Cotton prices: weighing the pros and cons

The economic managers of Pakistan must be taking heart from the recent spike in the cotton prices - both locally and internationally. Already there are talks of the current account deficit being narrowed down by $3~4 billion on account of cotton price increase alone. And the proponents of this belief have strong voices in the industry too, no matter how optimistic it may seem.
The production shortfall and a sudden rise in cotton demand from China, coupled with quantitative easing, jacked up cotton prices, which are now hovering around $140/lb, nearly double from the FY10 average of $73/lb.
Does this warrant an increase in Pakistans textile exports in the exact proportion? The answer is surely not simple; even the local cotton and textile industry is marked with opposing views.
The yarn millers seem to be boarding the optimistic ship having strong faith in the textile exports, which, they believe, will double to $20 billion in FY11. This camp believes that the recent price hike has strong fundamental backing and may well continue to be on the higher side as Chinas appetite is not expected to slow down in the near future and the supply shocks would keep the prices up.
On the other boat, and more importantly the larger one, is the value-added textile sector, which thinks that a $7-8 billion increase in textile exports is highly optimistic and that the daydreamers should see the reality. There is a strong belief in this camp that the price hike is highly speculative in nature and may burst anytime - with prices falling by 30 to 40 percent in a short period of time.
There is no denying the speculators involvement as the international financial institutions have taken strong positions in the commodity despite improving cotton production and inventory estimates. The most recent cotton balance sheet released by the USDA reveals that the global cotton stocks are at a satisfactory level with production likely to meet the previous years level. So the bears must be eying to make an entry - and maybe soon.
Even if prices do remain on the higher side, it will not be sustainable for the value-added sector, which accounts for nearly 85 percent of the sectors exports. Because of the fluctuation in prices, the manufacturers cannot cover their positions as order confirmation takes time. Moreover, many industry players see a 20~25 percent decline in export quantity, if the price does not cool shortly.
The availability of liquidity in the local market is also a concern for the local value-added sector as operating in such a high price scenario needs heavy liquidity injection, which does not seem easy in the current circumstances.
A very basic and rough look at the numbers reveals that the export benefit even in the best case scenario of the prices remaining on the high side may not exceed $3.2 billion. And if the prices do fall as feared, the benefit may be negligible. A detailed and cleared view form within the industry needs to be spelled out, as anticipation of such massive improvements in the current account has its impact on the currency movement estimates as well.

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                                                                        FY11 exports   FY11 exports

TEXTILE EXPORTS             FY10 exports   FY10 exports   FY11 exports  (E) @ $110/lb     USD (E) @

                                Volume       ($ 000)      volume (E)      ($ 000)    $90/lb ($ 000)

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Raw cotton                      155,945       195,732         171,540      322,313          263,711

Cotton yarn                     625,826     1,362,117         688,409    2,243,007        1,835,188

Cotton cloth                  1,577,491     1,759,622       1,261,993    2,107,332        1,724,181

Cotton carded or combed           1,456         1,867           1,165        2,236            1,829

Yarn other than cotton yarn      19,162        52,519          15,330       62,897           51,461

Knitwear                        106,907     1,748,419          85,526    2,093,915        1,713,203

Bed wear                        328,954     1,677,395         263,163    2,008,856        1,643,610

Towels                          215,030       667,197         172,024      799,038          653,759

Tents, canvas & tarpaulin        23,695        62,464          18,956       74,807           61,206

Readymade garments               27,787     1,342,277          22,230    1,607,517        1,315,241

Art, silk & synthetic textile   549,781       544,322         439,825      651,883          533,359

Made-up articles                              553,776                      829,006          678,278

Other textile materials                       327,253                      489,900          400,827

Total                         3,632,034    10,294,960       3,140,159   13,292,707       10,875,851

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