The recent surge in domestic cotton prices has become quite alarming, considering that its biggest consumer, textile industry, is nearly shambling on the rocks. After bottoming out in third quarter FY09, cotton prices started galloping northwards - rising 7 percent over the quarter to average Rs 3,634 per maund by the end of June.
This increase has threatened the gross margins of textile makers, as 35 to 40 percent of their cost of production comprises of cloth and yarn. The price hike primarily stems from short of target arrival of the commodity in domestic market amid recent rebounds in international cotton prices.
Cotton arrival for FY09 clocked at 11.349 million bales as against 11.535 million bales in the corresponding period last year. Data from cotton yielding provinces reveals that despite a 19 percent yield increase in Sindh, prices remained upward as delay in cotton arrival from Punjab together with lower provincial output (down 5.5%) dampened supply and forced millers to import cotton aggressively.
The trend observed between local and international cotton prices shows that country''s cotton production and arrival estimate generates a variation between the two. In 2005 and 2006, when cotton output was at a historical peak of 14.3 million bales and 13 million bales respectively; domestic prices traded on average discount of 20 percent to international global prices. But with gradual decline in production numbers, this discount squeezed to 7 percent by May 2009.
It is pertinent to note here that higher discount between global and local cotton prices is favourable for textile industry as it helps them to maintain their competitiveness in international market and enjoy higher profit margins at the same time, thereby contributing to the national exchequer.
But despite the urgency to arrest cotton price hike in order to remove pressure from textile businesses, it is unfortunate that it does not seem possible in the foreseeable future, given the quantum of problems. Cotton accounts for 7.3 percent of the value added in agriculture sector and contribute about 1.6 percent to Pakistan''s GDP. Similar to FY08, in FY09 initial cotton production target of 14.1 million bales, which was lowered to 12.5 million bales, was rendered unachievable as only 11.34 million bales arrived for the season.
This problem has continued during the last couple of months mainly due to shortage of irrigation water, lesser use of DAP fertiliser to cotton crop, attack of cotton leaf curl virus, mealy bug and white fly. In addition, higher support prices on wheat and sugarcane in the last season also discouraged the last picking of cotton.
Furthermore, it is evident that cotton and sugar cane cultivation have had a negative correlation, owing to a mix of government support and inherent risk factors involved in both crops. Sugarcane is a biggest competitor of cotton; however rice and maize are specific to certain areas.
And although sugarcane consumes more water than cotton and is a year long crop; cotton, which is sensitive to harsh weather conditions, suffers from water availability. This is because cotton irrigation, which is mostly done through tube wells, has been frustrated due to frequent load shedding and increasing prices of diesel.
In this context, it is essential to ponder over the means and ways to improve cotton production in the country. Given that cotton is the lifeline of our economy, there is a need to review cotton support prices coupled with effective pricing and provisioning of necessary resources to land owners and farmers.
Also there is a need to focus on genetically modified and hybrid crops to tap the true potential of agricultural productivity in the country in shortest possible time. The only option here is to increase per acre yield by applying modern cotton technologies that have successfully been adopted in many developed and developing countries.