India Commodity Year Book 2009
Shyamal Gupta
Mahatma Gandhi portrayed with cotton spinning wheel is still a symbol Indian consciousness. The spinning wheel is deeply embedded with national history and stands at the centre of the Indian flag.
Fundamental changes are taking place in cotton cultivation in India by which there is a potential to take the current productivity level (555 kgs/hect.) near to the world average cotton production per hectare in the near future (787 kgs/hect.). Apart from meeting the increased cotton consumption by domestic textile industry (24 Million Bales), country may have sufficient surplus cotton (4.3 Million Bales) to meet the cotton requirements of the importing countries.
In 2008, the textile industry accounted for 14.4% of the country’s export earnings. The cotton industry employs an estimated 46.6 million people. India is the second largest producer of textiles and garments after China and has a share of 3.9% in the global textile trade. In 2008, it contributed about 14% of industrial production, 4% of the GDP and provided direct employment to over 33 million people. The textile sector is the second largest provider of employment after agriculture.
Expected decline in output but modest investment in the textile industry: Cotton farmers received good returns due to a high minimum support price last year. This led to an increase of area under cotton cultivation to 9.43 million hectares from 9.14 million hectares. However “White Gold” is facing a decline in output and area under cultivation is likely to come down to 9.37 million hectares.
The cotton market in India presents an interesting picture …on one hand the production is likely to be low on the other hand textile industry is expecting a modest surge in investment. Cotton planting, which has been nearly completed in most regions, has expanded. While Maharashtra leads in terms of area, Gujarat is likely to tops in terms of productivity. Tamil Nadu and Andhra Pradesh will account for 95 per cent of the investments (Rs 69 Billion -CII Report 2009).
In the northern states of Punjab, Haryana and Rajasthan yield is expected to get adversely get affected. Rains are adequate and water availability is adequate in Punjab & Haryana. Pest infestation is under control. In northwestern and central India, the prolonged dry spell may reduce cotton output by 10-15 percent and cotton quality may also suffer. Gujarat sowing is on 2.55 million hectares while Maharashtra is expected to be 3.4 million hectares (09-10) mainly due to increase in expected switching over from soybean and pulses in the Vidharbha region. In MP sowing is less due to delayed rain and plant growth is likely to be stunted. The dry spell may hit cotton output by 10 percent, although the crop has been planted in 650,000 hectares, up from 625,000 hectares last year. Again in this state too, acreage has gone up due to switching from other crops.
Present Agro-climatic condition across the cotton belt is reported satisfactory. Crop progress is also satisfactory. However all would depend on monsoon rains.
Early adoption of BT cotton: India continues to reap the benefit of biotech cotton. Bt cotton is resistant to insects and transgenic cotton is resistant to herbicides. Cotton yields in India have increased by over 60% since the adoption of biotech cotton in 2002/03.
Gujarat, which reported a record 9.6 per cent growth in agriculture last year, no longer talks of its once-famed “Telia Rajas”, the prosperous Saurashtra oil kings, who largely controlled the State’s politics until the 1990s, as new cotton kings are emerging in the State which now produces more for marketing than for own consumption. Interestingly, the drought years of the 1980s and the 1990s had ‘empowered’ the oilseeds lobby in Gujarat but the current year, when most parts of India are facing drought, is ‘empowering’ the cotton growers. One of the major reasons for the growth of cotton is the success of the Bt variety in Gujarat where some pioneering farmers adopted it in 2001 itself (even before formal approval was granted). The share of cotton in Gujarat’s agricultural output has increased from 6 per cent to 12 per cent within seven years.
However, in 1997-98, Madhya Pradesh’s yields were a record 740 kg/ha – there was of course no Bt cotton then. However, in the six years after the introduction of Bt cotton, cotton yields in Madhya Pradesh have gone down to 518.3 kg/ha on a six-year-average. (“Bt Cotton and the Myth of Enhanced Yields” Kavitha Kuruganti EPW May 30, 2009 vol xliv no 22)
Cotton consumption projected to rebound slightly in 2009-10: On average, about 60% of total production in the world was consumed in the producing countries until late 1990s. About 6-7 mt is traded in the international markets every year. The volume of cotton traded in the international market has changed a lot due to lower consumption in the USA and higher consumption in China, India and Pakistan.
India total consumption is around 88 percent (23-24 Million bales per year) of the availability.
The latest U.S. Department of Agriculture (USDA) forecast for 2009-10 projects world cotton consumption at 112.8 million bales, a 2 per cent increase from 2008-09 but well below the 2004-07 season average of 117.7 million bales. The modest rebound is forecast as the world economy begins a slow recovery from the most severe global economic conditions in decades. Meanwhile, cotton consumption among the major spinners has become more concentrated.
The top four cotton-spinning countries are forecast to account for nearly 73 percent of global consumption in 2009-10, up from the 2004-2007 season average of 69 percent. In addition, the top three spinner’s shares continue to increase. China and India have each increased their share of world cotton consumption recently by nearly 2 percentage points above their respective 2004-07 averages.
There could be about 5 per cent decline in domestic cotton consumption in 2009 but a marginal growth in consumption in 2010. In the wake of firm prices in 2009, there are indications that India’s cotton acreage may increase from 9.37 mha in the current year to 9.5 mha in 2010.
Fragmented Industry but integrated companies making reasonable profit: Indian textile industry is extremely fragmented with the dozens of companies producing all kinds of yarns and fabrics. While the export has been traditionally seen as the driver for the industry, in the recent years, nearly two third of the total textile and apparel demand has come from domestic consumption.
The Indian textile industry is composed of two sectors. The "organized" sector (large-scale spinning units and composite mills); produces 95 per cent of yarn. The organized sector weaving mills account for 5per cent of cloth production. The "unorganized" sector, (small-scale spinning units, power looms, handlooms, hosiery units) account for the rest of production. The weaving industry is mainly supplied by the unorganized sector, with power looms accounting for 60 per cent handlooms for 18 per cent, and hosiery units for 17 per cent of total cloth production (2008 estimates).
Given that India is the third-largest producer of the cotton, and has second highest yarn producing and third highest weaving capacities in the world, the fragmented structure of the industry is a daunting barrier for a profitable growth. Moreover, the interest cost continues to limit the profitability of even the most efficient players.
The slowdown in developed countries while have largely affected the export earnings, few companies have experienced a sustained demand from foreign markets. This is attributed to vendor consolidation from the global buyers to save logistics and procurement costs. Moreover, due to the economic downturn, there has been a shift in demand from luxury items to basic products that has helped Indian exporters.
According to the data available from ministry of commerce, in last five years textile export grew at 15per cent compared to a 12 per cent increase in apparel export. In the last two years the home textile, a major export segment though experienced sluggish growth, the demand for bed, table, toilet and kitchen linen experienced a significant rise.
To sum it up, companies who have integrated their capacities in the recent past could benefit from vendor consolidation taking place in the developed markets to gain a larger chunk of the export market while increasing their presence in the growing domestic market.
International mergers in cotton industry: Internationally an interesting development is being seen. Dunavant Enterprises and Allenberg Cotton, two of the world's leading cotton merchants are in negotiations to merge their global cotton operations. Together, the two firms handled over 13 million (480-lb) bales of cotton in 2007. In March 2008, a steep, speculation-driven spike in cotton prices forced market players to pay extremely high margin calls to cover their positions. Similar moves in other markets eventually led to hearings in Congress and possible measures on position limits in commodity and energy markets. A pair of cotton merchants -- Weil Brothers Cotton and Paul Reinhart -- was forced to pull out of the market in 2008. Weil closed its cotton operations and Reinhart filed for bankruptcy protection. The four top cotton merchants remaining would be Allenberg, Olam, Noble and Cargill.
Cotton Futures and Price Benchmarking: Cotton was the first commodity to attract futures trade in the country in an organised manner. It began as early as 1875. The city of Surendranagar in Gujarat has one of the oldest cotton exchanges. Satta Hall located in the middle area of the city is one of the landmarks.
The East India Cotton Association (EICA now Cotton Association of India) has a long tradition of conducting cotton futures trading. Its members have hands-on experience in cotton trading. The Association has the domain knowledge. Yet, the performance of cotton derivatives trade has left much to be desired. After the ban in 1966, the FMC permitted only non-transferable specific delivery (NTSD) contracts at various FMC-recognised associations across the country.
More recently, two more exchanges, namely MCX and NCDEX began trading in the cotton futures contracts. In fact, MCX futures trade is in Kapas similar to futures trade in Kapas is carried out at Surendranagar. All exchanges launched Kapas futures contract with great pomp and fanfare, but trading in them failed to take off. The exception being Surendranagar, has showed some volumes thanks to the predominance of day traders. This is a paradoxical situation. Trade volumes on overseas counterparts like NYBOT are almost three hundred times the actual size of the crop. A section of the cotton industry, however, feels that it will still be tough for the national exchanges to generate volumes, owing to the tough competition from the Surendranagar-based Kapas Kabala.
Today the cotton trade has to not only look at the domestic market conditions, but also seek to know what is happening in the world market. Developments in other parts of the world impact the domestic market. Unpredictable inflow and outflow of funds in any commodity creates price volatility. Small players often find themselves unable to cope with rapid price changes in the market.
It should be pointed out here that there is no world futures contract currently used as an international cotton price benchmark. Indeed, standard specifications of futures contracts traded on the New York Commodity Exchange (NYBOT Contract) correspond mainly to US cotton market fundamentals. The basis risk of non-US origin cotton remains high and it is not always easy as spot and futures prices might suddenly diverge. World prices are monitored by means of price indexes (the "Cotlook Indexes", A and B) and published daily in the Cotton Outlook. The Indexes are intended to be representative of the price level on the international raw cotton market.
World cotton trade and production are highly affected by government policy intervention. Direct support to producers through price interventions is of particular concern as regards the efficiency of the global cotton market.
Tax Structure: The tax policies have their impact on cost of production, prices, domestic consumption and exports. Textiles had a chequered history of excise duty changes. In the Budget 1996-97, the government imposed basic excise duty at the fabric stage in order to capture value addition and also brought them under the Modvat (now called Cenvat) credit scheme. Till then, textile fabrics had attracted only additional excise duty in lieu of sales tax. In Budget 2003-04, the handlooms and powerloom sector were also brought in the Cenvat chain.
The current fibre-use pattern in India favours cotton against man-made fibres (MMFs) because the latter used to be taxed at very high rates. Although the tax rates on MMFs saw significant reduction in the last few years, the excise duty was unexpectedly hiked from 4 per cent to 8 percent in Budget 2009.
However, the very next year, the then finance minister changed the entire complexion of duty structure by introducing an optional excise duty scheme for textile fabric producers. The optional duty regime has continued since then.
In the meanwhile, the across-the- board reduction in the Cenvat rate by 4 percentage points in December 2008 followed by 2 percentage points in February 2009, caused peculiar implications for cotton textiles. Excise duty on cotton textiles got reduced to zero. Perhaps it was not so much by design than by accident.
For those exporters who were paying optional excise it meant denial of input duty refund, thus reducing their competitive strength. It is only to "rectify the situation" that the recent Budget restored the optional rate of 4% for cotton textiles beyond the fibre stage.
Cotton textile exporters who would again opt to pay excise duty can get refund of Cenvat paid at the input stage. The move should therefore benefit this category of exporters. For others, there is no change-the status quo continues. And to be sure, most exporters fall in this category.
The policy of negative discrimination to MMFs is at odds with the global market realities — in the US and EU markets, MMFs account for 60% of the fibre content in textiles. Since the share of MMF-based products in India’s exports is less than 20%, our ability to make full use of the diversity of the world markets is greatly crippled. Below-optimal use of MMFs coupled with the fragmented nature of weaving and processing industries has affected the quality of fabrics produced in India. No wonder India’s large garment exporters mostly import fabrics for export production.
After the abolition of the export quotas it became evident within a few years that the Indian textile exporters had little ability to respond to price dips, even in comparison to Vietnamese and Bangladeshi traders. The industry invested a record Rs 1,600 Billion in new plant and machinery in the last decade, pinning hopes on opportunities that post-quota export markets would throw up. Only right policies will ensure that these investments don’t go waste.
Issues: The issues of the cotton & textile industry has been of (1) Yield (2) Fragmented Nature of the textile industry (3) Price Discovery (4) Tax Structure. Besides the issues that plague the cotton industry are those related to the level of technology and modernization in the industry? These issues generally lead to larger problems that make the successful commercialization of cotton as a cash crop difficult. Consequently for the majority, cotton agriculture is stuck at the subsistence level
