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Cotton prices have been sliding since the beginning of the year due to concerns about demand in the aftermath of Covid-19.
Indian spinning mills are running at 50 per cent capacity due to shortage of labour or for want of order for yarn. Now, given the news of an increase in area under cotton in India — world’s largest cotton producer — the price outlook on cotton for the medium term is negative.
According to data from the Agriculture Ministry of Agriculture, as on 26 June, the area under cotton was 71.69 lakh hectares. In the same period in the last kharif season, the area under cotton was 27.08 lakh hectare. The increase is dues to higher support price (₹5,515 per quintal, up ₹260, for medium staple; ₹5,825/quintal, up ₹275, for long staple). Besides, Punjab and Haryana governments had asked farmers to diversify from paddy to cotton.
If the same pace continues in sowing, the season will end with significantly higher acreage under cotton and there will be a sharp jump in output the next year (October 2020-September 2021).
Considering that there will also be a large carry-forward stock from the current year that will move as opening stock for the October 2020-September 2021 year, cotton prices will be under pressure. For the October 2019-September 2020 period, the Cotton Association of India (CAI), the industry body with representations of growers, ginners, mills and merchants, has estimated a closing stock of 50 lakh bales (1 bale = 170 kg). This is higher than last year’s closing stock of 23.5 lakh bales.
The increase in closing stock is on account of higher production (up 5.8 per cent to 330 lakh bales) and a drop in domestic consumption by about 10 per cent over previous year to 280 lakh bales.
So, in the next cotton year, unless the Cotton Corporation of India (CCI), the government agency that procures cotton, steps in and buys in large scale, the situation is likely to be grim for cotton farmers.
Peasants, who have chosen cotton over paddy, have their fate hanging in the balance. The CCI is stuck with a large stock from the current season’s procurement itself. One can’t be sure if it will be able to dispose all its stocks and make space for procurement for the next year.
Cotton prices have dropped because of lower demand. In markets where CCI is not present, private ginners are procuring i at least ₹10-15/kg lower than the minimum support price (₹52.55/kg for medium staple and ₹55.50/kg for long staple), as demand is weak.
Globally, too, cotton demand is dismal and prices have been sliding lower. In the beginning of the year, the price of the ICE (Intercontinental Exchange) Futures Cotton #2 contract, a global benchmark for cotton, was quoting at 70 cents per lb. But a drop in demand due to Covid-19-led trade disruptions saw prices fall to about 48-49 cents/lb in April.
While prices have recovered from there and are quoting at 59 cents per lb, it is still about 15 per cent lower than the prices in January.
The USDA in its latest World Agricultural Supply and Demand Estimates (June 11) has said that the closing stock for cotton year 2020-21 will be 104.67 million bales — the largest since 2014-15, thanks to slow recovery in demand in China and India, as consumers are likely to defer purchase of clothings.
The CCI procured about 91.10 lakh bales between October 1, 2019, and May 31, 2020.
By June first week, it crossed 98 lakh bales, and the market reports that the Corporation’s procurement has crossed 1.2 crore bales now — a record high for any year. It is not certain if CCI will be able to keep up this pace in procurement next year as well.
The CCI is already burdened with stocks. It is reducing the sale price of its cotton, but still doesn’t have many takers. On June 2, the auction price was ₹45,000/candy (356 kg) for cotton of staple length 29 mm; in the auction on June 24, the price was slashed to ₹35,000-36,000/candy in places including Akola, Aurangabad, Rajkot and Indore.
Even at prices of ₹33,500-34,000/candy, there were not many takers for CCI’s stock.
Industry sources say that private spinning mills and traders have sufficient stock with them for the next two months and that is a reason why they are not participating in CCI’s auction.
By September, the spinning mills may need the CCI’s stock. But one can’t say how much of the CCI’s stock will be sold as demand outlook is uncertain.
If the CCI is not able to liquidate enough stocks by December, its cotton procurement in the next season may take a hit.
While this may be good news for ginners as it can help keep them afloat and make them competitive in export markets, it is certainly not good news for the cotton farmers.
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