At Variance: Bumper crop and price rise

       Demand and supply would influence prices. If there is more supply, with demand being constant or less, prices should fall, market pundits would tell us. Interestingly, even while the reports of bumper crop of cotton started emerging in December, 2011 and in later months, cotton yarn prices starting rising. Normally, as per demand-supply principles, higher arrivals of ‘fresh’ cotton produce should dampen the cotton yarn prices, or prices of any cotton product for that matter. Even in later months, these prices have ‘evened’ out, but have not decreased. Textbook definition of market says that if supply is on the higher side, while the demand has remained the same, prices should not increase. How can we unravel this mystery of rising prices, even as fresh cotton started arriving? There seems to have been some mechanism, which turned the market upside down. It could be because of forward contracts, trading and commodity exchanges.

      Cotton Advisory Board, under Ministry of Textiles, develops a balance sheet of cotton, every year. As per the balance sheet in this year, while the production has increased by 10 percent from the previous year, domestic consumption has declined by 5 percent. However, in 2009-10, there was more export of cotton, and one can easily surmise that this as a factor has pushed up the prices. But, then is there anything else, such as forward trading, pre-season cotton contracts, ‘hoarding’, etc?

      Between 1998-99 and 2010-11, a period of 10 years, Indian cotton production was 2902 lakh bales, while the consumption was 2,666.38 lakh bales, indicating that domestic consumption has always been on par with the production. Yet, in the last five years, 2006-07 to 2010-11, India has exported 319.50 lakh bales, more than the surplus generated by the gap between production and consumption in the last ten years. Who has benefitted from such export orientation? Not many farmers benefitted from it. But, surely, such a dependence on exports would hurt the domestic cotton supply chain.

         As per government statistics, exports of 83 lakh bales for 2010-11 is valued at Rs.10,270.21 crores, which averages to Rs.12,373 per bale (170 kgs). However, as I am writing this, the prevailing price per bale is Rs.17,000 per bale. Merely, on speculation of exports, prices are increasing. This increase is hurting the cotton consumers, while the traders at each level of cotton supply chain seem to be benefitting more. However, the pressure on government to allow export was done in the name of farmers – “exports would help farmers to get better price”.

       In Warangal market, the declared price ranged between Rs.4000 to Rs.6,000 per quintal over a six month period, starting from November, 2010 to May, 2011. This works out to Rs.6,800 to Rs.10,200 per bale. However, farmers in actual terms received an average of Rs.3500 per quintal, which is Rs.5,950 per bale. Ofcourse, this price includes various other incidentals a farmer has to pay at the mandies. Take home price per quintal would be much lesser.

       It is clear that cotton price, which is valued at variously between Rs.5,950 to Rs.17,000 per bale, benefitted the traders. Value of cotton above Rs.6,000 per bale was netted by traders, ginners and exporters. This network has skimmed atleast Rs.6,000 to Rs.11,000 per bale. This skimming is still continuing. At the macro-level, this turns out to be Rs.18,720 crores to Rs.34,320 crores.

From what the farmers received, at the macro-level, of Rs.10,920 crores, seed and pesticide companies have netted a profit of Rs.7,000 crores.