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Cotton prices under pressure
 LAHORE:
Declining world cotton rates have put pressure on local
cotton prices although the
depreciation of Pak rupee since last crop warrants that
farmers
get the same rates as last year.
After a very disappointing year in 1999-2000 when the cotton
farmers were ruined in the wake of a bumper crop, they got
better rates for the 2000-2001 crop. Encouraged by higher
world cotton rates, the Trading Corporation of Pakistan
intervened decisively to save the farmers from another
disastrous year.
This year, the world cotton rates are at 16-year lows. The
spinners have imported over 700,000 bales of cotton. They may
well test the patience of farmers to withhold their produce by
delaying procurement. The production cost for the farmers has
gone up sharply due to increased use of pesticides to deal
with intensive pest attack. All these events have put immense
pressure on the farmers.
However, much will depend upon how prudently the government
intervenes in the market through the Trading Corporation of
Pakistan and safeguard the interests of both the farmers and
the industry. It must be noted that Pakistan generates over 60
per cent of its export earnings through cotton textiles.
Another fact that must be taken into consideration is that
amongst the three major stakeholders in cotton trade the
farmers are the weakest and most disorganised. They are
exploited both by the ginners and spinning tycoons.
Ever since the government adopted free market system, the
textile millers calculate the rates of lint (ginned cotton) on
three basis. The price preferred by the industry is the export
substitution cost of cotton. Under this, the industry states
that it would give the actual export realisation cost of
cotton after deduction of transport, packing and other charges
from the export value of the crop.
They state and have been proved right that the export price of
Pakistani cotton is 10-12 per cent less than the world cotton
rates due to high percentage of contamination. The industry
initially purchased cotton under this formula in 1999-2000 but
as the cotton crop arrival in the market accelerated the
prices dropped to Rs350-400 per maund of phutti (raw cotton).
It was Rs600 per maund less than the price a year earlier and
was much less than even the cotton substitution price.
When there is a short crop in the country, spinners offer
export substitution price. They argue that instead of
exporting cotton it should be given to them at the actual
export price that the exporters get after including the
transportation, packing and incidental charges. The industry
offered to buy the stocks the Trading Corporation of Pakistan
managed to procure during the 1999-2000 season when the cotton
rates nosedived but rebounded a few months after the farmers
had parted with all their produce.
In extreme cases, when the industry sees no other alternative
it offers the growers import substitution price. That is the
actual cost of the imported cotton. Cotton prices this year
are much below the prices prevalent last year. The prices are
hovering around Rs1,800 per maund against Rs1,950 during the
initial period of last year. The average price of cotton last
year was Rs2,250 per maund though it went as high as Rs2,750
per maund for some time.
Cotton farmers last year managed to get a better price from
local spinners due to a little higher world cotton rates and
timely intervention by TCP. When the spinners tried to give
lower cotton rates the TCP threatened to export all the
procured stock as the world market rates of cotton were
favourable at that time. Export of two small lots of cotton by
TCP forced the local mills to buy cotton at reasonable rates.
This year the situation is reverse as the cotton prices are on
the decline. World cotton rates are under pressure as the
cotton stocks are expected to increase by one millon tons or
3.5 per cent to reach a record of 29.5 million tons in
2001-02.
According to US-based International Cotton Assessment
Committee (ICAC), this increase in world cotton stocks is due
to the expected world cotton production of 20.8 million tons
in 2001-02 while the demand is expected to be 19.9 million
tons.
The government fixes the minimum price for phutti which is
bought by the ginners who produce one maund of cotton from
three maund of phutti while the rest is cotton seed. According
to the formula given by the experts, the value of cotton seed
extracted from three maund of phutti is Rs400.
The spinners and the TCP do not buy phutti but they procure
lint (ginned cotton) which means that the beneficiary of
higher lint prices are the ginners and not the growers. The
system works like this when the spinners offer low rates to
ginners they reduce the procurement rate of phutti. As the
phutti rates decline the farmers stage protests. The
regulatory authorities then come into action.
The farmers who are unable to hold produce for long are
deprived of their stocks by the time the higher price of lint
is ensured through regulation. The real beneficiary is again
the ginners and the spinners.15
September, 2001
Courtesy
Daily The News
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