Rates of Indian fibre act as price floor for global produce
The recent increase in the minimum support price (MSP) for cotton, ahead of the start of kharif harvesting season from October, is expected to benefit farmers. Higher prices may incentivise farmers to increase cotton sowing.
While the move is a positive development for cotton farmers, it holds a mixed bag for the domestic textile companies, say sector analysts. On July 4, the cabinet committee on economic affairs (CCEA) approved an increase in MSPs for kharif crops for 2018-19, bringing into effect a proposal announced in the budget 2018-19. The government had promised at least 1.5 times the cost of production to farmers.
The Confederation of Indian Textile Industry (CITI) said the cotton MSP hike would make local fibre relatively expensive compared with international prices and inflate cotton products’ prices. CITI has urged the Centre to establish a delivery mechanism for the industry to procure raw material at reasonable prices.
Icra, on its parts, said the revision is likely to keep working capital requirements high and would warrant a sustained calibration in pricing for end-products, amid an upward shift in cost trajectory. Nevertheless, increased clarity on price floor mitigates the risks emanating from sharp volatility in cotton prices, as witnessed in the past. In fact, it’s expected to support profitability of spinners, particularly the well-stocked ones, in Q2FY19 by keeping yarn prices firm vis-à-vis their raw material-carrying cost.
While hailing the MSP increase, the Southern India Mills’ Association (SIMA) emphasised the need for price stabilisation fund scheme and a technology mission on cotton in a revised format to double the income of cotton farmers and grow the business of industry as well.
“Cotton productivity has stagnated at 500-550 kg per hectare against over 1,500 kg per hectare achieved by over 20 countries. Australia for instance, has achieved productivity of 2,200 kg per hectare. Also, the quality of Indian cotton is much inferior compared with imported fibre, affecting both farmers and industry,” said P Nataraj, SIMA chairman.
In the recent years, it has been witnessed that Indian cotton MSP acts as a price floor for the global fibre as well, given India’s status as the largest producer and the second largest consumer. Accordingly, higher prices are expected to support output, not just in India but also across the world.
Increase in output becomes increasingly relevant amid rising concerns on the global demand-supply situation, with a sharp increase in import demand from China likely over two-three years. At least that’s what a recent Icra study suggested.
“The announcement is unlikely to have any immediate impact on cotton prices as expectations of an increase in MSP had already been captured in cotton’s market prices over the past few months. As a result, the cotton is trading at higher than the new price floor,” said Jayanta Roy, senior vice-president and group head (corporate sector ratings), Icra.
Interestingly, from 2009-10 to 2017-18, MSP has been increased by Rs 1,320 per quintal and in 2018-19 it has been raised by Rs 1,130 per quintal. The impact is huge and possibly unprecedented. Although, China has imposed an additional 25 per cent import duty on American cotton and the rupee has also depreciated against the dollar, still cotton and yarn would face headwinds, a section of the analysts said.
Roy said start of cotton harvest season in October is typically accompanied by the softening of prices seen during April-September. But the decline in cotton (lint) prices last year had been curbed by the then prevailing price floor of Rs 105 per kg, which acted as a resistance level, keeping rates above that level. Accordingly, after declining by 12 per cent from Rs 118 per kg to Rs 105 per kg in September-November 2017, a rebound in prices to pre-harvest levels was seen, with the rates demonstrating a further upward bias and trading at Rs 120 per kg during the 4-month period ending April amid expectations of an increase in MSP.