The country’s cotton sector appears divided over the desirability for support price of cotton (phutti) as well as the government’s decision to procure 1m bales to bring about stability in cotton trade at a time when prices are globally under pressure over low demand.

The Economic Coordination Committee (ECC) of the Cabinet had early this month announced minimum support price for phutti at Rs3,000 per 40 kilograms for this fiscal year and to procure 1m bales through the Trading Corporation of Pakistan. Before the new crop started arriving in the middle of June, the price was moving around Rs6,500 per maund.

The All Pakistan Textile Mills Association (APTMA) has supported the ECC decision on support price. This is in contrast to the harsh stance by rich cotton growers on the government policy for paying compensation to only small farmers affected by floods.

The APTMA would like the average farmers to keep growing cotton instead of shifting to other crops. But cotton brokers have rejected the ECC decisions saying these have been taken under political pressure and are unlikely to be implemented in letter and spirit. They warned of a surge in import of cotton as they be cheaper under the circumstances.

Lower cotton prices are seen helping the spinners improve margins, and some closed units have resumed production

The cotton ginners have welcomed the decisions and hope the government policy would revitalise cotton trading at local markets. However, they think the support price should have been announced in pre-sowing period, sometimes in April, as that would have encouraged more growers to plant cotton seeds. Pakistan is expected to produce about 14m bales this year.

A section of the industry is of the opinion that the government’s decision to buy 1m bales is likely to benefit only five to six per cent ginners who have close links with bureaucracy. Moreover, the timing of buying by the state trading body will be of significance. A majority of farmers in Punjab usually harvest phutti in November and if the buying takes place before that then it would mean bypassing the farmers of a province which produces largest quantity of cotton.

According to textile circles, the price of cotton is likely to be in decline in local and international markets in coming months and may touch 55 cents per pound in New York in November. Accordingly, the price of fine cotton in Pakistan may go below Rs5000 per maund.

On October 19, prices came down in the cotton market in Karachi owing to falling mills’ demand after sharp decline in the NY cotton futures. The official spot rate, however, remained unchanged at Rs5,200. Under the circumstances, cotton traders are feeling depressed and are refraining from huge buying. Also, at a textile exhibition in China, Pakistani exporters are not getting much attention because China has surplus cotton.

An APTMA leader says if the government wants to compensate farmers for their cost of Rs3000, it should be across the board and not for a selected few.

Since corruption in the procurement process cannot be ruled out, which may negate the government’s original objective, he wants the government to procure the offered cotton crop in order to benefit the community of cotton farmers in true sense. The industry expects that the support price will jack up the price of ginned cotton to Rs6400 per maund for TCP against prevailing international price at Rs5100.

It is agreed that the government may have to bear a subsidy if the estimated difference persists.

Meanwhile, lower cotton prices are seen helping the spinners to improve margins and some closed units have resumed production. Mohammad Mansha, the country’s largest exporter, says the lower cotton rates have bailed out the spinning industry to some extent.

The drop in prices is not a Pakistan-specific phenomenon; it is being experienced by several countries including India, which is emerging as the world’s largest producer of cotton. The impact of lower prices is now being transferred to cotton yarn as well, whose prices are also plunging. Traditionally, cotton prices in Pakistan are lower than those of China and India.

The International Cotton Advisory Committee in its monthly review said China’s prices are unlikely to rise to the levels seen in the last two seasons. The country is expected to have 1.8m tonnes of surplus cotton production.

World cotton production is forecast to go up by one per cent to 26.2m tonnes. ICAC observed that the impact of recent floods in Pakistan has been minimal. In India, it said, the delayed monsoon encouraged farmers to switch to cotton, with yield closer to the three-year average.

Published in Dawn, Economic & Business, October 27th, 2014