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ANALYSIS: prospects of bumper new crop further depress cotton prices  

KARACHI (August 05 2004): New cotton season 2004-05 has taken its start from August 1, but previously Pakistan's cotton season used to commence from September 1 every year.

The reason for this revision is that our cotton activities---crop sowing, development and harvesting---are now starting quite earlier than before and that we have joined the international cotton community where cotton season starts from August 1 every year.

It is hoped that this new season would prove to be beneficial by producing a crop of 1.955 million tons = 8.98 million 480-lb bales = 11.5 million Pak (170 kg each) bales against our record high production of 12.8 million 375-lb bales in 1991-92 season.

Our average annual cotton production of last 12 years ( 1992-93 to 2003-04) has been below 10 million local bales and, in these 12 years period, our best production was 10.6 million bales (in 1995-96) and lowest one was 8.0 million bales (in 1993-94).

In 1991-92, when our production was 12.8 million bales, our total cotton consumption was 8.5 million bales.

In 2003-04, our production was 10.0 million bales and our raw cotton consumption around 12.0 million bales.

In the last 12 years, our production has been reduced by 21.875 percent from 12.8 million bales to 10.0 million bales, while consumption has increased by 41.17 percent---from 8.5 million bales to 12.0 millions bales.

The most unfortunate aspect is that the Ministry of Food, Agriculture and Livestock (Minfal) has perhaps not bothered to let the nation know the reasons for the reversal of cotton production and consumption phenomenon.

Perhaps Minfal has the highest number of research scholars / Ph Ds but research work has been reduced to lowest level as most of these scientists may be working on non-research / administrative posts.

The nation has the right to know why Minfal has miserably failed in keeping up with the already achieved cotton production performance of 12.8 million bales and has also failed to improve quality of cotton.

Strangely, Minfal wants to fix lower production targets, perhaps admitting that it cannot produce as much as 12.8 million bales already produced. The seed, namely S-12, which revolutionised our cotton production, has been buried deep down in the earth to die.

The President of Pakistan has already issued an Ordinance in November 2002 to introduce Cotton Standardisation System but it has been scrapped. In about two years' period, neither the Cotton Grading /Cotton Standardisation System has been implemented at ginning stage nor there appears any indication of implementing it in near future.

The plain reason is that through implementation of this Cotton Standards Ordinance, cotton growers will be entitled to receive payment of quality premium for quality better than Base Grade cotton according to a set formula.

The premium amount may run into billions of rupees in a season. In 2003-04 season, Pakistan imported record high quantity of cotton equivalent to 2.3 million local bales to meet its shortfall in cotton which is 23 percent of our production.

If the Cotton Standardisation System is implemented in real spirit, Pakistan can increase its production considerably to meet its domestic requirement and simultaneously improve quality of our cotton to international level.

We are short in wheat and may be importing more than 1.0 million tons. Sometimes, we import sugar and sometimes onion. We are an 'agriculture country' and are short in prime commodities.

The government should form a broad-based 'Inquiry Commission' for bringing out the facts of a possible conspiracy for low cotton production and poor lint quality thus keeping our economy dependent on other countries and the country poor.

Presently, our cotton crop is reported to be fine under very conducive weather conditions. We may receive less rainfall this cotton season and are already short in canal water.

Even then we are hopeful of producing a bumper crop of 11.5 million bales. Less rains means less undesirable vegetative growth, less chances of pest attack and less spray expenses.

About ten ginning factories each in Punjab and Sindh are already in operation and more and more factories are resuming operation in new crop.

The Pakistan Cotton Ginners' Association is trying to persuade the ginniers to delay ginning operation by one month to bail out the ginners (mostly of Rahimyar Khan and Bahawalpur districts) who are holding larger stocks of unsold cotton from 2003-04 crop.

The other day, a cotton man who had taken a tour of Punjab, told me that there were many ginners in Rahimyar Khan and Bahawalpur districts whose total production of 2003-04 season was still intact and they had not sold a single bale.

Total unsold stocks with the ginners / exporters are estimated around 300,000 to 350,000 bales---about 50,000 bales in Sindh and rest in Punjab. Exporters are holding unsold stocks of some 30,000 bales.

Reportedly, some spinners are offering imported cotton for sale in local market. Both the ginners and the spinners are caught in their own trap of making incorrect assessment of cotton production and consumption.

Generally speaking, many ginners have incurred heavy losses in cotton business and some of them may go bankrupt.

The lint prices have crashed to the level of Rs 2,200 to 2,000 per maund from season's record high price of Rs 3,600 per maund---a fall of 40 to 45 percent.

The attempt of the PCGA to persuade the government to bail the ginners out by purchasing all their unsold cotton stocks has also failed and the ginners are in soup.

In all prominent cotton producing countries of the world, the talk of the town is the prospects of a bumper cotton crop in 2004-05, but in Pakistan the talk of the town is heavy losses to cotton ginners / spinners.

The ginners / exporters should try to unload their long position before the present level of prices receives another blow when the arrivals of new cotton crop get momentum.

New crop lint is selling around Rs 2,200 to 2,300 per maund ex-gin and in view of expected record high world crop---nearly 105 million 480-lb bales---in 2004-05 season with China claiming more than 28 percent share at 28-30 million bales and anticipated structural changes in cotton marketing system / policies in view of abolition of old restrictive / quota system and introduction of free-trade policies under WTO regime from January 05, cotton market is likely to bog down below the strong psychological barrier of Rs 2,000 per maund ex-gin in the country and to the level of 40 cents or even below in world market.

The recently concluded WTO General Council meeting indicates that some agreements have been concluded between rich and poor nations. The main points of the agreements are as under:

1. All 147 members of World Trade Organisation (WTO) have agreed on the basis of talks on a trade deal but still have months of hard negotiations ahead.

2. Rich countries have agreed to eliminate all forms of export farm subsidies but can keep some of their domestic support.

3. The deal includes a "down payment" that would see an immediate 20 percent cut in the maximum permitted payments by rich nations.

4. Europe's multibillion-pound sugar industry is still outside the negotiations.

5. West African states failed in their attempt to open separate negotiations over the $3 billion subsidies for its cotton growers.

6. Poor countries will have to cut import barriers under which the highest get cut the most.

7. Developing countries have to negotiate on rules to make customs procedures easier and less expensive for business.

There are indications that prominent countries appear committed to the implementation of WTO regime from January 1, 2005. This would provide breathing space to developing agriculture countries.

The yarn and other textile products prices are ruling quite easy and are likely to add to the easiness of cotton prices in coming months. Over the last two years, China has increased its cotton acreage by 36 percent and Brazil by over 50 percent.

Any increase in cotton prices would encourage specially Brazil and China to increase cotton areas.

In 2003-04, China has proved its power in setting the direction of world prices of cotton and textiles products. Adam, vice-chairman of National Cotton Council (NCC) remarked: "As China goes, so the world markets".

Of course, China is the engine of world cotton and textile markets but in show of its strength which caused heavy losses to world cotton trade, it has also burnt its fingers and is now licking its economic wounds.

Cotton and textile operations in China have been slowed down due to high priced cotton imports, abnormally high local cotton prices, short power supply and liquidity squeeze.

New York cotton market's October contract is ruling only less than three cents above the psychological barrier of 40 cents and the new crop has yet to exert its arrival pressure on prices. The barrier of 40 cents may be washed away to enter into late 30s.

On the other hand, two-month long crucial period for cotton is there and fears of possible havoc playing by rude weather may reverse the cotton prices.

Cotton-surplus countries, especially USA, Brazil, CIS, African franc zone countries and Australia may face great difficulty in export sales of their cotton and that even at below production cost level to provide strength to their buyers who lost heavily in 2003-04 season.

Courtesy: Business Recorder

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