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The cotton scenario globally; rates and fluctuations.

Textile Raw materials market
The unavailability of cotton and curbs on opening Letters of Credit (LCs) for imports have badly impacted exports of the textile industry, causing large-scale unemployment across the sector.

The issue was raised by the All Pakistan Textile Mills Association (Aptma) recently in a letter sent to State Bank of Pakistan (SBP) Governor Jameel Ahmad. The association warned that the textile industry was on the brink of default as its production and earnings were way below the potential. The association urged the SBP governor to allow the opening of LCs for cotton import, citing that import consignments were stuck at ports, which needed to be released on a priority basis.

Despite this SOS call by the industry, the spot rates of the Karachi Cotton Association (KCA) decreased by Rs300 per 37.5 kg to close at Rs18700 per 37.5 kg. The local cotton market remained bearish with the trading volume remaining very low. The rate of cotton in Sindh varied from Rs17000 to Rs18500 per 37.5 kg. In Punjab, the cotton rates ranged from Rs17500 to Rs18500 per 37.5 kg. The rate of Phutti in Sindh was lower between Rs5500 to Rs8300 per 40 kg. While it was a little higher in Punjab it is between Rs6000 to Rs8500 per 40 kg. 500 bales of Sadiqabad were sold at Rs18500 per 37.5 kg. Polyester Fiber was available at Rs355 per kg.

Meanwhile, the State of Pakistan’s Agriculture Report 2023 released by the Pakistan Business Council says the major reason for stagnant yields and falling area under cotton in Pakistan is the lack of good quality seeds as the average cotton seed available hovers in the vicinity of 44 percent germination.

The germination efficiency of our cotton seeds is 44 percent while 56 percent are duds, the report reveals. The farmers typically apply 16kg of seed per acre which have uneven germination across a field. With good quality seed, only 8kg per acre would be needed.

The report revealed that Pakistan’s cotton production has declined over the years with an average of 10 to 12 million bales per annum produced in the last two decades but falling precipitously in the last few years. “China and Australia are major cotton-producing countries that cultivate irrigated cotton-like Pakistan. Their average productivity per acre has continued to rise over the years (barring years of drought) while Pakistan’s yields have remained constant at around 1 bale per acre with a fall in recent years,” stated the report.

The report mentions that yield gains in China and Australia were mainly led by the adoption of improved seeds followed by improved farming techniques, seedling transplantation, better crop management strategies to combat disease, more suitable irrigation, stronger fertilizer application, and the adoption of genetically modified (GM) technology traits in seeds for pest and weed control.

In the last 20 years, India’s cotton production has more than doubled. In the first few years of the 21st century, India’s cotton production hovered between 14 and 16 million bales while Pakistan’s cotton production ranged between 11 and 14 million bales. This was the period in which Bt cotton had been introduced in Pakistan but without a robust seed industry. Yields rose sharply.

In the subsequent decade, Pakistan’s cotton production continued to stagnate within this range, and India’s cotton production skyrocketed to almost 40 million bales as early as 2013. “Poor quality seed means low germination levels leading to higher seed cost per acre and more labor cost. It means low yields which lead to low earnings. It also means a higher susceptibility of the crop to climatic effects, and disease and pest attacks, inability to compete against weeds, and poor uptake of nutrients,” stated the report.

Moreover, Bt cotton was brought to Pakistan through irregular channels without any formal stewardship, which is why, although most of Pakistan’s cotton has transgenic technology, its effectiveness remains questionable. “All these factors culminate in sub-par cotton yields. The small farmer is the biggest sufferer from poor quality seed,” reasoned the report.

In the US cotton market cotton futures had a volatile week, closely following the path of outside markets, the banking sector in particular. A hot jobs report on Friday weighed on the market, sending the cotton limit down going into the weekend and having the lowest close since November. The news of the Silicon Valley Bank (SVB) collapse had people questioning if the Fed would actually increase interest rates, which helped give markets a little boost early in the week. A mixed tone was present to close out by the weekend. May futures settled at 79.16 cents per pound, down 302 points, but off the lows seen earlier in the week. Total open interest increased by 4,242 contracts to 190,675.

A strong jobs report released on Friday, which heavily pressured markets, appeared to be a small problem when compared to the events that followed. The global and domestic banking sector was in absolute turmoil this week. The freefall of the banking sector started with the collapse of SVB and Signature Bank. Inquiries about Credit Suisse’s solvency arose and the health of First Republic Bank was questioned. Worries about banks have many questioning what the Federal Open Market Committee will do concerning interest rates when they meet next week. After comments made last week, a 50-basis point hike seemed inevitable to take on a more aggressive stance on taming inflation after strong economic data was released.

However, after the events of the banking sector and slightly cooler economic data this week, many believe the Fed could pivot and increase interest rates at a lower level or pause altogether. The Consumer Price Index (CPI) was released and showed a month-over-month slowdown of 0.4 percent, making a year-over-year increase of 6.0 percent. Retail sales also fell by 0.4 percent month-over-month but are up 5.39 percent year-over-year. The U.S. Producer Price Index (PPI) fell by 0.1 percent month-over-month, below expectations, but still up 4.6 percent year-over-year. Initial jobless claims fell to 192,000, showing a continuing strong labor market. Cotton has not been the only commodity under pressure. Crude futures tanked and other row crop prices were mixed throughout the week. The hot and cold data over the past week has many hopeful the FOMC meeting next week will provide some clarity on where the economy is headed.

Although strong export sales were reported for the week ending March 9, the market seemed to shrug off the good report. Net sales of 225,500 Upland bales were reported for the 2022/23 crop year and 12,800 bales were booked for the 2023/24 crop year. The biggest buyers this week were Vietnam, purchasing 120,200 bales, followed by China with 35,800 bales, Turkey with 16,900 bales, Pakistan with 10,400 bales, and South Korea with 10,100 bales. For the second week in a row, shipments were above the pace needed to reach USDA’s export expectation of 12.0 million bales. A total of 273,900 bales were exported for the week. Pima sales were at a marketing year high. A total of 7,600 bales were booked for the week, while shipments were below the 4-week average with only 1,500 bales shipped.

There is not really anything new to report where drought is concerned throughout parts of Texas, Oklahoma, and Kansas. Temperatures have fluctuated from cold to above average, but no substantial moisture has been reported, although the winds are seemingly ever-present. Colder, windy conditions are forecast for West Texas over the weekend, but little precipitation is expected. Rain is desperately needed in the coming weeks to ease the drought-ridden soil and help prepare the ground for planting. Planting continues in South Texas, and unlike other areas in Texas, there is a chance of rain in the coming days. The anticipated moisture will help spur growth and improve soil conditions in the region.

Cotton-specific news will be pretty light next week, with the FOMC meeting taking up most of the space in traders’ minds. Will the Fed keep its hawkish stance and continue raising rates or will the events of the past week cause them to pause? The volatility seen in recent weeks will continue in the coming week with inflation being the main culprit. Where cotton is concerned, traders will continue to focus on Export Sales.
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