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It is cotton-picking season, and the domestic market could not have been more out of sync with global trends. Seed cotton price has climbed eight percent in the last twelve months according to the daily price bulletin. This at a time when commodity spot price has fallen thirty percent in international markets since last year, with futures market auguring further downward pressure.

And why shouldn’t prices drop. Global raw cotton stocks are projected to improve by a healthy five percent, even as demand is feared to slow down no thanks to recessionary reverberations amid on-again, off-again tariff slinging between the two giants.

So, what is keeping domestic dynamics out of step with the international salsa? With the change of reigns at the centre last year, earnest efforts at curtailing trade deficit by staging a coup d’étextile signaled to the markets that the crop of past glory was back in vogue. Federal Cotton Committee’s annual acreage target was finally taken seriously for a change. As a result, actual sown area for MY20 is 96 percent of targeted, compared to last year when it was missed by nearly 20 percent.

Read in isolation, improved crop outlook both domestic and globally should have made this raw material cheaper for the processing industry. That, after all, is the idea behind raising textile competitiveness on the back of cheaper inputs. Yet, so far there have been no signs of double-digit growth in off take by mills that would indicate serious demand side pressures. Rather, both Karachi Cotton Association and Textile Commissioner’s Organization confirm that domestic consumption is very much stable at 16 million bales per annum.

Alarm bells set off last week over possible decline in output due to news of crop damage seem in part based on hyperbole. Estimate of 7-8 million bales (against revised official estimate of 10.2 million bales) appears to have come from USDA, which uses the 1bale=480lb conversion factor (approx. 217kg), against the 170kg per bale factor used by official quarters such as Central Cotton Committee and PBS.

Market pundits also usually quote the lower number – especially since the 480lb per bale is the relevant standard for brokers & investors dealing in foreign trade – adding to the confusion. Nevertheless, since the difference is consistent, the crop should technically not see a decline going by either measure.

If the Textile Commissioner and KCA’s estimate of annual mill consumption (see illustration Fig-1) is not wide off the mark, the culprit is the secular decline in seasonal inventory over the past decade. The marketing year, it turns out, has began with opening stocks close to dead level, and the situation has never been so bad in recent memory.

Thus, if the processing sector’s raw cotton import are to remain restricted at last year’s level of 2.5 million bales, all bets are now on yield coming in at 800 kg/ha minimum, given the already sown area of 2.66 million hectares. And this too will only ensure that demand from mills is contained at last year’s level- a level at which textile value-add exports had barely inched forward.

Which brings us to the second leg, of the nature and drivers of domestic cotton consumption. Domestic consumption, it turns out, has remained remarkably resilient, soldiering forward despite the volatility of local crop performance. Cheaper imports post-FY15 have obviously paid a role, as these now service close to 18 percent of annual mill demand on average.

But an equally significant impact has come from carryover inventory from glorious ten years between FY05-FY15, when domestic output averaged at 13 million bales annually. The resulting boom in value-adding industry - ala capacity additions - during this period also drove up imports, which consistently resulted in available stocks (grossed up before exports) exceeding annual mill consumption by fifty percent for several years.

Annual shortfalls of over 2.5million bales for five consecutive seasons (compared to 13 million bale peak domestic production) has now dried up the carryover inventory, which is building pressure on domestic raw cotton price. As another shortfall is already in the offing once the harvest closes, deficit could push import as high as 4 million bales, unless global demand for made-up garments unexpectedly decelerates.

And now, a caveat. Although the context set thus far should insist that increased cotton production will prove to be a panacea in the long run, evidence does not speak as loudly. Textile export boom of mid-2000s and early 2010s had come on the back of buoyant global demand, which seems to have lost its flare since.

In fact, while value-added textile volume trend (various categories – see illustration Fig-3) sings like a songbird when compared against international cotton price, the former appears to be out of touch with changes in domestic cotton availability. It is hard to tell, for example, whether good crop years such as FY15 had an equally positive impact on downstream chain, as both mill consumption and volumetric export across cotton cloth, knitwear and garments segments declined that year.

Imports are a similar ghost story. Not only has absolute volume been volatile – ranging between 0.9 million bales to 3.5 million bales in past six years, there is little telling whether most of the quantity is re-exported after value addition or not. Close to 90 percent of raw cotton imported is declared under the ‘other category’ – HS code 5201-0090 - and the trend has only cemented since 1990s liberalization.

Short of relying on market anecdotes, there is really no way to confirm whether imported raw cotton is of higher quality demanded by value-added processors to be used as raw material for apparel exports, or not. And even if imported cotton were largely of better variety, it is no certainty whether the upsurge in recent years has come on the back of consumption by value-add re-exporters, or local consumers who have become increasingly slick and quality-aware.

Local raw cotton demand may be sticky, but whether it necessarily translates into increased value-added export is a matter of debate. Processors for higher-end denim brands in the weaving segment, for example, may choose to import intermediate products such as cotton thread, yarn (or even cloth), in case raw cotton shortage in local market drive up prices prohibitively throughout the value chain.

And that brings us to the final act. Over the weekend, Karachi Cotton Association’s Annual General Meeting announcement cited the consultative meetings held at MNFS&R for determination of seed cotton indicative price. If the objective is to revive cotton’s commanding share in kharif acreage, there is little doubt that the initiative shall succeed. But let’s take a pause to review what it won’t ensure.

If the bitter experience of wheat and sugarcane is any guide, indicative price-setting is resolutely responsible for disincentivizing investment in yield improvement, by guaranteeing financial return irrespective of crop quality. Thus, so long as target weight in bales is achieved, grower will have no reason to worry beyond boll formation and picking.

It will further disincentivize research in seed innovation and stewardship, as genuine R&D-led companies will be driven away. After all, indicative price measure cotton by mass and not by fibre-length, strength or thickness.

Third, the broken link between increased cotton production and value-added textile export growth. Research is missing on whether the locally grown cotton varieties – usually of short- and medium-length fibre - are even preferred by made-up textile buyers in foreign markets or not. In absence of this link, increased local production may only feed into more local consumption. And this does not even take into account the two-decade old revolution of man-made fibre responsible for Vietnam’s rise as major textile exporter, but of which Pakistan resists to become a part of.

And lastly, it will further de-couple local raw cotton prices from international market, risking erosion of much needed forex earnings of average $3.5 million from cotton yarn and greige cloth exports, rendering that low-value adding segment uncompetitive, as its export price largely follows the shadows of international cotton indices.

Word is that the indicative price setting decision has been referred to a high-powered committee consisting of federal cabinet members. In Pakistan, committees are usually where matters are referred to die a slow but sure death. Let’s hope that really happens in this case.

Sources: Volume: Raw Cotton – Production: Economic Survey; Import & Export – Trade Statistics, PBS; converted to bales for consistency at 170kg per bale. Bales quantity re-confirmed using Karachi Cotton Association data; Mill Consumption (raw cotton consumed by downstream sectors) as per Textile Commissioner’s Organization, re-confirmed from KCA; ending stock for FY90 based on indexmundi.com, converted to 170kg per bale. International cotton price (annual average) taken from Zakheera.com; re-confirmed using indexmundi.com data. Value-added textile exports (Qty) units; Cotton Cloth – Th sq. metres; Bedwear & towels – Tons; Knitwear & Readymade garments – Th dozen; all re-based to 100 as at FY09 for comparison purposes. For trade volumes, 8-digit data used to ensure consistency.

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