The Hindu Business Line : Cotton trade in a tricky situation as prices dip

THE cotton trade is faced with a tricky situation as global prices are declining. In the domestic market, the rates are even lower than the minimum support price (MSP) fixed by the Government for the crop this year.

"It is a piquant situation in the domestic market, especially with prices of Shankar-6 lower than the MSP. Not only that, since prices in the world market are declining, it could lead to two possibilities. One, mills may opt for higher imports. Two, domestic prices may fall further," an industry source, who did not wish to be identified, said.

Global cotton prices are nosediving in the face of projections of a record 23.51 million tonnes (mt) production and a higher carry over stock of 9.31 mt. This is in view of higher production in the US and India.

The Cotton Advisory Board last month put the Indian production at an all-time high of 213 lakh bales (of 170 kg). As a result, New York cotton prices have declined to 46.52 cents a pound (Rs 16,750 a candy of 355.62 kg) for December delivery and market participants expect it to head to below 45 cents. This is against prices over 50 cents two months ago.

In the domestic market, H-4 prices were quoted at Rs 17,700 a candy on Tuesday against Rs 23,000 on July 31. For Shankar-6, the prices have fallen to Rs 18,000 from Rs 24,000 during the same period.

The MSP for raw cotton has been fixed at Rs 1,960 a quintal this year. Only 35 per cent of the raw cotton makes up the processed or lint cotton and going by that figure, these varieties should fetch a little over Rs 19,000 a candy.

"If prices go below MSP, the Cotton Corporation of India can be asked to intervene and buy. But given the fact that there is a record production, how much can it buy?" the source asked.

"Even if the corporation buys, spinning mills will not panic. They very well will know that whatever is being bought will have to be sold. Therefore, the question of the prices rising as of now is ruled out," they said.

"In any case, there is the option of import. And imported cotton, despite higher freight, would be preferred since they are free of contamination and it saves money on cleaning the lint," the sources said.

Also, for the first time last season (October 2003-September 2004), exports and imports were of an equal eight lakh bales. "While the mills imported long staple cotton, they were able to export cotton produced here to Pakistan and South-East Asia, taking advantage of higher prices in the global market and steep freight rates," the sources said.

So far, there hasn't been any protest from the growers. When contacted, the Indian Cotton Mills Federation (ICMF) Secretary-General, Mr D.K. Nair, declined comment. "It is too early to say anything on prices or import. The season has just begun," he said.

However, ICMF has told the Centre that it should not "operate" the MSP system. "We are of the view that MSP induces inefficiency. We want a system that promotes production and productivity," Mr Nair said.