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Cotton flooding the world? 5 factors India has to watch out for

India’s cotton output in 2017-18 may also rise given the forecast of a normal monsoon.

business Updated: May 30, 2017 12:45 IST
Raj Kumar Ray
A farmer working at a cotton field.
A farmer working at a cotton field.(Reuters photo)

Indian cotton growers are embracing for a challenging year as a higher production in countries such as the United States, may keep prices low.

Higher prices of previous year have pushed farmers to grow more cotton and now the world faces an over-supply.

India’s cotton output in 2017-18 may also rise given the forecast of a normal monsoon.

The government may step in to protect the interest of farmers by raising the minimum support price, or purchase price of government agencies, slightly. There could also be import curbs to prevent the local farmers from the onslaught of dumping of cheaper cotton by countries such as China.

Here are some of the factors that could impact Indian farmers and textile companies:

1. Higher production

World cotton production is forecast to increase 7% to 113.2 million bales, or 24.65 million tonne in this crop year that starts from August 2017, after a 9% rise in 2016-17.

“The higher 2017/18 cotton production projection is the result of favorable prices that are encouraging a rebound in area,” the United States Department of Agriculture said in a report.

India, China, and the US are forecast to account for a combined 62% of global cotton production in 2017-18, as compared with 63% in 2016/17.

The International Cotton Advisory Committee (ICAC) said in a report that high cotton prices in 2016-17 are expected to encourage farmers to expand the area under cotton by 5% to 30.8 million hectares in 2017-18.

A normal monsoon forecast by India’s weather office IMD means a boost to the cotton and other agriculture products.

“India’s cotton area is forecast to increase by 7% to 11.3 million hectares in 2017-18 as farmers are encouraged by better returns due to high cotton prices and improved yields last year. Assuming yield is similar to the five-year average, production could increase by 3% to about 6 million tonne,” ICAC said.

After contracting in the last five seasons, China’s cotton area may expand by 3% to 2.9 million hectares due to the stable cotton policy and high cotton prices.

ICAC forecast production in China is expected to rise by 1% to 4.8 million tonne, the first increase in five seasons.

Similarly, farmers in the United States are forecast to expand harvested cotton area by 12% to 4.3 million hectares and production could grow by 8% to 4 million tonne.

2. Sluggish consumption

While output gathers pace, ICAC says global cotton consumption is forecast to increase at by 2% to 24.6 million tonne as world economic growth recovers in 2017 and 2018.

After decreasing by 3% to 5.1 million tonne in 2016-17, India’s consumption is forecast to recover by 2% to 5.2 million tonne due to competitive prices for its cotton yarn products, expanding capacity and the resolution of the consequences of demonetisation.

China’s mill use of cotton is forecast to increase by 1% to 7.7 million tonne, accounting for 30% of world cotton consumption. Mill use in Pakistan may grow by 1% to 2.3 million tonne due to new incentives for textile exports offered by the government while Bangladesh may witness 5% rise to 1.5 million tonne.

3. Exports and imports

A robust crop will encourage the US to export more while China is expected to dump its already-high inventory in the world market.

World cotton trade is forecast to rise 5% to 7.95 million tonne in 2016-17, after declines during the previous three seasons.

In 2017-18, the exports are expected to rise to 8.09 million tonne, tad higher than last year.

What’s worrisome, India’s exports are projected to decrease by 30% to 886,000 tonne, ICAC said.

4.Prices to remain subdued

With over supply in major countries, cotton prices may remain subdued.

Prices may also be tempered as China reduces its inventories by dumping cotton stock in world markets. China’s share of global stocks was 61% in 2013-14. It has fallen to 54% by 2016-17, and is expected to fall further to 45% by the end of 2017-18, says USDA.

Meanwhile, stocks in India, Brazil, the US and Pakistan are expected to rise in 2017-18 with larger crops forecast.

With a view to promote cotton farming, the government increased the minimum support price, or purchase price of government agencies, by 1.5-1.6% to Rs 3,860 per quintal for medium staple length cotton and Rs 4,160 for long staple.

Last year, the Cotton Corporation of India (CCI) Limited was been asked to procure cotton at the MSP to protect the interest of farmers and avoid distress sales.

5.Indian textile firms to gain?

A higher cotton output may help Indian textile firms in keeping their input costs lower.

The rollout of Goods and Services Tax (GST) will also help lower the cost for companies.

Ample supply, softer prices and GST will improve the earnings outlook for textile firms.