Weak market fundamentals may keep cotton prices contained in near future

Latest field reports from Punjab province are strengthening the estimate of a bumper cotton crop between 13.5 and 14.0 million local weight bales in 2011-12 season. Cotton trade expect seed- cotton arrivals equivalent to 1.0 to 1.2 million bales in the second fortnight of December month, making national arrivals around 12.0 to 12.2 million bales versus 10.24 and 11.93 million bales arrived same time last year and a year ago, respectively.
Cotton crop in Punjab province being reported very nice may yield around 11.0 million bales, while Sindh province may yield over 2.5 million cotton bales, making national total around 13.5 million bales, while last Year's crop was 11.6 million bales. By December-11 end, about 90 percent of the total seed-cotton arrivals have already reached ginning factories leaving behind only 10 percent crop. Local Spinning Mills have been slow in cotton buying because of their financial difficulties and slack demand of their products such as yarn and cloth in domestic and export markets. Unsold cotton stocks are expected to remain around 1.8 million local weight bales down from last level of over 2.0 million bales. In the second fortnight of December-11 month, local spinners geared up their cotton purchases on fears of escalation of lint cotton prices on the possibility of governmental intervention through cotton procurement by Trading Corporation of Pakistan (TCP) and on fears of increasing scarcity of quality cotton lots. In view of adverse operational conditions in trade and industries, Pakistan's total domestic cotton consumption may be curtailed down to 13,0-13.5 million local weight bales in 2011-12 season. Our cotton exports may be around 600,000 bales (Cotton export Registration is at 386,797 bales up to 7th December-11) and imports around one million bales (In August-November-11 period of four months total cotton imports is at 40,639 m/tons = 59,763 bales per month and annualised imports at 717,156 bales of 170-Kg each).
The trade and industry situation in balance seven months of 2011-12 cotton season, does not look better and friendly so the performance of textile sector may be lower than last season. In 2011-12, out export targets is $28 billions (inclusive of 15 billions of textile and clothing sector) against $25.0 billions (inclusive 14 billions of textile and clothing) achieved in 2010-11. We fear our export target of $28 billions in 2011-12 season may not be achieved. Trade circles fear our actual export in 2011-12 season may be around $23 billion - down 17.86 percent from the target and 8 percent down from last year's total export figures (inclusive of $13 billions -down 7.7 percent from last season). Our economy is under great pressure because of declining exports, rising imports -increasing negative balance of payment and trade, increasing contraction in economy, increasing foreign loans, decreasing foreign exchange reserves, reducing per capita income, increasing poverty level, increasing inflation, increasing pressure on foreign exchange reserves, decreasing economic activities and increasing unemployment ratio.
Cotton prices in local market maintained steady tone mostly because of news on governmental intervention in cotton market for procurement of lint cotton through Trading Corporation of Pakistan at Minimum Support Price (MSP). The government is holding series of meetings for fixing of Minimum Support Price, which may be fixed around Rs 6,000 for average grade cotton and next such meeting is fixed on 3rd. January 2012. If we analyse the government's Cotton Procurement Scheme on the ground of helping cotton growers, we find many factors against and in favour of this scheme.
The negative points are:
1) All Pakistan Textile Mills' Association (APTMA) and Karachi Cotton Association (KCA) have strong reservations against this scheme.
2) Prices of seed-cotton and lint cotton have already appreciated reasonably (Lint cotton at Rs 5,500 per maund from Rs 5,000 level) ahead of implementation of Government Procurement Scheme.
3) About 90 percent of season's total seed-cottons have already reached ginneries by 1st. January 2012.
4) Unsold lint cotton stocks may be left less than 2.0 million bales.
5) The scheme has already been delayed as only 10 percent of cotton supplies may be benefited, while 80-90 percent benefit of this scheme would go to ginners.
6) As the quality problem is very wide in Sindh, there may be greater chances of corruption.
7) The infra-structure facilities for conducting cotton procurement by governmental agency are almost non-existent and it would take more than a month period for raising some sort of procurement system.
8) There is already acute shortage of funds and procurement of one million cotton bales would require huge funds of Pak Rs 30 billions equivalent to $333 millions.
Instead of this, the government may offer subsidy in fertiliser, exemption in water and land revenues and supply seed free of cost to growers, as direct assistance to growers would immensely benefit. The government should take cognisance of all factors before reaching any final decision. However, there are some plus points also, which are viz: the cotton growers specially of Sindh have heavily lost due to rains and floods in consecutive two seasons and should be rescued financially; the government may be benefited politically by providing relief to growers in view of coming general elections and this scheme will with hold the impression of this government being people friendly. My personal perception is that this scheme may not be implemented by the government. But the government would try to linger on this tempo of steady cotton market and maintain the status quo position for posing fear of governmental intervention in cotton market to the spinning mills and exporters and hope of providing relief to the growers and ginners for some time providing bail-out chance to the ginners.
New York cotton market which was under Christmas and New Year Holiday mood, did not show mentionable activities in the last two weeks except that it operated in a narrow range and improved by about 5 cent-points to 91 level from season's low. US budget deficits and EU-27 debt crisis situations have not improved. The local currencies of Pakistan, India and Bangladesh, prominent in cotton and textile export trade, are losing their values substantially, which is making their exports more competitive and viable but make their imports more expensive, increase their debt-burden and increase inflation, as these countries import much more than their exports. Currencies of world's top exporting giant like China (Exports $1,506 billions), Germany ($1,337 billions) and Japan ($765.2 billions) whose annual cumulatively exports are over 24 percent of the world in 2010, are getting stronger, which is making their exports more costly and uncompetitive in the world. Thus, the financial crisis in US and Europe, currency value depreciation in prominent cotton and textile exporting countries and currency value appreciation in world top exporting countries jointly depressing economic and business conditions in the world. Thus, the international economic factors appear depressed and domestic factors in Pakistan are already not conducive to favourable economic growth so there appear bleak chances of any increase in cotton prices in local and export markets at least till the end of the first quarter of new year.
(The writer wishes all the readers a happy and prosperous New Year)