Shock cotton exports ban hurts India's image, sends prices surging

New York: India’s surprise ban on cotton exports which came unexpectedly from left field caused US cotton futures to surge on Monday igniting fears of a jump in prices for cotton goods.

The ban instituted on Monday with immediate effect by the Directorate General of Foreign Trade (DGFT), was so sudden that it even stunned agriculture minister Sharad Pawar, who told reporters, “I have not heard about it and I am coming to know about it from you.”

Even as Pawar struggled to come to grips with the ban, domestic cotton exporters, global commodity traders and the apparel industry went into a tailspin. US Cotton futures jumped 4.5 percent, the most allowed in a single day of trading, to 92.23 cents per pound following the Indian news.

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India may have taken the sudden decision with an eye on China, the world’s biggest consumer which in the past year has aggressively bought bales for a “government reserve” as a way to buffer against price volatility. The government said India has already exported almost 9.4 million bales of cotton this fiscal year, higher than government targets. Over 80 percent of exports so far have headed to China. The DGFT, of course, has said the ban is aimed at ensuring sufficient supply of cotton for Indian textile companies.

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“This India development really caught the entire cotton industry and traders off guard because it came with no warning,” Phil Flynn, senior market and commodities analyst with PFG Best, told CNN Money.

Flynn told the US channel that the market reaction to India’s move reflects concerns that it could “start a new rise in cotton prices that mirrors last year’s rally.” Cotton prices hit an all-time high of $2.27 a pound last March.

Natural gas epitomised the ‘widow maker’ trade of the 2000s after a series of big bets went wrong in the commodity. Now that gas has been tamed, trading in a narrow range that bores hedge fund managers, cotton has taken its place. Several traders have gone bust thanks to their bets on cotton which has become a notoriously volatile commodity trade.

Will the ban harm India’s reputation?

This is the second time in two years that India has banned cotton exports so buyers are 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.

Defaults probably will involve “Indian merchants to mills outside of India,” Jordan Lea, the chairman of Greenville, South Carolina-based Eastern Trading Co., told Bloomberg. “I understand that most of the Indian cotton that was sold, but yet unshipped, is owed to China.”

The Cotton Association of India is expecting Indian exporters to be slammed by claims and arbitration cases.

“We are shocked to hear that the government has suspended the shipments against past registrations. The registered but unshipped quantity as reported by the Textile Commissioner’s office on the day of the announcement is around 25 lakh bales,” said Dhiren N Sheth, president of the Cotton Association of India.

“These contracts between Indian exporters and their foreign buyers have been entered into several weeks back and exporters had prepared for shipments after registering their contracts with the Textile Commissioner’s office. It is quite likely that several of such contracts will turn into international disputes. Not only will the exporters be subjected to huge losses but they will have to also face claims and arbitrations with their buyers,” added Sheth.

Critics also say the ban is good for Indian textile mills as it gives them access to cheap cotton, but it prevents farmer from getting a bigger price for their crop. The government has fixed the minimum support price for long staple cotton for 2011/12 season by Rs 300 to Rs 3,300 per 100 kg.

India is the world’s second-biggest cotton producer and exporter while the US is the world’s No. 3 producer of cotton and the top exporter of the fiber. China is the world’s biggest producer and consumer of cotton for its huge textile industry and is likely to now buy more cotton from the US.