MUMBAI (Commoditiescontrol) – The 2016-17 cotton marketing season has been peculiar for the cotton value chain despite bumper crop and good prospects for exports. However, many challenges emerged after the high value currency notes were cancelled under the “Demonetisation” policy. Cotton mandis across the country are usually seen hustling and bustling at this point of peak arrival season, this year the demonetization policy has pull out the air from the markets. The impact is seen in many agricultural products, but cotton is seriously affected just because demonetization coincided with beginning of 2016-17 marketing season. Also the size of cotton industry is huge (value of cotton production = Rs 70,000 crore), long value chain and huge employment generator.
Even after 10 weeks of demonetization, currency circulation is still far from easing putting farmers and the rest of the chain in a state of dilemma. Administration and trading community are equivocal on the market status. While the government claims that demonetization has not impacted farmers and markets, trader have been blaming cash crunch to have hit their business. While it is true that farmers are still wary and reluctant to sell in non-cash transaction, cotton traders are unable to arrange adequate cash to pay the farmers.
Current market scenario appears to be more of wait and watch and sell later attitude. Farmers are holding to their produce because of two factors. One, withdrawal is limited despite being paid in full for his produce, a fallout of demonetization and two, the rising Futures are tempting farmer to sell later as they expect spot to move up in line with the Futures markets. As of early January, only 30 per cent of cotton crop had arrived in mandis, implying almost 2/3rd yet to come. Holding crop will only lead to price rise, and once arrivals peak which can depress prices, farmers will start selling in distress and incur further losses.
Cotton Corp of India have also entered the market buying cotton at commercial rates. Although the target is just 15 lakh bales or equivalent of half-month consumption, its motive is to secure some adequate volume of cotton now and offload them during lean season to balance the markets.
Ginners are also mirroring the farmers attitude. One, since arrivals are slow they do not have enough volume to run their ginning machines at full capacity. With inadequate stock they are running few shifts or for few days. and TWO, they to anticipate prices to surge in coming days. Currently cotton, they say, is in high disparity with kapas and neither cotton seed prices are remunerative enough to cover loss on cotton selling.
Somehow, both farmers and ginners have got into a vicious circle and postponing selling despite higher prices.
Meanwhile, mills have covered their raw material supplies with a strong understanding that prices will rise above global level. But since downstream yarn demand and further retail sales is hampered by demonetization, demand at every stage of conversion seems to have contracted.
For exports, Indian cotton at their current price levels is overvalued compared to other exporting nations. Both Pakistan and Bangladesh are in need for the white fibres and are scouting for suppliers across the globe. Indan exporters are finding it difficult to commit any volumes due to sluggish arrivals and very high pricing.
The question making rounds in the trading circle is “How to do business” when a large crop is yet to arrive and demand recovery still not in sight due to cash crunch.
A couple of incidences have raised doubt on credibility of Indian suppliers. Pakistan has reportedly diverted their buying from India to other country citing a case of wherein a major Indian merchant Exporter having officially backed out of almost all contracts done in Pakistan having sold at US cents 74.50-77.00/lb which can lead to cancellations or non-performance of upto 120,000 bales just for Pakistan market alone.
Here, the need of the hour is for government to step and ease currency flow in order to save the farmers from incurring losses. The primary reason for farmer’s reluctance to sell has been cash flow. Even if the farmers uses banking system, he is allowed to withdraw only Rs96,000 a month at the rate of Rs 24,000 per week. If the government withdraws this limit sooner and help both farmers and ginners overcome this impasse and save losses, which can otherwise send the entire textile value chain into a long depression.
(By Commoditiescontrol Bureau; +91-22-40015522)
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