Surprise ban on cotton exports sparks price volatility

Prices of key Shankar 6 variety rose R1,500 per candy or around 5% in the domestic market after the Director General of Foreign Trade announced the ban.

In the global market, however, cotton prices inched up to $1 a pound, as India is the second largest exporter of the fibre after the US.

The country has exported a record 9.5 million bales of the commodity in this marketing year through September, but with production estimated at 34.5 million bales, again an all-time high, there was no hue and cry from key sections of the user industry for a ban.

Commerce and textile ministries, however, favoured a ban, the former apparently thinking that unbridled exports of the raw material could hit textile and apparel exports in a highly competitive global market, and the latter pandering to sections of the industry especially garment makers and knitwear units from the south who have complained of their inability to source cotton in required volumes.

The division within the textile industry has been apparent. DK Nair, secretary-general, Confederation of Indian Textile Industry (CITI) said: ?We had not asked for any government intervention in the export market. So, we are a bit surprised by the decision which amounted to throwing a stone at the still water.? Apparently, the CITI, whose members mostly include cotton spinners, reckon that domestic cotton prices (Rs 34,000-35,000 per candy) are not very high and volatility might not be in the interest of spinning mills.

Apparel Export Promotion Council (AEPC) chairman A Sakthivel had a different take. ?This (ban on cotton exports) is the right step. There would have been a severe shortage of cotton in the country if there was no ban. When you allow raw material exports to our competitors in the global textile market like China, it is detrimental to your own industry.?

The DGFT statement said: ?Transitional arrangements will not be applicable for the export of cotton. Export against registration certificates already issued will also not be allowed.?

In November, commerce and textiles minister Anand Sharma had written to finance minister Pranab Mukherjee for restructuring of loans as well as interest subsidy to the garments and knit-wear sectors grappling with the economic slowdown, which effected a slump in product prices after the relentless rise in raw material costs. With no relief in sight on those proposals, the move to ban the exports was probably the only option to save the domestic industry operating at a very low working capital, a government official told FE on condition of anonymity.

?This is Dutch disease. You allow all your supplies to be exported and then nothing will be left for your own struggling industry, giving it a decisive blow,? the official added.

The export ban followed a meeting of a panel of secretaries, headed by commerce secretary Rahul Khullar on Friday, where discussions focussed on domestic supplies as well as exports of cotton.

Indian traders have sought permits to export a record 12.5 million bales, making up for more than a half of the fresh crop arrivals so far this marketing year through September. The ban casts doubts over the shipment of around 3 million bales of cotton for which registrations have already been sought or completed, industry executives said. India, the world’s second-biggest cotton supplier, had exported around seven million bales last year, mostly to China. One bale equals 170 kg.

Cotton export policy had sparked a heated debate in the last marketing year through September as the textiles and the agriculture ministries sparred over allowing more shipments to gain from a global shortage. While the agriculture ministry had pushed hard for allowing more exports than the quantity initially approved, the textile ministry ? the nodal ministry for cotton cotton distribution ? opposed any such move fearing a domestic spiral of prices and its adverse impact on cash-strapped textile mills.

Consequently, the government kept an export ceiling of 5.5 million bales for 2010-11 before raising it to 6.5 million bales in early July and finally lifting the restrictions later that month until the end of the season as domestic prices had eased from their record highs in March and April. The government freed cotton exports in 2011-12 anticipating a record harvest, aiding exporters who are lifting a bulk of the crop after a pick-up in Chinese demand. The country expects to reap a record cotton harvest of 34.5 million bales in 2011-12, compared with 33.9 million bales last year.

?The ban will hit farmers’s income badly, especially in view of low yield this year in some states following a rough weather. More than 10 million bales of cotton are yet to come to the market and the decision will further drag down domestic prices. Why should the poor farmer be at the receiving-end of any export policy?? said a senior government official of a key cotton-producing state.

In April 2010, the textile ministry, which was then handling the registration of cotton export contracts, banned cotton exports ?arbitrarily,? inviting sharp reaction from the agriculture ministry. The ban was revoked in around a month. In 2010-11, the charge of the registration of cotton contracts was handed over to the DGFT.

?While 1 kg of raw cotton provides a yield of Rs 100, same cotton as trousers provides a yield of Rs 500. The employment level at raw cotton level is 0.5 worker per kg, much less than at the finished product level, as the garment sector has employed 6 million workers,? said Sakthivel, who is also president of Tirupur Exporters’ Association.

Spinning and textile mills, which bought cotton at record-high prices in 2010-11, were caught off-guard when product prices suddenly fell significantly from April on poor demand as an approaching economic slowdown aggravated into a sustained crisis in the US and the EU, which together account for around 65% of India’s textile exports. Compounding the worries, even large mills currently get working capital loans for just three months’ requirement, which effectively prevents them from stocking up significantly.

Cotton Association Of India (CAI) president Dhiren Sheth said: ?The move will severely erode our credibility in the global market as a reliable cotton exporter. We will request the government to review the decision quickly.? CAI represents cotton traders.