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Damage to cotton and other crops may impact macros

Against average annual rainfall of 125mm, the ongoing season has received 3x more rains so far.

Karachi, August 30, 2022: Sindh and Balochistan have reportedly received the most damage with 5x – 6x more rains as compared to their respective annual averages, and higher than the magnitude recorded during flash floods of 2010-2011 for these provinces.

This has severely impacted lives, health, animals, crops, infrastructure and more. Sindh and Balochistan have 30%/8% share in the agricultural GDP, respectively.

Consequently, inflation may face threats of higher prices from crops, livestock and textile-related goods that cumulatively hold 30% weight in the CPI.

This is a high risk to the already sticky food inflation (at 28%; 13-year high) and high WPI (at 38.6%; all-time high).

Agriculture itself contributed 23% to total GDP

Cotton:

The worst affected crop that is among the substantial produces is cotton. After higher production of 8mn bales (+1.3mn YoY) in FY22, farmers had been facing water scarcity this year, raising concerns over the inability to subsequently repeat similar cotton production.

This is now further marred by heavy rains in rural Sindh where the cotton sowing has reportedly been destroyed to a large extent.

While the weight of this crop is barely 2% in GDP, destruction of cotton crop would lead to the absence of local cotton for textile sector.

The sector not only contributes a bulky 8% to GDP, the labour-intensive sector is also over 60% of the country’s exports, making the situation of absence of its core raw material an alarming one.

With a requirement of 2mn tons/annum, Pakistan imported 40% of the demand with an import bill of US$1.8bn in FY22.

Prospective higher imports this year, coupled with higher international cotton prices owing to recent droughts in US (international cotton prices +15% in a span of two weeks), would amplify the impact on the external front.

Assuming the country requires to import cotton to fulfil 80% of the demand this year, the import bill would likely exceed US$4.4bn (+144% YoY) in FY23.

On the other hand, any unavailability of import of raw cotton or other unprocessed textile would negatively impact the country’s textile exports.

Rice:

Rice is another crop that is expected to witness massive damage in the ongoing floods. Rice is among the few crops that has notably increased area under cultivation in the recent past (+20% in two years), which also yields US$2.5bn of annual exports to the country.

A threat to damage of rice crops would result in loss of exports, in addition to slight reduction in GDP growth and higher CPI Wheat and edible oil seeds: As water from flash floods is understood to take 2–3 months to leave the ground, the aftermath is likely to result in delay in wheat and edible oil seed sowing.

Delay in wheat sowing would be a double whammy to the ongoing shift of farmer preference from wheat to edible oils.

Moreover, residue post floods are also expected to negatively impact yields of upcoming wheat crops.

With demand of 30mn (2.2% weight in GDP), Pakistan imported 7% of its needs with an import bill of US$800mn. With delayed sowing and higher wheat import prices (albeit lower than recent highs), an assumption of 15% of wheat demand fulfilled by imports may take wheat import bill to US$1.7bn in FY23.

Livestock:

Alongside crops, more than 500k livestock have reportedly perished in the floods. This would not only add to already burdened rural income by higher HSD and fertilizer prices, but also possibly lead to supply shortage in milk.

Moreover, shortage of livestock, coupled with increase increase in probability of disease prone livestock post floods, could also lead to shortage of meat.

Material risk to inflation

In the ongoing flash floods, household groceries such as onion, tomatoes and chillies are also expected to face a supply deficit. Tomato prices have already started increasing due to monsoons, while one would need to brace for further impact.

These items, together with wheat, edible, milk and meat hold 18% weight in the CPI basket. This is a high risk to the already sticky food inflation (at 28%; 13-year high) and high WPI (at 38.6%, all-time high).

“Any risk to food security, shortages and bottlenecks in supply would exceed our existing FY23E CPI estimates of 21%,” indicated J.S research.

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