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Pakistan : Record high cotton prices jeopardise apparel, home textile industries (November 15, 10)

Pakistan : Record high cotton prices jeopardise apparel, home textile industries

Cotton crop arrivals appear attaining peak level in this month. A sharp drop of Rs 3,000 a maund of 37.324 Kg ex-gin last week would force the seed-cotton suppliers / growers to accelerate the pace of deliveries in fear of further drop in cotton prices.

Correspondingly, seed-cotton prices have also lost Rs 1,200 - 1,000 to Rs 3,500 - 3,700 a 40-Kg ex-gin also in furtherance of some weeklong suspension of most of the cotton activities due to Eid-ul-Azha holidays commencing from Monday (15th Nov). Some cotton professionals still maintain crop size around 12.0 running bales.

However, the cotton arrival figures through 15th November, 10 which may be available after Eid holidays would give better idea of crop size. It is most unfortunate that after producing an all time high cotton production of 32.50 million 170-Kg bales in running season, our Indian spinning mills are buying raw cotton at record high prices and are denied the benefit of record high production, one Indian cotton-man said.

He further said that cotton prices in cotton producing and non-cotton producing countries are almost the same. In free trade economy, world prices of commodities maintain a very close relation keeping prices at one level. In other words, all the countries are provided equal opportunities for level playing. This season, the best benefited sector is of cotton growers who sold their cotton almost at double the rate of last season with minor increase in production cost.

This season, money is flowing from industry to agriculture making them more confident and strong in planning and handling of next crop. The worst effected would be the end-user who will have to pay high price of the production and the retailer industry whose retail business would either lose profits margins drastically or run into losses due high prices of products and squeeze in volume of business.

The decades long restricted and controlled economy was finally transformed into free-trade economy from the advent of 21st century but the global economic recession of 2008 and the running period of unprecedented turmoil in commodity prices including cotton which touched historically high peaks has forced the economist to re-think over the decision of free-trade economy. As a result of global economic recession in the world, a large number of well-established years old companies in all sectors specially banking & finance and cotton have either wiped out or have sought refuge in amalgamation.

The giant economies of the world have great power to change the trend of market to suit their interests at the cost of comparatively weaker and smaller economies. Like trading companies who saved their existence by merging or amalgamation, the weak and small economy countries cannot do it but have to suffer from such adverse situation.

In respect to spiralling cotton prices globally, did cotton statistics of ending stocks, production, consumption, exports and imports created volatility in cotton prices which have almost doubled than last year or some other factors have caused this havoc. If we look at the cotton statistics, we find that this season's global cotton production has been estimated at 115,248,000 bales against 101,342,000 bales last year (+13,906,000 bales), consumption 116,821,000 bales against 118,484,000 bales last year (+1,663,000 bales) and ending stocks at 42,201,000 against 43,648,000 bales last year (-1,447,000 bales). This year world production is higher than last year by 13,906,000 bales while cotton consumption is lower than last year by 1,663,000 bales. It means this season, world cotton availability has increased by 15,569,000 bales from last season so there should not be such a dreadful cotton situation which we witnessed now. Then what are the other reasons for such sky-rocketing cotton prices. Of course, there are other reasons too. In controlled foreign trade, there were direct intervention from countries such as trade restrictions and levy of taxes on foreign trade while after 2000 AD and more precisely after 2005 when foreign trade was liberated in wider perspective, indirect interventions through economic and monetary policies of different countries started squeezing the benefits of free trade economy.

Delay in crop movement in Pakistan, India and China contributed to high price hike. India failed to adopt a consistent cotton export policy and made frequent changes despite some 7.0 million 170-Kg bales export surplus. China created high panic in cotton market by placing larger orders for import of raw cotton, cotton yarn and cloth even at very high rates. In China mill-delivered cotton prices surged to more than US $2.25 per lb which may not be viable for spinning mills of other Asian countries. It is not understandable that in operative efficiency, Chinese spinning mills enjoy supremacy over other countries spinning mills to the extent of 30 percent.

General perception is against this idea and reason for so high cotton purchase prices in China is direct or indirect subsidy to spinning mills. Outstanding strength of Chinese currency against other currencies of prominent economies specially the USA is greatly helping its imports. Chinese economy also drives its strength from its huge foreign exchange reserves at US $2,450 billions the highest in the world. The weakening of US dollar currency created a perception that US dollar may lose its value to a greater extent as some of the economists forecast a weak economic performance by US and European economies in near future.

Perhaps the world decided to purchase commodities against US dollars which increased commodities prices of gold, silver, crude oil, cotton edible oils, grains etc to in most cases to ever peak levels. The funds also fuelled commodities market prices by injecting huge funds. How long the saturated world market would sustain, may not be difficult to decipher.

Cotton prices in Pakistan's domestic market touched all time high at Rs 11,000 a maund of 37.324 Kg ex-gin and seed cotton prices around Rs 4,500-4,700 a maund of 40Kgs ex-gin in and December contract of New York Futures touched all time high at US Cents+157/lb. In the same week, lint prices came down to Rs 8,000 and New York December contract finished at 144.21. India has reportedly started cotton shipments by negotiating new prices against old bargains.

Although, India is harvesting a bumper crop 32.5 million 170-Kg bales and has exportable surplus of over 7.0 million bales yet under pressure from local spinning industry, India has fixed export target of 720,000 metric tons of cotton for this calendar year of 2010 of which India is reported to have shipped 335,000 m/tons in last seven months.

Pakistan has different conditions. We may be harvesting a crop of 11.5 to 12.0 million local bales and our domestic cotton consumption may stand around 14.0 million. We are already short of some 2.0 to 2.5 million bales, which would be imported. Despite being cotton deficient country, some 400,000 bales are understood to have been committed in exports and if same conditions continued further, our seasonal export commitments may touch the level of 800,000 bales which would also be imported by paying huge replacement cost. Our government appears quite liberal in maintaining a free cotton foreign trade policy. As a result of profit-taking, increase of Chinese lending rate by 0.5 percent to cool down inflation rate, squeeze in liquidity and etc may be the factors forcing cotton prices to retreat to this extent but trade thinks it a temporary phase of bullishness.

In view of wide fluctuations in cotton prices, there may higher percentage of defaults in contracts. World textile mills are facing uncertain conditions and are adopting hand to mouth position in cotton supplies. The real impact of these high cotton prices will be felt next year when cotton products would be available to retailers for sale to end-users.

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