Cotton ‘crisis’: challenges, opportunities, and way forward–I

Stagnation in Pakistan’s rural economy has been ongoing over the last decade for a multitude of reasons. The lackluster performance of cotton has contributed significantly to this.

The cotton sector, which has long been a vital pillar of the country’s rural economy, has faced unprecedented challenges including but not limited to un-approved seeds, substandard pesticides, government apathy etc., leading to adverse effects on the livelihoods of millions of farmers and a larger number of the poorest of the poor women who are seasonally employed for cotton picking.

The cotton industry in Pakistan heavily relies on women cotton pickers working under harsh conditions with low wages, little bargaining power, and facing health hazards. The money earned during the cotton-picking season is steadily dwindling due to cotton crisis and adding to their dismay. This pushes them further into abject poverty, making their situation even more dire.

Apart from the human angle, cotton is more than just a fiber. It is an “and” crop, providing fiber, linters, and seeds without extra resources. Its byproducts are used in various industries, from cattle feed and oil production to paper and food products. Cotton and its associated products account for 10 percent of the country’s gross domestic product (GDP) and contribute 55 percent to its foreign exchange earnings (Abdul Rehman et al., 2019).

As the backbone of Pakistan’s agricultural landscape, cotton cultivation not only provides employment to a significant portion of the rural population (approximately 40%) but also contributes substantially to the country’s export revenue and overall economic development.

The crisis, characterized by flood damages, declining yields, pest infestations, and unstable global cotton prices, has put the country’s rural communities in a state of distress. The once-thriving cotton fields turned into fields of uncertainty, leaving farmers grappling with financial hardships and pushing them further into poverty.

Unlike the United States, where large corporate farmers dominate production, small farmers grow cotton in Pakistan. Small changes in cotton prices or productivity have significant implications for poverty rates in a region that is consistently facing economic doldrums.

A delicate balance exists between cotton productivity and prices, where higher productivity may not necessarily offset the effects of lower prices. A study conducted by researchers from the International Food Policy Research Institute in Benin indicates that reductions in farm-level prices lead to increases in rural poverty (Minot and Daniels, 2002).

The data from Pakistan Bureau of Statistics related to the income inequality in Pakistan shows that urban areas have a higher concentration of wealth in the wealthiest quintile (43.80%) compared to rural areas (15.84%).

As income quintiles rise, average household receipts increase, exacerbating the disparity. In another study data from 480 cotton-growing respondents in Punjab, Pakistan, were analysed and approximately 67 percent of farm households fell below the poverty line when agricultural income was taken into account. This trend is further fortified by the declining cotton productivity as lower incomes are a direct consequence of productivity.

The data shows fluctuations in cotton yield (kg/ha) over several fiscal years, indicating varying agricultural conditions and practices in the cotton industry. These changes impact farmers’ incomes and the overall economic stability of the region.

Due to cotton’s extensive forward and backward linkages, it holds a crucial role in the advancement of the rural sector in the country. The cotton crisis has disrupted this advancement, leading to a chain reaction of economic repercussions across the country.

Challenges

The implementation of an 18% Goods and Services Tax (GST) on Banola, a byproduct of cottonseed, has had a significant impact on the prices of Phutti (cottonseed). As per the price calculations, the reduction in Banola prices from Rs 4,000 per mound to Rs 2,200 per mound resulted in a corresponding drop in Phutti prices from Rs 8,500 per mound to approximately Rs 7,300 per mound. This placed immense financial strain on cotton farmers.

The impact of low cotton rates extends beyond the farmers, rippling through the entire economy.

With a large percentage of the rural population relying on cotton farming for their livelihoods, the crisis has led to a rise in unemployment and a decline in household incomes. As cotton prices fall, farmers struggle to cover their production costs, leading to increased debts and economic hardships.

Additionally, the reduced income of cotton farmers affects the purchasing power of the rural communities, dampening consumption and further stalling economic activities in the region. The once-thriving rural markets are now subdued, as the financial burden takes a toll on businesses that rely on the prosperous cotton sector.

Beyond the implementation of the GST on Banola, several other factors are contributing to the decline in Phutti prices. The closure of textile mills due to the removal of competitive energy tariffs has resulted in reduced demand for cotton, leading to oversupply in the market and subsequent price decreases.

High interest rates have made it financially burdensome for businesses to hold cotton for future consumption, reducing demand and putting downward pressure on Phutti prices. Delayed refunds to the textile industry have also created cash flow constraints for businesses, leading to reduced demand and further affecting Phutti prices.

The high cost associated with maintaining a stock of cotton necessitates a substantial working capital. This means that a significant portion of a business’s funds must be allocated to holding the cotton inventory.

As a result, engaging in large-scale buying is not practical or desirable, which puts downward pressure on the farmers supplying the cotton. The need to allocate a considerable percentage of working capital to inventory limits the buying capacity of cotton buyers, leading to reduced demand and potentially lower prices offered to farmers, impacting their income and economic well-being.

Opportunities

Punjab has embarked on an ambitious plan to revive its cotton industry to lessen the country’s heavy reliance on cotton imports and achieve self-sufficiency in this vital sector. The project aims to reverse the declining cotton production trend by promoting local cultivation and reducing costly imports. This revival can have significant positive effects on the economy, creating jobs, stimulating economic growth, and benefiting supporting industries like textile manufacturing.

(To be continued on Sunday)

Copyright Business Recorder, 2023