IDH COTTON: Impact Report

IDH sustainable cotton programme and its impact Baseline and quick scan evaluation (2009-2012)

Concise report February 2013

Contents Key Findings ................................................................................................................................ 4

1. Introduction ............................................................................................................................. 5 1.1. Context ............................................................................................................................. 5 1.2. Rationale ........................................................................................................................... 5 1.3. Research Question .............................................................................................................. 6

2. The Better Cotton Fast Track programme ..................................................................................... 7 2.1. BCFTP initiative and IDH involvement .................................................................................... 7 2.2. Theory of Change ............................................................................................................... 7 2.3. Governance model .............................................................................................................. 8

3. Evaluation of BCFTP .................................................................................................................. 9 3.1. Results so far ..................................................................................................................... 9 3.2. Our interpretation of results ............................................................................................... 10 3.3. Challenges to Mainstreaming .............................................................................................. 13

4. Conclusions and Recommendations ........................................................................................... 16 4.1. Conclusion on IDH contribution to mainstreaming ................................................................. 16 4.2. Recommendation .............................................................................................................. 16

Annex ....................................................................................................................................... 17 Key organisations .................................................................................................................... 17 Methodology ........................................................................................................................... 17 Alphabetic list of respondents ................................................................................................... 18 The cotton market ................................................................................................................... 18

IDH Sustainable Cotton Programme and its Impact - 3

Key Findings The combination of BCI, BCFTP and IDH has made a difference in the global cotton market. The BCFTP has been instrumental in the acceleration of mainstreaming Better Cotton as it has ignited production which has increased significantly in only 2 harvests. Production has grown to 490,0001 MT in 2011-2012, increasing the share of sustainable cottons to 3.1% of total global cotton production.

IDH has a catalytic role in the mainstreaming of Better Cotton, both as convener of partners and as funder of the transition. IDH has provided a significant share of farmer projects as match funder. It has supported the BCI in its institutional earmarked annual contributions and has provided knowledge and human resources to

frontrunner private the investments in development with the BCFTP.

In view of the ambition of mainstreaming sustainable cotton, this start has been important. The BCFTP is well positioned to take this ambition to the next level, while there are several challenges that will have to be dealt with. The future will show to what extent the mainstreaming ambition will be realised.

Impact BCFTP 2010 - 2012 2010-2011

2011-2012

IDH Investment (â‚Ź)

1.7 mln (2011)

2.3 mln (2012)

Total BCFTP Investment (â‚Ź)

5.4 mln (2011)

7.3 mln (2012)

10

20

Number of retailers and brands in BCFTP

5

8

Number of retailers with public commitments

3

4

n/a

4%

75,000

484,0001

0.3%

1.8%

Number of farmers trained

68,000

125,000

Number of farmers licensed

28,000

90,000

17% (2011)

47% (2012)

Resourcing the Transition

Building Demand Number of partners in BCFTP

Cotton consumption of BCFTP retailers as share of global cotton production Encouraging Supply Production Better Cotton Better Cotton (MT) Production Better Cotton as share of global cotton production

Linking Supply and Demand Gin uptake of Better Cotton as share of total Better Cotton production Procurement of Better Cotton by Retailers (MT)

3,000

19,300

Institutional Development BCI: Number of members

79 (2011)

201 (2012)

Institutional Development BCI: Number of employees

17 (2011)

26 (2012)

1 Data are collected before the final values for Brazil were known. Climatic factors may affect the yield and thus actual production may be different than this forecast.

Baseline and Quick Scan Evaluation - 4

1. Introduction IDH is a not-for-profit public-private partnership that promotes the acceleration and up-scaling of sustainable trade. It launched its Cotton programme in 2009. The organisation co-invests in the Better Cotton Fast Track Programme (BCFTP). This is a consortium of private and public actors that promote the supply and demand of sustainably produced Better Cotton (BC), based on the standards of the Better Cotton Initiative (BCI).

1.1. Context Cotton is grown in more than 70 countries. In 2012, around 60% of the 27 million metric tonnes (MT) harvested cotton was concentrated in China, India and USA. Nevertheless, the global cotton production is diverse, with each of the cultivating countries having its own characteristics (see Table 2 in Annex). Around 50 million people, predominantly smallholder farmers, depend on cotton agriculture. The number varies yearly, as cotton is a rotation crop and when prices are low, farmers tend to switch to planting other, more profitable crops.

Cotton accounts for 3% water consumption, 7% of pesticide use, 14% of insecticide sales.

Among producing countries, major differences exist in farm sizes, organisation, market structures, state support mechanisms, making one-size-fits-all solutions impractical.

The growing of cotton poses numerous sustainability challenges. The large amounts of water, pesticides and insecticides used in its cultivation cause environmental damage. Furthermore, those practices involve high economic and health cost to the farmers. Issues of severe working conditions, child labour and fair-pay have been in the spotlight in recent years.

Challenges in the sector expand beyond the environmental and social aspects. Between the farm and the clothing store, there are multiple actors involved in trading, cleaning, spinning, and weaving the fibre.

Different kinds of cotton are blended to increase the quality of yarn. Those Retailers are hardly in factors translate into a lack of visibility in the supply chain: generally, control of their immediate brands do not know who their manufacturers are and where cotton comes suppliers, let alone of the from. There is very limited vertical integration within the supply chain and rest of the supply chain, given the volatile price of cotton, short-term contracts prevail. Contract which makes it difficult to breaches are not uncommon, especially in the last two years due to the cope with sustainability 2010 price shock. Consequently, the incentives of the different actors in challenges. the chain (in terms of risks, costs and rewards) are hard to align.

1.2. Rationale Given the serious challenges around the cultivation, processing and trading of cotton, the need for sustainability in the sector is evident. Nevertheless, in 2010 total sustainable cotton (Organic, Fairtrade and Cotton Made in Africa cumulatively) accounted for merely 1.4% of the total global production. There was a clear rational for the launch of an initiative that would transform the market and mainstream sustainable cotton, i.e. achieve a production volume that is a significant percentage of global cotton flows.2 BCI started in 2005 to address cotton sustainability challenges holistically, by combining environmental, social and economic issues in one integrated set of principles. It works with small- and large holder farmers on the ground. By teaching them to cultivate cotton with less water, chemicals and fertilizer, it aims to improve the ecological impact of production and to protect their health. The idea is that by using BCI’s best practices, farmers save input costs and improve their livelihoods. There are no formal premiums associated with Better Cotton and no label that indicates its usage to consumers. BCI further engages and supports all supply chain actors, from ginners to retailers.

2

There is no uniform agreement on what this percentage should be or when it should be achieved.

IDH Sustainable Cotton Programme and its Impact - 5

1.3. Research Question IDH strives to be accountable and transparent about its operations and progress to its stakeholder. By 2015 IDH would like to evaluate its results against longer term objectives and targets. This report has two main objectives: on the one hand, to conduct an intermediate assessment of the impact of the IDH Cotton programme and focuses on the integration of sustainability in the cotton value chain. On the other hand, to formulate verifiable criteria to improve the extent to which the IDH cotton programme can be evaluated in the future. The extent to which IDH (through BCFTP) influences the ecological footprint of cotton and the socio-economic conditions at farm level is separately researched by LEI/WUR and is thus excluded from this analysis. For the methodology of this research please refer to the annex.

Baseline and Quick Scan Evaluation - 6

2. The Better Cotton Fast Track programme 2.1. BCFTP initiative and IDH involvement When IDH initiated its cotton programme, the choice for BCI as the The BCI owns the system, production standard matched very well with IDH’s mainstreaming the Fast Track Program ambitions. The standard aims to improve the livelihoods of the farmers, helps make it happen. the environment and the sector’s future. These focus areas are similar to IDH’s general objectives and its result areas (Figure 1). Furthermore, both organisations have the objective to mainstream sustainable cotton. In 2009, as part of its cotton initiative, IDH convened several frontrunners from the retail sector in an implementation vehicle, the BCFTP, to support the long term objectives of the BCI and to accelerate the implementation of the Better Cotton standard. IDH is considered the convener of the BCFTP as it offers a platform where retailers and brands (Adidas, IKEA, H&M, Levi’s, M&S) can come together on a pre-competitive basis. IDH is also a funder as it matches the investment of the private partners together with Rabobank Foundation and ICCO.

2.2. Theory of Change The Theory of Change (ToC) as it has developed over the years, differentiates between 4 different interventions, as shown in figure 1. The first intervention is Resourcing the Transition; with the provision of both financial and human resources to enable a functioning platform for mainstreaming Better Cotton.

The second is Building Demand for Better Cotton by convening several frontrunner retailers who are (publicly) committed to the procurement of more sustainable cotton. Demand for Better Cotton is crucial as it provides a commercial incentive to farmers to produce Better Cotton, and for midstream to buy and process Better Cotton. The third intervention is Encouraging Supply of Better Cotton by the BCFTP investing in farmer support programmes in which farmers are trained, licensed and verified in Better Cotton production practices. The final intervention is Linking Demand and Supply that enables the BCFTP retailers and brands to purchase garments made of Better Cotton. This entails amongst others, the reconnection of the supply chain, the support of institutional development of BCI and Better Cotton and the creation and dissemination of knowledge.

IDH Result Area 1 Tangible improvements in ecology and socio-economic condition of production in countries of origin in supply chains

IDH Result Area 3: Effective collaboration and institutionalisation at sector level

Farmers

4

Farmers

Ginners

IDH Result Area 4 Knowledge on sustainability, efficient and effective supply chain approaches developed and shared

IDH Result Area 2: Tangible improvements in sustainable markets

Linking demand and supply

Traders

Retailers

Spinners

Farmers

Suppliers

Retailers

BCFTP Retailers

Implementing Partners 3

Encouraging supply of Better Cotton

2

Building demand for Better Cotton

BCFTP

“BCI Universe”

1

Resourcing Transition IDH

Figure 1: IDH Theory of change through BCI and BCFTP with four key interventions

IDH Sustainable Cotton Programme and its Impact - 7

The ToC of BCFTP has proven not to be a static model, but rather a starting point for practice of change.

Whereas it can be questioned whether sufficient time was spent on the design of the ToC at the start of the programme, working with an evolving ToC is considered to be a good practice.

The BCFTP target is set at 1 mln MT Better Cotton produced by ‘What retailers want is BC at the 2015. As with regular cotton, in order to ensure the availability of right time, right place, and right the right quality at a competitive price, a range of production volume for the right price’ sources is needed. The optimal mix therefore requires both smallholders and large scale farmers. The BCFTP has a portfolio approach which means that on the one hand a high number of smallholder farmers are engaged. Smallholders are farmers with small production areas and generally low productivity rates. One of the main objectives of IDH is to improve the livelihoods of smallholders. On the other hand large scale farmers are involved. They have a high productivity per farmer and produce high volumes. On smallholder level relatively large economic, environmental and social impact is expected, while on large farms this is likely to be lower.

Retailers have agreed not to buy Better Cotton at a premium. High production volumes of Better Cotton are crucial to ensure that supply meets demand: a shortage of supply in the market would increase the price for Better Cotton and render it uncompetitive against conventional cotton. Currently it appears that Better Cotton has been up-charged lately with a price premium even larger than that of Organic cotton, signalling a shortage of supply.

2.3. Governance model

Executive Board

All Funders, with a majority: VOTE Elected representatives of Private Partners: VOTE BCI representative: NO VOTE Accountable for the approval and delivery of:  The Charter representing the rules of the programme  The Strategic Plan driving all investment decisions

Investors Committee

Funders and Private Partners Membership by invitation from the Executive Board: VOTE BCI representative: NO VOTE Farmer Support programme (FSP) representative: RELEVANT VOTE* *No involvement on investment decisions and Implementing Partner management

Accountable for approval and oversight of investment decisions Building understanding, sharing knowledge, supporting procurement

Secretariat

IDH, BCI representatives Coordination, fund and project management

Working Groups

Set up by the Executive Board or the Investors Committee Special teams that may include Funders, Private Partners, Supply Chain Partners, Implementing Partners, specialist advisers and BCI representatives Dealing with short and long-term issues

Figure 2: The BCFTP Governance Model

The BCFTP governance model as shown in figure 2 reflects a robust allocation of responsibilities. The BCFTP Charter includes a clear description of the different roles and responsibilities and the corresponding voting regulations. The Charter also prescribes clearly the financial governance rules and the IDH Competition Compliance Policy that all the members have signed. This ensures pre-competitive cooperation, the presumption on which the partnership is based. This presumption however, does not imply that all partners have aligned motives to participate in the BCFTP: some have a business motive to secure their cotton supply chain, whereas others refer to a CSR window to participate. Even on the level of the project investments, partners may have different interests due to different positions in the value chain and geographies from which they source their cotton.

These differences of interests lead to different perspectives on implementation and management of the BCFTP:



relevance of Gin Uptake Rates and Retail Uptake Rates to management of the programme;



the intermediary adjustment of targets;



the relevance of compliance rates of different projects, as they may differ due to different duration of the project and thus experience;



the importance and implementation of the Volume Based Fee;



not all respondents agree to what extent the target of 1 mln MT by 2015 was ambitious.

The flexible approach to the ToC allows dealing with these different perspectives on implementation and management.

Baseline and Quick Scan Evaluation - 8

3. Evaluation of BCFTP 3.1. Results so far ‘The BCFTP is a reason to be optimistic about the future of Better Cotton,’ one of the respondents said.

This optimism is based on the results so far. In only two years the interventions of the BCFTP have resulted in doubling the volume of sustainable cotton. In the harvest year 2011-2012 3.1% of the total global cotton production was sustainable, and 1.8% of it was Better Cotton.

The BCFTP is making a difference in the global cotton markets by the four interventions defined in the ToC. As part of resourcing the transition funding by private partners and funders has increased from €5.4 mln in 2011 and totalled €7.3 mln in 2012, of which €2.3 mln was contributed by IDH. Dedicated IDH staff to manage the BCFTP is in place and there is a tentative indication of a positive business case for farmers in India by LEI/WUR.

Progress achieved through the ToC interventions signifies advancement towards IDH Result Areas

Since the beginning of BCFTP, the number of retailer and brands that are members has increased from 5 to 8. As is shown in figure 3, the total number of partners as per the 2011-2012 season is 20. At the provided platform they cooperate and share knowledge as a contribution to building demand. The amount invested by private partners (including supply “Our goal is 100% chain partners) went up from €2.3 mln in 2011 to €3.7 mln in 2012. Of those BC by 2015. There is total private investments, the contributions from the retailers and brands went no room for failure.” up in the same years from €1.9 mln to €2.4 mln. The share of current cotton consumption of BCFTP retail and brand partners is approximately 3.5% of total global cotton production. Half of them have made a public commitment to procuring 100% of sustainable cotton by 2020 at the latest. In some companies there is a dedicated sustainable raw materials responsibility, which has shifted sustainable sourcing from the sustainability department to the business.

Retail and Brands Investment 4%

20

3%

Millions

BCFTP Partners 25

BC Procurement

€3

50

5%

40

4%

30

3%

20

2%

10

1%

€2 15 2% 10 €1 1%

5 0

0% 2009-2010

2010-2011

Number of BCFTP partners Number of BCFTP private partners Number of private partners with public commitment*

2011-2012

Share of current cotton consumption BCFTP partners of total global cotton production**

€0 2009-2010

2010-2011

2011-2012

-

0% 2009-2010

2010-2011

2011-2012

Better Cotton Procured (MT) Euro Invested by private partners

Progress: share of Better Cotton procurement of total BCFTP cotton consumption

Figure 3: The change in BCFTP

The increase of production from 75,000 MT in the first harvest 2010-2011 to 484,0003 MT in 2011-2012, shows the effect of encouraging supply. There was an increase of farmer training investments; from €4.1 mln in 2011 to €7.3 mln in 2012. Subsequently there was a rise of the number of farmers trained to produce according to the BCI standards from 68,000 to 125,000. Of those farmers trained, the number of farmers licensed to produce Better Cotton increased from respectively 28,000 to 90,000.

Linking demand and supply is an important challenge. The rise of the Gin Uptake Rate (GUR) and retail procurement support the positive direction of the BCFTP. GUR went up from 17% to 47%. The volume of Better Cotton procured by BCFTP partners has increased significantly, as shown in figure 3, from less than 3,000 MT to more than 19,000 MT4. However, the share of Better Cotton procurement as percentage of total consumption of the retail and brands is a mere 2%. This low percentage can be explained by the challenge of balancing procurement and production at competitive market prices.

Through knowledge sharing (for example by organising supply chain conferences) the BCI knowhow on sustainable cotton is disseminated and the number of BCI members is growing. We note that mapping and traceability still proves to be challenging. This renders it difficult for those companies procuring

3

Data are collected before the final values were known. Climatic factors may affect the yield and thus actual production may be different than expected.

4 Both years the Retail Uptake Rate was 4% of total BC production, due to an equal increase in production and procurement

IDH Sustainable Cotton Programme and its Impact - 9

Better Cotton to know when and where Better Cotton is available, which keeps the Retail Uptake Rates rather low.

IDH supports the institutional development of BCI with an ‘BCI has become the common annual earmarked contribution of €150,000. BCI’s institutional standard with Olam’s cotton development can be regarded in terms of the growth of business to define sustainability’ membership in the last three years from 39 to 79 to 201 and total BCI income, from €1.0 mln to €2.5 mln in 2012. BCI has also experienced a significant institutional professionalisation (details are shown in figure 4). This was necessary as the organisation had increased local presence from zero to 4 to 5 countries (and a projected 7 the coming season). The number of employees went up from 3 in 2008 to 26 by the end of 2012.

As discussed before, the BCFTP progress is built on the standards of BCI. These are now considered the sustainable cotton standard by several partners.

Establishment of fixed office Introduction of permanent employees Creation of a director level leadership team Creation of anti-bribery, anti-trust, and data protection policies and Code of Practice for members • Improved internal processes to ensure that member inquiries are handled in a more timely manner by the appropriate person • Creation of tools and processes for better internal communication • Introduction Service costs • • • •

Millions

Institutional development 2010 - 2011 Total Income BCI

€3

BCI Employees

30 25

€2

20 15

€1

10 5

€0

0

2008-2009

2009-2010

2010-2011

2011-2012

2008

2009

Earned income

2010

Global hub

Philantropic income

2011

2012

Country teams

IDH earmarkerd institutional contribution (%)

Institutional development 2012 • Dedicated BCI Finance Manager • Introduction of stricter financial procedures and rules • Improved control and monitoring • Establishment of registered office in China and the UK, to provide employment and management at local level, • India and Pakistan registered offices in the pipeline • Development of the Strategic Review 2013-2015 • Introduction new business model towards financial selfsustainability • Development of comprehensive HR policy (in development 2013)

BCI Members

250

10%

200

150 5%

100 50 0

0% 2008-2009

2009-2010

2010-2011

2011-2012

8 7 6 5 4 3 2 1 0

BCI Local Presence

2010-2011

2011-2012

2012-2013

Local presence (# of countries, including pilot projects)

Figure 4: The change in BCI

Respondents shared positive comments on the roles of the three organisations. ‘BCI is on the right way, has the right people and organisation structure.’ ‘The support of the BCFTP is crucial for the success of Better Cotton.’ ‘IDH forces BCI to grow and increase outreach much faster.’ ‘IDH can be considered as a catalyst: the cotton business would not be where it is now in terms of sustainability, if it was not for IDH.’ It can be concluded that the BCFTP was instrumental in producing Better Cotton which has been accelerated in only a few years. The combination of BCI, BCFTP and IDH has indeed made a difference in the global cotton market.

The combination of BCI, BCFTP and IDH has indeed made a difference in the global cotton market.

3.2. Our interpretation of results It is undeniable that IDH and BCFTP have had a catalytic effect and made a difference on the global cotton markets. Yet, as often in these kinds of projects, the efficiency of the interventions is hard to interpret. Better Cotton has gathered momentum, but could these results have been achieved with fewer resources, or could the results have been even better with the actual investments?

In order to address efficiency we looked for comparison at other sustainable cotton initiatives and at regional results, and at the management information that was available.

Baseline and Quick Scan Evaluation - 10

Other sustainable cotton initiatives We have made a general comparison between Better Cotton and other sustainable initiatives5. We conclude that even though BCI is working with fewer farmers and has a smaller total area under cultivation, the production (in MT) per hectare and per farmer is higher. In 2010-2011, Better Cotton yield was 0.8 MT/Ha and it reached 1.1 MT/Ha in the following harvest. Production per farmer also increased from 2.6 MT/farmer in 2010-2011 to 5.4 MT/farmer in 2011-2012. This, combined with comments from respondents signals that, in terms of mainstreaming, Better Cotton is well positioned compared to other sustainable cotton initiatives.

Regional differences The Better Cotton production is increasing but among the various cultivating countries there are differences in the level of Better Cotton mainstreaming. These differences are shown in table 1 and can be explained by differences in market structures and by the fact that there are different implementation partners (in scope of LEI/WUR research).

One of the strengths of BCI is the ability to tailor solutions for local circumstances.

Mali

India

Pakistan

Brazil

2010-11

1.4%

0.2%

1.1%

2.0%

2011-12

2.8%

0.6%

5.0%

17.2%

Table 1: Regional Mainstreaming of Better Cotton: Better Cotton volume as a % of total in-country production

India In India, Better Cotton has experienced growth, although it is a modest part of the total cotton production. The number of projects has grown by 10 from 2010-2011 to 2011-2012. The compliance rate in India was low resulting in low licensed Better Cotton production. One of the respondents said: ‘In the past, partners spent too much money on small projects that did not deliver the desired volume and would not be accepted today.’ There is optimism among respondents about the development of Better Cotton in India. There is an ability to produce according to standards, however it would help if demand would become more predictable, it was remarked.

350

Better Cotton production and mainstreaming

Better Cotton farmers 1.0%

50

100%

0.8%

40

80%

200

0.6%

30

60%

150

0.4%

20

40%

0.2%

10

20%

0.0%

-

0%

300 250

100

50 2009-2010

2010-2011

2011-2012

2009-2010

Total Better Cotton Production (000s MT)

2010-2011

2011-2012

Total # of Better Cotton farmers (000s)

Better Cotton share of local cotton production (%)

Compliance rate farmers (%)

Better Cotton share of global cotton production (%)

Better Cotton Ginners

Better Cotton Cultivation Area 250

1.0%

100

100%

200

0.8%

80

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150

0.6%

60

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100

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40

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50

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0.0%

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0%

2009-2010

2010-2011

2011-2012

2009-2010

2010-2011

Total area cultvated Better Cotton (000s)

Number of Better Cotton ginners (#)

Better Cotton share of total area cotton cultivation (%)

Better Cotton Gin Uptake Rate (%)

2011-2012

Figure 5: Progress in India

5

Other sustainability initiatives explicitly exclude Bt (or Bacillus thuringiensis) Cotton, which the BCI standard does not

IDH Sustainable Cotton Programme and its Impact 11

Pakistan Despite limited farm size in Pakistan, the share of Better Cotton in total cotton production is 5% and thus higher than world average of 1.8%. More than by the number of farmers, this can be explained by the high compliance rate. Production costs per MT are also lowest in Pakistan. The model seems to be well tuned in Pakistan. The LEI/WUR research is expected to provide more detail.

350

Better Cotton farmers

Better Cotton production and mainstreaming

5%

50

100%

4%

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3%

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50 2009-2010

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Total Better Cotton Production (000s MT)

2010-2011

2011-2012

Total # of Better Cotton farmers (000s)

Better Cotton share of local cotton production (%)

Compliance rate farmers (%)

Better Cotton share of global cotton production (%)

Better Cotton Ginners

Better Cotton Cultivation Area 250

5%

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2009-2010

2010-2011

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2011-2012

2010-2011

Total area cultvated Better Cotton (000s)

Number of Better Cotton ginners (#)

Better Cotton share of total area cotton cultivation (%)

Better Cotton Gin Uptake Rate (%)

2011-2012

Figure 6: Progress in Pakistan

Mali The number of projects in Mali is limited. The high gin uptake rates of almost 100%, indicated in the figures below, can be explained by the state ownership of the gins. It is unclear how the current political unrest might affect the future of the Better Cotton projects.

350

Better Cotton farmers

Better Cotton production and mainstreaming

5%

50

100%

4%

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3%

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300 250

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50 2009-2010

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Total Better Cotton Production (000s MT)

2010-2011

2011-2012

Total # of Better Cotton farmers (000s)

Better Cotton share of local cotton production (%)

Compliance rate farmers (%)

Better Cotton share of global cotton production (%)

Better Cotton Ginners

Better Cotton Cultivation Area 250

25%

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2009-2010

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Total area cultvated Better Cotton (000s)

Number of Better Cotton ginners (#)

Better Cotton share of total area cotton cultivation (%)

Better Cotton Gin Uptake Rate (%)

2011-2012

Figure 7: Progress in Mali

Baseline and Quick Scan Evaluation - 12

Brazil Given farm sizes in Brazil, Better Cotton production and mainstreaming are in a different league than in the other countries. The total cultivation area has increased to 210,000 Ha, approx. 20% of the total Brazilian cotton cultivation area. The number of farmers trained is limited but their compliance rate is close to 100%. Total Better Cotton in 2011-2012 amounted to 325,000 MT6 . This is 67% of the total global Better Cotton production of 484,000 in that year.

Better Cotton farmers

Better Cotton production and mainstreaming

350

20%

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15%

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300 250 200

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50 -

0% 2009-2010

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-

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2011-2012

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Total Better Cotton Production* (000s MT)

2010-2011

2011-2012

Total # of Better Cotton farmers (000s)

Better Cotton share of local cotton production (%)

Compliance rate farmers (%)

Better Cotton share of global cotton production (%)

Better Cotton Cultivation Area

Better Cotton Ginners

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Total area cultvated Better Cotton (000s)

Number of Better Cotton ginners (#)

Better Cotton share of total area cotton cultivation (%)

Better Cotton Gin Uptake Rate (%)

2011-2012

Figure 8: Progress in Brazil

3.3. Challenges to Mainstreaming In a short period of time the BCFTP has made an impact on the global cotton market. The production of Better Cotton has significantly increased the volume of sustainable cotton. The pre-competitive cooperation of a growing number of brands and retailers has underpinned this momentum. IDH has been a catalyst as a financier and it has contributed to institutional development and knowledge sharing.

The BCFTP is well positioned to take its mainstreaming ambition to the next level.

In view of the ambition of mainstreaming sustainable cotton, this start has been important. Yet, mainstreaming will be subject to several challenges. Based on our research and the input of respondents we note that each ToC intervention has its particular challenges.

Self-sufficiency The current market for Better Cotton, as created by the BCFTP, is not (yet) self-sustaining. Currently only the BCFTP members resource the transition with their investments in the BCFTP. Yet, the availability of Better Cotton is not guaranteed to them.

This issue has been recognised by BCI and IDH who have agreed to develop together ‘Everybody is the Volume Based Fee (VBF). The expected introduction of a VBF could ensure the asking who will sustainability of the Better Cotton system. The idea of the VBF is to enable pay the BC bill.’ incentivising the transformational shift needed by cotton industry actors to make Better Cotton a mainstream commodity and move away from a business model based on goodwill and belief to one based on utility and value. In practice this means that procurers of Better Cotton will pay an additional fee that is inversely related to the volume of Better Cotton purchased. The accumulated fees

6

Data used about Brazilian production of 2011-2012 are collected before the end of harvest. Climatic factors may affect the yield and thus actual production may be lower than expected.

IDH Sustainable Cotton Programme and its Impact 13

will then be invested in farmer support projects to deliver impact. Increasing volumes of supply will be directly linked to Better Cotton consumption. Revenue from the VBF will be supported by credible traceability. If this succeeds, this could be a suitable exit strategy for the investors of BCFTP. There is support for this step, but respondents are not yet sure whether it will actually work. Three issues are put on the table explicitly which the cooperating parties are dealing with: will outsiders to the BCFTP be willing to pay this additional fee to procure Better Cotton, will the VBF ensure sufficient resources for the transition, and can the traceability and transparency be organised cost effectively?

Alignment of Incentives and Pricing In order to take Better Cotton to the next level it is important that A supply chain works well only there is better alignment of incentives that leads to a reconnection of when its players share the the value chain. Scaling up of Better Cotton is unlikely to happen risks, costs and rewards of without a positive business case for all actors. Respondents confirm doing business together. the need for clear financial incentives.

Our ‘Our company has research shows that pricing, cost and risk sharing are hot topics. Some a business to run: midstream players claim that handling Better Cotton results in additional handling you want to make costs. Others say that since sourcing Better Cotton is a novel process, they need sure you pay the to receive a premium (i.e. reward beyond compensation of any actual extra right price.’ costs) in order to engage in Better Cotton. ‘If you ask someone to change, you game.” need to offer a financial reward.’ However, paying premiums is not acceptable to retailers and there should be no difference between the price of Better Cotton and ‘When the retailer gets involved in conventional cotton. There is no Better Cotton label and the supply chain, everyone starts experience shows that consumers are not willing to pay for playing the premium game.’ sustainable products if they are not aware of the underlying issues. Furthermore, the actors up the supply chain claim to carry the most risk in engaging in Better Cotton. They have no guarantee of consistent demand. As a respondent put it: ‘It’s definitely a power balance game: retailer states what quantity at what price. It’s a game of who blinks first.’ Mid-stream actors feel squeezed. Uncertainties on the demand side are causing sub-optimality on the supply side and some farmers are prevented from joining BCI. Competitive prices and equally shared risk throughout the supply chain might provide necessary economic incentives. Well-managed portfolio approach could ensure market pricing, while the risk for the mid-stream can be alleviated by a steady flow of orders. Thorough transparency and mapping of the supply chain will reconnect the value chain. More access to information of ‘The least retailers Better Cotton projects (knowing who grows and sells Better Cotton and when it can do is alleviate the is available) might make the buying process easier for manufacturers. cost of risk for the Someone remarked: ‘This kind of information is currently not even available to midstream actors.’

BCI members. Ideally it would even be accessible to non-members too.’

Lasting Business Case at Farm Level It is expected that production according to the Better Cotton standard will improve both the livelihood and health of the farmer and the ecological conditions of cotton cultivation. The actual impact of Better Cotton on production level is part of the LEI/WUR research and outside our scope. Yet various respondents shared the consideration that a positive economic farmer business case is a ‘conditio sine qua non’ for the transformation of Better Cotton into a mainstream commodity. Respondents emphasise the importance of the self-reliance of the Better Cotton system and the need to figure out how farmers will continue producing Better Cotton after the end of the projects. There is no consensus on whether a positive business case is possible without continued subsidising of the farmer projects. Some think it will be very hard, whereas others already see evidence that farmers are paying It is still unclear how for training themselves. The farmer side seems to be the most researched to keep the farmers part of commodities value chains. In the case of Better Cotton LEI/WUR producing after the identified a tentative indication of a positive business case in India. The end of the projects. results of follow-up research are keenly awaited.

Baseline and Quick Scan Evaluation - 14

Scaling-up and Credibility With respect to encouraging supply there is also the challenge of significantly increasing volume while maintaining credibility of the BCI standards. The BCI strategic plan 2013-2015 says that the next phase is all about the adoption of Better Cotton production by countries such as Brazil, Australia and the USA without relaxation of the standard. The need for scale is emphasised by respondents. ‘Large scale is needed and you can’t go hectare by hectare. Thus BCI is well positioned.’ The lack of scale of Fairtrade and Organic has been a problem, which retailers can’t afford with BCI, a respondent said.

Yet, scaling up should not undermine the credibility of the BCI standards. In terms of credibility two aspects are being defined. On the one hand is the issue of upholding the ‘BCI should not lose sight of sustainability standards in developing markets. On the other hand the its goal to change the fact the BCFTP objective of 1 mln MT by 2015 is attained with a volume livelihood of small-scale increase in more developed markets may hide limited outreach to farmers in China and India. smallholders. Respondents emphasise the necessity of maintaining the However, it should also find credibility of the standards. Someone worried that the growth of BCI a way to recognise the good may pose a risk; ‘they want too much too fast’. Retailers and brands and innovative practices in have to show that they are serious enough and not involved in green USA and Australia.’ washing. This has the full attention of all the partners involved.

Supportive Governments Longer term commitment in the cotton value chains requires supportive ‘BCI needs to crack government policies. In the transformation to a mainstream sustainable the government market, the involvement of nationals and regional governments is crucial. code!’

This will support the important move from first mover to the critical mass stage. A group of global brands working together could have a big impact in convincing governments and institutions in the developing world to recognise the benefits of Better Cotton. Both BCI and IDH are aware of this and several initiatives have been taken to engage governments. In each Better Cotton producing country there is a National Stakeholder Council. Moreover there are specific dialogues to facilitate the adoption of Better Cotton standards as a minimum, for example in India and China.

IDH Sustainable Cotton Programme and its Impact 15

4. Conclusions and Recommendations 4.1. Conclusion on IDH contribution to mainstreaming The efforts of IDH and the BCFTP have made a difference in the cotton value chain. IDH is considered a catalyst of the progress in mainstreaming Better Cotton, as the market would not have been where it is now without IDH. Going forward, further mainstreaming of Better Cotton will mean that several challenges have to be dealt with.

IDH seems to have chosen appropriate interventions in its endeavour by building its programme around the existing Better Cotton production standard. Convening market players in the BCFTP also was an effective move. Although it can be questioned whether sufficient time was spent on the design of the ToC at the start of the process, the chosen approach has proven to allow for necessary flexibility.

IDH manages the mainstreaming process well. As this is a process of continuous improvement, IDH has addressed several challenges along the way. Still, further improvements could be beneficial.

IDH, as secretariat of the BCFTP, deals with the lion’s share of the investment management. Moreover it has an important role in the formulation of the strategy of the BCFTP and also supports BCI in its strategy. Since these are three separate entities it is important that the roles, responsibilities and objectives – although aligned to a great extent – are separated. Unclear boundaries should be avoided.

There is a robust governance framework in place for the BCFTP that clearly allocates roles and responsibilities. However, not all partners have similar motives and interests to participate. Thus they have different perspectives on the implementation and management of the programme. The BCFTP secretariat recognises these differences and should continue to manage them carefully in order to realise the BCFTP objectives.

Finally, IDH does not have full access to the Implementing Partners, nor direct influence over their activities, resulting in information gaps that make monitoring and management more difficult. An example of this is the lack of data about labour issues at the level of the projects, that are currently being collected in a different study.

IDH is keen to be accountable for its interventions, yet assessing the level of sustainable cotton mainstreaming after only 2 harvests has its limitations. It is important to continue the mainstreaming process and to continuously tweak the efforts to changing realities.

4.2. Recommendation The current framework to track progress is focused on the BCFTP objectives. Since IDH is a separate identity with its own responsibilities and result areas, IDH should not adopt the BCFTP framework as the sole monitoring tool. At this time it seems difficult for IDH to assess the impact of its interventions as IDH result areas and BCFTP objectives are not automatically aligned.

We feel it will add clarity and consistency if a simple framework to monitor IDH’s impact is adopted.

Firstly, the reporting periods for BCI and BCFTP should be aligned7. This will eliminate inconsistencies and discrepancies. Secondly, results need to be regarded in the perspective of both IDH’s result areas and the global cotton market as a whole. The latter will give a better indication of the level of mainstreaming.

Therefore we recommend the IDH Cotton Framework to track IDH impact on mainstreaming of Better Cotton to be built on three pillars: •

Effectiveness: Adequacy to accomplish the intended purpose? Are our interventions producing the intended level of mainstreaming of BC?

•

Efficiency: Competency in performance. Could we have achieved more mainstreaming with less investment/effort?

•

Credibility: The quality of being believable or worthy of trust. Does this intervention reinforce or undermine our position?

A proposed framework with indicators has been presented to IDH. 7

This will be the case as of 2013, when BCI adopts calendar years as reporting period

Baseline and Quick Scan Evaluation - 16

Annex Key organisations The Sustainable Trade Initiative IDH, The Sustainable Trade Initiative (IDH) accelerates and up-scales sustainable trade by building impact oriented coalitions of front running multinationals, SME’s, civil society organisations, governments and other stakeholders. In 16 sector programmes IDH convenes private and public capacity to mainstream sustainability in international supply chains.

Better Cotton Initiative The Better Cotton Initiative (BCI) aims to make global cotton production better for the people who produce it, better for the environment it grows in, and better for the sector’s future. BCI works with a diverse range of stakeholders to promote measurable and continuing improvements for the environment, farming communities and the economies of cotton-producing areas. BCI aims to transform cotton production worldwide by developing better cotton as a sustainable mainstream commodity.

Better Cotton Fast Track Programme A group of private and public players are collaborating on a pre-competitive basis in the Better Cotton Fast Track Programme (BCFTP) to accelerate the implementation of the system of the BCI and improve the social and environmental impacts of cotton cultivation.

The BCFTP channels funds directly to farmer training and improvement programmes, all designed around the Better Cotton standard. The aim is that – by 2015 – Better Cotton farmers will be producing well over 1 million metric tonnes of Better Cotton thanks to the BCFTP. The implementation is based upon the retailers’ investment, which is matched by a fund created by IDH, Rabobank Foundation, a Dutch financial cooperative, and ICCO, Interchurch Organisation for Development Cooperation.

Methodology Steward Redqueen B.V., an independent consultancy based in Haarlem, The Netherlands, was invited to carry out an intermediate evaluation of the IDH Sustainable Cotton Programme. This evaluation includes outcome results against longer term objectives and targets and was executed between July 2012 and January 2013.

The study is based on extensive desk research and discussions with stakeholders from the cotton sector.

As a first step in the process we undertook a structural research on the cotton market dynamics and the role and approach of IDH in transformation of the market. To gain more thorough and on-the-ground insights in those topics, we interviewed 23 respondents, both IDH staff as well as market players and other experts. We had conversations over the phone and in person. SRQ representatives attended the Shanghai BCFTP investors committee meeting in July 2012 and the 71st ICAC Annual Plenary Meeting in Interlaken, Switzerland, in October 2012.

The names of interviewees can be found in this annex. The list is not exhaustive since we talked informally to participants at the ICAC meeting mentioned above. Specific responses quoted in the report are anonymous. We refer to all respondents as masculine, partly to warrant the discretion of the respondent, partly for the sake of readability.

Throughout our research, we faced serious data challenges. Examples of those are: limited data on production level, unavailable formal information on mid-stream actors, confidentiality of figures, constant adjustment of public datasets, lack of thorough insight in the activities and records of implementation partners and differences in reporting periods of IDH, BCI and BCFTP. Due to these data gaps this research is based predominantly on qualitative information and is supported by quantitative data when available.

Our complete findings were presented to IDH in the form of a PowerPoint report, accompanied by a comprehensive bibliography. Those were discussed with representatives of the organisation. This document is a concise version of our extensive research and summarises the most important results and conclusions.

IDH Sustainable Cotton Programme and its Impact 17

Steward Redqueen believes this final report is a fair and balanced reflection of the available information and the conducted interviews. Although we have managed this process carefully, we emphasise that the scope of it was limited and therefore it cannot be excluded that other aspects or general uncertainties can impact the programme. The focus of the research was on IDH’s interventions in the cotton sector up to 2011-12 and we have used the latest data (publicly) available up to December 2012. Statements on expectations or intentions should by no means be considered as actual results or guarantees.

Alphabetic list of respondents 1. Chris Anstey (BCFTP-secretariat)

13. Lise Melvin (BCI)

2. Satish Arora (Abishek - Trident)

14. Joost Oorthuijzen (IDH)

3. D P Arya (Pratibha Syntex)

15. Lucian Peppelenbos (IDH)

4. Sean Cady (VFC)

16. Mahesh Ramakrishnan (Arvind)

5. Pramit Chanda (IKEA)

17. David Rosenberg (Ecom)

6. Anita Chester (IDH)

18. Amit Shah (Amit Group)

7. Eraina Duffy (Nike)

19. Mark Sumner (M&S)

8. Julian Jetten (Adidas)

20. William Trisna (P.T. Kahatex)

9. Ruchira Joshi (BCI)

21. Iris van de Velde (Rabobank Foundation)

10. Hammad Khan (WWF)

22. Guido Vereijke (IKEA)

11. Henrik Lampa (H&M)

23. Viola van Waaij (IDH)

12. Phillip Meister (Adidas) Plus various participants of ICAC conference.

The cotton market China 7.3 mln MT

15%

General characteristics of the cotton market

India 6.0 mln MT

27%

3%

USA 3.4 mln MT

4%

The cotton market is globally significant •

Pakistan 2.3 mln MT

7%

Production in some 70 countries

Brazil 1.9 mln MT Australia 1.2 mln MT

9%

Uzbekistan 0.9 mln MT

22%

•

In 2012 total production amounted to more than 27 mln MT

Main cotton producers in 2012, % of total

Around 50 mln farmers are dependent on cotton cultivation •

Ca 20 mln farmers depend solely on cotton production

•

30 mln farmers include cotton into their rotation scheme

Figure 9: Major cotton producing countries, % of global production 10.0 9.0

The global cotton production is diverse but highly concentrated The top 3 producing countries accounted for 62% of total production •

The top 5 for almost 80% of the total production

The largest producers of cotton are the largest consumers •

China (8.5 mln MT consumed)

•

India (4.4 mln MT consumed)

There exist large differences amongst cotton balance sheets •

China was the biggest importer with 5.3 mln MT

•

USA was the biggest exporter with 2.5 mln MT

Cotton Production

8.0

Cotton Consumption

7.0

mln MT

•

Other 4.1 mln MT

13%

6.0 5.0

4.0 3.0 2.0 1.0 0.0 China

India

USA

Pakistan Brazil

Cotton production and consumption in 2012, mln MT

Figure 10: Cotton production and consumption in 2012, mln MT

Baseline and Quick Scan Evaluation - 18

Differences in cotton market characteristics among producing countries

Table 2: Major differences in the cotton sector among producing countries

Sustainable cotton

Thousand MT

Before BCI’s first harvest, less than 1.5% of the cotton on the market was sustainable.

900

3.1%

% of total global cotton production

800 700

Better Cotton

600

CmiA Cotton 500

Fairtrade Cotton

400 1.4%

300

1.3%

1.3%

Both Organic and Fairtrade Cotton

1.0%

200

Organic Cotton

100 0

Figure 11: The Development of Sustainable cotton

IDH Sustainable Cotton Programme and its Impact - 19

Regional Production of Better Cotton

Better Cotton Production 2010-11

Better Cotton Production 2011-12

% of country BC production/global BC production

% of country BC production/global BC production

2%

5% 13%

7%

Mali

Mali

India

India 24%

Pakistan 54%

Brazil

Brazil

28%

67%

Total Better Cotton (MT)

% country cotton

% global cotton

3,300

1.4%

0.01%

India

10,000

0.2%

Pakistan

21,000

Brazil

40,200

Total

75,000

Mali

Pakistan

Total Better Cotton (MT)

% country cotton

% global cotton

Mali

12,500

2.8%

0.05%

0.04%

India

32,000

0.6%

0.12%

1.1%

0.08%

Pakistan

115,000

5.0%

0.43%

2.0%

0.16%

Brazil

325,000*

17.2%

1.22%

0.29%

Total

484,000

1.81%

Figure 12: Differences in regional mainstreaming of Better Cotton.

Baseline and Quick Scan Evaluation - 20

Kinderhuissingel 4 a/b 2013 AS Haarlem The Netherlands +31-(0)-23 55 30 400 www.stewardredqueen.com