During British rule on Indian sub-continent, agricultural land running in thousands of acres was allocated to companies/firms owned and operated by foreigners specially the Britishers on long lease extending to 49 years and 99 years. Thus, Pakistan inherited a system of corporate farming besides, general farming by individuals. These companies also owned their ginning factories where cotton was ginned and pressed. As domestic cotton consumption was very limited so most of the raw cotton was exported to European and British-ruled countries to feed their spinning mills.
To handle such exports, these companies had their own export houses in port cities of Karachi, Bombay, Madras and Calcutta. With a view to protecting the interests of cotton trade from adverse price fluctuations and facilitating the cotton trade in safe and smooth marketing, cotton was traded in Forward Contracts (hedge trading) and Ready Delivery/Spot Delivery system through two cotton exchanges; one in Bombay (established in 1922) and the other in Karachi (established in 1933).
When Pakistan came into being in 1947, it inherited this integrated/compact system which covered three different processes of cotton growing, ginning and export sales. In 1947-48, Pakistan produced some 1.1 million bales (170 kg each ) of raw cotton and its domestic cotton consumption was only 78,000 bales ie only 7.1 percent of its production around 93 percent was exported. Later, with the installation of more and more spinning mills, cotton consumption started increasing fast.
After partition of India in 1947, the foreigners started returning to their countries by winding up their companies, and the compact of the cotton trading system was disintegrated into three separate and independent sectors viz. cotton growing, ginning and spinning/exports. Under this new system, the growers sell their seed-cotton to ginners directly or through intermediaries who after ginning and pressing sell their lint cotton either to spinners or to exporters directly or through commission agents.
A large number of commission houses were established in Karachi for helping the ginners in disposal of their lint cotton to spinners or exporters. Marketing of most of the lint cotton was channelled through the Karachi Cotton Exchange which, by and large, operated smoothly. Later, sometimes, due to defaults in periodical settlement of hedge trading on the part of some unscrupulous companies/members, the hedge trading remained suspended for weeks and months. Some purely speculative elements tried to play with the hedge market detrimental to the interests of genuine cotton players.
Sometime the hedge market was exploited by floating rumours to the benefit of the exploiters. Reported defaults in exports and shipments were on the rise. Also by 1975, the atmosphere for nationalisation of industries and businesses had developed.
As a result of all these factors, the Government of Pakistan decided to put a ban on private exports of raw cotton in November 1973, and established the Cotton Export Corporation of Pakistan, a government monopoly agency for handling all exports of raw cotton from Pakistan. Later in 1975, the Government of Pakistan totally banned operation of cotton hedge market which has not been restored till now. The government used to fix minimum support prices of average grade seed-cotton and lint cotton with premia and discounts for higher and lower grade cotton, respectively. The ginners were bound to procure seed-cotton from growers/suppliers at the rate not below government's fixed price, while the Cotton Export Corporation was bound to procure lint cotton from ginners at the minimum support rate subject to premia and discounts according to grades/staples. The local spinners were free to procure lint cotton from ginners at prevailing rates.
This system stabilised the prices of seed-cotton and lint cotton, ensured proper return to growers and ginners and smooth and uninterrupted supply of lint cotton to spinners. This system worked quite satisfactorily for about 20 years. The Cotton Export Corporation used to procure any amount of lint cotton offered for sale at the government's fixed rate subject to premia and discounts.
In 1991-92, when Pakistan harvested all time record high crop of 12.8 million bales ex-gin, the Cotton Export Corporation had to procure about 2.9 million bales of lint cotton from ginneries. The lint cotton so procured by the Cotton Export Corporation of Pakistan was mostly exported, but sometimes the CEC came to the rescue of local spinning industry when there was scarcity of cotton and prices ruled abnormally high. When era of de-nationalisation and de-regulation of businesses and industries started in late 1980s and early 1990s, the Government of Pakistan decided to de-regulate the cotton export trade gradually, and in 1995, it was completely handed over to the private sector.
In four cotton seasons (1985/86 - 1988/89), the Cotton Export Corporation's export performance remained exceptionally good and its average annual export shipments during these four seasons was 3.85 million bales with nominal share of the private sector in last two seasons. The Cotton Export Corporation was disbanded in 1996. After 1995, neither there was any cotton procurement system at fixed price by any government agency nor any hedge trading to counter the wild price fluctuations in cotton prices.
Often one or two of the three cotton players viz: growers, ginners, and spinners/exporters, fell prey to the trap of wild price fluctuations, while other players benefited. The strong players tried to exploit cotton market to their benefit and the weaker ones sustained loss. Some time the strongest player, the spinners, was also caught and had to pay a quite high price for lint cotton. The ginners often are caught and sandwiched between growers and spinners.
The spinners are the most organised cotton players, while ginners organised and growers unorganised. When the ginners fail to dispose of their lint cotton at good price and hold large stocks of unsold lint cotton for a longer period incurring carrying charges, the growers also suffer as the spinners delay payments to ginners. The ginners sometime sell their lint cotton to spinners on credit which remains stuck up sometimes for years together.
Although there is no hedge trading in cotton yet the ginners have started a system of accepting deliveries of seed-cotton on unfixed basis with fixation of price at sellers' option within a fixed period extending to two/three months.
In the middle of 1999, the Government of Pakistan, estimating a larger cotton crop in 1999-2000 season, decided to intervene in cotton market to stabilise lint cotton prices to protect the interests of cotton growers. As the Cotton Export Corporation was disbanded so another government organisation namely the Trading Corporation of Pakistan (TCP) was inducted in lint cotton procurement from ginners at government's fixed rate to give support to the growers and the TCP procured some 525,000 bales in 1999-2000, when lint prices had decreased by 40 percent to the level of Rs 1,200 in local market and to US Cents 29 in New York Future market.
In 2000-01, the cotton market remained steady and the TCP could only procure 10,000 bales. In 2001-2002, the TCP again entered the cotton market to give support to the falling cotton prices and procured about 250,000 bales against its procurement target of 1 million bales, while in following two years, prices ruled quite high and the TCP did not enter cotton market for procurement. In 2004-2005, in anticipation of a record high crop of 15 million local bales and possible nosedive fall in cotton prices, the TCP procured some 1.63 million bales from ginners at a fixed price of Rs 2,159 per 37.324 kg ex-gin, while generally prices ruled around Rs 1,850 - Rs 1,900 per maund.
Actually, in view of TCP's limitations in procurement of lint cotton and not purchasing seed-cotton directly from cotton growers to directly benefit the growers, the absolute purpose of the scheme is defeated. At present, the TCP is holding a large unsold stocks of 1.6 million bales which costs the TCP around US cents 48.0/lb FOB, Karachi. When the TCP started procurement of lint cotton in September 4, a free fall in lint cotton prices in world market was expected, but after touching the level of 42, world prices started picking up more prominently after December 2004 and at present, local prices are ruling around Rs 2,300 per maund equivalent to US cents 50.0/lb FOB Karachi, while export prices are quoted around US cents 48.0/lb FOB Karachi. Unsold cotton stocks with the ginners are reported to have been reduced to around 500,000 - 550,000 bales with 1.6 million bales unsold with the TCP. Thus total unsold stocks are around 2.15 million bales.
The decision as to how to dispose of TCP's cotton stocks is to be taken in a high meeting scheduled on 28th instant. The system of procurement of lint cotton from the market through the TCP does not serve the purpose, and a permanent solution to the high risk of price fluctuation is to be sought.
Now, the government is reported to have decided to restore cotton hedge trading under the aegis of the Karachi Cotton Association (KCA) from the new cotton season ostensibly to provide cover to all cotton players against the wide price fluctuation risks, and let the cotton market operate freely on the basis of the demand and supply. Thus the government will be saved from its involvement in cotton market from time to time.
At present, domestic requirement for raw cotton is reported around 14.5 million bales, and it is increasing year by year while our seasonal production is lagging behind. In other words, Pakistan has great potential in textile production and exports for which regular and smooth supply of raw cotton should be ensured at competitive rates.
Pakistan should keep up its cotton output around 13 million-14 million bales to stay competitive in textile exports. With the restoration of the cotton hedge marketing system, the spinners would be able to get regular and smooth supply of raw cotton round the year, and the ginners and growers would get fair and prompt payment of their cotton.
Reportedly, ginners have some reservations in restoration of the cotton hedge market. Actually, a long time of 30 years has passed since closure of hedge trading and one generation practically involved in hedge trading has gone, and the new generation fears to face the situation. However, some old and experienced people are still in cotton trade to guide the trade people.
In hedge trading system, more and more people will get jobs, growers would get better price of their produce, ginners would find buyers all the time, spinners would get smooth and regular supply of lint cotton throughout the year, and above all, the price fluctuation risk would be minimised.
The Karachi Cotton Association should hold short orientation courses to give working knowledge and awareness about the cotton hedge trading. The KCA has already updated all its by-laws regulating the hedge trading operations. However, the control and monitoring system should be quite effective so as not to avoid pure speculation and profiteering by vested interests. Instruments for the settlement of the hedge market should be strong enough to arrest possible defaults in clearings.
Meantime, the implementation of cotton grading system and standardisation would be a pre-requisite for smooth and objective cotton marketing system based on quality of lint cotton. The establishment of fibre testing laboratories in public and private sector would help in determining value of lint cotton based on internationally accepted quality parameters. The quality certificate issued by such laboratories should be honoured by all parties so that bales are not broken again and again for quality check. This system would facilitate the Karachi Cotton Association in determining quality based price of each lot objectively.
The KCA has designated all the cotton ginning factories and Karachi as delivery points against the cotton tender. Also imported cotton has been accepted as tenderable cotton against deliveries. The Karachi Cotton Association should move fast to complete the necessary homework well before starting hedge trading operations.
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