Its not just yellow gold thats on a record making spree northwards; its the white gold as well. In both cases, the major driver behind high demand is Chinas rising appetite.
Cotton prices have soared by nearly 50 percent since the start of current fiscal year; by May the price of cotton had soared to its 15-year high of 90 cents per pound, according to IMF.
Tracking this hike, cotton prices (spot) have surged to about Rs6,400 per maund in local markets from nearly Rs3,500 in July 2009.
And it appears that this pressure on the profitability of local textile manufacturers is going to worsen in the upcoming season.
White gold supply is anticipated to remain tight amid rising demand for textile products by China and elsewhere as global economic recovery is gradually taking off.
Consequently , yarn prices are likely to either stay high at current level or rise further as global cotton stock-to-use ratio will remain tight at 43 percent, down from its 5-year(2005-09) average of 50 percent, according to International Cotton Advisory Committee.
Interestingly, this is despite an expected increase in production growth.
Global supply is expected to increase as better crop prices have triggered farmers around the world to plant more cotton. The ICAC estimates global cotton output to rise by around 12 percent to 24.74 million tons in the 2010-11 crop year.
With cotton sowing underway, players in the local industry also expect next years (2010-11) production to be around 14 million bales as against 12.69 million bales harvested in the last season.
The increase in output is attributed to the availability of good quality Bt cotton seeds, which is seen offsetting the impact of water shortages expected this season, due to its good yield.
For domestic farmers, higher cotton production is definitely good news. But the bitter truth about rising cotton prices doesn seem to be easily swallowed by the downstream sector, which is demanding a ban on raw cotton and yarn exports.
According to data released by Karachi Cotton Association, raw cotton exports reached 0.8 million bales in the first eleven months of the current fiscal year. Though, a tad higher than average raw cotton exports of 0.3 million bales seen between FY06 and FY09, it represents just 6 percent of total production this year.
If the government increases restrictions on exports of raw fibre and yarn to stabilize prices in local markets; it will definitely benefit finished goods producers.
But this benefit will surely come at the cost of farmers income, while dampening their motivation to plant more cotton.
And since, the government doesn have fiscal space to ensure a support price for cotton crop; it is best advised to let the market find its own harmony.