Implications of govt's intervention in cotton trade

PASSCO to buy cotton from ginners

From Shamim Ahmed Rizvi, Islamabad
Oct 04 - 10, 1999

The latest announcement made by the Federal Minister for Agriculture Mr. Abdul Sattar Lalika, that Pakistan Agriculture Supply and Storage Corporation (PASSCO) would buy lint cotton from gingers at the rate of Rs. 2200 per 40kg and arrange for its export, has surprised all those connected with cotton export and textile industry. This announcement has come when the prevailing prices of lint cotton in the domestic market is about Rs 1700 (per 40 kg) and Rs. 1800 (about $34.5) in international market.

According to the independent economist, this decision if implemented, will not only cripple the local textile industry and the cotton export trade, it will cause financial losses to the PASSCO of billions which would ruin the organization. The cotton export corporation which has lost about 3000 crores in the past is no more capable to undertake this burden. This time PASSCO has been chosen to bear the cost of appeasing the feudal lobby of cotton growers.

Federal Minister for Food and Agriculture announced this decision on Saturday last, while chairing a high-level meeting in Pakistan Central Cotton Committee, attended by Member of National Assembly from Bahawalpur, Aqilur Rehman, landlords, high officials of PASSCO and Ministry of Agriculture, Director, Pakistan Cotton Standards Institute, Vice-chairman, Pakistan Central Cotton Committee and some former employees of Cotton Export Corporation. He said that the decision has been taken with a view to ensure better return to cotton growers of their produce. The Government of Pakistan has decided to induct PASSCO as a government agency in procurement of lint cotton from ginning factories and its exports. The government wants that growers should get around Rs. 900 per 40 kg and ginners Rs. 2200 for their lint. The PASSCO has been given the task of procurement of cotton from ginning factories with the technical assistance of Pakistan Cotton Standard Institute (PCSI) and Trading Corporation of Pakistan The PASSCO may deploy former technical and commercial personnel of Cotton Export Corporation if required.

The network of PASSCO comprising about a dozen of its zonal offices in Sindh and Punjab equipped with all necessary infrastructure facilities and manpower would be utilized effectively. Their head office at Lahore would monitor all procurement, disposal, storage, transportation, inspection and other handling activities in field offices. PASSCO intends to utilize the expertise of private sector in exports of cotton. The exporters would be required to work for PASSCO as their export agent. However, further details in this regard are yet to be worked out.

On this announcements, immediate reaction of the local cotton market was bullish and rates jumped by Rs. 50-75 per maund for almost all styles. However, some circles appear to be very skeptical about implementation of this scheme. The PASSCO does not appear to be in a position to commence its purchase operation within next three-week time. The approval of the cabinet of the ministers and arrangements of the funds equal to Rs. 25 billion are yet to be done. However, there may be many difficulties of administrative, financial, technical commercial nature which would hamper the commencement of this operation.

The spinners and the exporters are reportedly annoyed on this decision of the government. If this operation plan goes on well, then spinners would have to buy cotton at higher rate of above Rs. 2200 per 37.3245kg ex-gin. One of the exporters commented that this decision of the government tantamount to nationalization of cotton export trade as export parity is around Rs. 1650 while minimum purchase price is Rs. 2200. The private sector cannot enter into export business at these rates and export situation cannot improve to the profitable level.

This announcement from the Federal Minister supported the price level in the cotton market. Otherwise the lint cotton prices had crashed on the Karachi Cotton Exchange to hit the 20 year low level of Rs. 1550 per maund. Explaining the situation, a representative of APTMA said that the market is essentially the victim of slack demand both from spinners and the exporters and until they resume their normal trading activities, there is no reasons why there is judicious equilibrium between the supply and demand sans manipulation.

He said spinners are sitting pretty comfortable on the cheaper imported stuff, letting the local prices to new lows before resuming buying. "The strong feudal lobby is disturbed over the falling cotton prices and managed to convince the ministry of commerce to induct some public sector agency to procure cotton at the fixed rate of Rs 800 per maund for phutti and Rs. 2,200 per maund for lint cotton." He said, it is a straight fight between the ruling elites, representing growers, and the other spinners and who win the battle of nerves is anybody's guess but it has certainly derailed the entire cotton trade. Never before in the history of Pakistan cotton trade, the major foreign exchange earner (over 60 per cent of the total exports) has ever received such a massive battering.

News that some official procurement agencies will be inducted to buy phutti and lint cotton at Rs 800 and 2,200 to ensure fair price for the growers, appears to have temporarily restored sanity to the cotton trade but how the system will work is not clear a leading cotton dealers remarked.

Analysts say, it needs an enormous amount running into billions of rupees to buy the surplus from the growers and ginners and whether or not the banks will finance the entire operation, all these questions need to be answered. "The most important aspect of the prevailing situation is that where to sell the lint as world prices are ruling much below the specified rate of Rs. 2,200. In the developing situation, notably an expected entry of official buyers could push prices higher from the current lows but spinners seem to be a little worried as their stock position is said to be pretty comfortable owing to cheaper imports of over a million bales during the last about four months.

APTMA has also challenged the official estimate of 10 billion bales for this year on the basis of their past experience. Last year actual cotton crop was about 8 million bales against the estimate of 11 million. They also challenged the statement of the Federal Minister that it would cause no loss to Pakistan if PASSC0 was ordered to lift 2.5 million bales of cotton at Rs. 2200 per 40 kg. According to APTMA, the government exchequer will have to pay about Rs 30 billion otherwise all textile exports will collapse.