THE sudden, sharp decline in domestic cotton prices on reports of a bumper crop this year will have serious implications for growers and affect the textile exports in terms of quantity and value both, unless the market stabilises at international price level soon.
Cotton prices fell far below global prices in July. Though the market bounced back somewhat to recover some of the lost ground towards the end of last week in the wake of reports of possible government intervention to prop it up, cotton was still being traded substantially below international price of around $1 per pound.
The government is understood to be considering fixing a minimum support price of around Rs7000 per maund for the new crop to shore up the domestic market to the global level, following China’s that has announced $1 per pound as minimum support price for its new cotton crop, according to officials.
However, the decision on how to implement the support price mechanism — whether to directly subsidise growers by involving Trading Corporation of Pakistan (TCP) in the market or to indirectly help farmers by providing cheaper credit to spinners for procuring the crop — is expected to be made at a meeting to be held this week.
President Asif Ali Zardari will chair the meeting to be attended by different stakeholders — textile and commerce ministry officials, farmers, industry, etc.
“Growers will switch to other crops next year if domestic cotton prices do not recover to the global level,” says Ijaz Ahmed Rao, a progressive farmer from Punjab’s southern district, Bahawalnagar.
The record high prices growers received for their last year’s crop had encouraged many to switch to cotton — the area under cotton cultivation increased by about 10 per cent this year, according to Rao. “Farmers never stick to a crop for long unless they are certain about its profitability,” he says.
Domestic cotton prices rose to their record high average of Rs13,301 per 40kg to fall to Rs9,157 in June. The market saw prices of new crop to dip to around Rs4,600 in July on the back of a projected bumper harvest of 16 million bales and carryover stocks of 1.6 million bales available with spinners in Punjab from last year. Last week, however, cotton prices bounced back to about Rs5900 per 40kg, recovering some of the ground lost earlier.
In line with cotton prices, Pakistan’s yarn and value-added textile export prices also came under pressure during last one month, with foreign buyers anticipating new declines in the cotton market. A stronger competition with Indian exporters also put considerable pressure on textile export prices on the global market.
“Our foreign customers are asking us to reduce our prices further. While it is difficult for us to negotiate rates with our customers because of an uncertain and volatile domestic cotton market, they are holding back on their Christmas orders anticipating further decline in prices,” says Ijaz Khokhar, chairman of the Pakistan Readymade Garments Manufacturers and Exporters Association.
“The market must stabilise soon to allow us negotiate Christmas orders. The ministries of commerce and textile must gather all stakeholders together to discuss the situation and find a mechanism to protect farmers and industry,” he insists, saying the apparel industry fears raw material shortages due to volatility in cotton prices.
Gohar Ejaz, chairman of the All Pakistan Textile Mills Association (Aptma), says the plunge in domestic cotton prices will not hurt yarn makers or the rest of the textile industry as far as their margins are concerned.
But, he argues, it does not augur well for the growers and exports or the future of the crop. “Farmers will have to suffer losses if they are constrained to sell their crop below international parity price. Why export cheaper textiles, at the cost of our farmers?,” he asks.
Moreover, he underlines, Pakistan stood to raise its textile exports to $20 billion this year from $14 billion last year at current global cotton price of $1 per pound if it fully consumes its new crop. “The differential between domestic and global cotton prices will result in the fall in the value of our textile exports even if consume the entire crop. The only beneficiary will be foreign buyers. The country will lose foreign exchange it could earn due to reduced export prices of textiles and farmers will not receive international price for their crop,” Gohar contends.
He says export of cotton is no solution to the problem of falling domestic prices. “Pakistan has never been able to export more than one million bales of cotton during last one year. The option is actually meant for keeping domestic cotton prices at the international level to protect farmers from losses,” he says.