COTTON farmers, who enjoyed attractive producer prices last season, should brace for a massive drop in producer prices this season, owing to the falling price of lint on the international market.
Industry sources yesterday lamented the tumbling lint price on the world market and the huge effect that it would have on local producer prices.
Last season, merchants were paying between US$0,85/kg and US$1,00/kg for seed cotton, which was a substantial increase on the previous season's US$0,30/kg.
Generally, when supply outstrips demand for lint, the price of lint will fall, which is what is currently happening on the global market. This will be bad news for local farmers since what buyers will be prepared to pay for their seed cotton will be commensurate with the current lint price on the market.
The good world seed cotton prices received by growers last season are largely expected to result in world cotton production increasing by 8 percent to about 26,9 million tonnes in the 2011/2012 season, the largest crop since the 2004/2005 season.
According to the recent Cotton Outlook, the increase in production during the 2011/12 season will be driven primarily by China and India with production yields of around 1 300kg/h and 510kg/h respectively.
China, the world's largest cotton producer, is expected to produce 7,2 million tonnes, an increase of 13 percent over last year, India, the world's second largest producer, is expecting to produce between 5,8-6 million tonnes, an increase of around 9 percent with Pakistan increasing production to 2,1 million tonnes a rise by 9 percent, Australia's rise by 27 percent will push production to 1,1 million tonnes, with production record levels expected in India and Australia.
The global trade is expected to increase by a moderate 2 percent to 7,8 million tonnes, with the Chinese national reserve appetite driving the imports to rise to 3,3 million tonnes, up for the third consecutive season.
The global cotton stocks could rebound to 11,3 million tonnes by the end of 2011/12 as a result of the projected surplus of 2,3 million tonnes. The world stocks-to-use ratio, excluding China, are expected to rise from 46 percent to 55 percent, which could translate into a significant decline in the average Cotlook A index for the season.
However, despite the falling lint price, there is still value in seed cotton production in the country as growers continue to enjoy spot cash payments, unlike other crops such as maize where farmers have to wait for payment after delivery of their crop.
They also benefit in cases where they sell their cotton to merchants at, for example, X price. If the lint price falls to a price lower than the X price that the buyer paid the farmer, the risk remains with the buyer to sell the lint at a loss.
On the other hand, if the lint price goes up, farmers are cushioned, as they will receive back payments.
