The government is gearing up for a record cotton purchase in the marketing year through September 2013 to prevent distress sales by farmers, as prices are expected to crash from November due to a pick-up in harvesting as well as poor domestic and export demand. State-run Cotton Corporation of India (CCI) has drawn a preliminary roadmap to buy as much as 9 million bales from farmers at the state-fixed benchmark prices, entailing a cost of R16,470 crore, a senior government official told FE.

CCI, the government’s biggest cotton procuring arm, has also projected losses of R2,430 crore on such purchases, said the official. It may have to purchase more if the cotton federation in Maharshtra, still reeling under losses from such an operation in 2009-10, fails to procure any, he added. Government agencies usually buy cotton at the minimum support prices (MSP) to ensure farmers get minimum fair returns in case the rates fall below the benchmark level, and sell the stocks later at market prices. Losses on account of the procurement operations are reimbursed by the government.

Farm co-operative Nafed, too, has expressed willingness to procure three million bales, worth approximately R5,500 crore, said another official, who didn’t want to be named. One bale equals 170 kg. Producing states will finalise the procurement plans in a meeting with the textile ministry next week. The government had procured a record 9 million bales in 2008-09, but state-run agencies had since barely purchased in a major way, thanks to good export demand.

?Global prices have tumbled below Indian rates following reduction in imports by largest consumer China, making exports by India unviable. Moreover, domestic mills have already piled up 3.8 million bales for consumption until the end of November and are unlikely to stock up now. So prices are expected to fall below the MSP from November,” said one of the government officials.

The country’s cotton output is forecast at 33.4 million bales in 2012-13, while consumption by mills is pegged at 25 million bales, according to the state-backed Cotton Advisory Board.

Prices in Punjab have already fallen below the benchmark levels. In June, the government raised fixed the MSP of seed cotton (before ginning) in the range of R3,600 to R3,900 per quintal, depending on the variety.

Indian prices had remained firm for most part of the last marketing year due to a record 12.9 million bales of shipment, and crossed the global level in July for the first time in three years after China trimmed purchases. US cotton futures stayed almost flat at 72.73 cents per lb on Thursday ? way below the record level of $2.197 a pound in March last year–and compared with slightly over 81 cents for a similar Indian variety. Domestic prices of cotton (after ginning) have fallen 1% in October to R33,900 per candy of 356 kg, although the rates had crashed to R33,200 earlier this month.

The agriculture ministry has indicated that the government may have to purchase 10 million bales in 2012-13 if current price trends continue. Key producing states, including Gujarat, Maharshtra and Andhra Pradesh have indicated that as much as 13.5 million bales may have to be lifted, the officials said.

Textile secretary Kiran Dhingra had discussed the cotton issue with the department of agriculture at the Centre, government officials of major producing states and procurement agencies in a meeting on October 18.

?The procurement operation by the government may be necessitted in November and December, as harvesting will be in full swing. Textile mills are not in a position to purchase significantly due to inadequate availbility of loans as well as high borrowing costs,? said DK Nair, the secretary-general of the Confederation Of Indian Textile Industry (CITI).

Nair said if textile mills are provided some relaxations in loan availability, which are largely revenue-neutral, the pressure on the government to procure so much and bear losses would be significantly reduced. ?The government should provide textile mills loans to purchase cotton at a 7% interest rate, around the same level as on the farm debt. It can ask banks to offer mills loan to purchase cotton against nine-months’ requirement so that they can buy more and stock up for a longer period in times of necessity. Also, the margin money of 20% to 25% for cotton purchases should also be reduced to 10%,” he said.

At present, credit to textile mills to purchase cotton is limited to three month’s raw material requirement and is available only at the much higher prime lending rate. The loan for raw material purchases is also restricted to 75% to 80% of the cost of cotton requirement.