Supply Chain Insights: India - Second Country Of Cotton

At the start of the 2009/10 crop year, the world’s focus is on India — as the world’s second-largest cotton producer, consumer, and exporter, India commands special attention. Cotton and the cotton textile industry have played a fundamental role in Indian culture and trade throughout India’s history — cultivation, spinning, weaving, and dyeing of cotton in India date back at least 5,000 years. India was one of the first countries to engage in large-scale textile manufacturing; in fact, the great popularity of Indian textile exports inspired some of the world’s first large-scale textile quota systems. In the 20th century, cotton grew in domestic importance and emerged as a central symbol of India’s independence movement. With recent technological advances and market liberalization, India has emerged in the 21st-century as a major player in the world cotton market.

COTTON’S ROLE IN INDIA’S ECONOMY

Though sometimes overshadowed by China (the world’s largest producer, importer, and consumer of cotton), India is a dominant player in the cotton world. Textile manufacturing is India’s second-largest industry (behind only agriculture), employing over 35 million people. Growth in India’s textile industry has been spurred by the opening up of world markets, particularly since the expiration of the World Trade Organization Multi-Fiber Agreement at the end of 2004. Since 2003/04, India’s cotton consumption has grown 35%, from 13.5 million bales to a forecast 22.5 million bales in 2009/10. India is now the third-largest exporter of cotton-dominant products to the United States, accounting for about 10% of U.S. cotton-dominant imports. India’s strong economic growth over the past decade has greatly expanded the country’s domestic market, leading to increased apparel spending and evolving apparel preferences among Indian consumers.

COTTON ACREAGE AND PRODUCTION

India devotes more land to cotton than any other country and claimed 30.4% of the world’s total cotton acreage in 2008/09, compared with 20.5% for China and 9.9% for the United States (International Cotton Advisory Committee). Even so, India remains a distant second to China in cotton production, producing 17.8 million bales in 2008/09 to China’s 33.5 million bales (USDA). India’s cotton yield, at 523 kilograms per hectare (kg/ha), lags significantly behind both the Chinese yield of 1,331 kg/ha and the world average of 766 kg/ha (USDA estimates for 2008/09). Recent years have seen significant improvements in Indian yield and production due to widespread introduction of genetically modified (GM) seed. Since commercial planting of GM seed was first permitted in 2002/03, its use has expanded to cover the majority of Indian cotton acreage — an estimated 80% in 2009/10 (Indian Directorate of Cotton Development). As the use of GM seed has spread, Indian yields have risen 74% (from 301 kg/ha in 2002/03 to 523 kg/ha in 2008/09), and the cotton harvest has grown 61% (from 14.0 to 22.5 million bales).

Another factor affecting Indian cotton yields and production is rainfall. India has distinct wet and dry seasons and depends on the monsoon rains to nourish many of its agricultural crops. About 80% of India’s annual rainfall comes from the monsoon, which typically occurs between June and September. Since only about 35% of India’s cotton acreage is irrigated, yields and production are highly susceptible to annual variation in rainfall. A dry year in 2008/09 contributed to the first year-to-year declines in yield and production since the introduction of GM seed — from 2007/08 to 2008/09, yield fell from 567 to 523 kg/ha and production from 24.6 to 22.5 million bales. This year, monsoon rainfall has been later and lighter than historical averages, delaying planting in some areas. If the current pattern continues, dry conditions could limit the size of the 2009/10 harvest.

EXPORTS AND GOVERNMENT PRICE SUPPORTS

With the substantial economic growth India has enjoyed over the past decade, Indian cotton consumption has risen 35%. While impressive, this growth has been outpaced by the 105% increase in production resulting from improved yields. India has thus enjoyed a surplus of production over consumption since 2003/04, contributing to its emergence as one of the world’s top exporters of raw cotton. Among the most important destinations for Indian cotton exports (based on value) are China (46.7%), Pakistan (20.5%), and Bangladesh (12.1%) (Indian Dept. of Commerce 2007/08 data).

Despite strong growth, an ongoing issue with Indian cotton exports is contamination. In the latest (2007) survey by the International Federation of Textile Manufacturers, the six most contaminated cottons tested were from India. Likely sources of contamination are hand-picking, where foreign matter (such as polypropylene strands from picking bags) may be accidentally introduced, and ginning, where seed coats may not be adequately removed, and wire or metal can break off machinery and remain embedded within the fibers.

The key factor affecting Indian exports in 2008/09, however, was not contamination, but government involvement in the pricing of cotton. In late summer 2008, the Indian government increased the guaranteed minimum support price for cotton by 30% to 50% (depending on quality). When cotton prices collapsed last fall, it became more profitable for Indian farmers to sell their cotton to the Cotton Corporation of India or India’s National Agricultural Marketing Federation than to sell it on the domestic or international market. Consequently, Indian cotton exports fell drastically (by 68%), from 7.0 million bales in 2007/08 to 2.0 million bales in 2008/09. Since accumulating almost 11 million bales, these organizations have sold most of their purchased cotton, primarily through bulk sales at a discount to the minimum support price.

IMPACT OF INDIAN COTTON IN 2009/10

General expectations are that Indian cotton will return to the world export market in 2009/10; the USDA currently estimates that India will ship 6.4 million bales. With returns for cotton harvests guaranteed by minimum support prices, Indian farmers have already increased their plantings by 16% in 2009/10, even though acreage is expected to decline in most cotton-producing countries as a result of weak global prices in 2008/09. However, India’s year-to-date rainfall is 25% below the long-term average, and drought is threatening Indian production. The USDA already projects a world production/consumption shortfall of 6.9 million bales (based on production of 105.9 million bales and consumption of 112.8 million bales). If continuing dry weather reduces Indian cotton production, the world production/consumption gap could grow further, contributing to upward pressure on cotton prices in 2009/10.