Cotton chaos in the making?

Cotton products, which were once considered one of the affordable items for the common men in one of the largest textile producing country, are now going beyond purchasing power.
Cotton prices, currently changing hands at Rs9800-10,600 per maund, are close to the peak of Rs11,000 per maund touched last year. The flurry in the local cotton market has undoubtedly been attributed to the rising fibre prices in the international market.
The Cotlook A Index - which is the average of the cheapest five offering prices on the international raw cotton market - reached around 181 cents per pound last week and has gained around 84 percent in 1HFY11 to average 168 cent per pound in December.
Cotton has been gaining momentum on the signs that world fibre output will fail to keep pace with strong appetite. As per the International Cotton Advisory Committee, "relatively low world stocks of cotton, limited supply, robust demand and a very low level of uncommitted cotton caused the surge in prices in 2010/11".
With global cotton output of 115 million bales expected in 2010-11, nearly 43 million bales of beginning stock, which is lowest since 1996-97, and consumption of around 116.5 million bales will exert negative pressure on supplies.
Since global ending stock is expected to fall by 2 percent to 42 million bales in 2010-11, the stock-to-use ratio is projected to remain at 37 percent compared to an average 49 percent during the past five years.
The high price means good news for cotton farmers. Textile export from Pakistan surged by a whopping 25 percent to $6.2 billion in 1HFY11, where in quantity terms, exports of raw cotton, cotton yarn and tent and canvas declined, while sale of cotton cloth, readymade garments, towels and knitwear witnessed growth.
With a steep increase in cotton prices during 1HFY11, inventory gains helped the manufacturers protect their margins. But, as cotton prices have already surged too much, textile industrys profitability in the latter half of the fiscal year depends on their capacity to pass on the cost to buyers.
However, panic has been observed in the local cotton market following the recent imposition of a 3.5 percent withholding tax on agriculture produce. Farmers are reluctant to sell as middlemen are passing the tax burden to growers, while, according to market sources, ginners having substantial inventory are planning to continue strike till first week of February. Knowing the history of cotton row seen last year, the earlier the authorities step in, the better.

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