ANALYSIS: cotton selling below government price despite TCP’s entry

Except for some scattered rains in a few cotton areas in Sindh and Punjab the weather has been very conducive in the past two weeks. So, the prospects of a bumper cotton crop have brightened up considerably.
Some optimistic estimates place cotton crop size at (plus) 14.0 million 375-lb bales, while moderate circles place it between 12.5 and 13.0 million local bales.
However, the last leg of the crucial period for cotton crop safety up to October 10 still remains to pass and it is hoped that it would pass peacefully.
The pace of arrivals of seed-cotton also confirms the harvesting of a real bumper crop, should the crucial period pass away peacefully.
Field reports indicate that quality of cotton is also very good. By the end of this month, seed-cotton equivalent to about 2.0 million bales would have reached the ginneries and the local spinner–buyers–are almost lifting all pressed bales.
Realising the importance of textile for national economy, the present government has met Textile Industry’s old demand of establishing a separate Textile Ministry.
Reportedly, Pakistan Cotton Standards Institute (PCSI), which was made almost redundant, has now been put under the umbrella of Ministry of Textile. This is a wise decision and the cotton and textile trade has welcomed it. Now, the Textile Ministry should take full use of PCSI in implementation of Cotton Standardisation System at ginning stage which would go a long way in improving the quality of lint cotton.
The technocrat / economist Prime Minister of Pakistan should immediately implement the Cotton Grading / Standardization system to ensure better return to cotton farmers and better quality cotton for textile industry.
The implementation of Cotton Grading System would benefit the growers to the extent of Rs 5.0 billion yearly besides other benefits to the textile industry and the economy of Pakistan.
Lint cotton prices in the local market remained under selling pressure during last week on reports of bumper cotton crop and larger arrivals of seed-cotton in factories. Prices of lint cotton and seed-cotton plunged to lower levels.
The government, taking notice of the situation, directed Trading Corporation of Pakistan (TCP) on September 23 to start purchases of lint cotton from ginneries at Rs 2,159 per maund of 37.324 kg ex-gin (equivalent to 44.60 cents /lb) for Grade III cotton with staple 1-1/32 inches and micronaire 3.8 – 4.9 from September 24.
The news flashed in cotton market but lost its charm when ginners continued to purchase seed-cotton at lower than government price of Rs 925 per 40 kg and continued selling lint cotton at below government price of Rs 2,159 per maund.
On Saturday, lint cotton of different stations of lower Sindh was sold at rates ranging from Rs 2,000 to Rs 2,125 per maund, depending on quality.
On the same day Karachi Cotton Association fixed spot rate for Grade III staple 1-1/32 inches at Rs 2,090 per maund ex-gin.
Despite the fact that quality of most of the cotton is above TCP’s Purchase Standard Grade III, the ginners were selling even at rate lower than TCP rate of Rs 2,159 per maund.
This meant that the growers and ginners either did not have confidence in TCP or TCP had entered the market at wrong time. One ginners said that when the market would break the barrier of Rs 2,000 and selling pressure would mount “then we would offer cotton to TCP at Rs 2,159 per maund because about Rs 59 is the cost of new hessian and hoops with four side coverings which is the requirement of TCP, and Rs 100 is the cost of delay in payments, possible deductions and other unaccounted for expenses”.
Presently, local mills are quite active in lifting cotton on price and quality grounds. Hence there is no piling up of unsold stocks. However, cotton trade’s earlier impression of depression in cotton market down to the level of Rs 1,800 or even lower does not hold good and workable.
This season the quality of cotton is so good that almost 75 percent cotton would command premium over Grade III. By not paying any premium for better quality cotton, the government on the one hand is discouraging production of better quality cotton and, on the other, is usurping the right of premium to growers. In all cases, growers are encouraged to produce better Grade / quality cotton by paying due premium but in Pakistan, Government acts against this international rule.
Nobody can understand when the Government verbally supports the growers but actually works against their interests.
The main reason why our economy is not performing well is that our agriculture sector and growers are grossly neglected. The potential economist Prime Minister Shaukat Aziz should give top priority to agriculture sector / growers and make a real breakthrough in our economy.
This would not only make Pakistan’s economy strong but would simultaneously reduce poverty level considerably. Why the elected representatives of the people in both houses ( Assemblies and Senate ), largely coming from rural areas, and the associations of growers sit and sleep over matters of agriculture and rights of agriculture community? If cotton prices in international market go down the level of 40 cents per pound and Pakistan produces a bumper crop of 13 million bales or more, which appears possible, then a huge selling pressure of about two million bales may develop which may be beyond the capacity and ability of TCP.
Another viable alternative to this cotton crisis may be the restoration of Cotton Hedge Market under Karachi Cotton Association.
This would on the one hand relieve TCP and the Government of the cotton pressure and on the other hand provide a better outlet for marketing of cotton to all stakeholders of cotton.
This season, exporters are also tightening up their muscles to play a larger role in export of raw cotton and reportedly some 20,000 bales have been committed in export at FOB Karachi prices ranging between 46 and 51 cents / lb. In view of the downdrift in New York cotton futures, inquiries have been reduced and asking rates have been lowered.
New York cotton futures are still looking for definite direction as the world cotton crop is passing through very crucial period. NY futures are dancing to the tunes of sensitive weather reports.
However, within the next fortnight, the position of cotton crop in all major cotton producing countries of Northern Hemisphere would become clear and then cotton prices would stabilise.
October contract finished at 49.40 cents, down 81 C/Pts, and December contract closed at 47.02 cents, down 191 c/pts.
Again, there was a report of another hurricane likely to touch US coasts. US crop is now estimated at plus 20 million 480-lb bales and its consumption around 5.6 million bales.
US has fixed export target of 12.0 million bales and more than 5.5 million bales are reported to have been committed in export.
US imports of apparels fell by 2.2 percent in July, 2004, when recovery in June proved to be short-lived. US imports of apparel from China registered a robust increase of 25.25 percent in the first half of 2004.
China’s cotton production is estimated at 29.5 million 480-lb bales by USDA but other sources place it down around 28.5 to 29.0 million bales and consumption one to two million down from early estimate of 34 million bales. Foreign reports indicate some problems in China’s textile industry.
Although, stocks of raw cotton with textile mills are quite low–almost half of last season–yet funding for cotton buying remains restricted. Mills consider moderate purchasing quite necessary.
Yarn prices are reported to have touched the bottom in China and rise in prices is predictable. Yarn of 32s is selling in Shaoxing market equivalent to Pak Rs 620 per 10-lb bundle.
Mills agree that yarn prices have recently improved and stocks have been reduced considerably. Some mills agree that there is good demand for pure cotton yarn and they can reduce polyester consumption due to higher prices. Low prices of cotton would exert pressure on polyester prices.
China has recently made a major breakthrough by developing 8 varieties of transgenic cotton which have been released for commercial sowing.
In 1996, China had introduced sowing of transgenic ( Bt. Cotton) on about 50,000 hectares and in 2003 the area had increased 40 times to 2.13 million hectares.
This season, the area under Bt. Cotton is estimated at around 4.67 million hectares, almost 34 percent more than Pakistan’s total acreage under cotton this season.
China would be producing some more than 20 million bales of Bt. Cotton and each acre of land would give extra benefit equal to Rs 1000 to Rs 1100 to the farmers.
Latest reports from India indicate a record high crop of some 21.3 million 375-lb bales–16.41 million 480-lb bales–this season against 17.7 million local bales produced last year, as assessed by Cotton Advisory Board of India.
Official estimates are for 19.0 to 19.5 million bales. This is all because of very cotton friendly weather in India. If all things go smooth, the four top countries would be producing record high crops viz, China 29.0 to 30.0 million bales, USA 20.90 million bales (Second highest), India 14.84 to 15.23 million bales, and Pakistan 10.15 million bales of 480-lb. World production is estimated around 106.75 million bales.
Until the time, clear pictures of crop sizes emerge from prominent cotton producing countries, cotton prices would remain fluctuating on positive and negative rumours / reports. Only in the middle of next month, cotton prices might stabilise.

Curtesy: Business Recorder

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