With the sowing period underway, the cotton production target has emerged as a central concern. As world cotton production is expected to improve by nine percent annually, the Ministry of Food and Agriculture (MINFA) has set a domestic target of 15 million bales, up 28 percent since last year, for FY12.
It is believed that the estimates will play a major role in the determination of cotton prices in both in the international and domestic market, which hit their peaks ($2.43 per pound and Rs13,000 per maund, respectively) during the third quarter in FY11. Since then prices have fallen mainly due to a slowdown in Chinese mill demand and in anticipation of improved supply next year. ‘Resultantly, we foresee that standalone spinners will be most affected’, said Rabia Tariq at JS, adding that composite and standalone weavers can benefit from lower yarn prices.
According to the latest estimates published by United States Department of Agriculture (USDA), world cotton output is forecasted to jump to 123.8 million bales in FY12. If this scenario materialises, it will constitute a record output level, exceeding the previous record of 121.8 million bales achieved in FY07. Furthermore, it is noteworthy that the world consumption is projected to augment to 119.5 million bales in FY12 (compared to 115.5 million bales in FY11) driven by global economic recovery alongside an improved production outlook.
On the domestic front, Ministry of Food and Agriculture has set an ambitious cotton production target of 15 million bales for FY12 against last year’s production of 11.7 million bales, a portion of which was affected by the 2010 floods. The expected jump in cotton output is mainly because of an anticipated increase in area under cultivation, forecasted to rise by eight percent in annual terms to 8.5 million acres.
It is generally viewed as an optimistic target while water constraints continue to pose a challenge while the Leaf Curl Virus and other pests plague cotton production, she added.
FY11 witnessed cotton prices rallying to all time peaks internationally and domestically on the back of limited supply and sharp demand. However, prices globally took a breather in April, predominantly owing to slowdown in demand by mills (mainly in China) and expectation of better crop in the coming season.
However, taking into account the global and local production forecasts, the cotton prices are projected to stabilise at around $1-1.25 per pound from the current levels of $1.49 per pound.
Weather conditions are also set to play a decisive role. Last year, destructive weather patterns wreaked havoc with crop yield such as in the case of floods in both Pakistan and Australia and heavy rains in China destroying the crop which resulted in price escalation. Moreover, pest attacks are also a vital aspect.
In case of the impact on local textile companies
With cotton prices predicted to stabilise in FY12, the profitability of standalone spinning units will be affected greatly as they will not be able to make wind fall gains as a result of continuously rising prices and supply concerns. However, the standalone weavers and other value added units will benefit due to lower yarn prices.
Furthermore, composite units like NML and NCL will continue to thrive as they are elastic in switching focus in-between their segments. Also, it is expected additional working capital lines (taken this year due to expensive cotton) to decrease resulting in lower finance costs post FY11, she added.
