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Tuesday, March 6, 2012

Indian cotton market sent on a tailspin by DGFT

The Notification no. 102/RE 2010/02009-14 dated 5.3.12 of DGFT has taken people by surprise and shocked some !  -  India is the world’s second-biggest  producer and exporter while the US is the world’s No. 3 producer  and the top exporter.  China is the world’s biggest producer and consumer – perplexing !!!  The Directorate General of Foreign Trade (DGFT) is the agency of the Ministry of Commerce and Industry of the Government of India responsible for administering laws regarding foreign trade and foreign investment in India.

It is all about ‘Cotton’ the soft,  fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal.  The plant is a shrub native to tropical and subtropical regions around the world, including the Americas, Africa, and India.  The fiber most often is spun into yarn or thread and used to make a soft, breathable textile.  Current estimates for world production are about 25 million tonnes annually, accounting for 2.5% of the world's arable land.

The  Indian cotton connection has a very long history – our cotton-processing sector gradually declined during British expansion in India and the establishment of colonial rule during the late 18th and early 19th centuries. This was largely due to aggressive colonialist mercantile policies of the British East India Company.  Those days, Indian markets were increasingly forced to supply only raw cotton and were forced, by British-imposed law, to purchase manufactured textiles from Britain.  British traders developed a commercial chain in which raw cotton fibers were  purchased from colonial plantations,  shipped on British ships, processed into cotton cloth in the mills of Lancashire, providing employment opportunities there, profit for machinery and factories, exported on British ships to captive colonial markets where kings and landlords bought them at a much higher price – selling the same product available in their native land at a higher price – how cunning …..

India, the  world's second-largest producer of the fiber after China unexpectedly announced an immediate ban on cotton exports, sending benchmark futures prices soaring.  It is having its political fallout – the  Agriculture Minister Sharad Pawar is being quoted as stunned and unaware of the ban, while the Gujarat CM Narendra Modi demanded immediate lifting of the ban, saying the ban would have disastrous consequences on cotton farmers of the state.  The sudden ban has caused US cotton futures to surge on yesterday (5th Mar 12) igniting fears of a jump in prices for cotton goods.  Mr Narendra Modi sought immediate lifting of the ban.  ‘Cotton prices have fallen from Rs.62000/-  per candy last year to Rs34,000 - Rs38,000 per candy this year. The prices were slowly picking up, and it is against this background that the Centre imposed the ban on exports. This will have a major impact on cotton farmers and agricultural economy of the state,” CM said in the letter.

Cotton in FP Bales awaiting export in  a Port
The sudden notification sure has sent domestic cotton exporters, global commodity traders and the apparel industry  into a tailspin. US Cotton futures jumped 4.5 percent, the most allowed in a single day of trading, to 92.23 cents per pound following the Indian news. It certainly affects the State of Gujarat as with its output of 116 lakh bales this year, Gujarat is expected to account for nearly one-third of the country’s total cotton production of 365 lakh bales.  It is stated that Gujarat  farmers incurred a loss of Rs14,000 crore due to the ban on cotton exports last year alone. The ban is reportedly  to help local textile mills and yarn manufacturers as the cotton prices could be lower than the MSP.  The real impact of the notification banning export of cotton till further orders is yet to be fathomed. 

The notification of DGFT effectively revokes export certificates for as much as 2.6 million bales.  This ban sure would affect the standing of the Indian exporters in International market.  It is stated that last year alone the U.K.-based International Cotton Association got 242 requests for technical arbitration, more than five times the yearly average and double the record in 2008.  The present ban would lead more defaults in turn leading to more fracas in International market.  Some sources of Confederation of Indian Textile industry suggest that about  12 million bales had been registered for export- the notification has stated that even  exports against registration certificates already issued would not be allowed.   

In the recent decades, India  has made rapid strides in cotton production ever since adopting the genetically modified technology. It has also helped the country emerge as a key supplier of the natural fibre to the global market, especially China.  However, the large-scale adoption of genetically modified technology is causing concern to other nations, especially in Europe.

The cotton prices have been steadily falling compared to last year – already that has hurt the farmers badly and the recent ban sure would hit them further.  Gujarat farmers have the largest share in cotton export would now find their profits squeezed further.  The cotton prices are already down by 60% compared to previous year, due to global slowdown.

While the Union Agriculture Minister is shocked and Gujarat CM is enraged, the  Minister in charge of Commerce and Industry, Anand Sharma said that the decision was taken in view of exports in current marketing year (October-September ) exceeding the surplus by 10 lakh bales. Exportable surplus for year was pegged at 84 lakh bales.   With this ban, the merchants  who had sold that cotton that has not been exported out of India will have to cover elsewhere to fulfill their contracts [and pay] the price difference between the Indian cotton and other growths as available in the market.

So on day 1 after the ban, the scenario is most chaotic and the farmers are left fuming

With regards – S. Sampathkumar.

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