Indian Ginners, Mills Want Government Assistance
7 April 2008 Global cotton prices have doubled in the past year with speculatives pouring money into ICE futures. Indian cotton is in heavy demand overseas as it is the cheapest available right now. Sensing a good opportunity, most of the world’s largest cotton trading companies have become active in the Indian market.
India has produced a record crop of 31 million bales in 2008. But local prices have continued to spiral due to heavy demand from exporters. Though rising prices have meant a very profitable deal for farmers, worried ginners and weaving mills have now asked the government to step in to make sure cotton remains affordable for them.
They have suggested imposing measures to prevent speculative hoarding, which distorts the supply chain and prices, along with registration of export contracts so that cotton trade can be monitored. The CCP, however, took a view that since there is still a surplus in the domestic market, this may not be the right time to impose export restrictions.
The biggest problem for local industry is that cotton prices are no longer being decided only by demand-supply fundamentals. The entry of hedge funds in U.S. cotton futures, as part of the global commodity bull run, has pushed up cotton prices even in Indian spot markets to unforeseen levels.
In a letter to the textile ministry, the Cotton Association of India (CAI) has alleged that large players, with access to cheap foreign cash, are trying to destabilize India’s cotton economy.
“Market operators who have access to finance at international interest rates are clogging the supply chain at various levels” in order to benefit from rising prices, “which have become volatile,” the CAI said. As a result, “there is no level playing field for Indian cotton operators on account of differential rates of interest.”
CAI believes these market operators have “disturbed the equilibrium” of the domestic cotton economy, which needs to be corrected. “We feel that a de-clogging process with an eye to restoring the flow of supply to consumption and exports is necessary,” CAI stated.
But it may be tough for the government to single-handedly bring down cotton prices. Cotton futures on ICE settled at a new 12-year high early last month as speculative investors drove the market higher. Large speculators in cotton futures have been net long since the middle of 2007 and have been adding to that net long position in recent weeks.
This speculative interest is being further fueled by bullish fundamentals. According to the USDA, China’s demand will continue to rise in 2008/09. USDA believes world consumption will rise to 129.5 million bales (more than 28.2 million tons) in 2008/09, while production will be lower by 6.5 million bales (more than 1.4 million tons).
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