20000103

Liberal procurement policy of TCP improves cotton prices

S A Aziz Shah

The current cotton crop estimates have generally been scaled down to the level of 10.0 million bales while some put it around 9.5 million bales. The flow of arrivals in the second fortnight of December, 99 would help in making the crop estimates more precise. The Pakistan Cotton Ginners Association (PCGA) seed-cotton arrival figures upto December 31, 99, are generally expected to be between 8.0 and 8.1 million bales. It means to reach the level of 10.0 and 9.5 million bales, another 1.9/2.0 and 1.4/1.5 million bales respectively are required.

During this season about 144,847 bales equivalent to 185404 Pak bales are reported to have been imported and total import may go up to 200,000 bales (Equal to 256,000 Pak bales) in the season. Domestic annual consumption is estimated around plus 9.0 million bales in view of favourable conditions. As such, there may be an exportable surplus of 1.0 million bales. Local lint prices have generally remained depressed and so the seed-cotton prices.

The induction of Trading Corporation of Pakistan into procurement of lint cotton as second buyer has not been able to firm up the prices as desired due to frequent changes in its policies. Spot rates as established by the Karachi Cotton Association on the December 31, 99 were Rs 1025 for Niab-78, Rs 1285 for K-68 and Rs 1330 for MNH-93 per maund of 37.324 kg ex-gin without sales tax. Low Grade cotton in lower Sindh and in some areas of southern Punjab is selling below the level of Rs 1000 per maund while better grade cotton around Rs 1250-1350 per maund. Exporters are lifting low grade cotton more aggressively than the TCP or local spinners. Factually, export prices of low grade cotton appear to be more viable than those of high grades.

Local spinners are lifting average quality cotton. Their total lifting by the close of December 99 is expected to be around 5.8 million bales which would be higher by 1.2 million bales than last year. Level of unsold stocks by the end of December is estimated around 2.0 million bales.

The TCP is reported to have made contracts for 980,000 bales against which about 425,000 bales have reached TCP stores (About 95,000 bales in CEC store Multan and about 325,000 in CEC Korangi store, Karachi). Both the CEC stores have attained maximum storage capacity and further arrivals are being diverted to RECP rice godowns at Pipri, Karachi which have larger storage capacity. However, the paid for position may not be more than 250,000 bales. As TCP is now reportedly accepting deliveries of lower grade cotton such as Alaka, Adnas and Nadan, the chances of meeting their contractual obligation of procurement of 980,000 bales already contracted now appear to be quite possible. TCP has extended the last date of delivery of contracts upto January 15 this year. The ginners hope that TCP would extend it till January 31, 2000, by which they would be able to perform their contracts. Local cotton prices have improved by Rs 50 per maund in view of liberal purchase policy of TCP. If this policy was adopted earlier by TCP, the growers would have been widely benefited.

Rush for payment of 80 percent is increasing at head office. The bill-files received at head office from upcountry office for payments are not recorded properly serial-wise and date wise. Store receipts are not properly maintained. The concerned ginners and their representatives have to run from pillar to post to trace their files. Any CEC man with sufficient experience in stores should be deployed here to streamline the work of processing bills in commercial department. The procurement operation was commenced by TCP without doing proper homework including lack of experience in cotton procurement, deployment of inadequate staff in zonal offices poor monitoring and inspection system, improper operational procedures/systems, paucity of funds, poor planning and shortage of time. Interestingly, the TCP has fixed the purchase rate of lint cotton equal to grade type Afzal 1.1.32 inches at Rs 1500 per maund ex-gin without fixing the base price of seed-cotton. As a result of this, the seed-cotton prices having failed to sustain selling pressure, lost parity with lint cotton prices and bogged down to the level of Rs 350-400 per 40 kg. Instead of helping the grower in getting them better rate of their seed-cotton, the TCP procurement system worked otherwise and helped only those ginners who could sell their lint cotton only to TCP. Although TCP was supposed to make its cotton purchases at prevailing market rates but it paid 15 to 20 percent more than market rates.

Surprisingly, the TCP kept the rate of Afzal constant and made quality differentials of lower grades variable. This is a new phenomena in pricing system contrary to all established pricing systems. Recently, the TCP increased the discounts of Alaka from Rs 22 to 85 and of Adnas from Rs 86 to Rs 170 per maund i.e. about three times and two times increase respectively. This change has been made applicable on all cotton bales despatched to any TCP godown after December 2, 99. Has not the larger margin of Rs 63 and 84 per maund for Alaka and Adnas respectively tempted the ginners to prepare necessary despatch documents including truck receipt back-dated December 27, 99 or earlier with the cooperation of TCP staff and truck adda, to mop the undue gain? This is due to poor information feeding system from upcountry to head office.

Daily feeding of all operational activities including the No of bales Contracted, Despatched to TCP godowns and paid for should regularly be sent by upcountry offices to head office through phone or fax. As a matter of fact, TCP upcountry office are not properly equipped with necessary manpower and communication facilities such as direct telephone connection and fax machines.

The decades old system of premiums and discounts as established by CEC after research of several years which has been working very smoothly for years, has now been distorted. The TCP has decided to invite tenders from international merchants for sale of 10,000 bales each of types 1467 and Afzal with staple 1.1.16 for both. Certainly, lower types will be offered later. The question is what will be the discounts applicable to lower types such as Alaka, Adnas, 1210 and Nadan etc., at the time of negotiation of rates? Certainly not the large purchases discounts which will go against the interests of the growers and ginners and will serve the interests of foreign buyers. There appears no commercial as well as technical justifications for such abnormal increase in discounts without reducing the base price of Rs 1500 for Afzal. The vested interests should not be allowed to exploit the higher purchase discounts equivalent of 20 cents per pound for Alaka and 4.0 cents per pound and for Adnas in favour of foreign buyers, while negotiating the sales rather the decades old and successfully implemented export price differentials for lower grades such as 0.5 cents per pound for Alaka and 2.0 cents per pound for Adnas (For staple 1.1.32 for both) should be applied. Complete transparency in foreign sales should be maintained.

Export sales of Pakistan cotton have reached the level of 306,406 bales as on 30-12-99 while about 50,000 bale contracts are in the pipeline. Against these sales only 26,742 bales have been shipped. India has emerged as a largest buyer claiming more than 55 percent share. Other prominent buyers are Bangladesh, Indonesia, Thailand, Korea and Taiwan. Recently, two sales of 40,000 and 20,000 bales have been repeated by India. Four bulky sales amounting to 120,000 bales have been registered by the exporters for some textile group located in Indian Punjab which are to be shipped through land route via Wagah boarder but so far nothing has been reportedly shipped. There are reports of reluctance on the part of India to allow cotton shipment through Wagah. There have been some reports of protests/demonstrations in Mumbai by some hardliner parties against Pakistan on the issue of import contracts by Indian mills/importers. Whether contracts will be fully performed or not, trade circles have doubts about it.

The Government should monitor all cotton export contracts and ensure that no under-invoicing takes place or performance of the contracts goes on smoothly. However, the government has not done well by withdrawing the condition of furnishing performance guarantee to the extent of 3 percent of the contract value. The government should again put this condition so as to ensure performance of the contracts. If TCP lifts about 900,000 bales, the requirements of the exporters and spinners would fall short. The domestic lint rates are also likely to become firm and go up in the coming months. Prices in international market are also showing signs of recovery due to persistent demand and somewhat reduction in availability.