Global cotton prices calm down on Pawar play, Indian export hopes

New York: Everyone anticipates chaos in India’s decision-making process so global commodity traders placing big bets on cotton are sitting tight till India figures out what it finally wants to do. International cotton prices finished lower on Wednesday as news that India could allow limited exports of cotton already under contract calmed the US market.

International cotton prices for May delivery on the ICE Futures US exchange in New York was down 1.30 cents, or 1.4 percent, to 90.12 cents per pound. Cotton futures started coming off their Monday high of 92.23 cents after agriculture minister Sharad Pawar said he asked for the cotton export ban instituted by the Directorate General of Foreign Trade (DGFT) to be revoked, less than 24 hours after it was announced.

Reuters quoted government sources saying New Delhi may allow some shipments to go ahead as up to 2.5 million bales of cotton were registered for export and ready to be shipped out before the ban was announced.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

Are we going to see the same sort of U-turn that we saw on India’s decision to shelve legislation to open its retail sector to foreign investors? Maybe, it depends on how hard Pawar and cotton farmers press the government. For a start, an Indian ministerial panel on Friday will review the recently imposed cotton-export ban.

[caption id=“attachment_238260” align=“alignleft” width=“380” caption=“New Delhi may allow some shipments to go ahead as up to 2.5 million bales of cotton were registered for export and ready to be shipped out before the ban was announced.AFP”]  [/caption]

Pawar appears to have won the first round by getting the prime minster and his Group of Ministers to reconsider the DGFT’s surprise decision. Pawar was forceful in making the case to the PM that after the ban on exports, traders have stopped buying cotton from farmers in Gujarat, Maharashtra, Madhya Pradesh and Karnataka in anticipation of a further fall in cotton prices. Local cotton prices have already tumbled 6 percent since Monday to 33,000 rupees per 356 kilograms for the widely traded Shankar-6 variety.

As many as 1,000 ginning mills in Gujarat are due to take part in a two-day protest at the decision. Gujarat chief minister Narendra Modi and his Maharashtra counterpart have also tongue-lashed the decision.

Still, there is widespread uncertainty over how the ministerial panel will decide on the issue on Friday. Textiles Secretary Kiran Dhingra said the panel’s review will hinge on the cotton demand and supply situation in India.

The players backing the ban

The DGFT said that the decision to ban further exports “took into account the trend of domestic consumption and depletion of domestic availability.”

Indian apparel exporters last month called for steps to curb India’s cotton shipments to China and conserve supplies for domestic textile mills instead. The Apparel Export Promotion Council (AEPC) said it welcomed the decision to ban cotton exports, saying it would generate more taxes through increased business opportunities, as well as more jobs.

“While 1 kg of raw cotton provides a yield of Rs 100, the same cotton as trousers provides a yield of Rs 500,” said AEPC chairman Dr A Sakthivel.

He said India’s garment exports from April 2011 to January 2012 jumped 21.45 percent to $10.86 billion, so the latest measure would ensure the “supply of the important raw material cotton would be adequately met.”

The fallout from the ban

Most US-based analysts think the Indian government will allow cotton that has already been sold (registered) to be shipped but will keep the ban in place for a while.

“In the longer run, it just throws out more questions (regarding) the credibility of India as a reliable source of cotton,” John Flanagan, president of Flanagan Trading Corp. in Fuquay-Varina, told The Wall Street Journal.

“It will likely mean that foreign buyers will require India to discount (its cotton) prices in the future,” added Flanagan.

This is the second time in two years that India has banned cotton exports so buyers are obviously going to get nervous about sourcing the fiber from India. Moreover, traders in India have signed contracts for nearly 10 million bales in total for export at $1.01-$1.03 per pound, including those already shipped and some still to be shipped. The sudden ban is likely to trigger contract disputes since the DGFT notification says that export against registration certificates already issued will also not be allowed.