Pakistan's Cotton Disaster: The Real Reason Behind the Shocking Decline in Production

The world cotton market has been left stunned by the dramatic decline in Pakistan's cotton production, with the latest report from the Pakistan Cotton Ginners’ Association (PCGA) revealing the second worst seed cotton arrivals in a decade. But despite the alarming statistics, independent forecasts remain optimistic about Pakistan's crop performance, predicting a decent revival in the 2024-25 kharif marketing season.

The news of Pakistan's underperforming cotton crop is not new, but it has taken two months of data to confirm the decline in cotton arrivals, which has left many experts worried about the chances of recovery. Historically, Pakistan has witnessed no more than one-fourth of its total seasonal arrivals accounted for by mid-September, but the trend shifted dramatically over the past two years, with as much as 45-50% of total season arrivals being accounted for by this time.

Despite the shift in trend, one version claims that cotton cultivation has switched back to late sowing varieties, with at least three-fourths of annual arrivals still awaited. While this claim is lent credence by the fact that many growers in the wheat-cotton rotation were unable to offload their grain inventories early on due to the April 2024 price crash, it remains uncertain whether late sowing is out of the realm of possibility.

The fall in wheat prices led to financial losses for much of the farming community, forcing them to hold back on investment in inputs during the following kharif season. As a result, both acreage and yield face tremendous downside risks. Furthermore, the downward pressure on cotton prices, falling 40-50% on both international and domestic indices (Cotlook and KCA), has made cotton less attractive to growers.

The textile sector, which persists with negative signaling and constant howling of looming credit defaults and industry closures due to high energy tariffs, has not offered any hope to farmers. In addition, farmers received suboptimal prices during the 2023-24 season, below the intervention prices, despite the election year populist rhetoric.

The data from PCGA reveals a pessimistic picture, with declining arrivals/flows every fortnight. The association has released five fortnightly reports, and if the milling segment has not set up ginning operations overnight, it is possible that the PCGA is reporting false data. The USDA projections of 7.1 million bales of cotton production are still on track, but this number may not be wide off the mark, considering that the USDA's cotton cultivation estimates are in line with actual surveys reported by provincial crop departments.

Whatever the reality, it is clear that cotton crops are set to underperform compared to last year, when the yield shot up dramatically. This means that the cotton import bill is set to shoot up, subject to inventories held up with the milling industry from the last season.

The APTMA reported a 20-year low in cotton yarn production last year, despite the reportedly five-year high cotton crop production. This means that the buying side has a lot of carryover inventory, with very little appetite for fresh crop, which might explain the absence of upward price pressures on fresh cotton arrivals, despite the reportedly weak domestic crop performance.

A cotton import volume of 3.5-4 million bales is almost certain, but the cost of this import is yet to be determined. If world cotton forecasts are yet to incorporate the poor crop performance by the world's fifth-largest producer, there may be some upward movement in international cotton prices. However, it remains uncertain whether the upward price pressures emanating from the supply deficit in Pakistan will be sufficient to cancel out the recessionary headwinds in global textile trade.

For now, for as long as international cotton prices find resistance at 90 cents, Pakistan's cotton import bill during 2024-25 shall remain contained under $1.4 billion. This is a significant amount, but it is on track with the past five years.