THE late onset of the south-west monsoon and a good revival in rains in the second half of the four-month period has resulted in farmers across India shifting to cotton in the kharif season. The area under cotton cultivation is expected to touch a record 12.5m hectares by the end of the month.

According to the Union Agriculture Ministry, farmers are increasingly opting for cotton. In Gujarat, for instance, farmers have sown cotton in over 3m hectares of land, a 50-year record. The Mumbai office of the Foreign Agricultural Service (FAS) of the US Department of Agriculture notes that the pace of planting since the beginning of August has been the fastest in the past four years.

“Planting is complete in the north and the central cotton growing regions but some additional area may be added in the southern states of Andhra Pradesh, Karnataka and Tamil Nadu,” says an FAS report. Farmers in the southern states have switched over from paddy and soya cultivation because of better returns from cotton last year.

The Indian Cotton Federation (ICF) expects cotton production to top 40m bales (each bale of 170kg) in 2014-15. Good rains in late August and September, especially in peninsular India — and even in backward and dry regions like Marathawada in Maharashtra — have dramatically changed the scenario for the cotton crop.

A few weeks ago, the cotton advisory board revised production estimates for the current marketing year to 39m bales (of 170kg; which is the equivalent of 30.5m bales of 480lbs, or 6.6m metric tonnes).

Indian farmers, who have taken to the genetically-modified Bt cotton seed in a big way over the past decade, have gained significantly, say analysts. Average yield has gone up from just a little over 300kg a hectare about 10 years ago to 565kg per hectare last year. Yields in India range from a low of 370kg in Maharashtra to a high of 750kg in Gujarat.

Indeed, though India is the second-largest producer of cotton in the world (after China), and is all set to even overtake its giant northern neighbour next year its cotton productivity is abysmally low. India’s yield of 565kg a hectare compares poorly with global average of 750kg, the US average of 930kg and China’s average yield of 1,500kg.

The expected glut in production in the new season is, however, not likely to dampen prices a lot, as domestic demand for cotton is huge. Profit margins in cotton are also quite substantial. While the cost of production ranges between Rs22,000 to Rs32,000 a hectare (depending on where it is grown — rain-fed area, irrigated land, or farms depending on drip irrigation), cotton prices are quite high at Rs40,000 a candy (of 356kg).

Though global prices are around Rs32,000 a candy, the government has fixed a minimum support price of Rs36,000 for domestic cotton.

But the cotton textile industry is unhappy with the higher price of domestic cotton and wants the government to intervene. Earlier this month, the Cotton Textiles Export Promotion Council (Texprocil) demanded that the Cotton Corporation of India (CCI), a state-owned agency, should buy cotton from farmers whenever prices in India are lower than global prices.

This happens between October and February, when domestic prices are cheaper following a glut in supplies. However, Indian cotton prices soar after supplies get reduced, making it difficult for exporters of yarn and garments.

If the CCI were to undertake the price stabilisation role and buy cotton from farmers whenever domestic prices are lower than international ones, it would help growers earn substantial profits, stabilise the operations of mills and make Indian manufactured products competitive globally, said Manikam Ramaswami, the outgoing chairman of Texprocil.

THE US Department of Agri­culture predicted earlier this month that India could overtake China and emerge as the world’s largest cotton producer in the new season. India’s cotton production in the new season could be 30m bales (of 480lbs each), as against a slight fall in China’s production, which could be around 29.5m bales.

While cotton cultivation has fallen sharply in many growing areas in China, the government there is also withdrawing a support programme — the temporary purchasing policy — which is acting as a dampener for growers. The country has been stockpiling cotton for the past three years under the government’s purchase policy.

The government has now announced that it plans to scrap the policy and replace it by providing direct subsidies to farmers. This could encourage local farmers to grow cotton, affecting imports.

Lower cotton production in China could have triggered increased exports from India, but if the farmer subsidy scheme is announced soon, it could upset the global cotton export trade, which is heavily dependent on Chinese consumption. In fact, cotton futures have slumped in recent days following speculation about the new subsidies. International prices are expected to remain muted, especially as the US — the world’s largest cotton exporter — has reported a bumper crop.

And as long as domestic prices in India are higher as compared to international prices, sales to China and other parts of Southeast Asia could get adversely affected. The price differential has hurt Indian cotton exports, which have fallen substantially. Import restrictions have also been imposed in China of late, with mills being allowed to import just a fifth of their requirements over and above the annual quota.

Traders fear that India’s cotton exports might fall by 35pc in the new cotton year. India has so far exported about 11.5m bales of cotton, marginally higher than last year.

And as a consequence of the sharp variance in the price of domestic and international cotton, imports into India have soared. According to industry estimates, India’s cotton imports will add up to 1.7m bales, a 12-year high. The textile industry usually imports about 500,000 bales of extra-long staple cotton, but this year mills have been aggressively buying cotton internationally because of the price advantage.

Published in Dawn, Economic & Business, September 22nd, 2014