As a global price spiral tightens its noose around most agricultural commodities – food and cash – cotton has failed to remain an exception. Since the April 2020 Covid bottom, white gold prices in the international market have shot up by more than 1.57 times. But unlike coal or wheat, world cotton prices are nowhere near their highest-ever. Cotton prices have risen at a slower pace than grain or energy, as the fiber crop has largely been spared from the fallout of the Russia-Ukraine war. Is the local textile value chain going to sail through the upcoming inflationary cycle safely or is there more to come?

According to latest data from PBS, Pakistan’s fibre crops (seed cotton) prices have shot up by 1.75 times over the past two years (since June 2020). Naturally, local prices have risen at a faster pace than international prices due to currency depreciation of ~20percent in the intervening period.However, unlike the 2010-11 commodities boom, international cotton prices have grown at a much slower pace, mainly due to higher carryover stocks. Does that mean local textile processors will be spared the pain?

Not so fast. Local cotton availability during FY22 is only marginally higher than FY21 – the year of worst local cotton production in four decades. Output + imports rose by only 6 percent, as cotton imports slowdown by a remarkable 15 percent against expectations during 10MFY22.

Although local cotton shortfall was projected at 5 million bales after the country achieved production of 8.3 million bales (of 170kg) during the outgoing fiscal, Pakistan imported a little under 3.6 million bales during 10MFY22. It is unclear whether the slowdown in imports compared to last year is indicative of slowdown in demand – either from local and international buyers or both – or driven by margin attrition leading to lower volumetric output.

What is clear – however – is that export volume of made-up textiles certainly picked up across various segments during the outgoing fiscal, with significant rise in quantity exported in readymade garments, and home textiles segments.

Meanwhile, although intervention price for seed cotton has been fixed at Rs6,000 per 40kg, early reports from farm do not inspire confidence. According to provincial crop reporting services, cotton sowing to-date during for kharif 2022-23 has only increased by 10.3 percent. The double-digit rise masks the fact that the rise has come on the base of lowest area under cultivation since at least the 1971 war.

Late sowing of the crop will also be completed by mid to late June, offering little hopes of marked improvement over the next fortnight. At 2 million hectares, cropped area may be second-lowest in half century. Meanwhile, water shortages in the canal along with inclement weather beginning July could potentially lower yield expectations.

Ergo, early signs suggest that cotton crop target of 11 million bales for FY23 may be missed by as much as 1.5 to 2 million bales. If international prices of cotton rise – or currency slides any further – demand for expensive imported cotton may witness further compression, lowering overall availability of raw material for domestic processors

What happens then? It is hard to say. Although demand from international buyers may see an eventual slowdown in case developed economies induce a recession to reign in rising inflation, local demand may turn out to be more volatile. Prices of made-up textiles have hardly kept up with the rise in raw material (cotton) prices over the past two years, with a near breakdown of previously anticipated lagged impact. However, now that local energy prices have also shot up, producers may have little choice but to escalate prices for local consumers sooner or later.

Is it time consumers geared up for lattha inflation?