ANALYSIS: TCP sale tender aggravates weak cotton prices

Now, all the estimations about size of our cotton crop (2005-2006) have now finally converged around 12.4 / 12.5 million local bales ex-gin while on the basis of ex-farm our production is placed at 13.0 million bales.
Still there are reports of stocks of seed-cotton running into thousands of maunds dumped in warehouses in Punjab. Almost every year, some stocks of seed-cotton are carried over to new season.
This season, cotton growers were enough lucky to get better price up to Rs 1,250 - 1,300 per 40-Kg ex-gin, well above Government's Minimum Support Price of Rs 950 per maund. Like cotton growers, sugarcane growers also got handsome price even up to double than the government price.
In view of better return, area under cotton was expected to increase up to 10 percent but due to even better return to sugarcane growers, area under cotton may stagnate at 3.25 million hectares and area under sugar may register increase. The government has many plans on paper for enhancing cotton productivity but ground realities are different.
India succeeded in repeating its last years ever record high crop of 24.25 million 170-Kg bales and has ambitious to improve it to 25.0 million local weight bales in 2006-2007 season while this season Pakistan is harvesting a crop of 12.4 - 12.5 million local weight bales against 14.6 million bales produced last year and its production estimates for 2006-2007 season's crop are 12.8 million 170-Kg bales.
India has been increasing its cotton productivity through adoption of new technologies in the fields of agronomy, morphology, seed-breeding, irrigation and plant protection for the last many seasons.
Now, India is producing some 3.0 million local weight bales surplus to its requirements every season and is planning to increase it to 5.0 million bales to capture export market. Presently, Pakistan's shortfall in cotton production against its total cotton requirements is around 3.0 million local bales and this may increase to 5.0 million bales by 2010 if our seasonal cotton production remains stagnated around 13.0 million bales.
Pakistan has to break the mafia circles and take bold measures in all fields of cotton production to sustain its role in textile exports. It appears quite unconvincing that Pakistan's textile industry can compete with other textile giants like China, India and Turkey in textile exports relying on imports of raw cotton to 20- 25 percent of its cotton requirements.
As on 1st March, 2006, stocks of unsold cotton with the ginners were reported at 17,40,000 bales while same time last year it was 9,50,000 bales (45 percent short). Trading Corporation of Pakistan (TCP) had procured some 1.6 million bales in 2004-2005 season and is still carrying some unsold stocks of 300,000 bales.
Recently, TCP has floated a tender for sale of 50,000 bales of cotton in the local market. Local exporters as well as local spinners can participate in the tender. This tender will be opened on 16th of March 2006. Lint cotton prices in the local market touched the highest level of Rs 2,600 per 37.324 Kg ex-gin and the prices remained steady to firm between Rs 2,400 and 2,600 in last two months but the ginners adopted the policy of slow selling in hope of getting even better rates on reports of short crop.
The local spinners preferred to book foreign cotton than buying local stocks beyond the level of Rs 2,600. The ginners have to bear carrying charges which are around Rs 30 - 40 per maund per month. Weak yarn prices in local and export markets, tight liquidity position, slow off-take of yarn, somewhat weak cotton prices on New York Market have tended local prices come under pressure.
The TCP tender for sale of 50,000 bales aggravated the weakness in cotton prices. Now, the local spinners are looking towards TCP tender rates and are evincing sufficient interest.
The pressure of TCP cotton sale tenders would adversely be affecting local lint cotton prices for next 2-3 months till the clearance of TCP stocks. Reportedly, the TCP is paying premium at the rate of Rs 50 per maund for so-called contamination-free cotton to growers through specified ginneries at the end of the season 2005-2006. The TCP is opening another Pandora box of corruption by taking up the matter of ginner appeals against lint cotton evaluation of Grade Four purchased in 2004-2005 season.
In the past two seasons when TCP made cotton procurements, evaluation of cotton lots was final in TCP sample Room at Karachi and there was no system of appeals. In the cotton purchase contract, there is no provision of any appeal against TCP evaluation duly accepted by the representative of the PCGA / ginners.
In 2004-2005 season, the ginners already got Rs 200 - 300 per maund higher than prevailing market price on cotton sales to TCP so there is no justification for any appeals. Some 60,000 bales mostly from Sindh are reportedly involved in so called appeals.
The difference between Grade 4 and Grade 3 is around Rs 30,000 per lot of 100 bales. Most of the cotton under so called appeals has already been sold out and delivered. The samples on which appeals would be decided do not appear genuine and thus cannot be relied upon. There appears no justifications for hearing these out-dated appeals with no provision in the contract.
Cotton prices on New York Cotton Exchange also showed weakness in the last weak amid selling. May, 06 contract closed at 55.11 and July at 56.32. New York Futures fluctuate between 54 and 57. China is slowly and gradually covering its cotton import requirements from world market particularly USA. Total US export commitments are now close to 12.5 million bales with some 5.5 million bales remaining unshipped. Cotton outlook's world estimates for 2006-2007 season have been released.
Accordingly, total acreage is placed at 35,516,000 hectares against 34,260,000 in 2005-2006 season. Global cotton production this season is 113.08 million bales while in 2006-2007 it is estimated at 116.12 million bales. Cotton consumption is in this season is 115.14 million bales against 119.17 million bales estimated for 2006-2007 season.
In the next season (2006-2007) China will increase its consumption by 7.1 percent, India by 5.2 percent, Vietnam by 9.1 percent, South Korea by 11.6 percent and Pakistan by 2.6 percent In USA, EU-25 and Nafta countries, cotton consumption would decrease by 2.4 percent, 6.6 percent next season and 5.0 percent respectively.
Economic performance in Asian countries particularly in China, Japan, India, South Korea, Pakistan, Indonesia and Vietnam is reported to be very encouraging which would have positive effect on cotton market next season.
TOP FIVE IN COTTON:

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              Area (Mln Hectares)          Yield (Kgs /Hectare)

            2005-2006     2006-2007     2005-2006     2006-2007

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India         8.90          9.10    Australia    1,892    1,833

USA           5.64          5.84    Israel       1,627    1,639

China         5.00          5.70    Syria        1,471    1,488

Pakistan      3.25          3.25    Turkey       1,333    1,284

Uzbekistan    1.43          1.43    Spain        1,222    1,071

                                    Pakistan       638      669

                                    India          463      467

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     Production (Mln 480-lb Bls)   Consumption (Mln 480-lb Bls)

China         26.20     28.93     China        45.00      48.21

USA           23.60     21.95     India        16.63      17.49

India         18.93     19.50     Pakistan     11.86      12.17

Pakistan       9.53     10.00     Turkey        6.77       6.77

Uzbekistan     5.51      5.28     USA           5.80       5.50

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