Early Cotton Procurement in Pakistan Raises Questions About the Market
Early and aggressive cotton procurement in Pakistan's textile industry has raised questions about the market's dynamics. Despite a significant increase in cotton sales to the industry, local cotton prices have not risen as expected. Various factors, including climate change, export orders, and low carryover inventory, contribute to this early buying trend. However, the lack of a substantial rise in bank financing for cotton procurement suggests that other financing mechanisms may be in play. This situation calls for further investigation to understand the impact on the economy and the effectiveness of monetary policies.
Business Recorder 
In the midst of the cotton marketing season, the rush to secure the "white gold" typically begins later, influenced by factors such as crop expectations, global prices, export orders, and existing inventory.
Historically, the textile industry's inventory buildup peaks in December, and over the past decade, the local cotton sold to the textile sector by the end of September has averaged at 2.4 million bales. A record-breaking 3.3 million bales were procured in 2021, coinciding with a remarkable 25% growth in Pakistan's textile export earnings, reaching a record $20 billion for the fiscal year 2021-22.
However, recent data from the Pakistan Cotton Ginners Association (PCGA) has raised eyebrows. It reveals that ginning factories in Pakistan had sold an astonishing 4.2 million bales of cotton to the textile industry by the end of September 2023, the highest figure in at least a decade and possibly in the country's history.
The early and aggressive inventory building by the textile industry can be attributed to two main factors. First, climate change and monsoon flooding have shifted the cotton picking season earlier in the year, leading to increased business activity in July to September. Second, a low carryover inventory from the previous year and robust export order interest, akin to 2021, has spurred early inventory building by the textile sector. This not only benefits the industry but also the economy, given the positive outcomes experienced in 2021-22.
However, aggressive early buying by the industry in the past resulted in a surge in cotton prices, leading to a 71% increase between June 2021 and March 2022. The stability of the currency during this period and rising world cotton prices contributed to this phenomenon. In contrast, global cotton prices have stabilized in 2023, and local prices have declined.
This raises questions about the lack of a price increase in the local market despite aggressive buying by the industry. Are farmers facing difficulties in selling their bumper crop, allowing mills to take advantage, or have declining global prices turned local cotton into a buyers' market? To gain insights into this, we can examine trends in banking credit for cotton procurement.
Based on SBP datasets and market prices reported by the Karachi Cotton Association, bank lending for cotton procurement is consistent with historical patterns. However, the amount financed by banks has not seen a significant increase despite the reported aggressive buying. This begs the question of how the industry is financing its cotton procurement and whether there are undisclosed factors at play.
If industry players are no longer relying on banking credit to finance raw material procurement, it raises questions about the ongoing monetary tightening cycle and its impact on the economy. This situation calls for closer examination by market observers and commentators to better understand the dynamics at play.
