Cotton pricing crisis sees local trading system grind to a halt: The government has temporarily suspended the local cotton trading system on the back of pricing issues that have crippled the industry this season, sector sources tell EnterpriseAM. The crisis stems from guaranteed prices for farmers set by the government that significantly exceed the crop’s current global market value, making it difficult to trade locally or internationally.

Sound smart: Cotton farmers put a lot of time, effort, and capital into growing their crop, but the price of cotton can — as shown recently — swing wildly and reach lows that mean that farmers might not be able to even cover their costs. A guaranteed price is a tool often used in agriculture where the government — at least in this case — promises to buy up farmers’ crops for a pre-determined amount if they fail to sell for above this in the market. This means that farmers can plan ahead knowing that they will at least get a certain amount for their crops and not be left out of pocket completely, while the government can ensure that certain strategic crops will continue to be planted.

Cotton trading system? First piloted during the 2019-20 cotton harvest season before being rolled out across the country in 2021, the cotton trading system mandates that all cotton produced by public or private entities be collected and sold at public auctions to the highest bidder. In order to protect producers from market volatility, the government sets a guaranteed price that acts as a floor for potential bids.

This year has seen guaranteed prices more than double: The government has raised the guaranteed price 122% from last season to EGP 10k per quintal of medium-staple Upper Egyptian cotton and 122% to EGP 12k per quintal of long-staple Lower Egyptian cotton for this harvest season.

This comes as global cotton prices have dropped to some USD 1.30 per lb, down nearly 30% from last year’s USD 1.80, a source from a professional body representing cotton exporters told EnterpriseAM. This drop has brought the maximum value of cotton at international market prices to EGP 8.5k per quintal — EGP 1.5k and EGP 2.5k short of the government’s guaranteed price for Upper and Lower Egypt cotton, according to the source.

A cotton glut is not helping matters: Cotton cultivation by area expanded by 23% this season to over 311k acres, with the year’s total production expected to reach 1.4 mn quintals. When added to the 650k quintals still left over from last year’s harvest — most of which is sitting with state-owned companies — the total expected supply for this year is expected to reach over 2 mn quintals.

THE COTTON MARKET IS FEELING THE EFFECTS OF THE PRICE GAP-

Traders and marketers are bowing out of this year’s cotton market: Some 325 private companies have chosen to not participate in this year’s local and international cotton trade as a result of the pricing crisis, leaving government entities to market the country’s entire production at guaranteed prices. This will entail significant losses for these entities if the government fails to offer extra support, our source told us. The source added that there have been no export requests for Egyptian cotton this season due to the high price — particularly concerning given that Egypt exports most of its cotton production, with Egyptian companies often opting to buy lower-quality imported cotton.

Domestic industry is also reluctant to take the pricing hit: Private factories in the freezones, which usually purchase some 300k quintals per year, have been wary of purchasing at the higher prices, worsening the market’s oversupply situation. State-owned factories are not faring much better, with Misr Spinning and Weaving Company’s factory in El Mahalla El Kubra one among a number of companies struggling to process its existing supply of cotton from last season. Both private and public sector companies are now relying on cotton imported for around USD 1.00 per pound.

A parallel market has already emerged, with farmers in Upper Egypt reportedly selling cotton for EGP 8k-8.5k per quintal, according to a source on the Internal Cotton Trade Regulatory Committee. The Holding Company for Spinning and Weaving’s purchase of only 300k quintals — around 15% of total supply — two months into the season has left farmers turning to private parties outside of the system to secure funds for the next agriculture cycle’s preparations despite the lower offered prices, the source added.

As our exports drop, US-produced cotton is ascendant: Exports of Egyptian cotton from the new harvest have fallen to zero — a stark fall from the over 13k tons exported during the same period last year, according to estimates from a professional body representing cotton exporters. Meanwhile, US-produced pima cotton is filling the gap in the export market, with pima cotton sales surging 35% since the beginning of the season, the source from the association said. Even Egyptian factories have expanded their imports of Pima cotton, purchasing around 8k bales this year, despite it being inferior in quality to Egyptian cotton.

EFFORTS ARE UNDERWAY TO RESOLVE THE CRISIS-

The relevant ministries are coordinating a response: The investment, industry, agriculture, and finance ministries, in coordination with the cabinet, decided to suspend the marketing system after holding a joint meeting around ten days ago, an Agriculture Ministry source told EnterpriseAM. The source added that the Agriculture Ministry has sent all details about production and marketing operations to the Finance Ministry.

Private players have proposed a couple of solutions: Private sector companies have submitted two proposals to the ministerial committee to resolve this year’s crisis. The first would see the government pay a subsidy of EGP 2k per quintal for all the supply on offer, while the second would allow private sector companies to establish parallel private channels for farmers to sell cotton outside of the government system.

Gov’t support is on its way: According to the source, the government is very likely to approve the subsidy proposal — particularly since the private sector trading scheme was rejected by the ministerial committee on the grounds that it would compromise the integrity of the public trading system. If the government adopts the subsidy proposal, which is currently being reviewed by the Finance Ministry, it will be the first time Egypt has offered cotton subsidies since the 2014-15 season.

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