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Setting global price for local cotton

July 31, 2011

Cotton prices fell far below global prices in July. Though the market bounced back somewhat to recover some of the lost ground towards the end of last week in the wake of reports of possible government intervention to prop it up, cotton was still being traded substantially below international price of around $1 per pound. — File Photo


THE sudden, sharp decline in domestic cotton prices on reports of a bumper crop this year will have serious implications for growers and affect the textile exports in terms of quantity and value both, unless the market stabilises at international price level soon.

Cotton prices fell far below global prices in July. Though the market bounced back somewhat to recover some of the lost ground towards the end of last week in the wake of reports of possible government intervention to prop it up, cotton was still being traded substantially below international price of around $1 per pound.

The government is understood to be considering fixing a minimum support price of around Rs7000 per maund for the new crop to shore up the domestic market to the global level, following China’s that has announced $1 per pound as minimum support price for its new cotton crop, according to officials.

However, the decision on how to implement the support price mechanism — whether to directly subsidise growers by involving Trading Corporation of Pakistan (TCP) in the market or to indirectly help farmers by providing cheaper credit to spinners for procuring the crop — is expected to be made at a meeting to be held this week.

President Asif Ali Zardari will chair the meeting to be attended by different stakeholders — textile and commerce ministry officials, farmers, industry, etc.

“Growers will switch to other crops next year if domestic cotton prices do not recover to the global level,” says Ijaz Ahmed Rao, a progressive farmer from Punjab’s southern district, Bahawalnagar.

The record high prices growers received for their last year’s crop had encouraged many to switch to cotton — the area under cotton cultivation increased by about 10 per cent this year, according to Rao. “Farmers never stick to a crop for long unless they are certain about its profitability,” he says.

Domestic cotton prices rose to their record high average of Rs13,301 per 40kg to fall to Rs9,157 in June. The market saw prices of new crop to dip to around Rs4,600 in July on the back of a projected bumper harvest of 16 million bales and carryover stocks of 1.6 million bales available with spinners in Punjab from last year. Last week, however, cotton prices bounced back to about Rs5900 per 40kg, recovering some of the ground lost earlier.

In line with cotton prices, Pakistan’s yarn and value-added textile export prices also came under pressure during last one month, with foreign buyers anticipating new declines in the cotton market. A stronger competition with Indian exporters also put considerable pressure on textile export prices on the global market.

“Our foreign customers are asking us to reduce our prices further. While it is difficult for us to negotiate rates with our customers because of an uncertain and volatile domestic cotton market, they are holding back on their Christmas orders anticipating further decline in prices,” says Ijaz Khokhar, chairman of the Pakistan Readymade Garments Manufacturers and Exporters Association.

“The market must stabilise soon to allow us negotiate Christmas orders. The ministries of commerce and textile must gather all stakeholders together to discuss the situation and find a mechanism to protect farmers and industry,” he insists, saying the apparel industry fears raw material shortages due to volatility in cotton prices.

Gohar Ejaz, chairman of the All Pakistan Textile Mills Association (Aptma), says the plunge in domestic cotton prices will not hurt yarn makers or the rest of the textile industry as far as their margins are concerned.

But, he argues, it does not augur well for the growers and exports or the future of the crop. “Farmers will have to suffer losses if they are constrained to sell their crop below international parity price. Why export cheaper textiles, at the cost of our farmers?,” he asks.

Moreover, he underlines, Pakistan stood to raise its textile exports to $20 billion this year from $14 billion last year at current global cotton price of $1 per pound if it fully consumes its new crop. “The differential between domestic and global cotton prices will result in the fall in the value of our textile exports even if consume the entire crop. The only beneficiary will be foreign buyers. The country will lose foreign exchange it could earn due to reduced export prices of textiles and farmers will not receive international price for their crop,” Gohar contends.

He says export of cotton is no solution to the problem of falling domestic prices. “Pakistan has never been able to export more than one million bales of cotton during last one year. The option is actually meant for keeping domestic cotton prices at the international level to protect farmers from losses,” he says.

Both the industry and growers support the government proposal to support the market through announcement of minimum price for the new crop. But they think it would be difficult for government to intervene in the market because of the severe financial crunch facing it.

“We need the government to support farmers. But where will it bring the money for supporting the market? The best way will be to provide gas to the entire textile industry seven days a week to allow it to start lifting the new crop. Once spinners begin procurement of cotton, the prices will automatically start rising to the international level,” suggests Rao.

Gohar concurs with him. “While we want government to help farmers get international parity price for their crop, we do not want it to interfere with the free trade mechanism. It will be much better for the growers, industry and economy if the government ‘subsidised’ farmers through the industry,” he says.

“We have capacity to consume the entire 16 million bale crop provided the government ensured uninterrupted supply of gas to the textile chain from spinning to processing and provided cheaper credit to procure cotton,” he says. He will take these proposals in the meetingwith the president, he adds.

“It is the first time that we are going to harvest a cotton crop sufficient enough for meeting our industry’s requirements. We must use this to our country’s advantage. If the prices continue to stay below the global markets it will benefit only foreign customers and result in huge losses to our farmers. If domestic prices are raised upwards of international parity prices it will cause losses to the industry.

Thus we must work out a strategy to maintain international parity in domestic prices. It will be a win-win situation for all the stakeholders and bring massive dividends to the economy in the terms of new jobs and trade surplus for this year,” Gohar maintains.