Egypt’s government is locked with bankers over $500m in financing for the country’s cotton growers, and help resolve a "crisis" evident in a 90% collapse in exports, and which is confronting both traders and farmers will losses.
Agriculture ministry officials are in talks with the state-owned Principal Bank for Development and Agricultural Credit, Egypt’s main farm lender, over providing 2.5bn-3bn Egyptian pounds ($420m-500m) for buying cotton produced by the ongoing harvest.
The talks follow the refusal of commercial banks to finance purchases of the fibre given a stand-off between growers – who have banked on receiving prices approaching the 1,800-2,000 Egyptian pounds a qintar, equivalent to about 250 cents a pound – and traders offering less than half has much.
For farmers to give in, and accept international market prices, would confront them with massive losses, given that their costs this year, on their estimates, were more than 1 Egyptian pound per qintar, or roughly 170 cents a pound.
The Cotlook A index of physical cotton prices stood on Tuesday at 107.75 cents a pound.
However, for traders to pay up would mean swallowing huge losses to shift Egyptian cotton on the international market, or sitting on the cotton in the hope of a market revival.
Indeed, sales by Egypt’s Alexandria Cotton Exporters’ Association, Alcotexa, have reached only 8,304 tonnes so far in 2011-12, which began at the start of last month, down from 78,598 tonnes at the same time last year.
US Department of Agriculture attaches in Cairo said that commercial banks were demanding guarantees of at least 25% against loans as "they are not sure that the exporters will be able to sell large quantities given the considerable difference between local prices and the international prices".
‘Crisis has escalated’
The industry’s deadlock, which has become more pertinent with the ongoing harvest period, stems from a government pledge that farmers would receive a profitable cotton price, prompting a surge of 40% to 221,000 hectares in sowings, and a splurge on fertilizers to support yields on more marginal land.
Egypt’s cotton harvest is expected to reach 180,000 tonnes, (745,000 bales), a rise of 37% year on year.
However, with Cairo yet to make an offer to growers, farmers have stopped sales "while waiting for an increase in the offered prices or for government intervention in the market", the attaches said.
"The cotton crisis has escalated especially with the rejection of the commercial banks [of requests] to finance local trading companies to purchase local cotton because they expect international prices will decrease."