Restoration of cotton hedge market

During British government rule in Indian subcontinent, agricultural land running in thousands of acres was leased out to companies owned and operated by foreigners, specially British, on long-term basis extending to 49 years and 99 years.
Thus the system of corporate farming was introduced 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, 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 like Bombay, Karachi, Madras and Calcutta.
With a view to protect the interests of cotton trade from adverse price fluctuations and to facilitate the cotton trade in safe and smooth marketing, cotton was traded in Forward Contracts (Hedge Trading) and Ready Delivery/Spot Delivery systems 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 (of 170 kg) of raw cotton and its domestic cotton consumption was hardly 10 percent of its production so most of the cotton was exported.
Later, the ratio of consumption to production started increasing with the installation of more and more spinning mills.
The foreigners started returning to their countries by winding up their companies and the compact cotton trading system was disintegrated into three separate and independent sectors viz; growing, ginning and spinning/exports marketing (foreign and local).
Under this new system, the growers sell their seed-cotton to ginners who, after ginning and pressing, sell their lint cotton either to spinners or to exporters. 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 Karachi Cotton Exchange, which by and large operated smoothly.
Later on, due to default in periodical settlement of Hedge Trading on the part of some unscrupulous companies/members, Hedge Trading remained suspended for many weeks.
Some purely speculative elements had tried to play with the Hedge Market detrimental to the interests of genuine cotton players.
Sometimes Hedge Market was exploited by floating rumours to the benefit of the exploiters. Reported defaults in exports and shipments were on increase.
Also the atmosphere for nationalisation of industries and business had developed.
As a result of all these factors, the Government of Pakistan decided to put ban on private exports of raw cotton in November 1973 and established Cotton Export Corporation, a Government monopoly agency for handling all exports of raw cotton from Pakistan.
Later in 1975, the Government totally banned operation of cotton Hedge Market which has not been restored till now.
The Government fixed Support Prices of average grade seed-cotton and lint cotton with premia and discounts for higher and lower grade cottons respectively.
The ginners were bound to procure seed-cotton from growers / suppliers at the rate not below Government's fixed price while Cotton Export Corporation was bound to procure lint cotton from ginners at fixed price subject to premia and discounts according to grades/staples.
The local spinners were free to procure lint cotton from ginners but at the rates not below Government price.
This system stabilised the prices of seed-cotton and lint cotton and ensured proper return to growers and ginners and worked quite satisfactorily for about 20 years.
The Cotton Export Corporation used to procure any amount of lint cotton offered for sale at 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, Cotton Export Corporation had to procure about 2.8 million bales of lint cotton from gunneries.
The lint cotton so procured by Cotton Export Corporation of Pakistan was mostly exported but sometimes CEC came to the rescue of local spinning industry when there was scarcity of cotton and prices were abnormally high.
When era of de-nationalisation and de-regulation of business and industry started in late 1980s and early 1990s, the Government decided to de-regulate cotton export trade gradually and in 1995 it was completely in private sector.
In four cotton seasons (1985/86 - 1988/89), 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 private sector in last two seasons.
The Cotton Export Corporation was disbanded.
Now after 1995 there was neither any fixed price system for the procurement of seed-cotton and lint cotton nor any Hedge Trading to counter the wild price fluctuations in cotton prices.
Of the three cotton players viz: growers, ginners and spinners/exporters, one or the other 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.
Sometimes the strongest players, the spinners were also caught and had to pay 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 are organized and growers are 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 their due payments are withheld by the ginners for long time.
The ginners some time 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; fixation of price of seed-cotton 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 Cotton Export Corporation had been disbanded, another Government organisation namely Trading Corporation of Pakistan was inducted in lint cotton procurement from ginners at Government's Fixed Rate to give support to the growers and Trading Corporation of Pakistan procured 525,000 bales in 1999-2000 when lint prices had decreased by 40 percent.
In 2000-2001, cotton market remained steady and TCP could only procured 10,000 bales. In 2001-2002, TCP again entered cotton market to give support to the falling cotton market and procured about 250.000 bales against its procurement target of 1.0 million bales.
Actually, the role of TCP in procurement of cotton is limited in view of IMF and World Bank pressure to let cotton market operate freely on demand and supply basis eliminating the element of subsidy.
In 2001-2002, the procurement price of TCP works out to around US Cents 41`.50 FOB Karachi plus carrying charges at the rate of US Cent one per lb per month. The present export price for average grade of Pakistan cotton was around US Cents 32.0/FOB, Karachi.
TCP sold some 16000 bales at an average price of about US Cents 33.50/lb FOB Karachi. Obviously, the Trading Corporation of Pakistan would incur heavy losses on export of its procured cotton, which may run into millions of Dollars.
On one hand, this situation is not acceptable to the Government and donor agencies while all the three cotton players especially the ginners are dissatisfied with the working of TCP.
Now, the Government is reported to have decided to restore Cotton Hedge Trading from the new cotton season ostensibly to provide cover to all cotton players against the wide price fluctuations and let the cotton market operate freely on the basis of demand and supply.
Thus the Government will be saved from incurring trade as well as other losses. The present position is that in 2001-2002, Pakistan harvested a crop of 10.4 million bales (170 kg) ex-gin and it imported cotton equivalent to 1.15 million Pakistan bales from different countries mainly USA, Australia, CIS, Africa and Syria.
Our domestic cotton consumption in 2003-04 season is now estimated around 12.5 million bales.
The present and the post-2005 global textile situation is favouring the increase of spinning capacity in Pakistan which would proportionately increase our domestic cotton consumption.
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.
If Cotton Hedge Marketing system is restored in Pakistan, 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.
Now, the Government has established National Commodity Exchange for conducting forward trading of many commodities including gold and cotton.
The Karachi Cotton Association which was the mother of Futures Trading in cotton has already updated its by-laws to suit new conditions and is seeking permission from the Government of Pakistan and reportedly it has been promised but official announcement and written permission is still awaited.
The KCA has all the necessary infrastructure facilities - required expertise, representation of all the three cotton stakeholders, own building and a good reputation to operate and manage Hedge Market under its control.
The KCA has designated all cotton ginning factories and Karachi as delivery points against cotton tender while there would be no delivery point in the procedure for Hedge Trading under National Commodity Exchange.
If there is no delivery point and only settlement is made then the purpose of Hedge Trading will be defeated, as it would become purely a gambling den.
Presently, Pakistan in previous decades was producing cotton largely surplus to its domestic requirements and the disposal of surplus cotton in exports required a specific marketing system such as Hedge Trading but the present cotton situation has almost reversed as Pakistan is producing 10 percent less than its domestic consumption and we are meeting this cotton deficiency through imports of foreign cottons to the extent of 15 percent of our production.
Do we now require Hedge Trading in cotton or we can do without it? Some trade groups are very much interested in restoration of Hedge Trading, perhaps to exploit the market to their benefit.
The Government of Pakistan should convene a broad based meeting of all cotton stakeholders and cotton professionals and discuss all the pros and cons of the matter before making any decision in this regard.