Determinants of Cotton Price in Pakistan: An Analysis

Abstract

Textile sector is back bone of Pakistan economy. It contributes 53 % to exports, employs 30 % of industrial labor force and has 9.5 % share in GDP. Pakistan is 4th largest producer and 3rd largest consumer of cotton world over. Fluctuation of raw material prices may result in crisis in industry, exports, foreign exchange reserves and GDP growth. It is therefore imperative to forecast the prices of raw material to help industry in reduction of cost and improvement in profitability. We estimated the factors causing variations in cotton prices of Pakistan. To determine the short run and long run relationship, annual data for the period 1960 to 2012 is used. Cotton Production and Consumption in Pakistan, China Imports of Cotton, World Cotton Consumption, Exchange Rate, Textile Exports of Pakistan, and New-York Cotton prices are taken as explanatory variables. Unit root test, Cointegration and Vector Error Correction Model (VECM) ate used to forecast cotton prices. Cotton production showed inverse impact on cotton price in Pakistan whereas all the other factors including local cotton consumption, textile exports, Cotton imports of China, exchange rate and international cotton prices had significant and positive impact both in short run and long run. Government should adopt policies to control exchange rate in order so that fluctuations in cotton price are minimized and risk of crisis in textile industry is minimized. Production and consumption should be monitored to strengthen the prices. This is the first application of time series analyses for evaluating relationship of non-stationary time series for forecasting short term and long term impacts.