Last week, scary projections of trade deficit during the ongoing financial year saw exchange rate close in on it’s all-time low, with punters predicting early breach of Rs 170 psychological barrier. While some solely blame bulls gone wild in the global commodity market, that may not be the case for cotton.
It was only over the weekend that Cotton Crop Assessment Committee finally revised its target cotton production down by one-fifth to 8.46 million bales (of 170kg). Back in July, BR Research had forecast that sowing target for the season may be missed by as much as 18 percent, which made the achievement of 10.5 million bales target almost impossible. This is the lowest area in four decades, and would require average yield of 925 kg per ha, against national highest 815kg per ha, that too achieved a decade ago.
Which makes it look even more optimistic that the CCCAC is still hung up on its initial targeted yield of 769kg per ha. Although news from the farm suggests that the crop has done remarkably better compared to last year thanks to friendly weather, 769kg per ha is a far cry versus last year’s 541kg national average yield! Afterall, growers would consider productivity gains by even 25 percent (over last season) substantial improvement, and the final tally may fall somewhere between 650kg – 675kg per ha.
Of course, when it comes to cotton, both the federal ministry and the minister tend to give in to nostalgia, as higher yields over 750kg per ha (last witnessed in FY18) do not seem such a distant memory to them. However, there is only so much weather can do to salvage yield in absence of quality seeds. Average germination rate is reported to have fallen to as low as 60 percent in recent years, making significant gains in productivity unlikely.
In fact, USDA FAS estimates yield to close in at 545kg per ha, which means the country may be looking at seasonal output of no more than 6.5 million bales (of 170 kg). However, USDA and GoP estimates have begun to drift further apart in recent years, and it is pertinent to note that USDA’s current year forecast is 22 percent higher than its estimate for the previous year. Market intelligence attributes the variance to a combination of under reporting by ginners and GoP’s romance for cotton’s glorious past, but that lament has received sufficient attention in this space (and not nearly enough by the government). The net result, however, is that estimates by everyone lose credibility, and add to uncertainty in the market.
How? Consider that as per PBS, Pakistan imported 5.05 million bales (of 170kg) cotton during FY21, yet market players have little clarity whether the volume shall clock in lower now that domestic output is set to rise, or higher considering MoC and APTMA hope to take textile group exports over $20 billion during FY22. Whether incremental exports of $5 billion by textile group can solely be fueled by higher unit prices remains unlikely. Which means that additional raw material would be required, and that additional bales of 1 – 1.5 million bales supplied by local growers may prove insufficient. How much more cotton may be required – and whether local spinners will see commercial sense in buying more imported cotton at ever higher prices – thus remains an unknown.
So now may be a good time to take bets on what the quantum of cotton import shall be in the ongoing fiscal year, and how much it may add to the incremental import bill (value). Interestingly, USDA is convinced that Pakistan’s annual consumption will be no less than 13.6 million bales (of 170kg) which if accurate also reveals why GoP has little choice but to pin its hopes on domestic crop’s chances. But even with 8.5 million bales of local production, minimum import requirement will work out at least 5.5 million bales, half a million bales higher than last year and another highest-ever. Afterall, spinners can hardly afford to start the next year with zero carryover stock given domestic crop’s erratic performance year after year.
But that’s hardly a drastic increase in value terms. Consider that cotton import during FY21 raked in an import bill of $1.5 billion. If volumetric momentum persists and import falls anywhere between 5.5 to 6 million bales, it may add another half a billion dollars to import bill. This is estimated at current global prices, which are highest in almost a decade ($1.9 to $2.15 per kg). There is little reason to believe that global prices shall chart even higher heights over rest of the year, unless of course all hell breaks loose.
Will it? Analysts should be cautioned against predicting tail risk events, so it is important to understand what hell breaking loose in global cotton market would look like. In Sep 2010, world cotton prices breached $2.8 per kg for the first time in history, breaching $5 per kg by March 2011, in less than 6 months. Prices quickly began to calm down thereafter, but it took another 12 months before prices had returned to their pre-bulls territory of under $2 per kg. For an 18-month long period, Cotton A-Index had averaged above $3.25 per kg.
Why is this important? Because cotton prices had never before – and never again – seen a sustained 6-month period where prices traded above $2.5 per kg. Emerging markets demand boom, coupled with frenzied Chinese reserve building – had led the world market to run wild. Trading volumes greatly diminish at such feverish prices, especially for smaller buying nations such as Pakistan.
Moreover, it is pertinent to remember that global ending stock to use ratio in 2010 and 2011 averaged at 40 percent; in 2022, the ratio is projected to stay above 70 percent. This is still less than 95 percent touched during the pandemic year, but is in the same territory as stock levels during pre-pandemic years (average 65 percent).
Nevertheless, isn’t even half a billion dollars more in cotton bill not too much? Consider that GoP plans to spend $0.8 to $1 billion on import of wheat to build strategic reserves, at a time when global wheat prices have also breached a 7-year high. GoP also claims that the country has achieved highest ever wheat production along with sufficient wheat stock during just ended harvest season. So, if bulls in global commodity market are creating panic viz. import bill forecast, there may be better places than cotton to start criticism from.
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