THE announcement by the Cabinet Committee on Economic Affairs (CCEA) on June 1, 2020, approving an increase in the minimum support prices (MSPs) for Kharif crops (including cotton) for the Cotton Year 2020-21 augurs well for cotton sowing but is likely to be unfavourable for the domestic spinning sector.
While the MSP for the medium-staple variety stands increased by Rs 260/quintal to Rs 5,515 per quintal, the price for the long-staple variety stands increased by Rs 275/quintal to Rs 5,825/quintal, translating into an increase of five per cent over the level fixed for CYi2020 (refers to Indian cotton year, ending September 2020). The increase of five per cent in cotton MSP for CYi2021 comes after a muted two per cent increase implemented for CYi2020, which followed a significant increase of 26-28 per cent announced for CYi2019. The hike is in line with the announcement made in the Union Budget 2018-19, to fix the MSPs at a level of at least 1.5 times of the all-India weighted average cost of production.
Commenting on the impact of the development on the sector, Jayanta Roy, Senior VP and Group Head, ICRA Ratings, mentioned, “The move is set to benefit the farmers on commencement of harvesting for the ongoing Kharif season, from the month of October 2020 onwards. It is a positive development for them and is likely to encourage cotton sowing, despite a fall in cotton prices witnessed in recent months. However, the move may heighten challenges for the domestic spinning companies, as this comes at a time when the Covid-19 pandemic has resulted in severe demand-side pressures in the international textile markets.”
Increased MSP, the timely onset of monsoon and expectation of normal monsoons augur well for cotton sowing in India. Although cotton sowing in key regions in the Western and Southern belts is yet to start in a meaningful manner, initial sowing patterns in the northern belt indicate higher acreage for the year. Nevertheless, cotton crop remains highly vulnerable to pest attacks, and output/ yield expectations remain contingent on these. In this context, the locust swarm which entered India in mid-May 2020 and has hit several parts of western and northern India including Rajasthan, pose a looming threat for the crops as these insects feed on a large variety of crops. Although the State Governments across the country are undertaking several control measures, the impact of these on crop output for CYi2021 cannot be assessed as of now.
In the meanwhile, demand and trade prospects in CYi2020 have been severely hampered owing to the pandemic. With demand-side pressures in the end-use segments (fabrics and apparels), demand for yarn is also getting impacted, which is likely to result in a decline in cotton consumption for CYi2020. With a double-digit decline likely in the global as well as Indian cotton consumption, closing stock levels are expected to shoot up significantly, after having remained range-bound over the past two to three years.
After correcting between February and April 2020 owing to dwindling demand, international cotton prices had gathered some support in May 2020, amid increased buying by China to replenish its state cotton reserves. However, with stocking by China nearing conclusion and continued weakness in China’s domestic as well as international demand for the country’s downstream products, China’s demand for cotton is tapering off.
“Demand-side pressures globally and expectations of higher carryover stocks from the current cotton year are likely to result in negative bias in the international cotton prices. Expectations of a similar demand-supply scenario in India, entailing supply exceeding demand, and a likely build-up in stock levels, are likely to create a downward pull in market prices. Revised higher MSP, however, is expected to act as a price floor, cushioning the decline,” added Roy.
Given that cotton is an internationally-traded commodity, any artificial build-up of domestic cotton prices owing to a higher MSP has the potential of rendering the domestic crop as well as domestic textile players uncompetitive in the global markets. This was also witnessed between May 2019 and October 2019 when domestic cotton traded at a ~5% premium vis-a-vis international cotton, which made domestic spinners uncompetitive in the international market, putting pressure on India’s cotton yarn exports. With spinners likely to face the challenge of a reduced spread in H2 FY2021, their ability to manage the cost structure remains crucial for their profitability.
Given that several countries across the world are still under the lockdown or are just beginning to open up, significant uncertainty remains on the extent and timing of the improvement in consumption patterns. However, Indian spinners’ ability to maintain a fine balance between the level of inventory and cost, while stocking cotton, will remain crucial for their profitability in FY2021 and FY2022, besides the recovery from the Covid-19 impact.