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Cotton market booms due to lack of 'policy measures'

Date: 06-08-2012
Subject: Cotton market booms due to lack of 'policy measures'
The Indian cotton market is at peace. Three months of respite from government meddling has allowed the business to stagger back on its feet. And everyone is making money - farmers, ginners, traders and millers.

Between March and April, the market was rocked by a series of export bans, partial roll-backs, and restrictive rules that battered exports, sent prices plummeting, and roused farmers, MPs and chief ministers of four states into raising a massive stink. Commerce and textiles ministries beat a hasty retreat after the prime minister himself waded in. And we haven't heard a peep out of it since.

It was cotton's lucky break. Finally, its price is being negotiated by physical demand and supply. In the absence of "policy measures", no one is robbing Peter to benefit Paul.

From May onwards, demand for cotton has exceeded supply. Yarn spinning mills, especially in Tamil Nadu, are humming with export contracts from China. Their cotton purchases in May-July were the highest in three years.

Since supply is dwindling as the season draws to an end, cotton prices are up by 10 per cent and now well above even the minimum support price set for the new marketing season starting October 1. So farmers are satisfied. Ginners, who buy cotton balls from farmers and press then into bales, are betting prices will rise further because of the poor monsoon and holding on to stocks.

In mid-July, Indian cotton prices overshot the world market and brought exports to a screeching halt. But traders quickly shifted to another opportunity. They began shipping in cheaper cotton from Tanzania to Tuticorin for mills on the lookout for affordable raw material. These imports are carefully caliberated. Traders plan to import just enough cotton to meet 15 days of mill consumption because everyone knows that in October the new Indian harvest will again replenish the pipeline and cool prices.

In short, because it is free, the market is in equilibrium. India exported cotton when world prices were high. It is importing cotton when world prices are low. God's in heaven and all's right with the world, to quote the poet.

Unfortunately, this calm may be short-lived. Commerce and textiles ministries are now ready with a cotton "distribution" policy that is meddling by another name. Using restrictions such as a buffer stock and tax on exports, the textiles ministry proposes to ensure a supply overhang in the market so that cotton prices always remain artificially low for mills. In other words, farmers and traders are expected to continuously subsidize industry.

Source : economictimes.indiatimes.com