Losing on the cotton rally

Six months back cotton prices had surged above Rs13,000 per maund. Many buyers had locked in trades at that level, fearing further increases in this rate on the back of heightened speculative activity in cotton markets. However, these eager buyers were left in the lurch when rates plummeted, falling as low as Rs5,000 per maund by the end of July. As white gold lost its luster, local growers demands for government to step in with supportive buying gathered strength, as did opposition to a proposed withholding tax on the commodity. Over the past fortnight, local analysts and brokers had repeatedly expressed confidence that the countrys cotton output target of 14.5 million bales would be met, even if rains lashed out in Sindh. Cotton broker Shakeel Khilji had argued that the country has excess reserves from the previous season as well, and these would help cover any losses faced in Sindh due to rain. The analyst had also opined that light rains would actually aid the harvest, reducing chances of infestation in the crop. However, the torrential downpours that have hit Sindh over the last ten days have doused this enthusiasm along with hundreds of acres of standing cotton crop. Talking to BR Research, former chairman Karachi Cotton Exchange Naseem Usman said, "the current rains and the resulting flooding have damaged at least 2 million bales of cotton". He also revealed that local mills have already placed orders with Indian suppliers and that some 50,000 bales would arrive from across the border within the next two weeks. His assertion appears conservative compared to a recent statement from the Farmers Association of Pakistan, which contended that the governments cotton output target may have to be revised downwards by 2.25 million bales. Local buyers are warily experiencing a sense of déjà vu, as local prices head north once again. International rates have also climbed by 5.6 per cent during the past six sessions of trade in New York to reach $1.112 per pound after a report of the US Department of Agriculture showed "world stockpiles will be smaller than previously forecasted," reported Bloomberg on Tuesday. International demand for cotton is expected to remain strong, mainly due to hefty buying from China and India while supply from the United States will also likely be muffled due to rains there. While cotton prices may not exhibit the same level of volatility as they did back at the beginning of 2011, it appears certain that another rollercoaster ride awaits buyers and sellers. Similarly, while the extent of losses to the crop in Sindh can only be ascertained once the water recedes; it is very likely that significant losses have to be contended with. Given the countrys reduced output and rising international prices, the country will unfortunately have to contend with higher-than-expected imports of the fiber at a time when its rates are set to surge once again.