Cotton pricing best left to the market

Prices of popular cotton varieties in India have spiked by 7-8 per cent in February-March 2013 due to bullishness of the domestic and overseas market. Textile mills are crying, “wolf” and seeking Government intervention to rein in this escalation. There are many stakeholders in cotton business — farmers, aggregators, ginners, traders, government trading entities such as Cotton Corporation of India (CCI) and NAFED, merchant exporters, mills, skilled and unskilled labour.

The supply-demand matrix and market volatility are inherently interwoven. High demand benefits producers when prices go up, and signals them to produce more. But it discounts interests of consumers in the short run. When demand diminishes, lower values discourage higher production by producers; they are eventually losers and consumers the beneficiaries - again in the short term.

Finally, the market finds its equilibrium, if allowed to operate freely. That is the way a commodity cycle runs. Therefore, any ad hoc Government intervention in its own policies can hamper the functioning of markets, which may not be fair to all stakeholders.

Higher MSP for farmers

The CACP’s (Commission for Agriculture Costs and Prices) kharif report of 2012-13 noted that “Despite record production, exports are booming and country has low stocks of cotton; akin to an excess demand situation. Market price during October 2011-February 2012 was Rs 4362/quintal. So a high MSP will not have an inflationary impact”.

It, therefore, recommended and Government agreed to fix an MSP of Rs 3600/quintal for medium staple (MS) and Rs 3900/quintal for long staple which were 28.5 per cent (Rs 2800) and 18 per cent (Rs 3300/quintal) above last year’s MSP.

Ginned cotton output in 2012-13 was 33 million bales (of 170 kg each) against last year’s 35.3 million bales. Despite this price incentive, overall production dropped by two million bales, partly due to poor monsoons in Gujarat and Maharashtra. The textile industry accepted 18-28 per cent higher MSP (due to costlier fertiliser and farm labour) without a whimper but is now threatened by 7-8 per cent demand driven inflation!

A November 2, 2012, press release of the Ministry of Textiles stated “The Cotton Advisory Board has estimated consumption at 260 lakh bales and an exportable surplus at 70 lakh bales (on January 23, 2013, it estimated exportable surplus at 80 lakh bales). Although domestic consumption is showing increasing trends, the sharp decline in global trade and increase in world stocks have imposed a downward stress on cotton prices, which is reflected in Indian cotton markets also ”. (emphasis added.)

Price stabilisation

The local market remained bearish and below MSP in October-November 2012. Mills stayed away anticipating further price decline for speculative profits; then, traders/exporters came to the rescue of falling prices and CCI/NAFED stepped in to cover 2.2 million bales at MSP.

The November 2 press statement also said “that price stabilisation operations would be taken up to alleviate farmer distress (emphasis added) both by Cotton Corporation of India and NAFED in coming months”. With progressive consumption, price stabilisation operations and exports on track, surpluses are now squeezed and market has logically ascended in February 2013.

Private industry and trade generally sermonise that Government should not be in the business of business. But at the drop of a hat, they see “God” in government and seek its intermediation for survival, citing local labour and its employment. Industry has now pleaded that stocks accumulated by CCI/NAFED be destocked at subsidised rates to cool the market.

Disposal by CCI

Going by the very concept of MSP, it is designed to help farmers rather than the industry. Cereals are bought at MSP by the Food Corporation of India to alleviate the risk of farmers. These cereals are then sold to the domestic trade and for export through domestic or international tenders or at Open Market Sale Scheme (OMSS) price at the absolute discretion of the Government for best price realisation.

Subsidised schemes for APL/BPL beneficiaries cannot be applied in the case of textile mills. For cotton, the same principle of disposal may be the guiding factor. CCI/NAFED may sell cotton domestically or for export through a tendered mechanism to industry and trade at a time when it can realise the best value. They also have the option of undertaking exports directly. Assuming that acquisition cost of Sankar 6 “ginned” variety by CCI is about Rs 35000/candy (1candy=356 kg each) and is disposed at Rs 39000/candy, the profitability is 11 per cent less its carrying cost.

If the market is poised for a bullish view due to likely tightness in US cotton crop for 2013-14, the profitability of CCI can be further augmented in coming months. After all, Sankar 6 variety had seen a high of Rs 61000/candy in February/March 2011. An informed decision is needed to liquidate CCI inventory in a phased manner for optimising value realisation, rather than to destock all fibre en masse . Should policymakers succumb to the pressure of the mills and depress market prices suddenly, not only will CCI/NAFED nurse losses but farmers (still holding 7-8 million bales), ginners, stockists, and exporters will be wiped out. Lower production of Kapas may be seen in 2013-14 with elevated prices. If cotton market crashes, CCI could be left with contracted but un-lifted stocks by its buyers, compounding losses as in 2011-12.

Mills might have erred, but can cover their immediate requirements from the domestic market or through imports from African countries (Tanzania, Zambia, Zimbabwe, etc.). Imports will be foreign-exchange neutral due to higher export intensity of both cotton and yarn. The Government cannot underwrite potential losses of mills by underselling cotton cheaper.

Assistance to mills

In September 2012, the Ministries of Textiles and Finance gave a Rs 35000-crore restructuring loan to mills to help them overcome their cash starvation; this was in the wake of the financial crisis in 2011 when world market plunged from $2/lb. to 88c/lb.

The RBI is reviewing the NPAs of some of these mills for financial accommodation extended in 2008-09. The Textile Upgradation Fund Scheme (TUFS) is already in place. The Government has attempted to bail out textile mills twice in the last five years.

The solution to the textile industry's woes is to usher in labour sector reforms, ensure constant availability of power, and do value addition towards fabrics/ garments. If China and Bangladesh can have a thriving garments industry by importing raw cotton from India, why can't India? Gujarat has announced a mantra of ‘farm to fibre to fabric to fashion to foreign’. The Rest of India needs to learn from that vision.

As for the macro policy environment, trading policies have made India the world’s second largest exporter of cotton (next to US) because all stakeholders are active participants.

There is no need to tinker with pre-defined policy, neither is it feasible to bend and mend with daily market volatility which shall remain in all commodities.

(The author is an independent grains trade analyst)

COMMENT NOW