On Wednesday, May 18, Union Textiles Minister Piyush Goyal convened a meeting of cotton traders, millers and garment manufacturers. The topic: Spiraling prices of cotton, resulting in demands by the textile and garment industries to ban exports of the fiber. This comes days after the government on May 13 banned wheat shipments in response to rising prices due to a heat wave-induced production shortfall. Is there a case for similar restrictions on cotton exports?
How much have cotton prices gone up?
They have nearly doubled compared to last year. The average modal or most-quoted price of kapas (raw un-ginned cotton) at Rajkot APMC (Agricultural Produce Market Committee) mandi was Rs 12,250 per quintal on Thursday, as against around Rs 6,300 this time last year. This was also way above the government’s minimum support price of Rs 6,025 per quintal for long-staple cotton varieties.
Prices have been rallying since November, when they crossed Rs 8,000 per quintal before scaling the Rs 10,000 mark for the first ever time in many markets by early-January. The marketing season for cotton extends from October to September, with more than 90% of crop arrivals already taking place by May end.
Why have prices risen so much?
Basically three reasons. The first is lower production. In 2020-21, India’s total cotton lint fiber output was 353 lakh bales (lb) of 170 kg each. For the current year, the Cotton Association of India (CAI), a Mumbai-based trade body, has estimated production at 323.63 lb. This figure, released on May 14, is lower than its previous estimates of 335.13 lb (made on April 9), 343.13 lb (February 25), 348.13 lb (January 18) and 360.13 lb (October 30).
The second reason is international prices. The Cotlook ‘A’ Index price – an average of representative quotes in the Far East destination markets – is currently ruling at 167 cents per pound, up from 92 cents a year ago. India is the world’s second largest cotton producer (after China) and third largest exporter (after the US and Brazil). High global prices have made exports attractive. Also, they have pushed up domestic prices closer to export parity levels, while simultaneously making imports more expensive.
The third reason is consumption. The state-owned Cotton Corporation of India (CCI), in March, projected total domestic consumption for 2021-22 at 345 lb, compared to 334.87 lb, 269.19 lb and 311.21 lb in the preceding three marketing years. “Demand has significantly increased, as mills and other users were operating at sub-optimal levels in the past few years. Even during the pandemic, demand for bed-sheets and towels had zoomed, translating into higher consumption of cotton and yarn,” said SK Panigrahi, chief general manager (marketing) of CCI.
But the pressure on availability from lower production has already led CAI to revise downwards its estimates of domestic consumption to 320 lb, from its earlier January 18 estimate of 345 lb. CCI is expected to follow suit soon.
Why has production fallen so much?
The area sown under cotton in India has reduced from 134.77 lakh hectares (lh) in 2019-20 to 132.85 lh in 2020-21 and 123.5 lh in 2021-22. This has been largely due to the diminishing benefits from the genetically-modified Bt cotton, which helped almost treble the country’s production from 136 lb to 398 lb between 2002-03 and 2013-14. Over a period, Bt cotton has become susceptible to pink bollworm and white-fly insect pest attacks, making it riskier for farmers to grow the crop. Besides, the government does not permit testing or commercialization of next-generation transgenic breeding technologies.
This time, the crop was also affected by unseasonal rains in November-December, which affected yields as well as quality of the bolls from the second and third “flushes” (cotton is generally harvested over three or even four pickings, with the first one in October-November and the subsequent ones every following 20-30 days).
How justified is the demand for a ban on exports?
India’s cotton exports are actually projected at 40 lb this year, down from the 78 lb of 2020-21. At the same time, imports are likely to be higher, at 15 lb, from last year’s 10 lb. Moreover, on April 13, the Center slashed the import duty on cotton from 11% to nil. Given the anyway lower exports and duty-free imports – which have for now been allowed until September 30, before the next marketing season – there may be no strong case for an outright ban on shipments.
Further, with domestic prices already rising to international parity levels, exports would slow down in the natural course. Advocates of an export ban say it would not impact farmers, as they have already sold their crop. However, a ban can also send wrong signals ahead of the planting season, which will take off next month with the arrival of the southwest monsoon rains.
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Who are the main players in the cotton value chain?
Lint, the white fiber that mills spin into yarn, constitutes only about 34% of kapas. The balance is seed (65%) and moisture. The seed further yields both oil (used for cooking) and de-oiled cake (used as a protein ingredient by livestock feed manufacturers). Kapas rates have firmed up not only because of export and domestic demand for lint, but also due to rising vegetable oil prices. Cotton seed oil is, in fact, India’s third largest domestically produced vegetable oil. Its estimated output, at 12.49 lakh tons (lt) in 2020-21, was next only to mustard (27.39 lt) and soybean (13.29 lt), out of a total 93.18 lt, according to the Solvent Extractors’ Association of India.
Kapas is mostly bought by traders and ginning units that separate the cotton fiber from the seeds. The fiber is sold to spinning mills and seed to oil mills for crushing and producing vegetable oil. From every one kilo of lint, mills obtain 700-800 grams of yarn. The yarn is further woven or knitted into fabric and garments. India in 2021-22 not only exported raw cotton valued at $2.8 billion, but also cotton yarn worth $5.5 billion and fabrics and made-ups worth $8.2 billion. Every part of the value chain, thus, involves exports.