• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

G. Chandrashekhar

Mumbai, Sept. 8 A sharp upward revision in the minimum support price for cotton in the 2008-09 season has raised the hackles of domestic traders, exporters and textile mills alike. Increases are as high as 40-50 per cent for medium staple and long staple varieties. Ironically, the announcement of MSP hike came at a time (September 1) when the growers had already completed their planting.

So, MSP is most unlikely to influence output. The delay is perplexing and someone in the government must assume responsibility for the delay in this matter. It is also an indication that for the government, support price for crops has ceased to be an instrument to influence cropping pattern, but a routine exercise to keep growers in good humour. The talk of a cotton MSP hike was of course in the air for some time; but none perhaps expected the hike to be so steep. The government is duty bound to explain the rationale behind such a decision. Do the policymakers believe, a sharp hike in MSP by itself will address all of growers’ problems and bring prosperity?

Even when the talks of a hike in MSP were in the air last month, the Confederation of Indian Textile Industry was quick to react to the possibility. It said a high MSP will drown the cotton textile industry and affect the farmers too as the produce would become prohibitively expensive and affect the marketability of the crop. Now, the trade body — Cotton Association of India (CAI) — too has joined the fray. It has attacked the decision by asserting that steep increase in cotton MSP will hit the entire cotton economy including exporters, mills and even growers.

To what extent are these comments justified? Clearly, in the last season 2007-08, market prices of cotton were considerably higher than the MSP of Rs 1,800 a quintal for medium staple and Rs 2,030 for long staple cotton. The reasons are clear. Despite production of a bumper crop — 315 lakh bales of 170 kg each — prices ruled 20 to 30 per cent higher because of a staggering export demand in addition to demand for domestic use.

It must be stated that unlike in the past, the Indian cotton market is now largely integrated with the global market. The domestic market takes cues from the international market and the overseas market closely watches developments in India. This cannot be wished away or reversed. Last season, Indian farmers and those who managed to build inventory at the right time of the season enjoyed tremendous price premium.

Others, including many textile mills who hoped that prices would soften under pressure of a big crop and heavy arrivals, were disappointed. There is a lesson here for all stakeholders. Do not take the market for granted and there is no guarantee that a large domestic crop would automatically translate to lower prices. There are sufficient indications that 2008-09 may be no different from the previous season in terms of international prices and export opportunities.

Lower global cotton production, higher import demand and drawdown of stocks would combine to push the market to new highs. What may change is that India may actually end up with either the same or slightly lower production of cotton. In the event, cotton prices are sure to remain strong from the beginning of the season because of tight market fundamentals.

Exporters should be happy that a weakened rupee over the coming months (unlike in the last season) will make exports competitive despite higher domestic prices. There is bound to be so much demand pressure from overseas markets that Indian exporters would be able to sell at what may be described as fancy prices.

Yes, this would surely push the raw material cost for the domestic textile industry. But again, a weak rupee will support textile exports (unlike last season). It would be a good idea to procure cotton at the time of heavy arrivals during December and January, without waiting for prices to soften. Apprehensions that cotton farmers will be hurt by higher MSP are unfounded. There is strong likelihood that cotton prices next season will rule slightly above the new MSP. In the event, the current hike in MSP will have no relevance to the market.

The cotton market would be analogous to the soya bean market. At over Rs 26,000-28,000 a tonne, soya bean prices ruled and continue to rule way above the MSP declared by the government. International market factors influenced domestic prices. Even a sharp hike in MSP would have made little difference to the open market rates of soya bean.

It would an unrealistic expectation of the industry and trade that the government would now revise the cotton MSP down. They will have to learn to live with it.

More Stories on : Cotton | Commodity Commentary | Agricultural Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line