THE NEW COTTON POLICY
The least intervention by the GoP desired
By SHABBIR H. KAZMI
Apr 24 - 30, 2000
The Government of Pakistan (GoP) has announced cotton policy for the year 2000-2001. It still allows Trading Corporation of Pakistan (TCP) to act as the second buyer or to intervene if any substantial reduction in cotton price is in the offing. While such intervention may be necessary, at times, the role of TCP should be minimal. Reportedly the policy for the year 1999-2000 has helped in maintaining cotton prices at a modest level. Therefore, it was considered appropriate to continue a similar policy for the next year.
Under the new policy, the TCP will buy only Afzal type raw cotton (phutti) directly from the growers at a fixed rate of Rs 725 per 40 kgs. As another major step, it was decided to introduce cotton grading and standardization system at ginning stage. Ministry of Food, Agriculture and Livestock has agreed to introduce this system at ginning stage from June 30, this year. This step is aimed at improving the quantity of cotton produced in the country and bring about a better correlation between price and quality.
According to cotton sector experts, it has been felt that while the GoP may have all the desire to introduce grading and standardization system, it does not have sufficient quantity of certified cotton seed at its disposal, to start with. Therefore, there is an urgent need to make efforts to enhance availability of certified seeds to meet the demand of the growers.
While announcing new policy, commerce minister, Abdul Razzak Dawood said that the government is planning to formulate a long-term textile policy to face the challenges of globalization and the impending quota free trade regime. However, exporters were not in favour of auctioning of the growth quota. The practice was opposed on the ground that auctioning will cause speculation and enable non-exporters to make profits without actually exporting the merchandise. Trading in quota affects the competitiveness of the new entrants at times the cost of quota itself is more than the cost of product.
Dawood said that Chief Executive (CE), General Pervez Musharraf, was concerned about the plight of the weaker section of cotton trade growers as he (CE) felt that last year's cotton crisis had affected cotton producers badly. The GoP recognized the need to provide for a level playing field for all the stakeholders i.e., growers, ginners, exporters and the textile industry, and the new policy addresses the same.
An important feature of the policy is that the GoP has expressed its determination to follow market based policies to address the issues in cotton trade. While there are various pressure groups, i.e. growers, spinners and manufacturers of value-added, the policy is aimed at letting them to learn to live with the international market forces. The policy gives a clear signal to the farmers to produce improved quality cotton if they want to get handsome return on their produce.
The policy reaffirms GoP's commitment to link prices of indigenous agriculture produce to international market prices to ensure fair return to the growers. It also reiterates GoP's desire of following consistent, transparent and market-driven policies. Therefore, the cotton policy envisages a continuing role for the TCP as a second player in the coming season.
Last year, when the TCP purchased lint at Rs 1500 per 40 kg, the policy helped in stabilizing cotton prices which benefited the small growers. In the new policy also ensures equipping the TCP to play more effective role as a second player. However, the GoP has decided that the TCP should enter the market for the purchase of phutti/lint only at times and for quantities as determined by its commercial interests when price of phutti fall below Rs 725 per 40 kg for the premium quality of phutti.
The minister said that in future, cotton exports by private sector as well as by the TCP would be allowed from the beginning of the season. All export contracts would be registered with the Export Promotion Bureau as per policy. Dawood made it clear that profits as may accrue to TCP, from cotton trade, would be used to look after growers' interest and not for TCP's other operations.
The government has ordered complete termination of the Cotton Export Corporation of Pakistan (CEC) and the Rice Export Corporation of Pakistan (RECP) immediately and transfer of all the assets and liabilities along with all pending matters to the TCP to practically complete the phase of merger. This provides an opportunity to the TCP to employ experienced and well-reputed workers for improving its performance.
Under the new policy, imports of superior quality raw cotton, not produced locally, will continue to be allowed to members of All Pakistan Textile Mills Association (APTMA) as per rules. However, the policy will be regularly reviewed by the ministry in order to ensure that Pakistani cotton growers are not placed at any disadvantageous position.
The forecast for the new crop indicates possible reduction in the output due to delay in sowing mainly due to shortage of water. There has been some relief because weather is still conducive for the sowing. Besides, the growers are happy because the germination percentage has been found better than last season's due to better quality of seed used. It is hoped that sowing conditions will also improve in all the cotton growing areas. Particularly due to enhanced water intake capacity of canals increased due to Bhal Safai operations. The canals apparently seem to be flowing well under the capacity. Reports indicate that cotton sowing conditions, specially due to enhanced water availability of water in lower Sindh, has improved substantially. As such growers have geared up their activities to accomplish sowing target as early as possible.
One may wonder about the basis used by the GoP to fix the minimum cotton price at Rs 725 per 40 kg which appears to be less than Rs 35 per 40 kg of the cost of cotton production (Rs 760 per 40 kg) as calculated by the Agriculture Price Commission. However, some analysts say whatever may be the price, it ensures minimum level, at least. As such the cost of production as calculated by the commission is not the last word. With the stability of various inputs prices and probability of reduction in interest rates, the difference is not of any significant consequence.
The quantity of unsold cotton was reported around 682,000 bales as on April 1, 2000, which will certainly reduce with the passage of time as the import of cotton has also slowed down. The situation does not appear all that alarming because the larger groups are reported to be holding cotton inventory larger than their requirements and are expected to selling surplus stocks. However, in view of the delay in the arrival of cotton from the new crop, the existing stock may hardly meet the requirements of the spinners and the exporters. The spinners association, APTMA, is continuously exerting its pressure on the government to release 100,000 to 200,000 bales from the stock held by the TCP to the spinners to avoid possible shortage. As the availability of cotton is expected to remain low, due to delay in arrival of new crop, the prices are likely to witness some surges in the coming months. According to some analysts domestic cotton prices have remained subdued lately due to lack of buying interests and not because of any selling pressure.
The new cotton policy incorporates two schemes: implementation of cotton grading and standardisation system and provision of minimum support prices for seed-cotton. The first scheme aims at bringing over all improvement in quality of lint and make payments to growers on the basis of their quality of seed-cotton an incentive for producing superior quality cotton. This policy also aims at better documentation of the production and transactions for both cotton and yarn.
The second scheme aims at ensuring minimum price of seed-cotton to the growers above their production cost so as to encourage higher production. All cotton players, specially the spinners, exporters, and ginners, are expected to contribute positively to make these schemes a success. Actually, the government has manifested its strong will towards its commitment for achieving the goals of higher production and better quality considered most important fundamentals for boosting the economy. An outstanding demand of the trade that there was a need to change the present pricing structure, following an old and outdated variety based system, has been accepted by replacing it with a modern and scientific grading system to be enforced from July 1, 2000.
Lately the TCP has sold 235,910 bales through tenders but shipment hardly touched 20,000 bales level. In future the TCP plans to publish its tender in Cotton Outlook to achieve wider publicity to its tenders and to attract more buyers. As the off-take of cotton in international market is slow, the merchants, who had purchased cotton from the TCP, are trying hard to liquidate their long position. While this has made the shipment of the TCP slow, the Corporation should monitor performance of all its contracts stage by stage to make its performance transparent and effective.
New York prices have settled at 56.43 cents per pound of cotton (May contract). The various indices are reported to be steady around respectively. Almost all certified US stocks have been sold out. On the basis of one such index value, price of Afzal types comes to 48.35 cents per pound of cotton, FOB Karachi.
The local exporters are finding it difficult to sell in South East and Far East markets because the foreign merchants are already selling Pakistani cotton in these markets. Actually, there is slackness in trading but prices seem to be pretty steady in ready transactions.
Factors hampering growth
Negligence in building new water reservoirs is a serious limiting factor for growth of agriculture, as stated by Shafi Niaz, member, National Security Council. He also observed that it was water and not the land which is a limiting factor in the development of agriculture in the country. Some analysts have conviction that Pakistan can achieve as high as 20 million bales from the area presently under cotton cultivation.
Shafi Niaz said that silting in Mangla and Tarbela dams has halved their water storage capacity. The poor supply of water has been affecting agriculture production in the country. No new dam was built during last 23 years. While the GoP may have failed in acquiring the needed funds the blame mostly goes to the politicians who made every project controversial.
The target of wheat production of 20 million tonnes may be difficult to achieve because water shortage was experienced by the farmers during the Rabi season. Production of wheat and edible oil whose imports cost the exchequer Rs 66 billion annually. There is need to encourage farmers to achieve higher production and better yield to cut down import bill of various commodities. To achieve this, the researchers should develop higher yielding varieties and farmers should be trained to use new technologies.
While agriculture employs the largest segments of population, it is also the engine for growth for Pakistan. Poverty alleviation largely depends on faster development of sector. While government is ensuring adequate prices of produce to the farmers, it is also their responsibility to reciprocate. Farmers should also adopt improved production techniques which require low water consumption.
A research centre has set up on-line website which would contain information about Pakistan's agriculture published anywhere in the world. The website provides good information about its research activities. Similarly in the field of biotechnology, a group of researchers have prepared a comprehensive project for development in the four key areas: tissue culture, genetic engineering, engineering of crops, molecular assisted breeding and animal biotechnology. This institution has the necessary expertise but they need funds to make the project operational.
The current economic managers intend to follow market based policies which means the least intervention in cotton trade and no quantitative restriction on export of cotton yarn. However, it is feared that people who have lived under excessive protection are not ready to adjust themselves to the changing realities.
All the stakeholders, in cotton and cotton related sectors, are never tired of soliciting government intervention, protection, new incentives. Growers demand minimum support price, spinners demand restrictions on export of cotton and value added sector does not like export of yarn. Their demands are not new. They have often been able to influence the GoP policies in the past and each group is once again pulling its strings to prove that it is the most important part and must get the best bet. Therefore, the new economic managers have to be extremely prudent in their decision making.
Long-term and stable policies are the basic requirement of businesses for making strategic decisions for investment with the expectation of earning a reasonable profit on it. Many business ventures in the country have failed because of frequent changes in policies affecting the economic fundamentals.
One of the reasons for inconsistent and adhoc policies is the lack of authentic data base. While it may be true that the exact size of cotton crop cannot be determined, Pakistan even does not have reliable data about installed number of spindles, weaving and processing facilities. In the absence of this data various pressure groups are able to get their point of view accepted. Even the office of Textile Commissioner relies on estimation rather than collecting actual figures.
There is an urgent need to collect data about installed and operating facilities of the major sub-sectors, the age of plant and machinery and production capabilities. Unless such data is available no authentic forecast can be made about cotton consumption and surplus available for export. However, in the mean time following a quarterly exportable quantities policy can be a workable option. This should be applicable for both raw cotton and cotton yarn up to 30 counts, as suggested by various analysts.
Therefore, it is desired that export of cotton based products with lower value addition should be discouraged. As such the quota regime will be completely phased out by December 31, 2004. There is a need to implement policy which supports production of superior quality as well as higher value addition. If textile industry is not willing to learn to follow this policy at its own the other alternative is to introduce policies which discourage export of low quality and low value-added products.
It is evident that Pakistan generally produce sufficient number of bales of cotton. Now polyester staple fibre also complements this. As a major BMR, in textile sector, is estimated around US$ 250 million there is also a need for increasing production of both cotton and man-made fibre in the country.