Cotton Fabric Producers,Traders wake up with shock - Folksmarket.com

The farmers, traders, importer-exporter wake up this morning with the shock of the plummeted price of the cotton. Global price of the cotton crashed significantly from the March 2011 last year. Owing to the forecast of bigger crops and waning demand have pushed down US cotton price from $2.2 per pound to $0.96/pound, which roughly translates to current price of INR 119/Kg from INR 420/Kg. 

Expected increase in Cotton Imports

The abrupt lowering of the price has generated an irresistible urge to increase the import of Cotton. Many textile companies cater to the world market which prefers cotton from US, Egypt and Australia. The cotton of these countries is finer in count and impurity free than the Indian cotton because of solid mechanization process in these countries. India is world’s second largest cotton producing country in the world. Gujarat, Maharashtra and Andhra Pradesh account for 90% of the total cotton production in India.

The price scenario now supports the import strategy of the textile companies as the price of the cotton in India today is INR 94/Kg, still lower than the global price of INR 119/Kg. 

After forex adjustments this price will be lower by 10% or less. As long as Indian textile companies receive a margin of 10% in the global rate, they will continue importing more. The superior cotton of US is greater in demand. The industry source confirmed that the excitement among Indian textile companies for imported cotton will last as long as the price differential is less than 10%.

Impact on Farmers

After a sharp rise in cotton production for two successive years, the decreased price will have a disastrous impact over the cotton production in India and Pakistan. Already there is a decline in number of hectares cultivated for cotton from last year. In Gujarat for example the total cultivation area for cotton was 3 million hectares last year which is going to decrease by atleast 500,000 hectares this year. Similarly the Pakistani farmers are also apprehensive about the sowing cotton this year because of the price decline. Though the cotton growth in the two countries take place in contrasting policies yet the result for India and Pakistani farmers remain tricky and at times dangerous. The complete ban proposed by central govt and executing partial ban on cotton export and abundance of illegal seed in the two countries pushed the farmers on the brink of hand to mouth situation.

Govt lacks will

The farmers are marred by the lax regulatory regime and absence of much needed structural transformation in both these countries. And now since the seed price has crashed from the last year price, the farmers will be less averse to grow cotton and look for other alternative to get better results from their investment. The lopsided cotton policy has already forced the farmers to sell their cotton at INR 32,000 per candy (355.5 Kg) against the same at INR 62,000 per candy they sold at, last year. Early trend suggest that there will be a minimum of 15% decline in the cotton production in these two countries.

Chinese aggression

China has taken the advantage of this fluid situation. China shocked the market by huge purchase of cotton from the US. Though China is world’s largest consumer of cotton and buying steadily since March 2011 but given the scale of its purchase close to 94% of net cotton export sales from US (795,700 bales) [1 bale = 170 Kg] is not in proportion to the huge demand back in China. The analyst fears that new purchase is meant for the strategic reserves of China and not the demand from apparel manufacturing. 

"Demand in China is anemic, but the reserve continues to buy to take advantage of lower prices for cotton," said Robert Antoshak, managing director of apparel maker and consultancy Olah Inc., which designs and produces apparel for Gap Inc. GPS +1.17%and Ann Inc. ANN +1.89%"They don't want to get caught buying expensive cotton again." [Source: Wall Street Journal]

The fear of lower price and increasing supplies in the coming year (beginning Aug 2012) starts surfacing. 

Road Ahead

The coming months may not see a decline in the order of cotton but the revenues are certainly going to be lesser. With the high import of cotton by the textile companies looming, the worst affected are the traditional cotton producing farmers who may either have to settle for less export price or reduced demand in domestic market.

The already tottered economy has suffered yet another blow and most of the countries govt including India and Pakistan have no strategy to counter. Govt has to be proactive to see how it can maintain a balance between the global market situation and cotton growing farmers.

May be by incentivizing the cotton fabric producers and popularizing the demand of cotton fabric both domestic and internationally. The moment calls for an out of the box solution.

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