Cotton may be called an ‘industrial crop’ with multiple uses – as fibre, food, feed and fuel. Several factors impact the cotton sector – economic growth; geopolitics; monetary policy; currency; weather; and not the least, the role of funds in the derivatives market.

While cotton production is subject to uncertainties of weather, technology inputs and farm practices, demand is impacted by economic growth, production cost, competition from synthetic fibres and so on.

Four origins – China, India, Brazil and USA - account for three-fourth of the world cotton production of 24-25 million tonnes. Six countries account for 80 per cent of domestic use – China, India, Pakistan, Bangladesh, Vietnam and Turkey. 35-40 per cent of production is traded globally in which Asia’s role is significant.

Asia’s share in global production is about 50 per cent or 12-13 million tonnes. Asia’s share in global consumption is over 70 per cent (18.5 million tonnes). Asia’s share in global trade too is over 70 per cent (7 million tonnes).

As a continent, Asia is actually a dominant player in the world cotton market as a producer, as a consumer and as an exporter/importer. Despite its dominant position, Asia is not a price-setter, but a mere price-taker.

Usually, the physical market and the derivatives market tend to feed on each other, that is, one takes a cue from the other. For cotton derivatives, the US cotton futures market continues to be the dominant market. Price changes there affect Asian market prices including in China and India.

Same time, cotton prices in India have a bearing on cotton prices in China via the export/import route. It is a unidirectional relationship flowing from India to China.

As per the Futures Industry Association, in 2022, China’s Zhengzhou Commodity Exchange accounted for over 90 percent of cotton volumes traded worldwide, while ICE in the US accounted for only 6 percent of volumes. Yet, ICE seems to be exerting a disproportionately larger impact on world cotton prices.

The volumes on Indian exchanges - MCX cotton (0.3 percent) and NCDEX (1.1 percent) for raw cotton or Kapas - is minuscule.

Indian value chain participants complain that prices discovered on Indian exchanges are divorced from ICE prices. As an exchange, ICE enjoys a deep and wide reach with large participation of commercials (hedgers) and non-commercials (speculators). In comparison, trading volumes on Indian exchanges are negligible.

It only means that Indian entities handling physical cotton – ginners, spinners, textile mills, exporters / importers – are either ignorant about hedging as a price risk management tool or are reluctant to hedge their price risk on an exchange or speculate in an uninformed manner. This deserves investigation.

It follows that Indian exchanges have not acquitted themselves well is spreading awareness about hedging as a scientific and time-tested tool for price risk management. It is unclear if the exchanges have reached the unreached value chain participants whose number runs to several thousand. Communication methods are likely not delivering. A new communication strategy may be necessary.

At the same time, the risk appetite among financial investors may be low too. What prevents, for instance, mutual funds from investing in cotton derivatives? Is it contract design? Is it lack of confidence in exchanges? Or is it something else?

Be that as it may, it would make commercial sense for cotton producing and consuming nations in Asia to come together and form what may be called ‘Asia Cotton Alliance’. This big idea when implemented with visionary leadership can potentially shift the centre of gravity to Asia.

Price setter

As a dominant force in world cotton, Asia can then be the price setter for cotton while other origins and markets will follow prices set by Asia. I believe, Asia Cotton Alliance is an idea whose time has come.

Indeed, we can expand the geography to include Africa in the proposed alliance. It would strengthen the existing trade relationship. The alliance is not just about trade, but may include investment, research and technology transfer.

Looking ahead, cotton production in India is sure to face challenges. The area for cotton is nearing a saturation point. Yields have actually declined by about 10 percent from the peak in the last five years. Pests like pink bollworm have developed resistance. Climate change is taking a toll.

At the same time, domestic consumption is set to expand as large number of spindles are added every year. If we continue the ‘business-as-usual’ attitude, India’s export surplus will shrink and we may soon become a net importer of cotton. Not only policymakers the user industry too needs to recognize this looming risk.

[Excerpts of the writer’s speech during the Plenary Meeting of Washington DC based International Cotton Advisory Committee - an intergovernmental body – held in Mumbai on December 3]

The writer is a senior journalist and policy commentator. Views are personal