Pakistani cotton prices hard to decrease

Since the beginning of this year, Pakistani spot cotton price has been constantly rising. By July 5, the price has hit a historical new high to be Rs. 12,900 per maund, equivalent to 98.76cent/lb. to be the one of the most expensive cotton in the world. Cotton production is hard to increase, and high tax weighs on the cotton costs, leading to the firm cotton prices and prices are hard to slip.

1. Pakistani cotton production hard to increase

As of June 15, cotton planting areas are supposed to decline by 16% year on year. The areas in Sindh decrease by 13% to 533,000 hectares. On June 3, the cotton planting areas in Punjab fall by 11% to 1.305 million hectares. Currently, the planting is virtually complete. Since the area devoted to cotton has fallen short both of the government’s target and of last year’s recorded level, trade sources are not very optimistic.

The lower cotton areas are mainly affected by the drought and hot weather. In 2021, the rainfall in the major cotton growing areas of Pakistan has been lower than the corresponding period of last year and the normal level of previous years, and the temperature has been constantly high. After a delay of four or five months, the current water level in the canal has improved, but for the cotton growers in Sindh, it is already too late, because it is now ready for picking. Throughout the cotton season, the water shortage rate of the barrage in Sindh is about 60-65%. Due to long-term water shortages, cotton yields in some areas such as Thatta, Badin, Sujawal, Umarkot, Hyderabad, Matiari, Sanghar, Tharparkar and Mirpurkhas are only 15-20 maund/acre, while the yield last year is 40-45 maund/acre.

In addition, due to the increase in planting costs (including seeds, fertilizers, and pesticides), growersfeel uneasy because the costs are much higher than the low returns from cotton. Currently, the market price of cotton is Rs. 4,000-4,500 per maund, and the growers hope the minimum support price of Rs. 6,500 per maund. In addition to these problems, pest infestations are also damaging cotton crops in some areas and substandard pesticides and fertilizers have increased the damage.

According to CCFGroup's estimation, 2021/22 Pakistani cotton planting areas may decrease by 11% year on year to 1.974 million hectares, and cotton production may reduce to less than 1 million tons affected by hot weather, drought and pest infestations.

2. High taxes weigh on cotton market

In 2020/21, Pakistani cotton production has fallen sharply. In order to make up for the domestic cotton supply gap, the monthly cotton imports continue to be at a relatively high level in the same period of previous years.

The Pakistani government has increased the GST rate on raw cotton and ginned cotton to 17%. It is reported that the ginning factories in Sindh has reduced cotton purchases in protest against the tax increase. This tax measure may aggravate the damage to cotton planting and ginning in Pakistan, and make cotton that is already in a difficult situation worse.

It is on record that 33% SME exporters have closed their export business since imposition of 17% GST which blocked exporters’ precious liquidity. With the continuation of 17% GST in 2021-22, many more SME textile exporters who managed to survive last year shall fear closure as well in the wake of liquidity pressure.

In summary, the cotton planting areas in Pakistan continues to decline this year affected by drought, hot weather, high costs and pest infestations. Cotton production is likely to be lower than one million tons. The higher tax on cotton may seriously damage the planting and ginning of cotton, also imcreasing the production costs. Pakistani cotton prices may remain firm, and be hard to decrease.