An unforeseen drop in global cotton output has seen prices flare up, putting at risk the fragile recovery of Pakistans textile industry. Global shortfall means that crop in Pakistan, despite the materialization of much expected bumper crop, is being exported to capitalize on higher cotton prices, crimping supply at home.
In the local market, cotton prices have shot up over 15 percent in just the last six weeks. The rally, which looks more like a speculative bubble has created a buying frenzy, pushing prices above what can be construed as fundamentally justified levels.
Worse! The scenario sets perfect stage for further price increase at home, given the wide discount - currently 9 percent -- between local and international cotton prices.
Tailgating the price of cotton futures in international market, the home grown commodity is likely to cross Rs5500 per maund from its current price of Rs4750 per maund. In international market, cotton prices have jumped more than 50 percent this year on account of falling global production as rebounding consumption breathes life into the market.
In its monthly demand-supply outlook, the US Department of Agriculture recently projected world cotton production at 103 million bales in the year through July 2010, down 4 percent from the previous year. Global consumption, on the other hand, is expected to rise 3 percent year-on-year to 114.5 million bales, drawing down global stockpiles.
The International Cotton Advisory Committee is of the similar opinion, saying that global cotton stocks in this season will see the largest annual decline in seven years.
At present, most farmers or ginners who sell their crop far in advance - in Brazil or West Africa - have almost sold out their stock. Therefore, like other commodity markets, price moves in cotton have raised suspicions about the impact of commodity investors worldwide, who buy and hold futures as a way to diversify their portfolios and guard against inflation or currency weakness.
Consequently, countries that normally sell on immediate shipment - India, Pakistan and Greece - are attractive avenues for now. Pakistans largely cotton-based textile industry has in recent weeks intensified its efforts to get cotton exports banned. From its own perspective, the industry may be justified in demanding a prohibition on exports as local prices have risen to levels uneconomic for the industry.
Hence, in the first flight, many of the local textile makers took off. Many have reportedly shifted their manufacturing units to Bangladesh while others are in the process of relocation. This is no surprise, considering that its natural for the capital to move towards better opportunities.
But for those manufacturers who, instead of walking away, wish to survive in current environment, which might persist in subsequent years, here is a small tip: think of how to build capacity to compete with cotton traders and exporters in the marketplace.
Establishing backward linkages and contract farming is also a good option, if textile makers wish ensure smooth supply of cost effective raw material in future. But surely, the industry has a lot of homework to do instead of relying solely on the government that has paid a deaf ear so far.