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Cotton Price Policy: gains and losses to farmers




  • The government announced the support price of seed-cotton (phutti) at Rs900 per 40kg for the 2003-04 crop, which was substantially higher than the last year’s Rs850.
    The total production of the crop was about 10 million bales. This was short by 2-3 million bales than the requirements of domestic industry.
    Because of this imbalance between the supply and demand situation, and the overall shortage in the world market, which forced the international market to rule high, all these factors impacted on the domestic price scene. The evident result was that the prices in the local market prevailed much higher than the Government declared price.

    GROSS RETURNS TO FARMERS 2003-04 CROP: Information available gives a range of Rs1000 to Rs1800 of phutti prices, which the farmers received. Experts who were following the trend of phutti price behaviour estimated that the average price received by the farmers would be about Rs1200 per 40 kg.
    Assuming that the total production of about 10 million bales (one bale = 170 kg) was sold in the market at this price, the farmers would have likely pocketed about Rs153 billion. Most of this money must have found itself in the market, which should have been able to accelerate the activities particularly in the rural areas.
    The impact on the net income of the farmers would of course be much less as the cost of production, which they had incurred to produce the crop in which the expenses incurred in controlling pesticides and insects would be very high as the crop in many areas was quite seriously affected.
    CROP OF 2004-05: The lucrative prices received by the farmers (for the 2003-04 crop) induced them to bring more area under cotton in the following year (2004-05) despite the fact that shortage of water was experienced in many parts of the Punjab and Sindh, the main growing provinces.
    They therefore seemed to have decided to reduce the area under sugarcane, which is a high water-delta crop and competes cotton in some areas. The result was that the area under cotton increased from about 3 million hectares in 2003-04 to 3.14 million hectares in 2004-05, an increase of 4.7 per cent.
    The area under sugarcane showed a decline of 74,000 hectares in the two years compared. Water saved from the cultivation of one acre of sugarcane would be approximately enough to raise 1.5 acres of cotton.
    The weather during the growing period of the crop remained quite favourable and luckily no disease or insect attack was noted to have any significant effect on yield per hectare.
    The result is that the production of the crop is recently estimated as 12.1 million bales by the Ministry of Food & Agriculture. There is, however, a strong belief amongst those interested in this crop that the production would be around 13 million bales.

    LOSS TO GROWERS IN 2004-05: The higher domestic production, the international prices ruling lower than last year because of large world output; much more than the anticipated consumption, had a dumping effect on the domestic cotton prices.
    Information coming from the field indicates that the price of phutti has been selling much lower than the support price of Rs925 per 40 kg. Only numbered cultivators might have received Rs900/- or even Rs925 but majority of them have been getting around Rs850 or even less.
    It has been estimated by knowledgeable persons that on an average the farmers received at least about Rs850/-, if not less. This means that from a crop of about 13 million bales, the farmers would be receiving gross returns of about Rs141 billion.
    This is even less by Rs12 billion (against Rs153 billion) than received last year. However, the net income to the farmers would be less by the cost of cultivating the crop.
    One thing to be noted is that the cost of growing the crop during 2004-05 would be comparatively lower than that incurred during the last year because of the few expenses on the spraying of the crop as the incidence of the insects and disease was much less than last year.

    LOSS TO FARMERS DUE TO THE LACK OF PROPER IMPLEMENTATION OF SUPPORT PRICE: The only purpose of announcing the support price was that the farmers should get at least that price in case the free market price rules prevailing lower than the promised price.
    Had the support price policy been implemented in true spirit, the farmers would have received about Rs153 billion. This made the farmers to suffer a loss of Rs12 billion.

    GAINS TO GINNERIES AT THE COST OF FARMERS: The Government made the Trading Corporation of Pakistan (TCP) as the implementing agency by giving it a free hand to purchase from the market as much quantities of lint (phutti is not purchased) as necessitated, so that cultivators get at least the support price. Although the TCP has done its best and has so far purchased about 1.3 million bales but it has in no way helped the farmers as the phutti prices have not moved beyond Rs850 or Rs860 at best.
    As a result of the TCP purchase of lint from the ginneries at its calculated price based on Rs925 per 40 kg of phutti, the ginners have gained, unlike the claim made that the ginneries that they purchased phutti from the farmers at the Government set price, no farmer, according to an information, received that price. They sold phutti, on the average, at Rs850 per 40 kg.
    Therefore, the ginneries make a profit of Rs75 for each 40 kg of phutti purchased and lint sold to TCP. The amount of phutti when translated from 1.3 million bales comes to about 16.4 million 40 kg. For the purchase of this amount of phutti, the ginners made a profit of about Rs1.2 billion.
    With more purchases made by the TCP, more profit would be reaped by the ginneries unless the market price of phutti escalates beyond Rs850. The profit will decrease with every rupee the price of phutti goes up in the market.

    CONCLUSIONS AND SUGGESTIONS:

    i) The implementation of the support price policy, despite all given efforts, has not produced the desired result because the farmers had to sell their produce much below the support price level. The estimated loss to the farmers is about Rs12 billion.

    ii) Without the effective implementation of support price during 2004-05, the gross returns to the farmers were less by Rs12 billion despite the fact that the total cotton produced during this year was about 3 million bales more than in the previous year.

    iii) The ginners seem to be making profit for every amount of lint sold to the TCP. The profit is equal to the difference between the support price and the price at which the farmers sold his produce.

    The ginners seem to be making a profit on an average of Rs75 per 40 kg of phutti purchased. They therefore could have made a profit of Rs1.2 billion on the amount of lint (1.3 million bales) so far sold to TCP.
    In addition to the above conclusions leading to effective and efficient implementation of the support price policy, there are some other important suggestions relating to the marketing of cotton, these are:

    i) The lint price, as understood, is not scientifically determined from the phutti price. It is probably done on a thumb-rule basis. In the past, if the author’s memory is not failing, this used to be done in the beginning by the Ministry of Commerce and later on the responsibility was passed on to the Agricultural Prices Commission (APCom) but the summary was submitted through MINFAL and Commerce Ministry to the ECC.
    The phutti price was decided by the Cabinet and the lint price by the ECC. There is a need for improving the determination of lint prices. Cost of ginning operation is an important factor involved.

    ii) The procedure for the estimation of cotton production needs to be reviewed. The Cotton Crop Assessment Committee should preferably be presided over by an independent person, not having direct interest in production levels and not by a Minister or Minister of State as the participants are reluctant to give their objective views in their presence.
    The main idea is that the Committee should not be got influenced by interested personalities. During the cotton season, it should meet, at least fortnightly, if not more, depending on the crop situation. This would help reduce the uncertainty about the size of the crop being created by different agencies.

    iii) In order to make the implementation of the price policy, the TCP needs to have more and experienced staff. The winding up of Cotton Export Corporation (CEC) has been controversial, which apparently was done under the influence of the international financing agencies perhaps based on faulty information. With the passage of time, it becomes clear that it was perhaps not the correct decision.

    Courtesy: The DAWN

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