Cotton farmers suffer as prices crash

Cap on exports of cotton and its yarn is the prime reason

Not only that the ongoing quantitative restriction on export of cotton in the face of sharp decline in domestic cotton price is now increasingly upsetting cotton growers, who are not getting even the basic remunerative prices.

The growing restlessness of cotton farmers in major cotton growing states like Gujarat, Maharashtra, Karnataka and Andhra Pradesh for not getting a fair price for their produce is threatening to catapult into a sensitive issue with political parties expressing concern over plight of cotton growers.

Unstable policies

The phenomenon of central government’s on and off imposition andremoval of quantitative restrictions on export of raw cotton as well as cotton yarn without taking a comprehensive view of demand and supply requirements of various segments of textile industry ranging from cotton growers, spinning mills to textile manufacturers--both from domestic and global market perspectives—has given rise to a complex situation.

The government normally imposes quantitative restrictions on export of raw cotton to ensure sufficient availability of this basic raw material for textile industry like spinning mills. Similarly the government imposes export restrictions on cotton yarn, which is the basic input for textile manufacturing, to ensure steady supply of textile for various segments of the textile industry including garment manufacturers. But because of lack of alertness on the part of the government to make timely and necessary changes in the export control regime in response to the ever changing dynamics of demand supply scenario of cotton as well as cotton yarn—both in the domestic and global market—is giving rise to the crisis in the textile industry.

The Centre imposed the ceiling on cotton exports in October last year in the wake of a sharp rise in prices of the commodity hitting the domestic textiles industry. The apparel units had even resorted to partial closures as raw material prices went up.

Putting the quantitative restriction on export of cotton the government had allowed the export of 5.5 million bales (170 kg each) of cotton in the 2010-11 marketing season (October-September). The entire quantity has already been exported.

However, the scenario has completely changed since March end this year with the prices of cotton posting a drastic fall. Analysts say the continuing cap on cotton export is leading to sharp fall in domestic price of cotton.

In Karnataka—one of the major cotton growing states— cotton farmers are in distress as they find nearly 30 per cent fall in the price of raw cotton. Cotton traders opposing the export cap have stopped purchasing the produce from cotton farmers.

Caught unawares

Since cotton cultivation is a highly expensive exercise in view of the pests and disease the crop is vulnerable to, drastic dip in demand in raw cotton is causing financial hardships to farmers all over the country.

The plight of cotton farmers in Andhra Pradesh has prompted Telugu Desam Party (TDP) President N Chandrababu Naidu to urge the Centre to permit export of cotton to bail out farmers. In a letter to Finance Minister, the TDP Chief has pointed out that cotton growers were facing severe hardship because of depressed market conditions and also a ban on export of the produce.

“The export restrictions, imposed under pressure from textile mills, have become a curse to the cotton growers,” the former AP Chief Minister has noted.

Similarly, the Gujarat Chief Minister Narendra Modi has also urged the centre to enhance at least the cap on cotton export. One of the prime reasons for sharp fall in domestic cotton price is because of virtual stoppage of buying of the natural fibre by the spinning mills, which are now plagued with huge stocks of cotton yarn.

In fact the crisis has reached such a proportion that spinning mills across the country stopped production for a day last month. The call for stoppage of production of cotton yarn was given by the Confederation of Indian Textile Industry (CITI). The cotton spinning industry has a turnover of Rs 70,000 crore, employing more than 700,000 workers and exporting about 3 billion dollar worth of yarn a year.

As the CITI Chairman Sishir Jaipuria explains a virtual ban on cotton yarn exports for more than two months in the last quarter of 2010-11 and the declining domestic demand has resulted in piling of a huge stock of cotton yarn in the mills.

When export of cotton yarn was allowed in April this year the accumulated stock caused a crash of cotton yarn prices in the global and domestic markets. Buyers of cotton yarn (fabric manufacturers) virtually fled the market as they anticipated that prices would fall further resulting in easy supply. With a share of more than 25 per cent in the global market, Indian supplies hold key to determination of global cotton yarn prices. Besides, experts say that frequent imposition and withdrawal of restrictions on export of cotton yarn has affected the reputation of India as a reliable source of supply of cotton yarn.

In April this year when the government suddenly allowed export of cotton yarn the global market got the perception that India had a very huge inventory of cotton yarn and cotton and thus there was no need to buy to hedge against a possible shortfall in availability of cotton.

Almost all major global buyers postponed purchases. The mounting pressure of inventory with Indian mills and their eagerness to get rid of their inventory before the arrival of new cotton, virtually pushed the global prices down by more than 30 per cent within a month and the domestic cotton prices fell below the international levels resulting in the present crisis.

One major domestic reason for crash of cotton yarn price is due to imposition of excise duty of 10.3 per cent on the garment industry as was proposed in the Budget 2011-12. This in turn has affected consumption of both yarn and fabrics.

In view of the the growing distress of cotton growers due to declining cotton prices, the Union Agriculture Minister Sharad Pawar has also suggested the government take an early decision on raising the export cap on cotton from the existing 5.5 million bales to 7 million bales.

Pawar says there is a case for more cotton exports as domestic production is high and there is a global shortage of the natural fibre. The government is soon expected to take a call on the issue. As per the estimate of the Agriculture Ministry the country is estimated to have harvested 34 million bales of cotton in 2010-11 crop year as against 24.22 million bales in the previous year. On the other hand the Textile Ministry has lowered cotton production estimates for the 2010-11 season to 30.5 million bales as un-seasonal rains in December has affected the crop output leading to lower arrival in mandis. The government has to take a decision on whether to raise export cap on cotton taking the holistic picture of probable demand supply scenario of raw cotton as well as cotton yarn in both domestic and international market so that legitimate interests of both cotton growers as well as textile industry are taken care of.