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Cotton Trade

Politics & Policy
Centre -   province

For the record  
ATM based networking
Dr. Matin A.Khan
Special Report
Cotton trade
A bugs life !!!

Ginners say that government's step is politically motivated

Oct 11 - 17, 1999

The involvement of public sector in the cotton trade as an active player has not only caused a stir among various segments of the cotton economy but in a way failed to get a spontaneous financial support from the State Bank of Pakistan.

The public sector which remained out of the ambit of cotton trade for a long time has figured in the market once again with an assignment to create a buffer stock by procuring one million bales of lint out of the market.

In order to accomplish the task, the government has asked the Trading Corporation of Pakistan to lift about one million bales of lint cotton from ginning factories, for which a credit line worth Rs10.8 billion has been allowed by the Ministry of Commerce. The State Bank has been requested by the Ministry to arrange the required fund from banking system.

The SBP on the other hand has informed the Ministry of Commerce that the request made by TCP for a credit line of Rs10.8 billion could not be accommodated under the credit plan of 1999-2000 unless the amount was shifted to the credit for private sector. It has been further clarified by SBP that instead of seeking approval of the State Bank for the credit line as a part of commodity operation, the TCP should better approach commercial banks on its own. The amount allocated for commodity operation is normally used by the banks on their own for financing, purchase of commodities like cotton, wheat, fertilizer or pulses etc by the government.

The Trading Corporation of Pakistan, which has been directed to purchase one million bales of lint, having a commercial proposition is entitled to seek a loan from any commercial bank under the terms and conditions to be agreed by the both sides. It is, however, yet to be seen how the TCP manages the finances, with the proper sanctioning of the funds. According to reports, the TCP has arranged the first installment of Rs1 billion from the banking system out of the total amount of Rs10.8 billion under National Credit Plan for 1999-2000.

The procurement process is to be completed in three phases between October-December1999. TCP has been directed not to purchase phutti (raw cotton). A support price of Rs836 per maund for phutti and Rs1,936 for lint has already been announced by the government.

Public sector

Originally, the decision to keep off the Cotton Export Corporation (CEC) from cotton trade was taken by the sub-committee of National Assembly's Public Accounts Committee due to extremely poor performance which had brought huge losses to the tune of Rs7.2 billion over a period 24 years. Primarily, the active involvement of the public sector into cotton trade was restricted in 1988-89 when the government had announced its policy of deregulation of trade in the country. The operations of Cotton Export Corporation and Rice Export Corporation of Pakistan (RECP) were finally wound up in 1998.

Besides restricting the role of public sector corporations, the government as a policy matter had decided to give a free hand to the cotton trade which was widely welcomed by various segments of the cotton trade. The spinning sector, however, was against the free export of local cotton and has always demanded of the government to create a buffer stock to ensure availability of cotton in the local market at the fag end of the season.

In order to ensure supply of cotton to the local industry, the government has now decided that TCP will procure about one million bales of lint cotton from ginning factories to create a buffer stock for the lean days.

The government claims that involvement of the public sector in cotton trade is directed to protect the growers' interest. The support price of Rs1,935 for lint cotton (Afzal category) per maund has also been announced by the government. Before the announcement of the official prices for lint and phutti a representative meeting of the cotton trade attended by growers, ginners and millers to evolve a price consensus. Pakistan cotton ginners association which is the apex body of ginning industry, however, differs from government's point of view regarding official prices.


The ginning sector which constitutes an important part of the cotton economy, however, has reacted strongly against the government policy to allow the public sector into the cotton trade.

To lodge their protest, most ginning factories in the province of Punjab have started to demonstrate against the government policy by not operating their factories.

Sheikh Muhammad Saeed, Chairman, Pakistan Cotton Ginners Association (PCGA), in a letter addressed to Prime Minister Nawaz Sharif, has described the official rates as unrealistic. Supporting his statement with certain overheads the ginners have to bear, he said that the rates are not feasible and are tantamount to bring the growers and the ginners in front of each other fighting for commencement in trading.

He pointed out that without incorporating the actual ginning expenses on phutti in no way the lint of Afzal category can be commercially viable at the rate of Rs1,936.

Giving the break up of the price of lint cotton, he said, we have to take into account the price of cotton seed (Banola) which costs Rs305 in Punjab, Rs260 in Sindh including Sales Tax. Without Sales Tax the rate of Banola comes to Rs260 in Punjab and Rs220 in Sindh. The actual ginning expenses have worked out at Rs363.72 per maund of lint or three maunds of phutti.

He urged the government to review the situation on its right perspective and ensure survival on real base so that the buying and selling for the ginners may be possible otherwise the present chaos may create unhealthy environment which is feared to damage the cotton trade in Pakistan.

Karachi Cotton Association(KCA)

A. Shakoor Dada, Chairman of KCA while commenting on the situation, has said that KCA firmly believes in free trading in cotton i.e. free export and import of cotton without any duty and quantitative restrictions as this policy has worked well in previous years.

He strongly opposed the government intervention into cotton trade which he feels influence the market behaviour and the price level as it causes unnecessary distortions in the market and affects other sections of the cotton trade.

It is not the job of the government or any Government agency to buy and sell cotton as it entirely falls under the purview of activities of the private sector as it may otherwise cause losses of billions of rupees to the national exchequer which would ultimately be borne by the poor tax payer of the country, he observed.

He also opposed the involvement of Trading Corporation of Pakistan into procurement of one million bales and said that marketing of cotton is a highly complex and intricate affair and its operations by any public sector organization would be marked by a high degree of inefficiency, incompetence, mismanagement and corruption as in the case of CEC which sustained huge losses, both visible and invisible, running into billions of rupees and ultimately it had to be wound up. Moreover, the government agencies lack necessary expertise, technical skills know-how and facilities to undertake the job. No one would deny the seriousness of the problem. However, the problem has to be resolved with mutual consensus and not to protect interest of one section alone without taking into consideration its repercussions on other segments of the cotton trade which would ultimately hurt the cotton economy of the country as a whole.

It must be realized that local mills are the major buyers of Pakistani cotton, buying 8.5 million to 9 million bales while the exporters buy the surplus cotton available to the extent of 1-1.5 million bales. The local prices of cotton being competitive, the mills may enter the market and accelerate their purchases which would help stabilize the local prices and protect the interests of the growers as well. This will also help to revive the economy and increase exports. With entry of exporters in the market, the market prices would also improve, assuring a fair return to the growers.

The KCA Chairman also urged the government to suspend the requirement of grading and classification of cotton by Pakistan Cotton Standard Institute at the export stage which will help facilitate exports while permission to resume hedge trading in cotton will also ensure efficient market of the cotton crop.

Cotton situation 1999-2000

The year 1999-2000 promises an excellent cotton crop, exceeding the target of 9.7 million bales, thereby meeting requirements of domestic mills to the extent of 8.5-9 million bales and providing surplus for export of at least one million bales. The international prices of cotton have, however, shown a marked decline in the current year. The New York Cotton futures rate has declined to 73 cents per pound (October 1999 contract) as on September 28, 1999 from 73.45 cents per pound, recorded a year earlier.

The decline in international prices of cotton is attributed inter-alia to a large US crop which is estimated to go up to 18.3 million bales in 1999-2000 from 13.92 million bales in 1998-99. Another factor causing this decline is the emergence of China as an exporting country in the world market as China has started exporting cotton in order to liquidate its burdensome stocks of cotton which have accumulated over the years.


The ginners have reacted strongly against the public sector involvement into cotton trade and have decided not to purchase phutti from the growers. They feel that the government's step of fixing phutti and lint prices and bringing the public sector back into cotton business was politically motivated as some major cotton producers are in the opposite camps.

Industry feels now is the time for all concerned, whether government or private sector to achieve the best out of the expected bumper cotton crop this year. Our cotton-based economy has already gone through many setbacks due to constant failures of the crop for the last many years. A better management of the cotton economy can bring the much sought after relief to the national economy. Creation of any dispute would be uncalled for at this stage which may deprive the national economy of better prospects.