Karachi Cotton Association Facilitates Pakistani Cotton Market
March 10, 2009 Cotton has been cultivated in Pakistan for more than 5,000 years. The indigenous variety of cotton, known as “Desi Cotton,” was cultivated in the Indus Valley during the Harappan-Mohenjo Daro civilization. Genetically, the plant is a perennial, but it was adapted as a seasonal crop for higher productivity with the advancement of farming technology.
The British introduced American cotton to Punjab at the onset of the 20th century. The genotypes were imported from North America initially and a test-cultivation was made in Punjab. Since 1917, cotton cultivation has shifted from Desi to American varieties in Punjab and Sindh, which are primarily crosses of new American breeds.
Pakistan Cotton Association Evolves
In 1933, the Indian Central Cotton Committee held one of its meetings in Karachi and recommended that an independent body be set up in Karachi. Prior to 1927, the cotton trade was regulated partly by the Karachi Chamber of Commerce and partly by the Karachi Indian Merchants’ Association. There were no uniform contracts or recognized standards. European and Japanese merchants were members of the Chamber; Indian merchants were members of the Merchants’ Association. The marketing system was not aligned with the requirements of the growing cotton trade, and reforms were needed.
The Sukkur Barrage promised vast agricultural possibilities in Sindh. The Karachi Indian Merchants’ Association took the initiative, and at the insistence of the Indian Central Cotton Committee, a joint meeting of the Karachi Chamber of Commerce and the Karachi Indian Merchants’ Association agreed to set up an ad hoc organization. Called the Karachi Joint Cotton Committee (KJCC), it consisted of eight members of the Chamber and eight members of the Association. This group introduced important reforms: (1) the establishment of a single agency to regulate the cotton trade of Karachi; (2) the organization of a regular forward market in Karachi; and (3) the introduction of a uniform contract for forward dealings. KJCC functioned well for six years with the cooperation and goodwill of the parent bodies. The history of KJCC is a story of cooperation and unity between Europeans, Japanese and Indians – all of whom were working to form an independent trade body. The question of a cotton association was already before the trade, and in 1929, the parent bodies formed one.
On April 20, 1933, the Karachi Cotton Association (KCA) was incorporated, and soon the cotton brokers section was brought into the fold. The fundamental objects of KCA were the unified control of the Karachi Cotton Trade, the creation and maintenance of facilities, and direction and standardization to create a modern cotton market. KCA also set up a clearinghouse and statistical service.
Organization Of The Association
KCA is the oldest trade body in Pakistan. Its management vests in a board of directors consisting of 17 members (8 buyers/exporters, 7 sellers and 2 others), elected by secret ballot every year by the members. Four directors are nominated from different federal ministries such as the Ministry of Food, Agriculture and Livestock; Ministry of Finance; Ministry of Industries; and Ministry of Commerce, and the board elects the chairman and the vice-chairman. The board is assisted by the appeal committee, special appeal committee, standards committee, clearinghouse committee, by-laws committee, standing finance committee and rates committee.
KCA has a full infrastructure and by-laws for hedge trading in cotton, including storage capacity of cotton at Karachi and 320 licensed cotton brokers who have their own offices at the Cotton Exchange. It also has a clearinghouse, survey room, sample room, trading hall, modern fiber testing lab with HVI Spectrum, as well as skilled and experienced manpower.
Facilitating Trade
KCA has a transparent mechanism of fixation of daily spot rates which reduces speculative trading and credit risk for borrowers. Hedge trading is a special segment of the trade which provides a cover against the risk of fluctuations in price, thereby facilitating the smooth flow of national and international trading in cotton.
Hedge trading existed in Karachi before 1926, but was suspended by an administrative order of the Government of Pakistan in 1976. Karachi cotton futures contracts and their relevant standards evolved over a number of years. As a matter of fact, one of the purposes of the KJCC was to set up standards to develop the local futures business.
For years, futures trading for cotton and wheat took place in an open market square; later it shifted to a municipal garden. With the building of the Karachi Indian Merchants Association, it was located there with separate rings for cotton and wheat before KCA built a Cotton Exchange which would enable it to carry on future trading.
Today, cotton and cotton products constitute two-thirds of the total exports of Pakistan, and WTO rules make it essential that costs are competitive for a modern and cost effective cotton hedge market.
Akbarali Hashwani is Chairman of the Karachi Cotton Association.
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