Cotton interventions: listen to SBP

Imposition of support price on cotton may prove to be the last death nail in the coffin of a crop already on its way to meet its maker. That seems to be the consistent view shared by sector stakeholders, yet public policy appears to be tilting in the opposite direction.

Never mind that the pro-support price camp has the best intentions at heart. Proponents argue that price-setting interventions have helped expand area under cultivation of competing crops; and price fixing of select crops at above-market levels while letting others exposed to vagaries of market forces discourages growers from investing in crops that may not offer attractive return over investment.

One box standard response to above line of argument is that governments should get out of the business of price-fixing altogether, and let growers decide crop-preferences based on localized demand and supply dynamics.

Of course, that should be the steppingstone of any meaningful strategy for revival of cotton; but as evidence of cropping patterns over the last decade shows, may prove acutely insufficient. Acreage remained on the higher side – over 2.8 million hectares – in 15 out of last 20 years. Yet output remained under twelve million bales in 13 of those years, while never unlocking the magical barrier of 15 million bales.

Pakistan’s annually missed cotton target of 15 million bales is not based in some complex econometric extrapolation but on simplistic estimates of sowing three million hectares and average domestic yield of 850 kg per ha.

As the share of crop acreage has historically been neatly divided between Punjab and Sindh – at 80 and 20 percent, respectively; the wise men at Central Cotton Committee target yield of 800 kg per ha for the larger province, with remainder being fulfilled by Sindh (at 1,050kg per ha). While the southern province has rarely disappointed – overshooting target in last seven years while remaining over 950 kg per ha all of past decade, target yield level in Punjab has forever been out of sight, remaining close to the average of 600kg per ha.

Cotton’s missed targets then, are largely a function of missed target yield levels, particularly in Punjab. The question then becomes whether introduction of indicative price can solve Punjab’s abysmal yield challenge. In this respect, the central bank’s special section on “Cotton Policy: Indicative Pricing & Other Important Aspects to Focus On” in the latest Annual State of the Economy report is of particular interest.

SBP’ has cautiously worded its critical review of government’s tilt toward indicative pricing, noting that “a major focus area for now is the introduction of a cotton indicative pricing… aimed at improving area under the crop, yet there are other aspects and policies that need to be considered”.

The report notes that cotton’s output has suffered due to lower ROI compared to competing crops; loss of yield over past five years due to increasing ineffectiveness against bollworms of existing seed varieties; weak regulatory implementation of Plant Breeder’s Act; and weak implementation of intellectual property rights and patents for high quality seed varieties; and poor agronomic practices including application of pesticides, picking practices, and irrigation application.

Most significantly, the central bank points out – in line with what has been noted repeatedly in this space – that yield gains in case of wheat and sugarcane, crops protected by support prices, have been minimal. Output growth for both crops also came on the back of higher acreage, except acreage remains in finite supply, and may fail to deliver target output for cotton due to crop’s sensitivity to vagaries of weather, as has been seen in the ongoing season.