000s have significantly improved the share of international price received by local producers. However, a number of problems must still be solved to improve the living conditions for rural agricultural producers. The purpose of this paper is to reassess parastatal cotton pricing in Burkina Faso by factoring the implicit benefit that producers have obtained from guaranteed prices which reduces the price variability risk. A mean-variance economic risk model was developed to measure the price risk that would have been associated with selling cotton on international markets rather than selling to parastatal companies at a guaranteed price. Results suggest that risk is often a significant factor in producers’ decision making, particularly over the past decade, when price volatility would have driven risk averse producers out of international markets. The viability of the parastatal markets, contrary to the prevailing literature which suggests that future policy shifts towards increased privatization, needs to consider price stabilization and the price variability risk associated with the international cotton market.

Key words: Cotton, price risk, mean-variance model, risk premium, certainty equivalent.