Recent rains in Sindh have led to a lot of hullabaloo about the damage caused to agricultural crops, in turn, negative impact on Pakistan’s economic produce. The rains and ensuing deluge has hit badly the areas of Badin, Mirpurkhas, Thatha, Sangar, amongst others, causing substantial socioeconomic harm to these regions. According to National Disaster Management Authority (NDMA), 23 per cent of the Sindh province has been affected by monsoon rains, displacing more than seven million people. More than 300 people have lost their lives according to the data released by NDMA. This has left 27 per cent of total crop area in the province either damaged or destroyed in the process. Of these, a negative impact on cotton is also feared, resulting in expectations of a less than targeted output and causing the cotton price to shoot up once again, although not to levels that were seen last year.
Cotton, in turn textiles, account for about two-thirds of the country’s exports and provides employment to 45 per cent of the workforce; thereby making healthy cotton crop vital for economic growth. Last year, cotton production fell to 11.7 million bales against a target of 14 million owing to devastating floods. The losses in the cotton crop, in addition to industrial damage reported, were among the top reasons why Pakistan’s economic slipped to 2.4 per cent from the original target of 4.5 per cent growth. The underlying economic significance of the crop has not changed and still holds today. Cotton is Pakistan’s main cash crop, contributing 1.4 per cent to GDP, and a drop in output will likely make it difficult to achieve a 4.2 per cent GDP growth target in the current financial year.
Damage to cotton crop this year… overplayed? While we maintain that the target seems hard to achieve, analysis indicates that the talk about the magnitude of damage has been surely overplayed. According to the ministry of food and agriculture, Sindh contributes about 16 per cent of total crop area of the country and a total of 19 per cent of all cotton production. Reports claim that 27 per cent of Sindh’s area has been affected. Even if half of Sindh’s production is assumed destroyed/damaged, this results in a loss of 1.5 million bales. There is good reason to regard this as a pessimist estimate owing to the fact that most of the areas affected are considered low in terms of cotton plantation but more towards chilli and rice growing. Recent reports which indicate a loss of 1-1.2m bales also support the fact that the damage is considerably less than what was experienced last year. As per analyst estimates, the impact on GDP would merely by in a range of 25bps to 50bps. Therefore, we anticipate a production of around 12.5-13m bales this year which would be higher than the amount achieved last year. Nevertheless, the production would yet again fall short of demand, as it has consistently in recent years, and in such we do not rule out the possibility of an import of cotton from India. However, the burden on the national exchequer is not expected to be massive as being perpetrated by the media.
Cotlook: The price impact: The international price situation is certainly a tricky aspect which depends upon factors other than Pakistan’s output alone. These include mainly this years’ demand for cotton in China, trade policies with respect to cotton export adopted by India, and general crop yield globally. Last year, heavy demand from China as the mass producer stocked up on inventory helped sustain high levels. The international price has since retraced and has been hovering at a level of USD 100cents/pound for the last two weeks. We do not expect deviations from this level, at least in the short run, however with an upside potential as a reaction to China’s requirements.
Meanwhile, cotton prices have surged about 30 per cent since hitting their low of close to Rs5,000 per maund in July 2011 to stand at Rs6,430 per maund at the time of writing. In our view, much of this increase is attributed to speculative activity in anticipation of low production. Given less than anticipated disaster, it is highly unlikely that prices would reach close to the highs of Rs12,500 per maund seen last year. Better and drier weather is replacing itself compared to the earlier months, resulting in stabilisation in the prices of the cash crop, as supplemented by the trend of trading activity seen in the KCA. Several textile ginners foresee Punjab cotton acting as a stabiliser anticipating makret prices dropping to the range between Rs5,500-6,000 per maund. On the local front, we share this view and regard this as a plausible estimate. This carries significant importance in the eyes of local procurers, for whom inventory management has become an integral aspect directly effecting profitability given the volatility they have had to bear previously. With calculated and timely buying, gains are surely there for the taking for those who have the willingness and ability to procure gradually. While the willingness may be there for textile manufacturers, which manufacturers have the ability to realise these benefits still remains to be seen.
Cotton outlook turns negative – damage overplayed?
