By admin       2018-07-07

On July 4, 2018, the Cabinet Committee on Economic Affairs (CCEA) approved an increase in the minimum support price (MSP) for kharif crops (including cotton) for 2018-19. This brings into effect a proposal made in the Union Budget 2018-19 to fix the MSPs at a level of at least 1.5x the cost of production. The move is set to benefit Indian farmers upon the commencement of harvesting for the ongoing kharif season from October 2018 onwards. While this is clearly a positive development for India's cotton farmers, the announcement holds a mixed bag for the domestic textile companies. The revision is likely to keep their working capital requirements high and would warrant a sustained calibration in pricing for end products amid an upward shift in cost trajectory. Nevertheless, increased clarity on the price floor mitigates the risks emanating from sharp volatility in cotton prices, as witnessed in the past. In fact, this is expected to support the profitability of cotton spinners, particularly the well-stocked ones, in Q2FY2019 (ie before the Kharif harvesting season begins) by keeping yarn prices firm vis-a-vis their raw material-carrying cost. Further, higher cotton prices are expected to incentivize farmers to increase cotton sowing. In the recent years, it has been witnessed that the MSP announced for Indian cotton acts as a price floor for global cotton as well, given India’s status as the largest cotton producer and the second-largest consumer of cotton. Accordingly, higher cotton prices are expected to support cotton output, not just in India but across the world. Increase in cotton output becomes increasingly relevant amid rising concerns on a global demand-supply situation, with a sharp increase in import demand from China likely over the next two-three years. The MSPs were announced at the beginning of the sowing season for certain crops based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). Except for bajra and a few pulses, MSPs announced for most crops this year have been fixed to provide a 50-60% return to the farmers over their estimated cost of production. In accordance, the MSP for the more commonly used medium-staple and long-staple cotton fiber varieties have been increased by ~28% and ~26%, respectively, translating into an estimated return of ~50% and ~59%, respectively, over the cost of production for farmers. The increase comes after five consecutive years of subdued increase of ~1-4% per annum, following a 29%, and 22% increase announced for the year 2012-13. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA Ltd, said: The announcement is unlikely to have any immediate impact on cotton prices, as expectations of an increase in MSP had already been captured in cotton market prices over the past few months. As a result, cotton is currently trading at a level higher than the new price floor. The cotton harvesting season is typically accompanied by the softening of cotton prices from the levels seen during April-September. However, the decline in cotton (lint) prices last year had been curbed by the then prevailing price floor of Rs105/kg, which acted as a resistance level and kept the prices above that level. Accordingly, after declining by ~12% from about Rs118/Kg to Rs105/Kg during September-November 2017, a rebound in cotton prices to pre-harvest levels was seen, with cotton prices demonstrating a further upward bias and trading at ~Rs120/kg during the four-month period ending April 2018 amid expectations of an increase in MSP. Domestic cotton prices witnessed a further increase starting mid-May 2018 following the upward trajectory in international prices amid expectations of a decline in the global stock-to-use ratio to a multi-year low level because of lower cotton crop expected next year and fast-depleting China’s reserve stocks. As a result, cotton (lint) is now trading at a significantly higher level of Rs130-135/kg. In comparison, the MSP-implied cotton lint floor price stands revised to an estimated ~Rs125/kg. Thus, while the announcement is not likely to have any immediate impact on cotton prices; cotton is now expected to trade in a new range altogether which is higher than the level seen till last year (barring some interim spikes).

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