Last season, about 80 percent of the cotton crop was bought at prices between US$0,85 and US$1,05/kg because the prices went up to US$2,45/pound.
The average price of lint as initially agreed declined at a time when growers were still delivering their cotton. Consequentially, the producer prices were way above the realisable prices on the international market.
Domestic prices remained stable despite the declining international lint prices, creating a situation where growers got over-paid.
The overall effect pointed to the fact that ginners bought seed cotton at prices outside the limits of the pricing model.
Cotton Ginners Association director general Godfrey Buka told The Financial Gazette’s Farming that the downward trend in prices, occasioned by the global slowdown in the demand for yarn, resulted in mills not ordering the lint, preferring to watch the market for even lower prices.
“Prices have fallen to levels where it has become difficult for ginners to profitably sell their lint further compounding the problem. Where contracts had been signed with spinners, these were reneged due to the huge decline in prices,” Buka said.
He said the International Cotton Advisory Council had projected a significant drop in prices in the current 2011/12 season, which began in July 2011 and ends in June 2012.
“Ginners continue to face difficulties in disposing their lint at attractive prices due to this global lint price crash. At the prevailing prices, lint is now being sold at a loss, that is, at prices below cost of production.”
While ginners have managed to export their lint, the movement was not as desired due to lack of demand for yarn which slowed down lint market activity.
“The consumption of lint stocks by international spinners who used to maintain two to three weeks stocks has been stretched to as much as three months. Demand for lint has drastically dropped and most mills have stopped ordering in anticipation of cheaper prices as lint prices continue to drop. This resulted in lint stockpiling at warehouses awaiting dispatch at ports in Durban and Beira. The uptake from there has been very slow,” Buka said.
As a result some lint merchants/buyers have defaulted on forward sales agreements and in many cases contracts had to be re-negotiated at lower price offers with some downright cancellations of orders being experienced.
Selling lint has become a real challenge since there are no ready takers offering viable prices and the available buyers are bargaining to buy at lower prices. There has been an increase in cases of default due to quality claims which entail renegotiating of prices at lower levels.
Buka also added that there were instances where export permits expired without any movement of lint because of these marketing challenges and ginners remain with the challenging obligation to finance crop production and in many cases have had to use roll-over borrowings.
“Due to slow movement of lint the ginners carry costs i.e. interest cost on borrowed funds and warehousing costs which have dramatically gone up.”
The International Cotton Association (ICA) reports that requests for technical arbitration skyrocketed in 2011, increasing five times above its normal yearly average and double the record high set in 2008.
The industry is still seeing parties failing to honour their contractual obligations. This is continuing to have a direct impact on the number of disputes brought for arbitration at the ICA and the pace does not seem to be slowing down. The majority of the world’s cotton is traded under ICA by-laws and rules. These regulations act as guidelines for the cotton industry on how cotton should be traded.
The high prices last year were mainly driven by the high demand from the Chinese market, a scenario which gradually eased, resulting in prices declining. The lint price decline started when growers began delivering their crop for sale after the domestic price negotiations had been concluded.
The mismatch between the procurement to ginning and sales execution meant that local lint got onto the international market when the price decline was in full swing hence lint sellers did not enjoy any prices at the projected average lint prices.
“Cotton is a strategic crop which has the capacity to improve quality of lives and alleviate poverty for communities living in the arid regions of the country where the crop is grown successfully. Because of high prices in 2011, the level of farmers viability improved significantly in the last season,” said Buka.
Although international prices keep falling, they are still comparatively better than lint prices for the years before 2010 when prices averaged US$0,67/lb. However, the market can be very volatile.
Farmers planted more than 450 000 hectares of cotton this season and ginners are still committed to the development of the cotton industry by financing through contract farming despite losses made last season.