This uncertainty has now become a permanent feature of our cotton trade as almost every year the speculations about the size of the cotton crop start from the beginning of the season and remain until the time of the last picking.
As a result the cotton prices follow a roller--coaster path and negatively impact all participants, including the farmers, ginners, spinners and the value added manufacturers.
What is required is an assessment of the impact of this situation on our economy and an investigation as to how we can mitigate or neutralise its severity.
Cotton picking for the current season has just started and the cotton prices have so far been fluctuating in between Rs 2125 to Rs 2425 per maund (KCA spot prices).
This fluctuation is currently approximately 14% with the whole year estimate being even higher.
The profitability of any textile company is largely dependent on the level of prices at which cotton is bought. The textile sector alone earns about 66% of the total foreign exchange for the country.
Any erratic movement in local prices of raw material, therefore, has a negative impact on its export competitiveness, consequently leading to a loss of foreign exchange. This would naturally have a severe impact on the country's economy.
The risk associated with the fluctuations of the cotton prices can be mitigated to a large extent, through the availability of "Futures Trading". At present, no instrument is available to the local textile industry for 'price risk management'.
There is a misconception amongst the general public in Pakistan that trading in commodity futures on derivatives exchanges means only volumes, brokerage fees, and instruments designed for trading and speculating.
This myopic view and rather faulty perception about the commodity exchanges and futures trading needs to be addressed on an urgent basis otherwise Pakistan may never be able to benefit from what has evolved globally over the last hunted years and benefited all sectors of the global economy.
"Futures Trading" performs two important economic functions; Efficient Price Discovery and Hedging. Through this mechanism a farmer can receive signals in advance that would help him in making sowing decisions today.
These days, agriculture requires investments - farmers spend money on fertilisers, high yielding varieties, etc.
The return on this investment is uncertain as there is a risk that by the time the crop is ready for sale, prices may drop, resulting in losses. Thus a farmer would like to lock in his future price and not be exposed to this risk due to price fluctuations.
Similarly the textile manager, through the mechanism of futures trading, can reduce the risk of change in cotton prices.
In this way he would be able to focus his time and efforts with more concentration, in performing his specialised functions for the benefit of the company without being exposed to the hazards of wild fluctuations of raw material prices.
In line with research reports published by leading equity brokerage houses, the introduction of futures trading in commodities will lead to the establishment of research houses producing quality research on all commodities covering different areas such as crop size, consumption volumes, crop conditions etc thus not only improving the information available to the market participants but also providing the much needed transparency.
All participants of the commodity value chain, including farmers, manufacturers and consumers are already reaping the benefits of futures trading not only in the developed countries but also in many developing countries.
This raises a question as to why we in Pakistan are reluctant to obtain the benefits of a tried and tested trading instrument.
(The writer is Manager, Research & Development, National Commodity Exchange Ltd (Ncel)