Manipulation has once again struck the cotton market. Reportedly, after the Federal Committee on Agriculture (FCA) reduced the official production target for the ongoing marketing season from 12.5 million bales to 11.7 million bales (of 170 kg), a faction of Pakistan Kissan Ittehad has claimed that members of federal government are over-estimating cotton output to artificially suppress market prices of phutti.

Earlier, Gohar Ijaz, the interim federal minister for Commerce – who is also the Patron-in-Chief of APTMA, the main lobby group for spinning industry who are the primary buyers of ginned cotton in the country – had congratulated cotton farmers on achieving production of 12 million bales, the highest national cotton output in nine years. However, those messages of felicitation are no longer sitting well with farmer-cum-ginner representative organizations, who are concerned about the precipitous fall in local cotton prices.

Over the last six weeks, prices of new cotton crop have fallen by nearly 25 percent, from Rs 21,000 per maund to under Rs 16,000 this week. Earlier this week, this newspaper reported that there is a “crisis-like situation in the cotton market”, where trading volume has vanished as buyers cannot find willing takers even at lowest cotton prices of the last 22 months.

How did we get here? From a market in May 2023 with very low carryover inventory to lowest dollar-equivalent prices in the world by October 2023? Those who follow the market know the story well. Pakistan reported the lowest cotton output in six decades during the marketing year 2022-23, after monsoon floods destroyed most of the second cotton picking back in Aug – Sep 2022. Matters were made worse when a foreign exchange liquidity crisis caused a slowdown in fulfillment of import orders, as spinning industry delayed shipments as commercial banks were unwilling to make timely payments due to shortage of dollar liquidity. No surprises then that USDA estimated lowest cotton consumption in two decades for the country, as quantity imported also dropped to 4 million bales (of 170kg), from 5 million bales in previous years. Note that demand for cotton from the local spinning industry is estimated at close to 15 million bales, and the cotton supply (local production + imports) balance only clocked up to 9 million bales, creating serious pressures on carryover inventory of the mills.

But the milling industry was also aware that the 11th hour would soon come to an end. Repeated cycles of crop destruction by monsoon and pre-monsoon rains and basin flooding have convinced more and more farmers to shift cotton cultivation earlier, beginning sowing season as early as February 2023. Early sowing allowed the milling industry to somewhat offset the restrictions on imports as first picking now starts to trickle in as early as June. Early sowing also gave the industry a sneak peak into the future, lowering quantum of import orders placed with exporters based in USA and Brazil.

However, the tipping point came only last month. First, the fact that much of Indus basin lived through the monsoon 2023 without significant weather-related incidents calmed down the nervousness of investors, who were biting their tongues as Sutlej flooding reignited haunting memories of last year. And, then began the furtive fall of dollar against the Rupee, which send cotton prices on a downward spiral in the local market even as international market prices strengthened.

Lest we forget, cotton prices in the international market have remained substantially range bound for the last many months, trading in the narrow band of $1.8 - $.19 per kg since at least July 2023. Downward revisions of crop estimates in the top four producing regions have also not helped the sentiments in the international market. In fact, Pakistan is the only major producing country where prices have fallen in local currency terms during September and October 2023.

Whether cotton prices will take a turn for worse or not going forward solely depends on Pak Rupee’s much wanted stability against the dollar, at least in the short run. Going by the fact that the 30-day long streak of downward spiral finally broke last month, looks like those days might be over after all.