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A ‘non-event’ event has taken place this fiscal, yet no one has batted an eye. Pakistan, which for the last decade has restricted cotton import during July-December to protect domestic producers, has ‘forgotten’ to re-impose tariffs this year. So far, no farming lobby or cotton ginners association has registered serious protest.

There are two theories. The first suggests that Pakistan was slated to import over 5 million bales in FY20, one-third of which could not materialize due to disruption of global supply chain in the aftermath of Covid-19 and ensuing worldwide lockdown. By July, monthly imports had declined by 72 percent from their peak levels in February 2020.

Thus, the “delay” in reimposition of tariffs is to facilitate the consignments whose shipment had been postponed or cancelled back in March-April. After all, given lowest domestic production in 30 years – even going by the official estimates – Pakistan had faced a shortfall of at least 6 million bales last year, which had to be resupplied sooner or later once manufacturing resumed in the domestic textile value chain.

But it appears the delay has already turned into a permanent deferment this season. Historically, two-third of cotton crop is harvested by mid-October, leaving little sense in reimposition of duties now. Which raises an important question: why are farmers and ginners not up in arms?

Answering this question brings us to the second theory: a cotton shortfall so severe that Pakistan’s cotton imports may exceed domestic production this season! That claim comes as much of a shock to BR Research as it would to readers, but it appears has not been made in thin air.

Imports made in FY21 thus far do not indicate such trends. Yes, Jul-Sep imports are highest ever, but that’s only because tariff barriers restricted imports in same period during past seasons. But compared to 1.7 million bales imported in the quarter preceding Covid (Jan-March 2020), the 0.75 million bales imported in Q1FY21 is only a trickle.

So, what has led market pundits to make such dreary forecasts? Looking at Pakistan Cotton Ginners’ Association’s arrival data may help answer the mystery. As of October 15, domestic cotton arrivals in the ginning factories across the country had clocked in at just 2.5 million bales, down 44 percent from a year which already had the lowest base in three decades!

Even if monsoon rains or climate change has delayed harvest season by over a month in just one season (unlikely) and this is only one-third of total crop (an assumption that is conspicuous by its absence in any news reports), total crop would still clock in at no more than 7.5 million bales.

That this would mean that the official production target will be missed by at least 30 percent is no longer a shock. In recent years, both public and private sector players have trained themselves in cotton output missing its target by similar margins. But it may help to remember that at 10.9 million bales, the target was lowest since 1990s.

And lest readers forget, the 7.5 million bales estimate is now the best-case scenario, never mind what the Central Cotton Committee has to say. That means supply to domestic spinning industry will be short by an equal quantum unless Pakistan keeps the floodgates to imports open.

Which brings us back to the original question, why are growers and ginners not complaining, in a season where destruction of ready-to-harvest crop due to untimely monsoon rains has made headlines? To find the answer, look at price data as reported by Karachi Cotton Association.

Between Jul-Sep, the per unit price of imported cotton averaged at $1.59 per kg. In local price parity terms, that translates into Rs 10,500 per 40kg. Meanwhile, domestic cotton spot rate is already over Rs 10,700, with December waada closing in over Rs 11,000 per maund.

Based on news from the farms, it has perhaps already dawned upon the ginners that the spinning segment can only import so much cotton by December-January by which time the ginning operations shall start to wind down. The supply shortfall thus is so severe that prices of domestic cotton will remain lucrative for remainder of the ginning season, even if spinners have a carte blanche on imports.

Back in FY18 when Pakistan imported 3.6 million bales, cotton import bill clocked in at $1billion. If textile exports plan to keep up, Pakistan may have to dole out an additional billion dollars to import the incremental difference. Of course, that is lost opportunity, but that lament is for another day. For now, spinners must hope and pray that international cotton prices remain rangebound below $1.65 per kg if they are to stay competitive in an increasingly price driven textile market.