Reacting on lower cotton arrivals by 17.33 percent at 4.173 million local weight bales on 15th October, 2010 against 5.048 million bales same period last year, renewed cotton buying interests and strictly following NY cotton Futures step by step, lint prices in local market reached all time-high of Rs 8,000 per 37.324 Kg ex-gin against rate of Rs 3,700-3,750 same period last year.
It means, this season's ruling lint prices have increased by 115 percent and seed-cotton prices by 95 percent over last year prices. As up to 1st October, 2010, seed-cotton arrivals were short of 15 percent over last season's arrivals of same period. This season, cotton crop appears late by 2 to 3 weeks from last season and it has contributed to short cotton arrivals.
Field reports from Punjab indicate wide spread opening of cotton bolls over most of the cotton areas which indicate towards increase of arrivals in second fortnight of this month and first fortnight of next month.
Still field reports indicate towards crop size of 11.5-12.0 million bales. In view of almost straight rise in cotton prices, growers / suppliers are holding up seed-cotton deliveries in hope of even better prices. This season, growers are getting much better prices over last season's prices of their cotton proceeds while their production cost has not increased proportionately. Thus, cotton growers are benefited more than any other stakeholder. As such, this season flow of money will be diverted from ginners, spinners and exporters to growers/farmers.
Although, cotton prices are almost double of last season, yet cotton purchase by mills + exports have been better than last season. Spinning mills purchased 76.85 of cotton arrivals against 70.20 percent last season. By the second fortnight of October month, our total cotton export commitments are estimated around 200,000-225,000 bales while last season it was around 800,000 bales. There may be no surprise if this season, our cotton exports also close near last year's level of 800,000 bales. This season, as cotton prices are double of last season, the ginners and spinners could buy half of the last year's amount of cotton in the same credit facilities.
In other words, double amount of funds are required to handle cotton crop this season which may not be possible so liquidity crunch would be there adversely affecting rise in cotton prices when the credit limits exhaust. The State Bank of Pakistan has already increased its discount rates from 12.5 to 13.0 percent. The government is proposing imposition of one percent tax on all textile exports. The proposal of levying Reformed Sales Tax at 15 percent on majority of commodities is on anvil and may be imposed in the near future. All these factors along with increasing utility and power bills would adversely affect our ailing economy.
The all time high price of raw cotton is another factor badly affecting cotton consumption. Taking into account the above mentioned adverse factors, this season's total domestic cotton consumption is estimated around 14.0 million bales.
On international front, cotton prices have reached all time high. Active December contract of NY cotton futures has touched life-time high of US Cents 119.80/lb last week and so lint prices in other countries.
India has major share in cotton price hike, being world's second largest exporter of raw cotton after USA. On the explicit pressure of India's domestic cotton users, Indian cotton was obliged to make frequent changes in its cotton export policy last season as well as this season which created market uncertainties leading to distortion of market prices. The fortnightly Report (16-10-2010) of South India Cotton Association, Coimbatore (Tamil Nadu-India) gives latest scenario of cotton confusion in India which is reproduced here "while monsoon activity has just come to a pause for the present, there are indications of more rains following up, government has released 55 lakh (5.5 million) bales (170-Kgs each), and the Ministry proclaims from all platforms, that exports will be permitted only after the domestic mills requirements of 260 lakh (2.60 million) bales are met. What is happening is just the reverse. 55 lakh (5.5 million) bales announced for export has been grabbed in sheer haste by MNCs (Multinational companies) and a few Indian Exporters for shipments within 45 days. These bales will, therefore, find way to other competing countries even as the crop starts moving in the market, between 1st November and 31st December 2010.
Domestic mills have been left waiting for these exporters to procure cotton against these commitments, Mills can start buying needs only after these bales move out and not before. The price levels are going to be high for the industry. Why such complicated logic is needed. The price push is going to keep yarn prices also high". Cotton economists and analysts indicate that speculative buying is rampant which must be nipped in the bud. Indian mills are on wait and watch situation to the price fluctuations.
Since international cotton supply position is tight so there may be little chance of any drastic fall in cotton prices in India. Next alternative to the spinning mills is to increase the use of fibres other than cotton specially the MMF by increasing mix ratio or through straight use of mmf. Cotton economists also say that the market driven price mechanism with the support of envisaged international cotton supply crunch, shortage of supply in Pakistan, delay in arrivals of crops in India and China, export restrictions in some cotton exporting countries and drying up of domestic cotton stocks / reserves in cotton consuming countries are the main factors for creating this cotton chaos. By last week, the Indian Textile Commissioner's Office is reported to have approved some 3.9 million bales export sale contracts against 5.5 million bales applied for registration.
The Cotton Association of India has recently estimated 2010-11 season's cotton production at 34.5 million 170-Kg bales against 32.5 million bales by India's Cotton Advisory Board while total cotton consumption of the season has been estimated between 26.0 and 26.6 million bales. The general consensus in India is in favour of a larger crop up to 35.0 million bales this season.
India's spinning mills, weaving / knitting sectors, garment manufacturers and a section of cotton exporters are pressurising Federal Government of India to postpone the shipment of raw cotton till January, 2011, allowing domestic cotton industries to cover major part of their cotton consumption requirements first then to cotton exporters. In this regard, Shishir Jaipuria, Chairman of the Confederation of Indian Textile Industries (CITI) is reported to have sent an SOS message to the Prime Minister of India. One Indian exporter said that shipments of cotton sold below US Cents 100 level might be jeopardised in view of abnormal price difference between contracted prices and prevailing export prices.
He further said that there might lot of defaults in shipments as neither the exporters had so much finance to procure cotton nor the country had enough logistic infrastructure for effecting shipments of 5.5 million bales within in 60 days period. Liquidity crunch is there in India and possible squeeze in money market in coming weeks / fortnights may further aggravate liquidity crunch resulting fall in cotton prices. Pakistani buyers are understood to have booked Indian cotton equal to eight hundred thousand to one million 170-Kg bales of cotton for import into Pakistan but the shipments either may be delayed or defaulted in part or whole.
The All Pakistan Textile Mills Association is understood to have shown concern about the shipment and is taking necessary steps to fight their case through Government of Pakistan. There are fears of drastic fall in cotton prices in India after this December month when their cotton arrivals would reach peak level and disposal would be slow in view of liquidity and logistic matters.
Bangladeshi spinners / buyers also very much worried on delay of Indian cotton shipments and as a stop-gap arrangement they have booked some more than 100,000 bales from Pakistan and are getting shipments to feed their mills. Bangladeshi spinners are demanding of India to allocate a special quota of raw cotton for them so as they get regular supply of raw cotton every year.
There is general perception in cotton trade that after next December or January months, cotton prices may be eased down on peak movement of physical cotton into domestic markets, liquidity crunch, logistic difficulties and other factors.