Re-evaluating the use of Burkina Faso’s Stabilization Fund (Fond du Lissage): The current Producer Price Commitment introduces Commodity Price Risk as Fond du Lissage is depleted after repeated occurrences of end-season cotton price in world markets that are lower than the producer price commitment. The depletion of fond du lissage can be prevented by hedging the Producer Price using cotton futures contracts.

1. A Strategy for Commodity Risk Management in
Burkina Faso
Re-evaluating the use of Burkina Faso’s Stabilization
Fund (Fond du Lissage)
A Presentation for the Ministry of Finance and the Ministry of Agriculture

2. 2
1. Cotton Ginning Companies to reduce transaction costs by opening a foreign exchange
account for USD payments and removing need for repeated foreign exchange
transactions
 Currently companies are paying high transaction costs by continually exchanging USD or EUR into local
currency and vice versa rather than using incoming FX proceeds to pay for outgoing FX payments
 Constraint: Authorization required from Ministry of Finance to open foreign exchange account
2. Cotton Ginning Companies to utilize a trade finance regimen that nets US Dollar import
payments against US Dollar export proceeds by structuring shorter dated export L/Cs
against longer dated import L/Cs
 Arrange for payment dates on imports bills to come due at a date after export proceeds have realized
 Constraint: Local capacity and expertise in trade finance instruments such as letters of credit (L/Cs) at
the cotton ginning company level
3. Cotton Ginning Companies to hedge net expected US Dollar proceeds in the liquid
EUR-USD foreign exchange market
 Ginning companies set floor prices for producers early in the season without reference to cotton futures
 Constraint: Authorization required from Ministry of Finance to execute a yearly forward exchange rate
transaction at the start of the planting season
Three Steps for a Commodity Risk Management Strategy:
Using Trade Finance and Forward Exchange Rate Efficiencies

3. 3
 Steps to reduce high transaction costs: Burkina Faso can leverage its
pegged exchange rate to the Euro to access the most liquid foreign exchange
market in the world
The 2008 cotton export proceeds for Burkina Faso amounted to approximately $211,000,000:
Cost of Converting USD $211,000,000 to CFA (using difference from mid) $ 1,832,629
Cost of Converting USD $211,000,000 to EUR (using difference from mid) $ 37,759
Year End 2008
BID OFFER
DIFFERENCE
(as a % of
Exchange Rate)
USD-CFA 461.47 469.48 1.74%
EUR-USD 1.3970 1.3975 0.04%
Source: Bloomberg Data
Three Steps for a Commodity Risk Management Strategy:
Analyzing the impact of liquidity constraints on emerging market currencies

4. 4
Cotton Ginning
Companies
Cotton
Producers
Local Bank
administrating
Fond du Lissage
Association of
farmers and
ginners (AICB)
Producer Price
announced in April
Farmer payments at harvest
by ginners based on floor set
by producer price
Bank prepares “Note” documenting
calculation of Producer Price based
on agreed moving averages formula
Ginners compensated
from the fond du lissage
for payments made to
farmers in excess of end-
season market prices
1
2
3
4
Current Producer Price Commitment introduces Commodity Price
Risk:
Fond du Lissage is depleted after repeated occurrences of end-season cotton price
in world markets that are lower than the producer price

5. 5
Cotton Ginning
Companies
Cotton
Producers
Local Bank
administrating
Fond du Lissage
Association of
farmers and
ginners (AICB)
Producer Price based on price
quoted in cotton futures market
Farmer payments at harvest
by ginners based on floor set
by producer price
Local bank executes futures
contract to hedge producer price
Ginners compensated
from the fond du lissage
for payments made to
farmers in excess of end-
season market prices
2
1
3
4
Futures Cotton
Trader
Funds exchanged at cash
settlement offsets difference
between producer price and
market price
5
Preventing Repeated Depletion of Fond du Lissage by Hedging
the Producer Price using Futures Contracts

6. 5
Cotton Ginning
Companies
Cotton
Producers
Local Bank
administrating
Fond du Lissage
Association of
farmers and
ginners (AICB)
Producer Price based on price
quoted in cotton futures market
Farmer payments at harvest
by ginners based on floor set
by producer price
Local bank executes futures
contract to hedge producer price
Ginners compensated
from the fond du lissage
for payments made to
farmers in excess of end-
season market prices
2
1
3
4
Futures Cotton
Trader
Funds exchanged at cash
settlement offsets difference
between producer price and
market price
5
Preventing Repeated Depletion of Fond du Lissage by Hedging
the Producer Price using Futures Contracts